SEC Info - MGIC Investment Corp. - ‘10-Q’ for 6/30/22

(Unaudited)

ASSETS

Investment portfolio:

7 / 8

Fixed income, available-for-sale, at fair value (amortized cost 2022 - $6,087,857; 2021 - $6,397,658)

i 5,712,820

i 6,587,581

Equity securities, at fair value (cost 2022 - $15,986; 2021 - $15,838)

i 14,481

i 16,068

Other invested assets, at cost

i 850

i 3,100

Total investment portfolio

i 5,728,151

i 6,606,749

Cash and cash equivalents

i 410,188

i 284,690

Restricted cash and cash equivalents

i 9,073

i 20,268

Accrued investment income

i 51,635

i 51,902

Reinsurance recoverable on loss reserves

i 53,958

i 66,905

Reinsurance recoverable on paid losses

i 310

i 36,275

Premiums receivable

i 57,547

i 56,540

Home office and equipment, net

i 45,072

i 45,614

Deferred insurance policy acquisition costs

i 21,003

i 21,671

Deferred income taxes, net

i 75,617

i —

Other assets

i 147,053

i 134,394

Total assets

i 6,599,607

i 7,325,008

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Loss reserves

i 727,178

i 883,522

Unearned premiums

i 217,739

i 241,690

Federal Home Loan Bank advance

i —

i 155,000

Senior notes

i 882,572

i 881,508

Convertible junior subordinated debentures

i 35,339

i 110,204

Other liabilities

i 163,760

i 191,702

Total liabilities

i 2,026,588

i 2,463,626

Contingencies

Shareholders’ equity:

Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2022 - 371,353; 2021 - 371,353; shares outstanding 2022 - 305,436; 2021 - 320,336)

i 371,353

Paid-in capital

i 1,791,380

i 1,794,906

Treasury stock at cost (shares 2022 - 65,917; 2021 - 51,017)

( i 887,959)

( i 675,265)

Accumulated other comprehensive income (loss), net of tax

( i 325,738)

i 119,697

Retained earnings

i 3,623,983

i 3,250,691

Total shareholders’ equity

i 4,573,019

i 4,861,382

Total liabilities and shareholders’ equity

i 6,599,607

i 7,325,008

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q2 2022 | 8

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands, except per share data)

Note

2022

2021

2022

2021

Revenues:

Premiums written:

Direct

i 276,536

i 283,523

i 551,329

i 566,528

Assumed

i 2,055

i 2,202

i 4,086

i 4,333

Ceded

( i 34,270)

( i 43,988)

( i 68,429)

( i 87,625)

Net premiums written

i 244,321

i 241,737

i 486,986

i 483,236

Decrease in unearned premiums, net

i 11,376

i 9,802

i 23,951

i 23,348

Net premiums earned

i 255,697

i 251,539

i 510,937

i 506,584

Investment income, net of expenses

i 40,305

i 41,129

i 78,567

i 79,022

Net gains (losses) on investments and other financial instruments

7/8

( i 4,746)

i 2,911

( i 5,518)

i 5,161

Other revenue

i 1,860

i 2,273

i 3,746

i 5,042

Total revenues

i 293,116

i 297,852

i 587,732

i 595,809

Losses and expenses:

Losses incurred, net

( i 99,058)

i 29,164

( i 118,372)

i 68,800

Amortization of deferred policy acquisition costs

i 2,982

i 3,025

i 5,722

i 5,721

Other underwriting and operating expenses, net

i 53,449

i 53,798

i 108,181

i 101,821

Loss on debt extinguishment

i 6,391

i —

i 28,498

i —

Interest expense

i 13,461

i 17,997

i 28,373

i 35,982

Total losses and expenses

( i 22,775)

i 103,984

i 52,402

i 212,324

Income before tax

i 315,891

i 193,868

i 535,330

i 383,485

Provision for income tax

i 66,623

i 40,817

i 111,049

i 80,413

Net income

i 249,268

i 153,051

i 424,281

i 303,072

Earnings per share:

Basic

i 0.81

i 0.45

i 1.36

i 0.89

Diluted

i 0.80

i 0.44

i 1.34

i 0.87

Weighted average common shares outstanding - basic

i 308,840

i 339,326

i 312,388

i 339,116

Weighted average common shares outstanding - diluted

i 313,545

i 356,536

i 319,012

i 356,461

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q2 2022 | 9

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Note

2022

2021

2022

2021

Net income

i 249,268

i 153,051

i 424,281

i 303,072

Other comprehensive income (loss), net of tax:

Change in unrealized investment gains and losses

( i 175,380)

i 45,054

( i 446,318)

( i 49,075)

Benefit plan adjustments

i 490

i 663

i 883

i 1,536

Other comprehensive income (loss), net of tax

( i 174,890)

i 45,717

( i 445,435)

