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, 2018 included in our 2018 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, 2019.

Substantially all 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 and subject to a floor amount). Based on our ~~interpretation~~application of the more restrictive PMIERs, as of ~~June~~September 30, 2019, 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 2018 amounts have been made in the accompanying financial statements to conform to the 2019 presentation.

Subsequent events

We have considered subsequent events through the date of this filing. On July 25, 2019, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.06 per share payable on September 20, 2019, to shareholders of record at the close of business on August 30, 2019. On August 2, 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount is in line with our original estimate of the probable loss. The agreement remains subject to GSE approval.

Note 2. Significant Accounting Policies

Income taxes

Deferred income taxes are provided under the liability method, which recognizes the future tax effects of temporary differences between amounts reported in the consolidated financial statements and the tax bases of these items. The estimated tax effects are computed at the enacted federal statutory income tax rate. Changes in tax laws, rates, regulations, and policies or the final determination of tax audits or examinations, could materially affect our estimates and can be significant to our operating results. We evaluate the realizability of the deferred tax assets based on the weight of all available positive and negative evidence. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.

The recognition of a tax position is determined using a two-step approach. The first step applies a more-likely-than-not threshold for recognition and derecognition. The second step measures the tax position as the greatest amount of benefit that is cumulatively greater than 50% likely to be realized. When evaluating a tax position for recognition and measurement, we presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize interest accrued and penalties related to unrecognized tax benefits in our provision for income taxes.

Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income, subject to certain limitations, the amounts added to contingency loss reserves that are recorded for regulatory purposes. The amounts we deduct must generally be included in taxable income in the tenth subsequent year. The deduction is allowed only to the extent that we purchase and hold U.S. government non-interest-bearing tax and loss bonds in an amount equal to the tax benefit attributable to the deduction. We account for these purchases as a payment of current federal income tax.

Recent accounting and reporting developments

Accounting standards effective in 2019, or early adopted, and relevant to our financial statements

Accounting Standard Update (“ASU”) 2016-02 - Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) amended the previous leasing standard and created ASC 842, Leases. ASC 842 requires a lessee to recognize a right-of-use asset and lease liability for substantially all leases. Effective for the quarter ended March 31, 2019, we adopted the updated guidance for leases and also elected to apply all practical expedients applicable to us in the updated guidance for transition of leases in effect at adoption. The adoption of the updated guidance resulted in the recognition of an immaterial right-of-use asset as part of other assets and a lease liability as part of other liabilities in the consolidated balance sheet. The adoption of the updated guidance did not have a material effect on our consolidated results of operations or liquidity. Our minimum future operating lease payments as of ~~June~~September 30, 2019 totaled ~~$2.3~~$2.0 million.

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 326		Financial Instruments - Credit Losses
		•	ASU 2016-13 - Measurement of Credit Losses on Financial Instruments	January 1, 2020
ASC 820		Fair Value Measurement
		•	ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurements	January 1, 2020
ASC 715		Compensation - Retirement Benefits
		•	ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans	January 1, 2021

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to incorporate their forecast of future economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. The allowance for current expected credit losses (“CECL”) generally reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect, however, credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods

within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. In May 2019, the FASB amended this guidance to provide entities with an option to irrevocably elect the fair value option for eligible instruments in order to provide targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. The effective dates remain the same. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements and disclosures, but do not expect it to have a material impact.

Changes to the Disclosure Requirements for Fair Value Measurement

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 clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, 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 updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. An entity is permitted to early adopt any guidance that removed or modified disclosures upon issuance of this update and to delay adoption of the additional disclosures until its effective date. 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.

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.

The reinsurance premiums ceded to each Home Re ~~special purpose insurer~~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 toby the Home Re Entity on the ~~notes~~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 ~~change~~changes in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As ~~the reinsurance premium will vary based on changes in these rates,~~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 ~~June~~September 30, 2019, were not material to our consolidated balance sheet, and the change in fair values during the three and ~~six~~nine months ended ~~June~~September 30, 2019 were not material to our consolidated statements of operations. Total ceded premiums were ~~$4.5~~$5.4 million and ~~$7.0~~$12.4 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively.

At the time the Home Re Transactions were entered into, we assessed whether each Home Re ~~entity~~Entity was 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. We concluded that each Home Re ~~entity~~Entity is a VIE. However, given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re ~~entity’s~~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,~~Entity, consolidation of ~~either~~neither Home Re ~~entity~~Entity is ~~not~~ 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 ~~June~~September 30, 2019, and December 31, 2018, 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.

~~The following~~Table 4.4 presents the total assets of the Home Re ~~entities~~Entities as of ~~June~~September 30, 2019 and December 31, 2018.

Home Re total assets

Table

4.4

(In thousands)

Home Re entity (Issue date)

Total VIE Assets

June 30, 2019

Home Re Entity (Issue date)

Total VIE Assets

September 30, 2019

Home Re 2018-01 Ltd. (Oct - 2018)

318,636

Home Re 2018-01 Ltd. (Oct - 2018)

299,655

Home Re 2019-01 Ltd. (May - 2019)

315,739

Home Re 2019-01 Ltd. (May - 2019)

315,739

December 31, 2018

Home Re 2018-01 Ltd. (Oct - 2018)

318,636

Home Re 2018-01 Ltd. (Oct - 2018)

318,636

The assets of the Home Re ~~special purpose insurers~~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 would reduce 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 2018, and the first ~~half~~nine months of 2019, curtailments reduced our average claim paid by approximately 5.8% and 4.7%, respectively.

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

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

Under ASC 450-20, until a ~~liability~~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. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss, including recording a probable loss of $23.5 million in the first quarter of 2019. Until settlement negotiations or legal proceedings for which we have recorded a probable loss are ~~concluded,~~concluded; (including the receipt of any necessary GSE approvals), it is reasonably possible that we will record an additional loss. In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when all of these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately ~~$289.0~~$264.0 million more than the amount of probable loss we have recorded. This estimate of maximum exposure is based upon currently available ~~information and~~information; is subject to significant judgment, numerous assumptions and known and unknown ~~uncertainties, and~~uncertainties; will include an amount for matters for which we have recorded a probable loss until such matters are ~~concluded. We do not consider settlements concluded until any required GSE approval for such settlements is obtained. The~~concluded; will include different matters ~~underlying the estimate of maximum exposure will change~~ from time to ~~time. This estimate of our maximum exposure~~time; and does not include interest or consequential or exemplary damages. In the third quarter of 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount was consistent with our original estimate of the probable loss. The agreement remains subject to GSE approval.

Mortgage insurers, including MGIC, have in the past been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act ~~which is commonly known as RESPA,~~(“RESPA”), and the notice provisions of the Fair Credit Reporting Act ~~which is commonly known as FCRA.~~(“FCRA”). While these proceedings in the aggregate ~~have~~did not ~~resulted~~result in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse effect on us. ~~In addition, various regulators, including~~To the ~~CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief~~extent that we are construed to make independent credit decisions in connection with ~~alleged violations of RESPA. The insurance law provisions of many states prohibit paying for~~our contract underwriting activities, we also could be subject to increased regulatory requirements under the ~~referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable~~Equal Credit

~~laws~~Opportunity Act (“EOCA”), FCRA, and ~~regulations, it is not possible~~other laws. Under ECOA, examination may also be made of whether a mortgage insurer’s underwriting decisions have a disparate impact on persons belonging to ~~predict~~a protected class in violation of the ~~eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.~~law.

Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2018 and the first ~~six~~nine months of 2019 was immaterial to our consolidated financial statements.

In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or consolidated results of operations.

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.

We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.

Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between default and claim 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 decreased in the first ~~six~~nine months of 2019 compared to the same period in 2018, due to ~~a decrease in the number of new delinquencies, net of related cures and~~ a decrease in the estimated claim rate on delinquencies that occurred in the current year.

For the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, we experienced favorable loss reserve development on previously received delinquencies. This was, in large part, due to the resolution of approximately ~~49%~~61% and ~~51%~~65%, respectively, of the prior year delinquent inventory, with lower claim rates due to improved cure rates. The favorable loss reserve development resulting from a reduction in the estimated claim rate was partially offset in the ~~six~~nine months ended ~~June~~September 30, 2019 by the recognition of a probable loss of $23.5 million related to litigation of our claims paying practices and an increase in our LAE reserves, and for the ~~six~~nine months ended ~~June~~September 30, 2018, by an increase in our severity assumption on previously received ~~delinquencies.~~delinquencies and an increase in our LAE reserves.

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 servicers are utilizing 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.


Delinquent inventory rollforward	Delinquent inventory rollforward									Delinquent inventory rollforward
Table	11.3									11.3
		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Delinquent inventory at beginning of period	Delinquent inventory at beginning of period	30,921		41,243		32,898		46,556		Delinquent inventory at beginning of period	29,795		36,037		32,898		46,556
New notices	New notices	12,915		12,159		26,526		26,782		New notices	14,019		13,569		40,545		40,351
Cures	Cures	(12,882	)	(15,350	)	(27,230	)	(33,423	)	Cures	(12,592	)	(14,197	)	(39,822	)	(47,620	)
Paid claims	Paid claims	(1,112	)	(1,501	)	(2,300	)	(3,072	)	Paid claims	(1,045	)	(1,374	)	(3,345	)	(4,446	)
Rescissions and denials	Rescissions and denials	(47	)	(76	)	(99	)	(144	)	Rescissions and denials	(42	)	(56	)	(141	)	(200	)
Other items removed from inventory	Other items removed from inventory	—		(438	)	—		(662	)	Other items removed from inventory	(195	)	(581	)	(195	)	(1,243	)
Delinquent inventory at end of period	Delinquent inventory at end of period	29,795		36,037		29,795		36,037		Delinquent inventory at end of period	29,940		33,398		29,940		33,398

~~The~~When compared to the prior year periods, the decrease in the primary delinquent inventory experienced during the three and nine months ended September 30, 2019 and 2018 was generally across all markets and primarily in book years 2008 and prior. ~~Historically as a delinquency ages it becomes more likely to result in a claim.~~

~~Hurricane activity~~

New ~~delinquent notice activity~~notices increased in the ~~fourth quarter~~three and nine months ended September 2019 when compared to the same periods of ~~2017 because of hurricane~~2018 primarily due to our larger, more recent book years entering their expected peak loss years, and an overall increase in our insurance in force and policies in force. New notice activity ~~that primarily impacted Puerto Rico, Texas, and Florida~~ in the ~~third quarter of 2017. Many of~~three months ended September 30, 2019 exceeded the ~~loans~~reductions to our delinquent inventory resulting in a slight increase in our delinquent inventory from ~~the hurricane impacted areas remained delinquent through the period ending~~ June 30, ~~2018 and are shown in the 4-11 months delinquent category in table~~ ~~11.4. The majority of the delinquent notices received from the hurricane activity cured as of December 31, 2018.~~2019.