( i 47,539)

Comprehensive income (loss)

i 74,378

i 198,768

( i 21,154)

i 255,533

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q2 2022 | 10

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Note

2022

2021

2022

2021

Common stock

Balance, beginning and end of period

i i 371,353 /

Paid-in capital

Balance, beginning of period, as previously reported

i 1,783,611

i 1,782,041

i 1,794,906

i 1,862,042

Cumulative effect of debt with conversion options accounting standards update

—

( i 68,289)

Balance, beginning of the period, as adjusted

i 1,783,611

i 1,782,041

i 1,794,906

i 1,793,753

Reissuance of treasury stock, net under share-based compensation plans

i —

( i 348)

( i 17,867)

( i 15,745)

Equity compensation

i 7,769

i 4,567

i 14,341

i 8,252

Balance, end of period

i 1,791,380

i 1,786,260

i 1,791,380

i 1,786,260

Treasury stock

Balance, beginning of period

( i 793,696)

( i 384,550)

( i 675,265)

( i 393,326)

Reissuance of treasury stock, net under share-based compensation plans

i —

i 9,179

i 8,776

Repurchase of common stock

( i 94,263)

i —

( i 221,873)

i —

Balance, end of period

( i 887,959)

( i 384,550)

( i 887,959)

( i 384,550)

Accumulated other comprehensive income (loss)

Balance, beginning of period

( i 150,848)

i 123,565

i 119,697

i 216,821

Other comprehensive income (loss), net of tax

( i 174,890)

i 45,717

( i 445,435)

( i 47,539)

Balance, end of period

( i 325,738)

i 169,282

( i 325,738)

i 169,282

Retained earnings

Balance, beginning of period, as previously reported

i 3,399,935

i 2,839,884

i 3,250,691

i 2,642,096

Cumulative effect of debt with conversion options accounting standards update

—

i 68,289

Balance, beginning of the period, as adjusted

i 3,399,935

i 2,839,884

i 3,250,691

i 2,710,385

Net income

i 249,268

i 153,051

i 424,281

i 303,072

Cash dividends

( i 25,220)

( i 20,573)

( i 50,989)

( i 41,095)

Balance, end of period

i 3,623,983

i 2,972,362

i 3,623,983

i 2,972,362

Total shareholders’ equity

i 4,573,019

i 4,914,707

i 4,573,019

i 4,914,707

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q2 2022 | 11

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended June 30,

(In thousands)

2022

2021

Cash flows from operating activities:

Net income

i 424,281

i 303,072

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

i 29,523

i 32,472

Deferred tax expense

i 3,378

i 6,863

Loss on debt extinguishment

i 28,498

i —

Net (gains) losses on investments and other financial instruments

i 5,518

( i 5,161)

Change in certain assets and liabilities:

Accrued investment income

i 267

( i 2,217)

Reinsurance recoverable on loss reserves

i 12,947

( i 16,111)

Reinsurance recoverable on paid losses

i 35,965

( i 37)

Premium receivable

( i 1,007)

( i 593)

Deferred insurance policy acquisition costs

i 668

( i 1,069)

Profit commission receivable

( i 3,054)

( i 4,464)

Loss reserves

( i 156,344)

i 55,699

Unearned premiums

( i 23,951)

( i 23,348)

Return premium accrual

( i 4,500)

i 2,500

Current income taxes

i 22,831

( i 1,357)

Other, net

( i 13,341)

i 3,173

Net cash provided by (used in) operating activities

i 361,679

i 349,422

Cash flows from investing activities:

Purchases of investments

( i 375,754)

( i 1,097,418)

Proceeds from sales of investments

i 266,374

i 142,754

Proceeds from maturity of fixed income securities

i 401,112

i 548,727

Additions to property and equipment

( i 2,146)

( i 1,405)

Net cash provided by (used in) investing activities

i 289,586

( i 407,342)

Cash flows from financing activities:

Purchase of convertible junior subordinated debentures

( i 74,865)

i —

Repayment of FHLB Advance

( i 155,000)

i —

Cash portion of loss on debt extinguishment

( i 28,498)

i —

Repurchase of common stock

( i 219,073)

i —

Dividends paid

( i 50,838)

( i 41,186)

Payment of withholding taxes related to share-based compensation net share settlement

( i 8,688)

( i 6,621)

Net cash provided by (used in) financing activities

( i 536,962)

( i 47,807)

Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents

i 114,303

( i 105,727)

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period

i 304,958

i 296,680

Cash and cash equivalents and restricted cash and cash equivalents at end of period

i 419,261

i 190,953

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q2 2022 | 12

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. i 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, 2021 included in our 2021 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 an interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The substantial majority of our NIW 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 risk in force, calculated from tables of factors with several risk dimensions). Based on our application of the PMIERs, as of June 30, 2022, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Subsequent events

We have considered subsequent events through the date of this filing.

Note 2. i Significant Accounting Policies

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 944

Long-Duration Contracts

•

ASU 2018-12 - Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

January 1, 2023

Targeted Improvements for Long Duration Contracts: ASU 2018-12

In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies the amortization of deferred insurance policy acquisition costs. It also provides updates to the recognition, measurement, presentation and disclosure requirements for long duration contracts, which generally do not apply to mortgage insurance. The updated guidance requires deferred acquisition costs to be amortized on a constant level basis over the expected term of the related contracts, versus in proportion to premium, gross profits, or gross margins. In November 2020, FASB issued ASU 2020-11 deferring the effective date, so that it applies for annual periods beginning after December 15, 2022, including interim periods within those annual periods. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact.

MGIC Investment Corporation - Q2 2022 | 13

Note 3. i Debt

Debt obligations

The aggregate carrying values of our long-term debt obligations and their par values, if different, as of June 30, 2022 and December 31, 2021 are presented in table 3.1 below.

Long-term debt obligations

Table

3.1

(In millions)

FHLB Advance - 1.91%, due February 2023

i —

i 155.0

5.75% Notes, due August 2023 (par value: $242.3 million)

i 241.6

i 241.3

5.25% Notes, due August 2028 (par value: $650 million)

i 641.0

i 640.2

9% Debentures, due April 2063 (1)

i 35.3

i 110.2

Long-term debt, carrying value

i 917.9

i 1,146.7

(1)Convertible at any time prior to maturity at the holder’s option, at a conversion rate, which is subject to adjustment, of 76.5496 shares per $ i 1,000 principal amount, representing a conversion price of approximately $ i 13.06 per share. The payment of dividends by our holding company results in adjustments to the conversion rate, with such adjustments generally deferred until the end of the year.

The i 5.75% Senior Notes (“ i 5.75% Notes”), i 5.25% Senior Notes (5.25% Notes) and i 9% Convertible Junior Subordinated Debentures (“ i 9% Debentures”) are obligations of our holding company, MGIC Investment Corporation.

During the first half of 2022, we repurchased $ i 74.9 million in aggregate principal amount of our 9% Debentures at a purchase price of $ i 102.0 million plus accrued interest. The repurchase of 9% Debentures resulted in a $ i 27.2 million loss on debt extinguishment on our consolidated statement of operations and a reduction of approximately i 5.7 million shares in our potentially dilutive shares.

The Federal Home Loan Bank Advance (the “FHLB Advance”) was an obligation of MGIC. In the first quarter of 2022, we repaid the outstanding principal balance of the FHLB Advance at a prepayment price of $ i 156.3 million, incurring a prepayment fee of $ i 1.3 million.

In July, we redeemed the outstanding principal balance of the i 5.75% Notes at a price of $ i 248.4 million plus accrued interest. The redemption of the 5.75% Notes resulted in a $ i 6.8 million loss on debt extinguishment, which will be recorded in the third quarter of 2022.

See Note 7 - “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information pertaining to our debt obligations. As of June 30, 2022 we are in compliance with all of our debt covenants.

Interest payments

Interest payments for the six months ended June 30, 2022 and 2021 were $ i 29.2 million and $ i 35.2 million, respectively.

MGIC Investment Corporation - Q2 2022 | 14

Note 4. i Reinsurance

The reinsurance agreements to which we are a party, are discussed below. i The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.

Reinsurance

Table

4.1

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2022

2021

2022

2021

Premiums earned:

Direct

i 287,846

i 293,047

i 575,119

i 589,318

Assumed

i 2,121

i 2,480

i 4,247

i 4,891

Ceded (1)

( i 34,270)

( i 43,988)

( i 68,429)

( i 87,625)

Net premiums earned

i 255,697

i 251,539

i 510,937

i 506,584

Losses incurred:

Direct

( i 109,334)

i 37,983

( i 130,426)

i 86,054

Assumed

( i 154)

i 79

( i 361)

i 54

Ceded

i 10,430

( i 8,898)

i 12,415

( i 17,308)

Losses incurred, net

( i 99,058)

i 29,164

( i 118,372)

i 68,800

(1)Ceded premiums earned net of profit commission.

Quota share reinsurance

We have entered into quota share reinsurance ("QSR") transactions with panels of third-party reinsurers to cede a fixed quota share percentage of premiums earned and received and losses incurred on insurance covered by the transactions. We receive the benefit of a ceding commission equal to i 20% of premiums ceded before profit commission. We also receive the benefit of a profit commission through a reduction of premiums we cede. The profit commission varies inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at annual loss ratios higher than we have experienced on our QSR Transactions.