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							11.4
		June 30, 2019		December 31, 2018		June 30, 2018			September 30, 2019		December 31, 2018		September 30, 2018
3 months or less	3 months or less	8,970		9,829		8,554		3 months or less	9,462		9,829		9,484
4-11 months	4-11 months	8,951		9,655		12,506		4-11 months	9,082		9,655		9,564
12 months or more ⁽¹⁾	12 months or more ⁽¹⁾	11,874		13,414		14,977		12 months or more ⁽¹⁾	11,396		13,414		14,350
Total	Total	29,795		32,898		36,037		Total	29,940		32,898		33,398
3 months or less	3 months or less	30	%	30	%	24	%	3 months or less	32	%	30	%	28	%
4-11 months	4-11 months	30	%	29	%	35	%	4-11 months	30	%	29	%	29	%
12 months or more	12 months or more	40	%	41	%	41	%	12 months or more	38	%	41	%	43	%
Total	Total	100	%	100	%	100	%	Total	100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory	Primary claims received inventory included in ending delinquent inventory	630		809		827		Primary claims received inventory included in ending delinquent inventory	557		809		766

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 net risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires 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 ~~June~~September 30, 2019, MGIC’s risk-to-capital ratio was ~~10.1~~9.9 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was ~~$2.7~~$2.9 billion above the required MPP of $1.6 billion. ~~In calculating~~The calculation of our risk-to-capital ratio and MPP ~~we have taken full~~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, matters that could negatively affect such compliance are discussed in the rest of these consolidated financial statement footnotes.

At ~~June~~September 30, 2019, the risk-to-capital ratio of our combined insurance operations was ~~10.0~~9.8 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 May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk, minimum capital floors, and action level triggers. 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 State Capital Requirements, may prevent MGIC from continuing to write new insurance in such jurisdictions.

If we are unable to write business in a particular jurisdiction, 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, matters that could negatively affect MGIC’s claims paying resources are discussed in the rest of these consolidated financial statement footnotes.

Tax and Loss Bonds

As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the IRC for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that we purchase tax and loss bonds (“T&L Bonds”) in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. During the ~~three~~nine months ended ~~June~~September 30, 2019, we had net purchases of T&L Bonds in the amount of ~~$74~~$126 million. Under statutory accounting practices, purchases of T&L Bonds are accounted for as investments. Under GAAP, purchases of T&L Bonds are accounted for as a payment of current taxes.

Dividend restrictions

In each of the first ~~and second~~three quarters of 2019, MGIC paid a $70 million dividend to our holding company. MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without such dividends being subject to regulatory disapproval 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 lowered.

Comparative quarterly results

We recorded ~~second~~third quarter 2019 net income of ~~$167.8~~$176.9 million, or ~~$0.46~~$0.49 per diluted share. Net income decreased by ~~$19.0~~$5.0 million ~~(10%~~(3%) from net income of ~~$186.8~~$181.9 million in the prior year, primarily reflecting an increase in losses incurred, net, partially offset by an increase in ~~investment income~~revenues and a decrease in our provision for income taxes. Diluted income per share ~~declined 6 percent reflecting the decrease in net income, offset in part by~~was unchanged as a decrease in our ~~diluted~~ weighted average shares ~~outstanding.~~outstanding offset the decline in net income.

Adjusted net operating income for the ~~second~~third quarter 2019 was ~~$167.6~~$173.6 million ~~(Q2~~(Q3 2018: ~~$189.2~~$180.9 million) and adjusted net operating income per diluted share was ~~$0.46 (Q2~~$0.48 (Q3 2018: ~~$0.50)~~$0.48). Adjusted net operating income per diluted share ~~declined 8% reflecting~~was unchanged from the ~~decrease in net income, offset in part by~~prior year period as a decrease in our diluted weighted average shares ~~outstanding.~~outstanding offset the decline in adjusted net operating income.

Losses incurred, net for the ~~second~~third quarter of 2019 were ~~$21.8~~$34.0 million, an increase of ~~$35.3~~$35.5 million compared to the prior year. The increase was primarily due to a lower level of favorable loss reserve development on previously received delinquencies when compared to the prior year. The ~~increase was offset in part by lower current year losses incurred as the~~ estimated claim rate on new notices in the ~~second~~third quarter of 2019 was 8%, compared to ~~9.5%~~9% in the prior year.

The decrease in our provision for income taxes in the ~~second~~third quarter of 2019 as compared to the prior year was ~~primarily~~ due to a decrease in income before ~~tax.~~tax and a lower effective tax rate.

In June 2019, MGIC paid a dividend of $70 million to our holding company and we expect MGIC to continue to pay quarterly dividends of at least that amount, subject to approval by MGIC’s board of directors and non-disapproval by the OCI.

Comparative year to date results

We recorded net income of ~~$319.7~~$496.7 million, or ~~$0.87~~$1.36 per diluted share during the first ~~six~~nine months of 2019. Net income decreased by ~~$10.7~~$15.7 million from net income of ~~$330.5~~$512.4 million in the prior year, primarily reflecting an increase in losses incurred, net, partially offset by an increase in ~~premiums~~revenues and ~~investment income.~~a decrease in our provision for income taxes. Diluted income per share was the same as the prior year as ~~the decrease in net income was offset by~~ a decrease in our diluted weighted average shares ~~outstanding.~~outstanding offset the decline in net income.

Adjusted net operating income for the first ~~six~~nine months of 2019 was ~~$320.0~~$493.7 million (YTD 2018: ~~$333.8~~$514.7 million) and adjusted net operating income per diluted share was ~~$0.87~~$1.35 (YTD 2018: ~~$0.88)~~$1.36). Adjusted net operating income per diluted share was ~~roughly the same as~~comparable to the prior year as ~~the decrease in net income was offset by~~ a decrease in our diluted weighted average shares ~~outstanding.~~outstanding partially offset the decline in adjusted net operating income.

Losses incurred, net for the first ~~six~~nine months of 2019 were ~~$60.9~~$94.9 million, an increase of ~~$50.5~~$86.0 million over the prior year. The increase was due to a lower level of favorable loss reserve development on previously received delinquencies and the recognition of a probable loss of $23.5 million for litigation of our claims paying practices during the first quarter of 2019. The increase was offset in part by lower current year losses incurred as the estimated claim rate on new notices in the first ~~six~~nine months of 2019 was 8%, compared to 9% in the prior year.

The decrease in our provision for income taxes in the first ~~six~~nine months of 2019 as compared to the prior year was primarily due to a decrease in income before tax.

See “Consolidated Results of Operations” below for additional discussion of our results for the three and ~~six~~nine months ended ~~June~~September 30, 2019 compared to the respective prior year periods.

Capital

MGIC dividend payments to our holding company

In the first nine months of 2019, MGIC paid a total of $210 million in dividends to our holding company. We expect MGIC to pay dividends of at least $280 million in 2020, subject to approval by MGIC’s Board of Directors. We ask the OCI not to object before MGIC pays dividends.

Share repurchase programs

~~On March 19,~~In the first three quarters of 2019, we repurchased approximately 7.3 million shares of our ~~board~~common stock, using approximately $94 million of ~~directors authorized an additional share repurchase program under which we~~holding company resources. We may repurchase up to ~~$200~~an additional $131 million of our common stock through the end of ~~2020. During~~2020 under a share repurchase program approved by our Board of Directors in the ~~second~~first quarter of ~~2019, we repurchased approximately 1.8 million shares of common stock for $25 million, which used the remaining authorization on the program announced in April 2018.~~2019. 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. As of ~~June~~September 30, 2019, we had approximately ~~354~~349 million shares of common stock outstanding.

~~Since the end of the second quarter of 2019, through August 5, 2019, we repurchased approximately 1.8 million shares of our common stock for approximately $23 million.~~

Dividends to shareholders

In September 2019, MGIC paid a dividend of $0.06 per common share totaling $21 million to its shareholders. On ~~July 25,~~October 24, 2019, ~~the~~our Board of Directors declared a quarterly cash dividend ~~to shareholders of the company~~ of $0.06 per common share ~~payable on September 20, 2019,~~ to shareholders of record ~~at the close of business~~ on ~~August 30,~~November 11, 2019, payable on November 25, 2019.

GSEs

We must comply with the PMIERs to be eligible to insure loans delivered to or purchased by the GSEs. In addition to their financial requirements, the PMIERs include business, quality control and certain transaction approval requirements. Refer to “Liquidity and Capital Resources - Capital Adequacy - PMIERs” of this MD&A for additional information regarding our capital adequacy under PMIERs.

If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, it would significantly reduce the volume of our new business writings. Factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:



è	The GSEs may amend the PMIERs at any time and may make the PMIERs more onerous in the future. The GSEs have indicated that there may be potential future implications for PMIERs based upon feedback the FHFA receives on its June 2018 proposed rule on regulatory capital requirements for the GSEs, which included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage ~~insurance (public comments were due by November 16, 2018).~~insurance. The FHFA recently indicated that the capital requirements will be finalized no earlier than the end of 2019 and may not be finalized until Spring 2020. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan (discussed below) could have future implications for PMIERs. In addition, the PMIERs provide that the factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs have indicated that they will generally provide notice 180 days prior to the effective date of such updates.
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.

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 the past, members of Congress have introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted.~~

In ~~March~~September 2019, at the direction of President Trump, ~~directed~~ the U.S. Treasury Department ~~to develop a plan, as soon as practicable, for~~(“Treasury”) released the “Treasury Housing Reform Plan” (the “Plan”). The Plan recommends administrative and legislative reforms for the housing finance system, ~~(“Treasury Housing Reform Plan”),~~ with such reforms intended to ~~reduce taxpayer risk, expand~~achieve the ~~private sector’s role, modernize the government housing programs, and achieve sustainable homeownership. The directive outlines numerous~~ goals ~~and objectives, including but not limited to, the end~~ of ~~conservatorship~~ending conservatorships of the ~~GSEs, increased~~GSEs; increasing competition and participation ofby the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, ~~appropriate capital~~simplifying the QM rule of the CFPB, transferring risk to the private sector, and ~~liquidity requirements for~~eliminating the GSE Patch (discussed below); establishing regulation of the GSEs that safeguards their safety and ~~evaluation~~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. It does not refer to mortgage insurance explicitly; however, it refers to a requirement for credit enhancement on high LTV loans, which is a requirement of the current GSE ~~Patch.~~charters. The Plan also indicates that the FHFA should continue to support efforts to expand 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 ~~Qualified Mortgage (“QM”)~~QM under the ~~Truth in Lending Act~~TILA (Regulation Z) to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the DTI ratio limit of 43% included in the standard QM definition.

The GSE Patch is scheduled to expire no later than January 2021. In July 2019, the CFPB released an Advanced Notice of Proposed Rulemaking on the QM definition. The director of the CFPB indicated that the CFPB would consider only a short-term extension of the GSE Patch. Approximately 30%, 24% and ~~24%~~22% of our NIW in the first, second and ~~second~~third quarters of 2019, respectively, was on loans with DTI ratios greater than 43%.