Each of our QSR Transactions typically have annual loss ratio caps of i 300% and lifetime loss ratios of i 200%.

Table 4.2 below provides additional detail regarding our QSR Transactions.

Quota Share Reinsurance

Table

4.2

Quota Share Contract

Covered Policy Years

Quota Share %

Annual Loss Ratio to Exhaust Profit Commission (1)

Contractual Termination Date

2015 QSR

Prior to 2017

i 15.0

i 68.0

December 31, 2031

2019 QSR

2019

i 30.0

i 62.0

December 31, 2030

2020 QSR

2020

i 12.5

i 62.0

December 31, 2031

2020 QSR and 2021 QSR

2020

i 17.5

i 62.0

December 31, 2032

2020 QSR and 2021 QSR

2021

i 17.5

i 61.9

December 31, 2032

2021 QSR and 2022 QSR

2021

i 12.5

i 57.5

December 31, 2032

2021 QSR and 2022 QSR

2022

i 15.0

i 57.5

December 31, 2033

2022 QSR and 2023 QSR

2022

i 15.0

i 62.0

December 31, 2033

2022 QSR and 2023 QSR

2023

i 15.0

i 62.0

December 31, 2034

Credit Union QSR (2)

2020-2025

i 65.0

i 50.0

December 31, 2039

(1) We will receive a profit commission provided the annual loss ratio on policies covered under the transaction remains below this ratio.

(2) Eligible credit union business written before April 1, 2020 was covered by our 2019 and 2015 QSR Transactions.

We can elect to terminate the QSR Transactions under specified scenarios without penalty upon prior written notice, including if we will receive less than i 90% ( i 80% for the Credit Union QSR Transaction) of the full credit amount under the PMIERs, full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.

MGIC Investment Corporation - Q2 2022 | 15

Table 4.3 provides additional detail regarding optional termination dates and optional reductions to our quota share percentage which can, in each case, be elected by us for a fee. Under the optional reduction to the quota share percentage, we may reduce our quota share percentage from the original percentage shown in table 4.2 to the percentage shown in table 4.3.

Quota Share Reinsurance

Table

4.3

Quota Share Contract

Optional Termination Date (1)

Optional Quota Share % Reduction Date (2)

Optional Reduced Quota Share %

2015 QSR

2019 QSR

25% or 20%

2020 QSR

10.5% or 8%

2020 QSR and 2021 QSR, 2020 Policy year

14.5% or 12%

2020 QSR and 2021 QSR, 2021 Policy year

December 31, 2023

14.5% or 12%

2021 QSR and 2022 QSR. 2021 Policy Year

December 31, 2023

May 29, 2021 - December 31, 2021

10.5% or 8%

2021 QSR and 2022 QSR, 2022 Policy Year

December 31, 2024

July 1, 2023

12.5% or 10%

2022 QSR and 2023 QSR, 2022 Policy Year

December 31, 2024

July 1, 2023

12.5% or 10%

2022 QSR and 2023 QSR, 2023 Policy Year

December 31, 2025

July 1, 2024

12.5% or 10%

(1) We can elect early termination of the QSR Transaction beginning on this date, and bi-annually thereafter.

(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.

See Note 9 “Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2021 for information about the termination of our 2017 and 2018 QSR Transactions, which resulted in a reinsurance recoverable on paid losses of $ i 36 million for loss and loss adjustment expenses (“LAE”) reserves incurred at the time of termination.

Table 4.4 below provides a summary of our QSR Transactions, for the three and six months ended June 30, 2022 and 2021.

Quota Share Reinsurance

Table

4.4

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2022

2021

2022

2021

Ceded premiums written and earned, net of profit commission

i 14,995

i 33,983

i 37,373

i 67,373

Ceded losses incurred

( i 10,430)

i 8,903

( i 12,415)

i 17,308

Ceding commissions (1)

i 12,762

i 12,991

i 25,034

i 26,058

Profit commission

i 48,814

i 30,978

i 87,794

i 62,922

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

Ceded losses incurred for the three and six months ended June 30, 2022 primarily reflects favorable loss reserve development. See Note 11 - “Loss Reserves” for discussion of our loss reserves.

Under the terms of our QSR Transactions, ceded premiums earned, ceding commissions, profit commission, and ceded paid loss and LAE are settled net on a quarterly basis. The ceded premiums earned due after deducting the related ceding commission and profit commission is reported within Other liabilities on the consolidated balance sheets.

The reinsurance recoverable on loss reserves related to our QSR Transactions was $ i 54.0 million as of June 30, 2022 and $ i 66.9 million as of December 31, 2021. The reinsurance recoverable balance is secured by funds on deposit from reinsurers, the minimum amount of which is based on the greater of 1) a reinsurer's funding requirements under PMIERs or 2) ceded reserves and unpaid losses. Each of the reinsurers under our quota share reinsurance agreements described above has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three.

MGIC Investment Corporation - Q2 2022 | 16

Excess of loss reinsurance

We have entered into an excess of loss reinsurance transaction, in the traditional reinsurance market with a panel of third-party reinsurers (the “XOL Transaction”) to provide up to $ i 175 million of reinsurance coverage on eligible NIW in 2022. The XOL Transaction has a contractual termination date after approximately i ten years, with an optional termination date after i seven years and quarterly thereafter. For the covered policies, we retain the first layer of the aggregate losses paid, and the reinsurers will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. The reinsurance coverage is subject to adjustment based on the risk characteristics of the covered loans. The reinsurance premiums ceded to the XOL Transaction are based off the remaining reinsurance coverage levels.

We also have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special purpose insurers (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. Subject to certain conditions, the reinsurance coverage decreases over a period of either i 10 or i 12.5 years, depending on the transaction, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.

The Home Re Entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. Each ILN is non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.

When a “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments. As of June 30, 2022 a "Trigger Event" has occurred on our Home Re 2019-1 ILN transaction because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded a percentage of the total reinsured principal balance of loans specified under each transaction. A "Trigger Event" has also occurred on the Home Re 2022-1 ILN transactions because the credit enhancement of the most senior tranche is less than the target credit enhancement.

Tables 4.5a and 4.5b provide a summary of our Home Re Transactions as of June 30, 2022 and December 31, 2021.

Excess of Loss Reinsurance - Home Re Transactions

4.5a

($ in thousands)

Issue Date

Policy In force Dates

Optional Call Date (1)

Legal Maturity

Initial First Layer Retention

Initial Excess of Loss Reinsurance Coverage

Home Re 2022-1, Ltd.

April 26, 2022

April 25, 2028

i 12.5 years

$ i 325,589

$ i 473,575

Home Re 2021-2, Ltd.

August 3, 2021

January 1, 2021 - May 28, 2021

July 25, 2028

i 12.5 years

i 190,159

i 398,429

Home Re 2021-1, Ltd.

February 2, 2021

August 1, 2020 - December 31, 2020

January 25, 2028

i 12.5 years

i 211,159

i 398,848

Home Re 2020-1, Ltd.

October 29, 2020

January 1, 2020 - July 31, 2020

October 25, 2027

i 10 years

i 275,283

i 412,917

Home Re 2019-1, Ltd.

May 25, 2019

January 1, 2018 - March 31, 2019

May 25, 2026

i 10 years

i 185,730

i 315,739

Home Re 2018-1, Ltd.

October 30, 2018

July 1, 2016 - December 31, 2017

October 25, 2025

i 10 years

i 168,691

i 318,636

(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after the respective Optional Call Date.

4.5b

Remaining First Layer Retention

Remaining Excess of Loss Reinsurance Coverage

($ in thousands)

Home Re 2022-1, Ltd.

i 325,589

—

i 473,575

—

Home Re 2021-2, Ltd.

i 190,159

i 384,694

i 398,429

Home Re 2021-1, Ltd.

i 211,142

i 337,270

i 387,830

Home Re 2020-1, Ltd.

i 275,169

i 275,204

i 162,705

i 234,312

Home Re 2019-1, Ltd.

i 183,789

i 183,917

i 208,146

Home Re 2018-1, Ltd.

i 165,075

i 165,365

i 184,664

i 218,343

MGIC Investment Corporation - Q2 2022 | 17

The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the remaining reinsurance coverage levels, and the investment income collected on the collateral assets held in a reinsurance trust account and used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. The amount of monthly reinsurance coverage premium ceded on the Home Re Transactions will fluctuate due to changes in the reference rate and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. The Home Re 2021-2 and Home Re 2022-1 Transactions reference SOFR, while the remaining Home Re Transactions reference one-month LIBOR. As a result, we concluded that each Home Re Transaction contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at June 30, 2022, were not material to our consolidated balance sheet and the changes in fair value during the three and six months ended June 30, 2022 were not material to our consolidated statements of operations. (See Note 8 - “Fair Value Measurements”). Total ceded premiums under the Home Re Transactions were $ i 18.2 million and $ i 30.0 million for the three and six months ended June 30, 2022, and $ i 10.0 million and $ i 20.3 million for the three and six months ended June 30, 2021.

At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity that could be significant to the Home Re Entity, consolidation of the Home Re Entities 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 30, 2022, and December 31, 2021, 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 the VIEs under our reinsurance transactions. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance transactions. 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 transactions. 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 transactions 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 transactions should its claims not be paid. We consider our exposure to loss from our reinsurance transactions with the VIEs to be remote.