However, it is possible that not all future loans with DTI ratios greater than 43% will be affected by a sunset of the GSE Patch, in part because the standard QM definition may be liberalized under the new rules. In this regard, we note that the CFPB asked for comment about whether the definition of QM should retain a direct measure of a consumer’s personal finances (for example, DTI ratio); whether the definition should include an alternative method for assessing financial capacity; whether, if the QM definition retains a DTI ratio limit, the limit should remain 43% or be increased or decreased; and whether loans with DTI ratios above a prescribed limit should be given QM status if certain compensating factors are present. In addition, the Plan indicates that, pending legislation, the GSE Patch should expire; the CFPB should amend its ability-to-repay rule under TILA (“ATR rule”) to establish a clear bright line safe harbor that replaces the GSE Patch; and the FHFA and the CFPB should continue to coordinate their efforts to avoid market disruption in connection with the expiration of the GSE Patch and the implementation of any amendments to the CFPB’s ATR rule.

We may 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 “ability to repay” rules 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.

The rule that includes the QM definition that applies to loans insured by the FHA was issued by the Department of Housing and Urban Development (“HUD”) and that definition is less restrictive than the CFPB’s definition in certain respects, including that (i) it has no DTI ratio limit, and (ii) it allows the lender certain presumptions about compliance with the ~~“ability to repay” requirements~~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.

~~In March~~However, in September 2019, ~~the President also directed the Secretary of~~ HUD ~~to develop a plan~~released its Housing Reform Plan and indicated that ~~would recommend administrative and legislative reforms to the programs HUD oversees, including those~~ 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 ~~Government National Mortgage Association.~~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 and high DTI 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.”

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 2018 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. The level of new delinquencies has historically followed a seasonal pattern, with new delinquencies in the first part of the year lower than new delinquencies in the latter part of the year, though this pattern can be affected by the state of the economy and local housing markets. Losses incurred are generally affected by:

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

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

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

The percentage of coverage on insured loans, with deeper average coverage tending to increase 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

Comparative quarterly results

NPW ~~decreased~~ and NPE ~~was flat~~increased for the three months ended ~~June~~September 30, 2019 ~~from~~compared with the prior year reflecting ~~an increase in ceded premiums compared to the same period of prior year, which offset~~ an increase in premiums from a higher average insurance in force and a decrease in premium refunds from lower claim activity. The increase in ceded premiums was due to a non-recurring termination fee related to our 2015 QSR Transaction, premiums ceded under our Home Re Transactions, and a lower profit commission due to higher ceded losses. NPE also reflects lower premium rates on our IIF and an increase in premiums from single premium policy cancellations, partially offset by lower premium rates on our insurance in force and higher ceded premiums when compared to the same period of the prior year. The increase in ceded premiums was due to premiums ceded under our Home Re Transactions.

Comparative year to date results

NPW ~~decreased~~increased slightly and NPE increased for the ~~six~~nine months ended ~~June~~September 30, 2019 when compared to the prior year ~~period. NPW and NPE reflect an increase in ceded premiums compared to the same~~ period ~~of the prior year, which offset~~primarily reflecting an increase in premiums from higher average insurance in force and ~~a decrease~~an increase in premiums from single premium ~~refunds from~~policy cancellations, offset in part by an increase in ceded premiums and lower ~~claim activity.~~premium rates on our insurance in force. The increase in ceded premiums was due to ~~a non-recurring termination fee related to our 2015 QSR Transaction,~~ premiums ceded under our Home Re Transactions, and a higher percentage of our IIF covered by quota share reinsurance. The negative effect of higher ceded premiums and IIF having lower premium rates on our NPE was offset by an increase in premiums from single premium policy cancellations when compared to the prior year.

See “Overview - Factors Affecting Our Results” above for additional factors that influenced the amount of net premiums written and earned during the periods.

MGIC Investment Corporation - Q3 2019 | 41

Premium ~~yield~~yields

~~Premium~~Net premium yield (NPE divided by average IIF) for the ~~second~~third quarter of 2019 was ~~46.5~~49.6 basis points ~~(Q2~~(Q3 2018: ~~49.6~~49.3 basis points) and our net premium yield for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~46.9~~47.8 basis points (YTD 2018: ~~48.5~~48.9 basis points). Our net premium yield is influenced by a number of key drivers, which have a varying impact from period to period.

The following table ~~reconciles~~presents the key drivers of our net premium yield for the three and ~~six~~nine months ended ~~June~~September 30, 2019 from the respective prior year ~~period.~~periods.

Premium yield
(in basis points) Three Months Ended Six Months Ended
Premium yield - June 30, 2018 49.6
48.5
Reconciliation:
Change in premium rates (1.2 ) (1.3 )
Change in premium refunds and accruals 0.6
0.5
Single premium policy persistency 0.8
0.3
Reinsurance (3.3 ) (1.1 )
Premium yield - June 30, 2019 46.5
46.9



Premium Yields
	Three Months Ended September 30,				Nine Months Ended September 30,
(Basis points)	2019		2018		2019		2018
Inforce portfolio yield ⁽¹⁾	51.1		52.8		51.7		52.9
Single premium policy persistency	3.5		1.3		2.2		1.3
Total direct premium yield	54.6		54.1		53.9		54.2
Ceded premiums earned, net of profit commissions and assumed premiums ⁽²⁾	(5.0	)	(4.8	)	(6.1	)	(5.3	)
Net premium yield	49.6		49.3		47.8		48.9


⁽¹⁾	Total direct premiums earned, excluding accelerated premiums from single premium policy cancellations.


⁽²⁾	Ceded premiums earned, net of profit commissions and assumed premiums. Assumed premiums include our participation in GSE CRT programs, of which the impact on total revenues was immaterial.

~~Our~~Changes in our premium ~~yield declined~~yields when compared to the respective prior year periods ~~and reflects~~reflect the following:



~~Negative drivers:~~Key Driver:			Explanation:
Direct premiums earned - inforce portfolio (including premium refunds on cancellations and change in accrual)			è	A larger percentage of our IIF is from book years with lower premium rates due to a decline in premium rates in recent years resulting from pricing competition and insuring mortgages with lower risk characteristics, ~~and pricing competition,~~ and certain policies undergoing premium rate resets on their ten-year ~~anniversaries, and~~anniversaries.
			è	~~more~~Premium refunds adversely impact our premium yield and are primarily driven by claim activity and our estimate of ~~an adverse impact from our reinsurance primarily due to the non-recurring termination fee~~refundable premiums on our ~~2015 QSR Transaction and ceded premiums under our Home Re Transactions.~~delinquent inventory.
~~Positive drivers:~~Single premium policy persistency
	è		~~less of an adverse impact from premium refunds primarily due to lower claim activity, and~~
è		~~greater~~Greater amounts of accelerated earned premium from cancellations of single premium policies prior to their estimated policy life, primarily due to increased refinancing activity.
Ceded premiums earned, net of profit commissions and assumed premiums			è	More of an adverse impact as the 2019 periods include ceded premiums under our excess-of-loss reinsurance transactions (Home Re Transactions), which were not in effect in the respective prior year periods.

We expect our net premium yield to continue to decline ~~in 2019, primarily due to lower average~~as older insurance policies with higher premium rates ~~on our IIF.~~run off or have their premium rates reset, and new insurance policies with lower premium rates are written.

MGIC Investment Corporation - Q2Q3 2019 | 4142

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.



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.

Covered risk

The amount of our NIW subject to our QSR Transactions as shown in the following table will vary from period to period in part due to coverage limits that may be triggered depending on the mix of our risk written during the period. The 2019 QSR Transaction covering our 2019 NIW increased thresholds for risk written on loans with LTV ratios of 95% or greater and loans with DTI ratios greater than 45%, each when compared to our 2018 QSR Transaction. The NIW subject to quota share reinsurance increased for the ~~six~~nine months ended ~~June~~September 30, 2019 when compared to the same period of the prior year due to the increased threshold on risk written on loans with DTI ratios greater than 45% and a decrease in the percentage of our NIW with DTI ratios greater than 45%. In the first ~~six~~nine months of 2018, the risk written on loans with DTI ratios greater than 45% exceeded the threshold.

We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into an amended quota share reinsurance agreement with certain participants from the existing reinsurance panel that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. The reduction in the cede rate resulted in a reduction to our ceded RIF but does not impact our determination of the amount of IIF subject to quota share reinsurance agreements. During the second quarter of 2019, we incurred a termination fee of $6.8 million, which was paid in July to participants of the reinsurance panel that are not participating in the amended 2015 QSR Transaction. Under the amended terms we will generally receive a profit commission provided that the loss ratio on the covered loans remains below 68%.

The following table provides information related to our quota share reinsurance agreements for 2019 and 2018.

															Quota share reinsurance
		As of and For the Six Months Ended June 30,							As of and For the Nine Months Ended September 30,
($ in thousands, unless otherwise stated)	($ in thousands, unless otherwise stated)	2019			2018			($ in thousands, unless otherwise stated)	2019			2018
NIW subject to quota share reinsurance agreements	NIW subject to quota share reinsurance agreements	83		%	75		%	NIW subject to quota share reinsurance agreements	83		%	75		%
IIF subject to quota share reinsurance agreements	IIF subject to quota share reinsurance agreements	78		%	78		%	IIF subject to quota share reinsurance agreements	78		%	78		%

Statements of operations:	Statements of operations:							Statements of operations:
Ceded premiums written and earned, net of profit commission	Ceded premiums written and earned, net of profit commission	$	64,689		$	54,468		Ceded premiums written and earned, net of profit commission	$	87,721		$	79,716
% of direct premiums written	% of direct premiums written	12		%	10		%	% of direct premiums written	11		%	10		%
% of direct premiums earned	% of direct premiums earned	11		%	10		%	% of direct premiums earned	11		%	10		%
Profit commission	Profit commission	75,902			71,958			Profit commission	108,079			111,622
Ceding commissions	Ceding commissions	26,765			25,285			Ceding commissions	37,807			38,268
Ceded losses incurred	Ceded losses incurred	5,116			4,053			Ceded losses incurred	7,845			3,531

Mortgage insurance portfolio:	Mortgage insurance portfolio:							Mortgage insurance portfolio:
Ceded RIF (in millions)	Ceded RIF (in millions)	$	10,212		$	12,236		Ceded RIF (in millions)	$	10,807		$	12,581

Excess-of-loss reinsurance

Our excess-of-loss reinsurance provides ~~$634.4~~$604.6 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 ~~June~~September 30, 2019, the aggregate exposed principal balances under the Home Re 2018-01 ~~Ltd.~~ and 2019-01 ~~Ltd.~~ transactions were approximately ~~$6.6~~$6.2 billion and ~~$7.1~~$6.6 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 ~~$4.5~~$5.4 million and ~~$7.0~~$12.4 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively.

We expect that we may enter into similar excess-of-loss reinsurance transactions if capital market conditions remain favorable.

Investment income

Comparative quarterly and year to date results

Net investment income in the ~~second~~third quarter and first ~~six~~nine months of 2019 was ~~$42.4~~$42.7 million and ~~$83.0~~$125.7 million, respectively, up from ~~$34.5~~$36.4 million and ~~$66.6~~$103.0 million in the respective prior year periods. The increases in investment income were due to an increase in the average balance of the investment portfolio along with higher investment yields over the periods.

MGIC Investment Corporation - Q2Q3 2019 | 4243

Losses and expenses


Losses and expenses	Losses and expenses										Losses and expenses
		Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)	(In millions)	2019		2018			2019		2018		(In millions)	2019		2018			2019		2018
Losses incurred, net	Losses incurred, net	$	21.8	$	(13.5	)	$	60.9	$	10.4	Losses incurred, net	$	34.0	$	(1.5	)	$	94.9	$	8.9
Amortization of deferred policy acquisition costs	Amortization of deferred policy acquisition costs	2.8		2.8			5.2		5.4		Amortization of deferred policy acquisition costs	3.1		3.2			8.4		8.6
Other underwriting and operating expenses, net	Other underwriting and operating expenses, net	43.0		41.8			88.9		87.9		Other underwriting and operating expenses, net	45.2		43.7			134.1		131.6
Interest expense	Interest expense	13.6		13.2			26.8		26.5		Interest expense	12.9		13.3			39.7		39.7
Total losses and expenses	Total losses and expenses	$	81.2	$	44.3		$	181.8	$	130.2	Total losses and expenses	$	95.3	$	58.6		$	277.1	$	188.8

Losses incurred, net

As discussed in “Critical Accounting Policies” in our 2018 10-K MD&A and consistent with industry practices, we establish loss reserves for future claims only for loans that are currently delinquent. The terms “delinquent” and “default” are used interchangeably by us. We consider a loan to be delinquent when it is two or more payments past due. 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 estimating the amount of the claim payment, which is referred to as claim severity.

Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment, and the current and future strength of local housing markets. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new notice activity and a lower cure rate. Our estimates are also affected by any agreements we enter into regarding our claims paying practices, such as the settlement agreements discussed in Note 5 – “Litigation and Contingencies” to our consolidated financial statements. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment.

Comparative quarterly results

Losses incurred, net in the ~~second~~third quarter of 2019 were ~~$21.8~~$34.0 million compared to ($~~13.5)~~1.5) million in the prior year. The increase was due to a lower amount of favorable loss reserve development on previously received delinquencies. During the ~~second~~third quarter of 2019 there was a ~~$30~~$27 million reduction in losses incurred due to positive development on our primary loss reserves, before reinsurance, for previously received delinquent notices, compared to ~~$70~~$59 million in the ~~second~~third quarter of 2018. Current year losses incurred ~~declined~~increased due to an increase in LAE reserves and less of a decrease in IBNR reserves, offset in part by a lower ~~estimated~~ claim rate on new notices when compared to the prior year.

Comparative year to date results

Losses incurred, net in the ~~six~~nine months ended ~~June~~September 30, 2019 were ~~$60.9~~$94.9 million compared to ~~$10.4~~$8.9 million in the prior year period. The increase was due to lower favorable loss reserve development on previously received delinquencies in the current year period, which includes the recognition of a probable loss of $23.5 million for litigation of our claims paying practices. Losses incurred on current year delinquencies declined ~~primarily~~ due to a lower estimated claim rate on ~~new delinquent notices received~~delinquencies that occurred in the current year when compared to the prior year.

																																			Composition of losses incurred
		Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended September 30,								Nine Months Ended September 30,
(in millions)	(in millions)	2019			2018			% Change		2019			2018			% Change		(in millions)	2019			2018			% Change		2019			2018			% Change
Current year / New notices	Current year / New notices	$	46.6		$	49.3		(5	)	$	94.1		$	108.4		(13	)	Current year / New notices	$	48.6		$	47.4		2		$	142.6		$	155.8		(8	)
Prior year reserve development	Prior year reserve development	(24.8		)	(62.7		)	(61	)	(33.2		)	(98.0		)	(66	)	Prior year reserve development	(14.6		)	(49.0		)	(70	)	(47.8		)	(146.9		)	(67	)
Losses incurred, net	Losses incurred, net	$	21.8		$	(13.5	)	261		$	60.9		$	10.4		486		Losses incurred, net	$	34.0		$	(1.5	)	N/M		$	94.9		$	8.9		N/M

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 and ~~six~~nine months ended ~~June~~September 30, 2019 compared to the respective prior year periods was primarily due to an increase in losses incurred, net, offset in part by an increase in ~~earned premiums.~~net premiums earned.

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Loss ratio 8.8 % (5.4 )% 12.3 % 2.2 %



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Loss ratio	12.7	%	(0.6	)%	12.4	%	1.2	%

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 net unrealized gains on our holding company investment portfolio were approximately ~~$2.3~~$2.8 million at ~~June~~September 30, 2019 and the portfolio had a modified duration of approximately 1.8 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, 2018 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 has ~~$155.0~~$155 million of debt outstanding in the form of a fixed rate advance from the FHLB. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose

fair value 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 ~~June~~September 30, 2019, MGIC’s Available Assets under the more restrictive application of the PMIERs totaled approximately ~~$4.4~~$4.5 billion, an excess of approximately ~~$1.1~~$1.2 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, including, we believe, to the extent they are revised. Our reinsurance transactions provided an aggregate of approximately $1.3 billion of ~~PMIERs~~ capital credit under the more restrictive application of the PMIERs as of ~~June~~September 30, 2019. Refer to Note 4 - “Reinsurance” to our consolidated financial statements for additional information on our QSR and Home Re Transactions.

We plan to continuously comply with the PMIERs through our operational activities or through the contribution of funds from our holding company, subject to demands on the holding company's resources, as outlined above. Refer to “Overview - Capital - GSEs” of this MD&A for further discussion of PMIERs.

Risk-to-capital

We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operation basis. The risk-to-capital ratio is our net RIF divided by our policyholders’ position. Our net RIF includes both primary and pool risk in force and excludes risk on policies that are currently in default and for which loss reserves have been established, and those covered by reinsurance. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. Policyholders’ position consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve, and a portion of the reserves for unearned premiums. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to the contingency reserve of approximately 50% of net earned premiums. These contributions must generally be maintained for a period of ten years. However, with regulatory approval a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net earned premiums in a calendar year.

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. We are not undertaking any obligation to update any forward looking statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.

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, 2018, as supplemented by Part II, Item 1 A of our Quarterly Report on Form 10-Q for the ~~quarter~~quarters ended June 30, 2019 and March 31, 2019, and by Part II, Item 1A of this Quarterly Report on Form 10-Q. The risk factors in the 10-K, as supplemented by this 10‑Q and through updating of various statistical and other information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our investment portfolio is essentially a fixed income portfolio and is exposed to market risk. Important drivers of the market risk are credit spread risk and interest rate risk.

Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.

We manage credit risk via our investment policy guidelines which primarily place our investments in investment grade securities and limit the amount of our credit exposure to any one issue, issuer and type of instrument. Guideline and investment portfolio detail is available in "Business – Section C, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018.

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 ~~June~~September 30, 2019, 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 ~~second~~third quarter of 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 ~~Item 1A.~~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, 2018, as supplemented by Part II, Item I A of our Quarterly ~~Report~~Reports on Form 10-Q for the ~~Quarter~~Quarters ended March 31, 2019 and June 30, 2019. The risk factors in the 10-K, as supplemented by ~~that 10-Q~~those 10-Qs and 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.

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 that 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.

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 rates (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").

In the first quarter of 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 a limited period of time. As a result, our volume may fluctuate more than it had in the past.

We monitor various competitive and economic factors while seeking to balance both profitability and market share

considerations in developing our pricing strategies. A reduction in our premium rates will reduce our premium yield (net premiums earned divided by the average insurance in force) over time as older insurance policies with higher premium rates run off and new insurance policies with lower 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.

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."

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 dissatisfied with our claims-paying practices (including insurance policy rescissions and claim curtailments). Regarding the concentration of our new business, our largest customer accounted for approximately 5% and 7% of our NIW, and our top ten customers accounted for approximately 24% and 26% of our NIW, in each of 2018 and the first nine months of 2019, respectively.

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.~~insurance."

~~Alternatives to~~Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. The current private mortgage ~~insurance include:~~

~~lenders using FHA, VA and other government~~insurer eligibility requirements ("PMIERs") of each of the GSEs require a mortgage ~~insurance programs,~~

~~investors using~~insurer to maintain a minimum amount of assets to support its insured risk, ~~mitigation and credit risk transfer techniques other than private mortgage insurance,~~

~~lenders and other investors holding mortgages~~as discussed in ~~portfolio and self-insuring, and~~

lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio that has private mortgage insurance.

In 2018, Freddie Mac and Fannie Mae initiated programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. These programs compete with traditional private mortgage insurance and, due to differences in policy terms, they may offer premium rates that are below prevalent single premium lender paid mortgage insurance ("LPMI") rates. We participate in these programs from time to time. See our risk factor titled “~~Changes~~“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 ~~business practices~~following ways:

A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs ~~federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses”~~ ~~for a discussion of various business practices of the GSEs that may be changed, including through expansion or modification of these programs.~~

and/or our customers, potentially resulting in a decrease in the amount of ~~credit enhancement that did not involve traditional private~~our new insurance written.

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 mortgage insurance ~~such as engaging in credit-linked note transactions executed~~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 stable 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 ~~capital~~current or any future markets or using other forms of debt issuances or securitizations that transfer credit risk directly to other investors, including competitors and an affiliate of MGIC; using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; or accepting credit risk without credit enhancement.

The FHA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was 31.1% in the first quarter of 2019, 30.5% in 2018 and 33.9% in 2017. In the past ten years, the FHA’s share has been as low as 30.5% in 2018 and as high as 66.8% in 2009. Factors that influence the FHA’s market share include relative rates and fees, underwriting guidelines and loan limits of the FHA, VA, private mortgage insurers and the GSEs; lenders' perceptions of legal risks under FHA versus GSE programs; flexibility for the FHA to establish new products as a result of ~~federal legislation and programs; returns expected~~the financial strength ratings assigned to be obtained by lenders for Ginnie Mae securitization of FHA-insured loans compared to those obtained from selling loans to the GSEs for securitization; and differences in policy terms, such as the ability of a borrower to cancelour insurance ~~coverage under certain circumstances. We cannot predict how the factors that affect the FHA’s share of~~subsidiaries, our future new insurance written ~~will change in the future.~~

The VA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was 23.4% in the first quarter of 2019, 22.9% in 2018 and 24.7% in 2017. In the past ten years, the VA’s share has been as low as 14.3% in 2009 and as high as 27.2% in 2016. We believe that the VA’s market share has generally been elevated in recent years because of an increase in the number of borrowers that are eligible for the VA’s program, which offers 100% loan-to-value ratio ("LTV") loans and charges a one-time funding fee that cancould be ~~included in the loan amount, and because eligible borrowers have opted to use the VA program when refinancing their mortgages.~~negatively affected.

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.