Table 4.6 presents the total assets of the Home Re Entities as of June 30, 2022 and December 31, 2021.


Home Re total assets
Table	4.6
(In thousands)
Home Re Entity		Total VIE Assets
June 30, 2022
Home Re 2022-1 Ltd.		$	i 473,575
Home Re 2021-2 Ltd.		i 391,130
Home Re 2021-1 Ltd.		i 345,131
Home Re 2020-1 Ltd.		i 174,006
Home Re 2019-1 Ltd.		i 208,146
Home Re 2018-1 Ltd.		i 193,106

December 31, 2021
Home Re 2021-2 Ltd.		$	i 398,429
Home Re 2021-1 Ltd.		i 398,848
Home Re 2020-1 Ltd.		i 251,387
Home Re 2019-1 Ltd.		i 208,146
Home Re 2018-1 Ltd.		i 218,343

The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least i 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaamf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.

The total calculated PMIERs credit for risk ceded under our excess of loss transactions is generally based on the PMIERs requirement of the covered policies and the attachment and detachment points of the coverage, all of which fluctuate over time. (see Note 1 - “Nature of Business and Basis of Presentation”).

MGIC Investment Corporation - Q2 2022 | 18

Note 5. i Litigation and Contingencies

Before paying an insurance claim, generally 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 or deny a claim on the loan (both referred to herein as “rescissions”). In addition, our insurance policies generally provide that we can reduce a claim if the servicer did not comply with its obligations under our insurance policy (such reduction referred to as a “curtailment”). In recent years, an immaterial percentage of claims received have been resolved by rescissions. In the first half of 2022 and in 2021, curtailments reduced our average claim paid by approximately i 5.3% and i 4.4%, respectively. The COVID-19 related foreclosure moratoriums and forbearance plans decreased our claims paid activity beginning in the second quarter of 2020. It is difficult to predict the level of curtailments once foreclosure activity returns to a more typical level. 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 loss associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. When we determine that a loss is probable and can be reasonably estimated, we record our best estimate of our probable loss. In those cases, until settlement negotiations or legal proceedings are concluded (including the receipt of any necessary GSE approvals), it is possible that we will record an additional loss.

We are monitoring litigation that involves refunds of mortgage insurance premiums under the Homeowners Protection Act. In one case, we expect to be named as a third-party defendant. We are unable to assess the potential impact of any such litigation at this time. In addition, from time to time, we are involved in other disputes and 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 disputes and legal proceedings will not have a material adverse effect on our financial position or results of operations.

MGIC Investment Corporation - Q2 2022 | 19

Note 6. i 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. The determination of whether components are dilutive is calculated independently for each period. 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 i 9% Debentures result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive.

Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.

Earnings per share

Table

6.1

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands, except per share data)

2022

2021

2022

2021

Basic earnings per share:

Net income

i 249,268

i 153,051

i 424,281

i 303,072

Weighted average common shares outstanding - basic

i 308,840

i 339,326

i 312,388

i 339,116

Basic earnings per share

i 0.81

i 0.45

i 1.36

i 0.89

Diluted earnings per share:

Net income

i 249,268

i 153,051

i 424,281

i 303,072

Interest expense, net of tax (1):

9% Debentures

i 719

i 3,712

i 2,231

i 7,423

Diluted income available to common shareholders

i 249,987

i 156,763

i 426,512

i 310,495

Weighted average common shares outstanding - basic

i 308,840

i 339,326

i 312,388

i 339,116

Effect of dilutive securities:

Unvested RSUs

i 1,613

i 1,425

i 1,821

i 1,560

9% Debentures

i 3,092

i 15,785

i 4,803

i 15,785

Weighted average common shares outstanding - diluted

i 313,545

i 356,536

i 319,012

i 356,461

Diluted earnings per share

i 0.80

i 0.44

i 1.34

i 0.87

(1) Interest expense for the three and six months ended June 30, 2022 and 2021, respectively, has been tax effected at a rate of i i i i 21 / / / %.

MGIC Investment Corporation - Q2 2022 | 20

Note 7. i Investments

Fixed income securities

Our fixed income securities classified as available-for-sale at June 30, 2022 and December 31, 2021 are shown in tables 7.1a and 7.1b below.