The GSEs’ charters generally require credit enhancement for a low down payment mortgage loan (a loan with an amount that exceeds 80% of a home’s value) in order for such loan to be eligible for purchase by the GSEs. Lenders generally have used private mortgage insurance to satisfy this credit enhancement requirement. (For information about GSE programs initiated in 2018 that provide for loan level default coverage by various (re)insurers (which may include affiliates of private mortgage insurers), 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.") Because low down payment mortgages purchased by the GSEs have generally been insured with private mortgage insurance, the business practices of the GSEs greatly impact our business and include:


•	the GSEs' private mortgage insurer eligibility requirements, ~~of the GSEs,~~ the financial requirements of which are discussed in our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease asif we are required to maintain more capital in order to maintain our eligibility,”


•	the capital and collateral requirements for participants in the GSEs' alternative forms of credit enhancement 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 level of private mortgage insurance coverage, subject to the limitations of the GSEs’ charters, when private mortgage insurance is used as the required credit enhancement on low down payment mortgages,

the amount of loan level price adjustments and guaranty fees (which result in higher costs to borrowers) that the GSEs assess on loans that require private mortgage insurance,

whether the GSEs select or influence the mortgage lender’s selection of the mortgage insurer providing coverage,

the underwriting standards that determine which loans are eligible for purchase by the GSEs, which can affect the quality of the risk insured by the mortgage insurer and the availability of mortgage loans,

the terms on which mortgage insurance coverage can be canceled before reaching the cancellation thresholds established by law,

the programs established by the GSEs intended to avoid or mitigate loss on insured mortgages and the circumstances in which mortgage servicers must implement such programs,

the terms that the GSEs require to be included in mortgage insurance policies for loans that they purchase, including limitations on the rescission rights of mortgage insurers,


•	the extent to which the GSEs intervene in mortgage insurers’ claims paying practices, rescission practices or rescission settlement practices with lenders, and

the maximum loan limits of the GSEs compared to those of the FHA and other investors.

The Federal Housing Finance Agency (“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 the past, members of Congress have introduced several bills intended to change the~~

~~business practices of the GSEs and the FHA; however, no legislation has been enacted.~~

In ~~March~~September 2019, at the direction of President Trump, ~~directed~~ the U.S. Treasury Department ~~to develop a plan, as soon as practicable, for~~("Treasury") released the “Treasury Housing Reform Plan” (the "Plan"). The Plan recommends administrative and legislative reforms for the housing finance system, ~~(“Treasury Housing Reform Plan”),~~ with such reforms intended to ~~reduce taxpayer risk, expand~~achieve the ~~private sector’s role, modernize~~goals of ending the ~~government housing programs, and achieve sustainable homeownership. The directive outlines numerous goals and objectives, including but not limited to, the end of conservatorship~~conservatorships of the ~~GSEs, increased~~GSEs; increasing competition and participation ofby the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, ~~appropriate capital~~simplifying the qualified mortgage ("QM") rule of the Consumer Financial Protection Bureau ("CFPB"), transferring risk to the private sector, and ~~liquidity requirements for~~eliminating the GSE Patch (discussed below); establishing regulation of the GSEs that safeguards their safety and ~~evaluation~~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. It does not refer to mortgage insurance explicitly; however, it refers to a requirement for credit enhancement on high LTV loans, which is a requirement of the current GSE ~~Patch.~~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 ~~Qualified Mortgage (“QM”)~~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 ~~DTI~~debt-to-income ("DTI") ratio limit of 43% 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. In July 2019, the CFPB released an Advanced Notice of Proposed Rulemaking on the QM definition. The director of the CFPB indicated that the CFPB would consider only a short-term extension of the GSE Patch. Approximately 30%, 24% and ~~24%~~22% of our NIW in the first, second and ~~second~~third quarters of 2019, respectively, was on loans with DTI ratios greater than 43%. However, it is possible that not all future loans with DTI ratios greater than 43% will be affected by a sunset of the GSE Patch, in part because the standard QM definition may be liberalized under the new rules. In this regard, we note that the CFPB asked for comment about whether the definition of QM should retain a direct measure of a consumer’s personal finances (for example, DTI ratio); whether the definition should include an alternative method for assessing financial capacity; whether, if the QM definition retains a DTI ratio limit, the limit should remain 43% or be increased or decreased; and whether loans with DTI ratios above a prescribed limit should be given QM status if certain compensating factors are present. In addition, the Plan indicates that, pending legislation, the GSE Patch should expire; the CFPB should amend its ability-to-repay rule under TILA ("ATR rule") to establish a clear bright line safe harbor that replaces the GSE Patch; and the FHFA and the CFPB should continue to coordinate their efforts to avoid market disruption in connection with the expiration of the GSE Patch and the implementation of any amendments to the CFPB’s ATR rule.

We may insure loans that do not qualify as ~~QMs,~~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 “ability to repay” rules 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.

However, in September 2019, HUD released its Housing Reform Plan and indicated that 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 ~~March 2019,~~addition, Treasury's Plan indicated that the ~~President also directed the Secretary of~~FHFA and HUD toshould develop and implement a ~~plan that would recommend administrative and legislative reforms~~specific understanding as to the ~~programs HUD oversees,~~appropriate roles and overlap between the GSEs and FHA, including

with respect to the GSEs’ acquisitions of high LTV and high DTI loans.

~~those of the FHA and the Government National Mortgage Association.~~ As a result of the matters referred to above, it is uncertain what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future. The timing and impact on our business of any resulting changes is uncertain. ~~Most meaningful~~Many of the proposed changes would require Congressional action to implement and it is difficult to estimate when Congressional action would be final and how long any associated phase-in period may last.

We are ~~involved in legal proceedings~~subject to comprehensive regulation and other requirements, which we may fail to satisfy.

We are subject to comprehensive, detailed regulation, including by state insurance departments. Many of these regulations are designed for the ~~risk of additional legal proceedings in the future.~~

Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, 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 2018 and the first half of 2019, curtailments reduced our average claim paid by approximately 5.8% and 4.7%, respectively.

Under ASC 450-20, until a liability associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimateprotection of our ~~probable loss, including recording a probable loss~~insured policyholders and consumers, rather than for the benefit of $23.5 million in the first quarter of 2019. Until settlement negotiations or legal proceedings for which we have recorded a probable loss are concluded, it is reasonably possible that we will record an additional loss. In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when all of these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $289 million more than the amount of probable loss we have recorded. This estimate of maximum exposure is based upon currently available information and is subject to significant judgment, numerous assumptions and

known and unknown uncertainties, and will include an amount for matters for which we have recorded a probable loss until such matters are concluded. We do not consider settlements concluded until any required GSE approval for such settlements is obtained. On August 2, 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount is in line with our original estimate of the probable loss. The agreement remains subject to GSE approval. The matters underlying the estimate of maximum exposure will change from time to time. This estimate of our maximum exposure does not include interest or consequential or exemplary damages.

investors. Mortgage insurers, including MGIC, have in the past been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act ~~which is commonly known as RESPA,~~("RESPA"), and the notice provisions of the Fair Credit Reporting Act ~~which is commonly known as FCRA.~~("FCRA"). While these proceedings in the aggregate ~~have~~did not ~~resulted~~result in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse effect on us. ~~In addition, various regulators, including~~To the ~~CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief~~extent that we are construed to make independent credit decisions in connection with ~~alleged violations~~our contract underwriting activities, we also could be subject to increased regulatory requirements under the Equal Credit Opportunity Act ("ECOA"), FCRA, and other laws. Under ECOA, examination may also be made of ~~RESPA. The~~whether a mortgage insurer's underwriting decisions have a disparate impact on persons belonging to a protected class in violation of the law.

Although their scope varies, state insurance ~~law provisions~~laws generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of ~~many states prohibit paying~~the insurance business, including payment for the referral of insurance business, premium rates and ~~provide~~discrimination in pricing, and minimum capital requirements. For more information about state capital requirements, see our risk factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.” For information about regulation of data privacy, see our risk factor titled “We could be

The minimum capital required by the risk-based capital framework contained in the exposure draft released by the NAIC in May 2016 would be, in part, a function of certain loan and economic factors, including property location, loan-to-value 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 on the provisions of the capital requirements when they are released in final formdeveloped and become effective, and what form they will take.

Your ownership in our ~~mix of business~~company may ~~affect~~be diluted by additional capital that we raise or if the ~~minimum capital we are required to hold under the new framework.~~

~~The percentage~~holders of our NIW from all single-premium policies (LPMI and BPMI, combined) has ranged from approximately 10% in 2013 to 19% in 2017 and was 17% in 2018 and 16% in the first half of 2019. Depending on the actual life of a single premium policy and its premium rate relative tooutstanding convertible debt convert 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~~debt into shares of our insurance written from 2013 through 2019, 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 on 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 remain favorable.

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 have been trending lower.

Our ability to rescind insurance coverage became more limited for insurance we wrote beginning in mid-2012, which, as of June 30, 2019, represents approximately 84% of our flow, primary insurance in force. As a result of revised PMIERs requirements, we have revised our master policy and expect it to be effective for new insurance written beginning March 1, 2020, subject to state regulatory approvals. 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.

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 Fannie Mae and Freddie Mac 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~~.

Even when home prices are stable or rising, mortgages with certain characteristics have higher probabilities of claims. As of June 30, 2019, mortgages with these characteristics in our primary risk in force included mortgages with LTV ratios greater than 95% (15.4%), loans with borrowers having FICO scores below 620 (2.1%), mortgages with borrowers having FICO scores of 620-679 (9.9%), mortgages with limited underwriting, including limited borrower documentation (1.9%), and mortgages with borrowers having DTI ratios greater than 45% (or where no ratio is available) (14.6%), 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. 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 changed our operational procedures to account for this, 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.common stock.

~~The widespread use of loan level pricing systems by the private mortgage insurance industry (discussed in~~As noted above under 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") will make 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~~continue to meet the GSEs’ private mortgage insurer eligibility requirements and our ~~mix~~returns may ~~fluctuate~~decrease if we are required to maintain more ~~as a result.~~

~~If state or federal regulations or statutes are changed~~capital in ~~ways that ease mortgage lending standards and/or requirements, or if lenders seek ways~~order to ~~replace business in times of lower mortgage originations, it is possible that more mortgage loans could be originated with higher risk characteristics than~~maintain our eligibility,” although we are currently ~~being originated, such as loans~~in compliance with lower FICO scores and higher DTIs. 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,the requirements of the PMIERs, there can be no assurance that we would not seek to issue non-dilutive debt capital or to raise additional equity capital to manage our capital position under the ~~premiums earned and~~PMIERs or for other purposes. Any future issuance of equity securities may dilute your ownership interest in our company. In addition, the ~~associated investment income will be adequate to compensate for actual losses even under~~market price of our ~~current underwriting requirements. We do, however, believe that our insurance written beginning~~common stock could decline as a result of sales of a large number of shares or similar securities in the ~~second half of 2008 will generate underwriting profits.~~

~~Our holding company debt obligations materially exceed our holding company cash and investments.~~market or the perception that such sales could occur.

At ~~June 30,2019,~~September 30, 2019, we had ~~approximately $333~~outstanding $390 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~~9% Convertible Junior Subordinated Debentures due in ~~2023~~2063 ("~~5.75% Notes") and $390 million of~~ 9% ~~Debentures~~Debentures") (of which approximately $133 million was purchased, and is held, by MGIC, and is eliminated on the consolidated balance sheet). ~~Annual debt service on~~The principal amount of the ~~5.75% Notes and~~ 9% Debentures ~~outstanding as~~is currently convertible, at the holder’s option, at a conversion rate, which is subject to adjustment, of ~~June 30, 2019, is~~74.0741 common shares per $1,000 principal amount of debentures. This represents a conversion price of 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.~~$13.50 per share. 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~~by our holding company ~~cash inflow, is restricted by insurance regulation. MGIC is~~will result in an adjustment to the conversion rate and price at the end of 2019.

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 ~~source~~amount of ~~dividends,~~the 9% Debentures being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds $17.55 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 ~~first half~~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 a discussion of the dilutive effects of our convertible securities on our earnings per share, see Note 4 – “Earnings Per Share” to our consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on February 22, 2019. As noted above, during 2019 and in 2018, it paid a total of $140 million and $220 million, respectively, in dividends to our holding company. We expect MGIC to continue to pay quarterly dividends of at least the $70 million amount paid in the second quarter of 2019, subject to approval by its Board of Directors. We ask the OCI not to object before MGIC pays dividends.

~~In the second quarter of 2019 and in~~ 2018, we repurchased ~~approximately 1.8 million and 16.0 million~~ shares of our common stock ~~respectively, using approximately $25 million~~ and ~~$175 million of holding company resources, respectively. Since the end of the second quarter, through August 5, 2019, we repurchased approximately 1.8 million shares for approximately $23 million. We~~ may ~~repurchase up to an additional $177 million of our common stock through the end of 2020 under a share repurchase program approved by our Board of Directors~~do so in the first quarter of 2019. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time. 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.

~~The price of our common stock may fluctuate significantly, which may make it difficult for holders to resell common stock when they want or at a price they find attractive.~~

~~The market price for our common stock may fluctuate significantly.~~future. In addition, ~~to the risk factors described herein, the following factors may~~we have an adverse impact on the market price for our common stock: announcements by us or our competitors of acquisitions or strategic initiatives; our actual or anticipated quarterly and annual operating results; changes in expectations of future financial performance (including incurred losses on our insurance in force); changes in estimates of securities analysts or rating agencies; actual or anticipated

~~changes in our share repurchase program or dividends; changes in general conditions~~ in the ~~economy, the mortgage insurance industry or the financial markets; changes in operating performance or market valuation of companies~~past purchased, and may in the mortgage insurance industry; the addition or departure of key personnel; changes in tax law; and adverse press or news announcements affecting us or the industry. In addition, ownership by certain types of investors may affect the market price and trading volume offuture purchase, our common stock. For example, ownership in our common stock by investors such as index funds and exchange-traded funds can affect the stock’s price when those investors must purchase or sell our common stock because the investors have experienced significant cash inflows or outflows, the index to which our common stock belongs has been rebalanced, or our common stock is added to and/or removed from an index (due to changes in our market capitalization, for example).debt securities.



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	~~June~~September 30, 2019
☐	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



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)



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



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



Table of contents
		Page
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements:
	Consolidated Balance Sheets - ~~June~~September 30, 2019 (Unaudited) and December 31, 2018	7
	Consolidated Statements of Operations (Unaudited) - Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	8
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	9
	Consolidated Statements of Shareholders’ Equity (Unaudited) - Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	10
	Consolidated Statements of Cash Flows (Unaudited) - ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	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	16
	Note 6 - Earnings Per Share	17
	Note 7 - Investments	18
	Note 8 - Fair Value Measurements	21
	Note 9 - Other Comprehensive Income	24
	Note 10 - Benefit Plans	25
	Note 11 - Loss Reserves	26
	Note 12 - Shareholders’ Equity	28
	Note 13 - Share-Based Compensation	28
	Note 14 - Statutory Information	2829

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures about Market Risk	5556
Item 4	Controls and Procedures	5556

PART II — OTHER INFORMATION
Item 1	Legal Proceedings	5657
Item 1A	Risk Factors	5657
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 6	Exhibits	62
INDEX TO EXHIBITS		62
SIGNATURES		63

																	MGIC INVESTMENT CORPORATION AND SUBSIDIARIES	CONSOLIDATED BALANCE SHEETS
(In thousands)	(In thousands)	Note	June 30, 2019			December 31, 2018			(In thousands)	Note	September 30, 2019			December 31, 2018
ASSETS	ASSETS		(Unaudited)						ASSETS		(Unaudited)
Investment portfolio:	Investment portfolio:	7 / 8							Investment portfolio:	7 / 8
Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,357,436; 2018 - $5,196,784)			$	5,504,823		$	5,151,987
Equity securities, at fair value (cost 2019 - $3,991; 2018 - $3,993)		2 / 7 / 8	4,114			3,932
Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,473,893; 2018 - $5,196,784)									Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,473,893; 2018 - $5,196,784)		$	5,660,992		$	5,151,987
Equity securities, at fair value (cost 2019 - $17,205; 2018 - $3,993)									Equity securities, at fair value (cost 2019 - $17,205; 2018 - $3,993)	2 / 7 / 8	17,360			3,932
Other invested assets, at cost	Other invested assets, at cost	2 / 7 / 8	3,100			3,100			Other invested assets, at cost	2 / 7 / 8	3,100			3,100
Total investment portfolio	Total investment portfolio		5,512,037			5,159,019			Total investment portfolio		5,681,452			5,159,019
Cash and cash equivalents	Cash and cash equivalents		218,908			151,892			Cash and cash equivalents		165,425			151,892
Restricted cash and cash equivalents	Restricted cash and cash equivalents		6,275			3,146			Restricted cash and cash equivalents		6,329			3,146
Accrued investment income	Accrued investment income		48,272			48,001			Accrued investment income		48,320			48,001
Reinsurance recoverable on loss reserves	Reinsurance recoverable on loss reserves	4	18,402			33,328			Reinsurance recoverable on loss reserves	4	19,566			33,328
Reinsurance recoverable on paid losses	Reinsurance recoverable on paid losses		16,903			2,948			Reinsurance recoverable on paid losses		1,573			2,948
Premiums receivable	Premiums receivable		57,492			55,090			Premiums receivable		51,804			55,090
Home office and equipment, net	Home office and equipment, net		51,607			51,734			Home office and equipment, net		50,540			51,734
Deferred insurance policy acquisition costs	Deferred insurance policy acquisition costs		17,669			17,888			Deferred insurance policy acquisition costs		18,010			17,888
Deferred income taxes, net	Deferred income taxes, net		20,932			69,184			Deferred income taxes, net		11,583			69,184
Other assets	Other assets		87,040			85,572			Other assets		92,149			85,572
Total assets	Total assets		$	6,055,537		$	5,677,802		Total assets		$	6,146,751		$	5,677,802

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY								LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:	Liabilities:								Liabilities:
Loss reserves	Loss reserves	11	$	621,902		$	674,019		Loss reserves	11	$	602,297		$	674,019
Unearned premiums	Unearned premiums		400,999			409,985			Unearned premiums		392,556			409,985
Federal Home Loan Bank advance	Federal Home Loan Bank advance	3	155,000			155,000			Federal Home Loan Bank advance	3	155,000			155,000
Senior notes	Senior notes	3	420,290			419,713			Senior notes	3	420,578			419,713
Convertible junior subordinated debentures	Convertible junior subordinated debentures	3	256,872			256,872			Convertible junior subordinated debentures	3	256,872			256,872
Other liabilities	Other liabilities		164,809			180,322			Other liabilities		159,831			180,322
Total liabilities	Total liabilities		2,019,872			2,095,911			Total liabilities		1,987,134			2,095,911
Contingencies	Contingencies	5							Contingencies	5
Shareholders’ equity:	Shareholders’ equity:	12							Shareholders’ equity:	12
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2019 - 371,353; 2018 - 371,353; shares outstanding 2019 - 354,177; 2018 - 355,371)			371,353			371,353
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2019 - 371,353; 2018 - 371,353; shares outstanding 2019 - 348,709; 2018 - 355,371)									Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2019 - 371,353; 2018 - 371,353; shares outstanding 2019 - 348,709; 2018 - 355,371)		371,353			371,353
Paid-in capital	Paid-in capital		1,860,578			1,862,536			Paid-in capital		1,864,973			1,862,536
Treasury stock at cost (shares 2019 - 17,176; 2018 - 15,982)			(194,070		)	(175,059		)
Treasury stock at cost (shares 2019 - 22,644; 2018 - 15,982)									Treasury stock at cost (shares 2019 - 22,644; 2018 - 15,982)		(263,196		)	(175,059		)
Accumulated other comprehensive income (loss), net of tax	Accumulated other comprehensive income (loss), net of tax		30,810			(124,214		)	Accumulated other comprehensive income (loss), net of tax		63,782			(124,214		)
Retained earnings	Retained earnings		1,966,994			1,647,275			Retained earnings		2,122,705			1,647,275
Total shareholders’ equity	Total shareholders’ equity		4,035,665			3,581,891			Total shareholders’ equity		4,159,617			3,581,891
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity		$	6,055,537		$	5,677,802		Total liabilities and shareholders’ equity		$	6,146,751		$	5,677,802

											Long-term debt obligations
Table	3.1					3.1
(In millions)	(In millions)	June 30, 2019		December 31, 2018		(In millions)	September 30, 2019		December 31, 2018
FHLB Advance - 1.91%, due February 2023	FHLB Advance - 1.91%, due February 2023	$	155.0	$	155.0	FHLB Advance - 1.91%, due February 2023	$	155.0	$	155.0
5.75% Notes, due August 2023 (par value: $425 million)	5.75% Notes, due August 2023 (par value: $425 million)	420.3		419.7		5.75% Notes, due August 2023 (par value: $425 million)	420.6		419.7
9% Debentures, due April 2063 ⁽¹⁾	9% Debentures, due April 2063 ⁽¹⁾	256.9		256.9		9% Debentures, due April 2063 ⁽¹⁾	256.9		256.9
Long-term debt, carrying value	Long-term debt, carrying value	$	832.2	$	831.6	Long-term debt, carrying value	$	832.5	$	831.6

																											Reinsurance
Table	4.1													4.1
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	(In thousands)	2019			2018			2019			2018			(In thousands)	2019			2018			2019			2018
Premiums earned:	Premiums earned:													Premiums earned:
Direct	Direct	$	287,183		$	268,236		$	566,796		$	533,487		Direct	$	294,909		$	275,044		$	861,705		$	808,531
Assumed	Assumed	1,015			106			1,887			227			Assumed	1,388			709			3,275			936
Ceded	Ceded	(41,096		)	(21,378		)	(71,820		)	(54,643		)	Ceded	(28,440		)	(25,327		)	(100,260		)	(79,970		)
Net premiums earned	Net premiums earned	$	247,102		$	246,964		$	496,863		$	479,071		Net premiums earned	$	267,857		$	250,426		$	764,720		$	729,497

Losses incurred:	Losses incurred:													Losses incurred:
Direct	Direct	$	25,276		$	(16,778	)	$	66,080		$	14,723		Direct	$	36,755		$	(2,081	)	$	102,835		$	12,642
Assumed	Assumed	(9		)	(100		)	(76		)	(10		)	Assumed	(34		)	55			(110		)	45
Ceded	Ceded	(3,431		)	3,423			(5,105		)	(4,318		)	Ceded	(2,736		)	508			(7,841		)	(3,810		)
Losses incurred, net	Losses incurred, net	$	21,836		$	(13,455	)	$	60,899		$	10,395		Losses incurred, net	$	33,985		$	(1,518	)	$	94,884		$	8,877


⁽¹⁾	Premiums are ceded on an earned and received basis as defined in the agreements. The ~~three and six~~nine months ended ~~June~~September 30, 2019 include the $6.8 million termination fee discussed in “2015 QSR Transaction” above.