Details of fixed income securities by category as of June 30, 2022

Table

7.1a

(In thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized (Losses)

Fair Value

U.S. Treasury securities and obligations of U.S. government corporations and agencies

i 123,595

i 19

( i 6,295)

i 117,319

Obligations of U.S. states and political subdivisions

i 2,455,698

i 11,529

( i 174,093)

i 2,293,134

Corporate debt securities

i 2,532,263

i 945

( i 158,155)

i 2,375,053

ABS

i 108,064

i 9

( i 4,805)

i 103,268

RMBS

i 240,109

i 31

( i 17,591)

i 222,549

CMBS

i 282,090

i 50

( i 15,529)

i 266,611

CLOs

i 337,823

i 6

( i 10,418)

i 327,411

Foreign government debt

i 4,486

i —

( i 740)

i 3,746

Commercial paper

i 3,729

i —

i 3,729

Total fixed income securities

i 6,087,857

i 12,589

( i 387,626)

i 5,712,820

Details of fixed income securities by category as of December 31, 2021

Table

7.1b

(In thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized (Losses)

Fair Value

U.S. Treasury securities and obligations of U.S. government corporations and agencies

i 133,990

i 285

( i 868)

i 133,407

Obligations of U.S. states and political subdivisions

i 2,408,688

i 133,361

( i 7,396)

i 2,534,653

Corporate debt securities

i 2,704,586

i 75,172

( i 13,776)

i 2,765,982

ABS

i 150,888

i 830

( i 1,008)

i 150,710

RMBS

i 309,991

i 2,397

( i 3,278)

i 309,110

CMBS

i 315,330

i 5,736

( i 1,936)

i 319,130

CLOs

i 360,436

i 609

( i 106)

i 360,939

Foreign government debt

i 13,749

i —

( i 99)

i 13,650

Total fixed income securities

i 6,397,658

i 218,390

( i 28,467)

i 6,587,581

We had $ i 12.6 million and $ i 13.4 million of investments at fair value on deposit with various states as of June 30, 2022 and December 31, 2021, respectively, due to regulatory requirements of those state insurance departments. In connection with our insurance and reinsurance activities within MAC and MIC, insurance subsidiaries of MGIC, we are required to maintain assets in trusts for the benefit of contractual counterparties, which had investments at fair value of $ i 177.6 million and $ i 189.8 million at June 30, 2022 and December 31, 2021, respectively.

MGIC Investment Corporation - Q2 2022 | 21

The amortized cost and fair values of fixed income securities at June 30, 2022, by contractual maturity, are shown in table 7.2 below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.

Fixed income securities maturity schedule

Table

7.2

(In thousands)

Amortized cost

Fair Value

Due in one year or less

i 299,593

i 297,963

Due after one year through five years

i 1,536,218

i 1,489,620

Due after five years through ten years

i 1,822,146

i 1,695,419

Due after ten years

i 1,461,814

i 1,309,979

i 5,119,771

i 4,792,981

ABS

i 108,064

i 103,268

RMBS

i 240,109

i 222,549

CMBS

i 282,090

i 266,611

CLOs

i 337,823

i 327,411

Total as of June 30, 2022

i 6,087,857

i 5,712,820

The proceeds from the sale of fixed income securities classified as available-for-sale along with gross gains (losses) associated with such sales are shown in table 7.3 below.

Details of fixed income securities gains (losses)

Table

7.3

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

2022

2021

2022

2021

Gains on sales

i 987

i 2,275

i 5,121

i 5,291

Losses on sales

( i 1,093)

( i 353)

( i 5,750)

( i 745)

Change in credit allowance

i —

i 31

i —

i 49

Proceeds from sales of fixed income securities

i 46,730

i 83,235

i 263,554

i 140,062

Equity securities

The cost and fair value of investments in equity securities at June 30, 2022 and December 31, 2021 are shown in tables 7.4a and 7.4b below.

Details of equity security investments as of June 30, 2022

Table

7.4a

(In thousands)

Cost

Gross Gains

Gross Losses

Fair Value

Equity securities

i 15,986

i —

( i 1,505)

i 14,481

Details of equity security investments as of December 31, 2021

Table

7.4b

(In thousands)

Cost

Gross Gains

Gross Losses

Fair Value

Equity securities

i 15,838

i 264

( i 34)

i 16,068

For the three and six months ended June 30, 2022, we recognized $ i 0.7 million and $ i 1.7 million of net losses on equity securities still held as of June 30, 2022. For the three and six months ended June 30, 2021, we recognized $ i 0.2 million of net gains and $ i 0.2 million of net losses, on equity securities still held as of June 30, 2021.

MGIC Investment Corporation - Q2 2022 | 22

Other invested assets

At December 31, 2021, the FHLB Advance amount was secured by $ i 167.2 million of eligible collateral. As a result of the prepayment of the outstanding principal balance on the FHLB Advance we are no longer required to maintain collateral. Our other invested assets balance includes an investment in FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility.

Unrealized investment losses

Tables 7.5a and 7.5b below summarize, for all available-for-sale investments in an unrealized loss position at June 30, 2022 and December 31, 2021, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.5a and 7.5b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report on Form 10-K.