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


⁽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.

																			Earnings per share
Table	6.1									6.1
		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	(In thousands, except per share data)	2019		2018		2019		2018		(In thousands, except per share data)	2019		2018		2019		2018
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income	Net income	$	167,778	$	186,814	$	319,719	$	330,451	Net income	$	176,934	$	181,900	$	496,653	$	512,351
Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	355,734		368,578		355,694		369,736		Weighted average common shares outstanding - basic	351,475		362,180		354,272		367,190
Basic earnings per share	Basic earnings per share	$	0.47	$	0.51	$	0.90	$	0.89	Basic earnings per share	$	0.50	$	0.50	$	1.40	$	1.40

Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income	Net income	$	167,778	$	186,814	$	319,719	$	330,451	Net income	$	176,934	$	181,900	$	496,653	$	512,351
Interest expense, net of tax ⁽¹⁾:	Interest expense, net of tax ⁽¹⁾:									Interest expense, net of tax ⁽¹⁾:
9% Debentures	9% Debentures	4,566		4,566		9,132		9,132		9% Debentures	4,566		4,566		13,698		13,698
Diluted income available to common shareholders	Diluted income available to common shareholders	$	172,344	$	191,380	$	328,851	$	339,583	Diluted income available to common shareholders	$	181,500	$	186,466	$	510,351	$	526,049

Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	355,734		368,578		355,694		369,736		Weighted average common shares outstanding - basic	351,475		362,180		354,272		367,190
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Unvested RSUs	Unvested RSUs	1,841		1,275		1,913		1,472		Unvested RSUs	2,072		1,697		1,966		1,547
9% Debentures	9% Debentures	19,028		19,028		19,028		19,028		9% Debentures	19,028		19,028		19,028		19,028
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	376,603		388,881		376,635		390,236		Weighted average common shares outstanding - diluted	372,575		382,905		375,266		387,765
Diluted earnings per share	Diluted earnings per share	$	0.46	$	0.49	$	0.87	$	0.87	Diluted earnings per share	$	0.49	$	0.49	$	1.36	$	1.36


⁽¹⁾	The periods ended ~~June~~September 30, 2019 and 2018 were tax-effected at a rate of 21%.


Details of fixed income securities by category as of June 30, 2019
Details of fixed income securities by category as of September 30, 2019											Details of fixed income securities by category as of September 30, 2019
Table	7.1a										7.1a
(In thousands)	(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses) ⁽¹⁾			Fair Value		(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	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	194,222	$	1,474	$	(127	)	$	195,569	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	197,748	$	1,456	$	(75	)	$	199,129
Obligations of U.S. states and political subdivisions	Obligations of U.S. states and political subdivisions	1,566,166		88,379		(648		)	1,653,897		Obligations of U.S. states and political subdivisions	1,552,283		108,763		(494		)	1,660,552
Corporate debt securities	Corporate debt securities	2,570,289		61,459		(3,134		)	2,628,614		Corporate debt securities	2,653,124		74,630		(3,151		)	2,724,603
Asset backed securities (“ABS”)	Asset backed securities (“ABS”)	215,016		2,787		(102		)	217,701		Asset backed securities (“ABS”)	212,792		2,819		(65		)	215,546
Residential mortgage backed securities (“RMBS”)	Residential mortgage backed securities (“RMBS”)	213,024		183		(4,710		)	208,497		Residential mortgage backed securities (“RMBS”)	248,098		1,022		(2,663		)	246,457
Commercial mortgage backed securities (“CMBS”)	Commercial mortgage backed securities (“CMBS”)	268,189		4,450		(750		)	271,889		Commercial mortgage backed securities (“CMBS”)	280,364		6,714		(266		)	286,812
Collateralized loan obligations (“CLO”)		330,530		55		(1,929		)	328,656
Collateralized loan obligations (“CLOs”)											Collateralized loan obligations (“CLOs”)	329,484		81		(1,672		)	327,893
Total fixed income securities	Total fixed income securities	$	5,357,436	$	158,787	$	(11,400	)	$	5,504,823	Total fixed income securities	$	5,473,893	$	195,485	$	(8,386	)	$	5,660,992



Details of fixed income securities by category as of December 31, 2018
Table	7.1b
(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		$	167,655	$	597	$	(1,076	)	$	167,176
Obligations of U.S. states and political subdivisions		1,701,826		29,259		(10,985		)	1,720,100
Corporate debt securities		2,439,173		2,103		(40,514		)	2,400,762
ABS		111,953		226		(146		)	112,033
RMBS		189,238		32		(10,309		)	178,961
CMBS		276,352		888		(9,580		)	267,660
CLOs		310,587		2		(5,294		)	305,295
Total fixed income securities		$	5,196,784	$	33,107	$	(77,904	)	$	5,151,987


⁽¹⁾	At ~~June~~September 30, 2019 and December 31, 2018, there were no other-than-temporary impairment losses recorded in other comprehensive income.

											Fixed income securities maturity schedule
Table	7.2					7.2
		June 30, 2019					September 30, 2019
(In thousands)	(In thousands)	Amortized cost		Fair Value		(In thousands)	Amortized cost		Fair Value
Due in one year or less	Due in one year or less	$	367,161	$	367,474	Due in one year or less	$	372,478	$	373,388
Due after one year through five years	Due after one year through five years	1,900,096		1,930,664		Due after one year through five years	1,928,972		1,966,387
Due after five years through ten years	Due after five years through ten years	930,951		976,031		Due after five years through ten years	1,001,486		1,059,774
Due after ten years	Due after ten years	1,132,469		1,203,911		Due after ten years	1,100,219		1,184,735
		4,330,677		4,478,080			4,403,155		4,584,284

ABS	ABS	215,016		217,701		ABS	212,792		215,546
RMBS	RMBS	213,024		208,497		RMBS	248,098		246,457
CMBS	CMBS	268,189		271,889		CMBS	280,364		286,812
CLOs	CLOs	330,530		328,656		CLOs	329,484		327,893
Total as of June 30, 2019		$	5,357,436	$	5,504,823
Total as of September 30, 2019						Total as of September 30, 2019	$	5,473,893	$	5,660,992



Details of equity security investments as of June 30, 2019
Table	7.3a
(In thousands)		Cost		Gross Gains		Gross Losses			Fair Value
Equity securities		$	3,991	$	129	$	(6	)	$	4,114



Details of equity security investments as of December 31, 2018
Table	7.3b
(In thousands)		Cost		Gross Gains		Gross Losses			Fair Value
Equity securities		$	3,993	$	11	$	(72	)	$	3,932


Unrealized loss aging for securities by type and length of time as of June 30, 2019
Unrealized loss aging for securities by type and length of time as of September 30, 2019																	Unrealized loss aging for securities by type and length of time as of September 30, 2019
Table	7.4a																7.4a
		Less Than 12 Months					12 Months or Greater					Total						Less Than 12 Months					12 Months or Greater					Total
(In thousands)	(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			(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	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	12,483	$	(19	)	$	45,423	$	(108	)	$	57,906	$	(127	)	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	25,284	$	(48	)	$	7,364	$	(27	)	$	32,648	$	(75	)
Obligations of U.S. states and political subdivisions	Obligations of U.S. states and political subdivisions	2,283		(468		)	57,193		(180		)	59,476		(648		)	Obligations of U.S. states and political subdivisions	4,965		(467		)	10,007		(27		)	14,972		(494		)
Corporate debt securities	Corporate debt securities	29,333		(1,987		)	298,419		(1,147		)	327,752		(3,134		)	Corporate debt securities	135,541		(2,818		)	78,842		(333		)	214,383		(3,151		)
ABS	ABS	9,257		(102		)	—		—			9,257		(102		)	ABS	8,998		(65		)	—		—			8,998		(65		)
RMBS	RMBS	32,181		(297		)	158,325		(4,413		)	190,506		(4,710		)	RMBS	47,166		(309		)	116,534		(2,354		)	163,700		(2,663		)
CMBS	CMBS	—		—			78,697		(750		)	78,697		(750		)	CMBS	21,882		(196		)	13,579		(70		)	35,461		(266		)
CLOs	CLOs	247,983		(1,587		)	45,137		(342		)	293,120		(1,929		)	CLOs	147,272		(1,008		)	113,322		(664		)	260,594		(1,672		)
Total	Total	$	333,520	$	(4,460	)	$	683,194	$	(6,940	)	$	1,016,714	$	(11,400	)	Total	$	391,108	$	(4,911	)	$	339,648	$	(3,475	)	$	730,756	$	(8,386	)



Unrealized loss aging for securities by type and length of time as of December 31, 2018
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		$	23,710		$	(15	)	$	69,146	$	(1,061	)	$	92,856	$	(1,076	)
Obligations of U.S. states and political subdivisions		316,655		��	(3,875		)	358,086		(7,110		)	674,741		(10,985		)
Corporate debt securities		1,272,279			(18,130		)	785,627		(22,384		)	2,057,906		(40,514		)
ABS		51,324			(146		)	—		—			51,324		(146		)
RMBS		24			—			178,573		(10,309		)	178,597		(10,309		)
CMBS		65,704			(1,060		)	163,272		(8,520		)	228,976		(9,580		)
CLOs		296,497			(5,294		)	—		—			296,497		(5,294		)
Total		$	2,026,193		$	(28,520	)	$	1,554,704	$	(49,384	)	$	3,580,897	$	(77,904	)


Assets carried at fair value by hierarchy level as of June 30, 2019
Assets carried at fair value by hierarchy level as of September 30, 2019										Assets carried at fair value by hierarchy level as of September 30, 2019
Table	8.1a									8.1a
(In thousands)	(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)		(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	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	195,569	$	42,825	$	152,744	$	—	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	199,129	$	40,545	$	158,584	$	—
Obligations of U.S. states and political subdivisions	Obligations of U.S. states and political subdivisions	1,653,897		—		1,653,897		—		Obligations of U.S. states and political subdivisions	1,660,552		—		1,660,552		—
Corporate debt securities	Corporate debt securities	2,628,614		—		2,628,614		—		Corporate debt securities	2,724,603		—		2,724,603		—
ABS	ABS	217,701		—		217,701		—		ABS	215,546		—		215,546		—
RMBS	RMBS	208,497		—		208,497		—		RMBS	246,457		—		246,457		—
CMBS	CMBS	271,889		—		271,889		—		CMBS	286,812		—		286,812		—
CLOs	CLOs	328,656		—		328,656		—		CLOs	327,893		—		327,893		—
Total fixed income securities	Total fixed income securities	5,504,823		42,825		5,461,998		—		Total fixed income securities	5,660,992		40,545		5,620,447		—
Equity securities	Equity securities	4,114		4,114		—		—		Equity securities	17,360		17,360		—		—
Other ⁽¹⁾	Other ⁽¹⁾	169,584		169,584		—		—		Other ⁽¹⁾	161,518		161,518		—		—
Real estate acquired ⁽²⁾	Real estate acquired ⁽²⁾	10,250		—		—		10,250		Real estate acquired ⁽²⁾	7,779		—		—		7,779
Total	Total	$	5,688,771	$	216,523	$	5,461,998	$	10,250	Total	$	5,847,649	$	219,423	$	5,620,447	$	7,779



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


⁽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.


Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2019
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended September 30, 2019											Fair value roll-forward for financial instruments classified as Level 3 for the three months ended September 30, 2019
Table	8.2a										8.2a
(In thousands)	(In thousands)	Fixed income		Equity Securities		Total Investments		Real Estate Acquired			(In thousands)	Fixed income		Equity Securities		Total Investments		Real Estate Acquired
Balance at March 31, 2019		$	—	$	—	$	—	$	11,639
Balance at June 30, 2019											Balance at June 30, 2019	$	—	$	—	$	—	$	10,250
Purchases	Purchases	—		—		—		7,107			Purchases	—		—		—		4,681
Sales	Sales	—		—		—		(8,152		)	Sales	—		—		—		(7,173		)
Included in earnings and reported as losses incurred, net	Included in earnings and reported as losses incurred, net	—		—		—		(344		)	Included in earnings and reported as losses incurred, net	—		—		—		21
Balance at June 30, 2019		$	—	$	—	$	—	$	10,250
Balance at September 30, 2019											Balance at September 30, 2019	$	—	$	—	$	—	$	7,779

																			Financial assets and liabilities not measured at fair value
Table	8.3									8.3
		June 30, 2019				December 31, 2018					September 30, 2019				December 31, 2018
(In thousands)	(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value		(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets	Financial assets									Financial assets
Other invested assets	Other invested assets	$	3,100	$	3,100	$	3,100	$	3,100	Other invested assets	$	3,100	$	3,100	$	3,100	$	3,100

Financial liabilities	Financial liabilities									Financial liabilities
FHLB Advance	FHLB Advance	$	155,000	$	155,690	$	155,000	$	150,551	FHLB Advance	$	155,000	$	156,637	$	155,000	$	150,551
5.75% Senior Notes	5.75% Senior Notes	420,290		462,702		419,713		425,791		5.75% Senior Notes	420,578		467,317		419,713		425,791
9% Convertible Junior Subordinated Debentures	9% Convertible Junior Subordinated Debentures	256,872		340,669		256,872		338,069		9% Convertible Junior Subordinated Debentures	256,872		351,699		256,872		338,069
Total financial liabilities	Total financial liabilities	$	832,162	$	959,061	$	831,585	$	914,411	Total financial liabilities	$	832,450	$	975,653	$	831,585	$	914,411


Components of other comprehensive income (loss)	Components of other comprehensive income (loss)													Components of other comprehensive income (loss)
Table	9.1													9.1
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	(In thousands)	2019			2018			2019			2018			(In thousands)	2019			2018			2019			2018
Net unrealized investment gains (losses) arising during the period	Net unrealized investment gains (losses) arising during the period	$	89,562		$	(12,558	)	$	192,183		$	(94,145	)	Net unrealized investment gains (losses) arising during the period	$	39,712		$	(15,288	)	$	231,895		$	(109,433	)
Income tax (expense) benefit	Income tax (expense) benefit	(18,808		)	2,636			(40,358		)	19,770			Income tax (expense) benefit	(8,340		)	3,211			(48,698		)	22,981
Net of taxes	Net of taxes	70,754			(9,922		)	151,825			(74,375		)	Net of taxes	31,372			(12,077		)	183,197			(86,452		)

Net changes in benefit plan assets and obligations	Net changes in benefit plan assets and obligations	1,961			491			4,050			1,116			Net changes in benefit plan assets and obligations	2,024			558			6,074			1,674
Income tax expense	Income tax expense	(412		)	(103		)	(851		)	(234		)	Income tax expense	(424		)	(118		)	(1,275		)	(352		)
Net of taxes	Net of taxes	1,549			388			3,199			882			Net of taxes	1,600			440			4,799			1,322

Total other comprehensive income (loss)	Total other comprehensive income (loss)	91,523			(12,067		)	196,233			(93,029		)	Total other comprehensive income (loss)	41,736			(14,730		)	237,969			(107,759		)
Total income tax (expense) benefit	Total income tax (expense) benefit	(19,220		)	2,533			(41,209		)	19,536			Total income tax (expense) benefit	(8,764		)	3,093			(49,973		)	22,629
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	$	72,303		$	(9,534	)	$	155,024		$	(73,493	)	Total other comprehensive income (loss), net of tax	$	32,972		$	(11,637	)	$	187,996		$	(85,130	)


Reclassifications from AOCI	Reclassifications from AOCI													Reclassifications from AOCI
Table	9.2													9.2
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	(In thousands)	2019			2018			2019			2018			(In thousands)	2019			2018			2019			2018
Reclassification adjustment for net realized gains (losses) ⁽¹⁾	Reclassification adjustment for net realized gains (losses) ⁽¹⁾	$	1,701		$	(3,621	)	$	(978	)	$	(3,712	)	Reclassification adjustment for net realized gains (losses) ⁽¹⁾	$	2,772		$	(2,567	)	$	1,794		$	(6,279	)
Income tax (expense) benefit	Income tax (expense) benefit	(357		)	760			206			779			Income tax (expense) benefit	(582		)	539			(376		)	1,318
Net of taxes	Net of taxes	1,344			(2,861		)	(772		)	(2,933		)	Net of taxes	2,190			(2,028		)	1,418			(4,961		)

Reclassification adjustment related to benefit plan assets and obligations ⁽²⁾	Reclassification adjustment related to benefit plan assets and obligations ⁽²⁾	(1,961		)	(491		)	(4,050		)	(1,116		)	Reclassification adjustment related to benefit plan assets and obligations ⁽²⁾	(2,024		)	(558		)	(6,074		)	(1,674		)
Income tax benefit	Income tax benefit	412			103			851			234			Income tax benefit	424			118			1,275			352
Net of taxes	Net of taxes	(1,549		)	(388		)	(3,199		)	(882		)	Net of taxes	(1,600		)	(440		)	(4,799		)	(1,322		)

Total reclassifications	Total reclassifications	(260		)	(4,112		)	(5,028		)	(4,828		)	Total reclassifications	748			(3,125		)	(4,280		)	(7,953		)
Total income tax benefit		55			863			1,057			1,013
Total income tax (expense) benefit														Total income tax (expense) benefit	(158		)	657			899			1,670
Total reclassifications, net of tax	Total reclassifications, net of tax	$	(205	)	$	(3,249	)	$	(3,971	)	$	(3,815	)	Total reclassifications, net of tax	$	590		$	(2,468	)	$	(3,381	)	$	(6,283	)


⁽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.

																					Rollforward of AOCI
Table	9.3										9.3
		Six Months Ended June 30, 2019										Nine Months Ended September 30, 2019
(In thousands)	(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)			(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, December 31, 2018, net of tax	Balance, December 31, 2018, net of tax	$	(35,389	)	$	(88,825	)	$	(124,214	)	Balance, December 31, 2018, net of tax	$	(35,389	)	$	(88,825	)	$	(124,214	)
Other comprehensive income before reclassifications	Other comprehensive income before reclassifications	151,053			—			151,053			Other comprehensive income before reclassifications	184,615			—			184,615
Less: Amounts reclassified from AOCI	Less: Amounts reclassified from AOCI	(772		)	(3,199		)	(3,971		)	Less: Amounts reclassified from AOCI	1,418			(4,799		)	(3,381		)
Balance, June 30, 2019, net of tax		$	116,436		$	(85,626	)	$	30,810
Balance, September 30, 2019, net of tax											Balance, September 30, 2019, net of tax	$	147,808		$	(84,026	)	$	63,782

																											Components of net periodic benefit cost
Table	10.1													10.1
		Three Months Ended June 30,													Three Months Ended September 30,
		Pension and Supplemental Executive Retirement Plans						Other Postretirement Benefit Plans							Pension and Supplemental Executive Retirement Plans						Other Postretirement Benefit Plans
(In thousands)	(In thousands)	2019			2018			2019			2018			(In thousands)	2019			2018			2019			2018
Service cost	Service cost	$	2,176		$	2,703		$	360		$	310		Service cost	$	2,086		$	2,633		$	337		$	290
Interest cost	Interest cost	3,898			3,765			274			203			Interest cost	3,926			3,774			283			208
Expected return on plan assets	Expected return on plan assets	(4,825		)	(5,555		)	(1,447		)	(1,591		)	Expected return on plan assets	(4,866		)	(5,563		)	(1,447		)	(1,590		)
Amortization of net actuarial losses/(gains)	Amortization of net actuarial losses/(gains)	2,039			1,684			—			(79		)	Amortization of net actuarial losses/(gains)	2,103			1,734			—			(62		)
Amortization of prior service cost/(credit)	Amortization of prior service cost/(credit)	(70		)	(88		)	(9		)	(1,026		)	Amortization of prior service cost/(credit)	(71		)	(88		)	(8		)	(1,026		)
Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)	$	3,218		$	2,509		$	(822	)	$	(2,183	)	Net periodic benefit cost (benefit)	$	3,178		$	2,490		$	(835	)	$	(2,180	)

																											Components of net periodic benefit cost
Table	10.2													10.2
		Six Months Ended June 30,													Nine Months Ended September 30,
		Pension and Supplemental Executive Retirement Plans						Other Postretirement Benefits							Pension and Supplemental Executive Retirement Plans						Other Postretirement Benefits
(in thousands)	(in thousands)	2019			2018			2019			2018			(in thousands)	2019			2018			2019			2018
Service cost	Service cost	$	4,172		$	5,265		$	672		$	580		Service cost	$	6,258		$	7,898		$	1,009		$	870
Interest cost	Interest cost	7,853			7,547			565			417			Interest cost	11,779			11,321			848			625
Expected return on plan assets	Expected return on plan assets	(9,733		)	(11,125		)	(2,892		)	(3,179		)	Expected return on plan assets	(14,599		)	(16,688		)	(4,339		)	(4,769		)
Recognized net actuarial gain (loss)	Recognized net actuarial gain (loss)	4,206			3,469			—			(125		)	Recognized net actuarial gain (loss)	6,309			5,203			—			(187		)
Amortization of prior service cost	Amortization of prior service cost	(140		)	(175		)	(17		)	(2,052		)	Amortization of prior service cost	(211		)	(263		)	(25		)	(3,078		)
Net period benefit cost (benefit)	Net period benefit cost (benefit)	$	6,358		$	4,981		$	(1,672	)	$	(4,359	)	Net period benefit cost (benefit)	$	9,536		$	7,471		$	(2,507	)	$	(6,539	)


•	2019 - 195 items were removed from the delinquent inventory with an amount paid of $4 million.