Unrealized loss aging for securities by type and length of time as of June 30, 2022

Table

7.5a

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

i 106,464

( i 6,062)

i 2,561

( i 233)

i 109,025

( i 6,295)

Obligations of U.S. states and political subdivisions

i 1,471,282

( i 168,115)

i 34,851

( i 5,978)

i 1,506,133

( i 174,093)

Corporate debt securities

i 2,043,621

( i 130,168)

i 172,444

( i 27,987)

i 2,216,065

( i 158,155)

ABS

i 79,046

( i 4,066)

i 17,173

( i 739)

i 96,219

( i 4,805)

RMBS

i 140,146

( i 10,365)

i 81,398

( i 7,226)

i 221,544

( i 17,591)

CMBS

i 228,340

( i 12,783)

i 33,890

( i 2,746)

i 262,230

( i 15,529)

CLOs

i 269,852

( i 8,363)

i 51,649

( i 2,055)

i 321,501

( i 10,418)

Foreign government debt

i 3,746

( i 740)

i —

i 3,746

( i 740)

Total

i 4,342,497

( i 340,662)

i 393,966

( i 46,964)

i 4,736,463

( i 387,626)

Unrealized loss aging for securities by type and length of time as of December 31, 2021

Table

7.5b

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

i 91,154

( i 790)

i 2,616

( i 78)

i 93,770

( i 868)

Obligations of U.S. states and political subdivisions

i 452,021

( i 7,189)

i 15,540

( i 207)

i 467,561

( i 7,396)

Corporate debt securities

i 865,085

( i 13,260)

i 10,997

( i 516)

i 876,082

( i 13,776)

ABS

i 100,064

( i 998)

i 1,552

( i 10)

i 101,616

( i 1,008)

RMBS

i 180,586

( i 2,548)

i 31,641

( i 730)

i 212,227

( i 3,278)

CMBS

i 89,889

( i 1,887)

i 1,511

( i 49)

i 91,400

( i 1,936)

CLOs

i 177,663

( i 71)

i 21,973

( i 35)

i 199,636

( i 106)

Foreign government debt

i 13,649

( i 99)

i —

i 13,649

( i 99)

Total

i 1,970,111

( i 26,842)

i 85,830

( i 1,625)

i 2,055,941

( i 28,467)

Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2022 presented in table 7.5a above are not indicative of the ultimate collectability of the current amortized cost of the securities. The unrealized losses in all categories of our investments at June 30, 2022 were primarily caused by an increase in prevailing interest rates. We also rely upon estimates of several credit and non-credit factors in our review and evaluation of individual investments to determine whether a credit impairment exists. All of the securities in an unrealized loss position are current with respect to their interest obligations.

There were i 1,164 and i 610 securities in an unrealized loss position at June 30, 2022 and December 31, 2021, respectively.

MGIC Investment Corporation - Q2 2022 | 23

Note 8. i Fair Value Measurements

Recurring fair value measurements

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

•Fixed income securities:

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies: Securities with valuations derived from quoted prices for identical instruments in active markets that we can access are categorized in Level 1 of the fair value hierarchy. Securities valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information in the valuation process are categorized as Level 2 of the fair value hierarchy.

Corporate Debt Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy.

Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation. These securities are generally categorized in Level 2 of the fair value hierarchy.

Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities. These securities are generally categorized in Level 2 of the fair value hierarchy.

Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable. These securities are generally categorized in Level 2 of the fair value hierarchy.

Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices. These securities are generally categorized in Level 2 of the fair value hierarchy.

Collateralized loan obligations ("CLOs") are valued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity. These securities are generally categorized in Level 2 of the fair value hierarchy.

Foreign government debt is valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy.

Commercial Paper, which has an original maturity greater than 90 days, is valued using market data for comparable instruments of similar maturity and average yields. These securities are generally categorized in Level 2 of the fair value hierarchy.

•Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”) and Bond Mutual Funds, with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in Level 1 of the fair value hierarchy.

•Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in level 1 of the fair value hierarchy. Instruments in this category valued using market data for comparable instruments are classified as level 2 in the fair value hierarchy.

MGIC Investment Corporation - Q2 2022 | 24

Assets measured at fair value, by hierarchy level, as of June 30, 2022 and December 31, 2021 are shown in tables 8.1a and 8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report on Form 10-K.

Assets carried at fair value by hierarchy level as of June 30, 2022

Table

8.1a

(In thousands)

Total Fair Value

Quoted Prices in Active Markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

U.S. Treasury securities and obligations of U.S. government corporations and agencies

i 117,319

i 105,652

i 11,667

i —

Obligations of U.S. states and political subdivisions

i 2,293,134

i —

i 2,293,134

i —

Corporate debt securities

i 2,375,053

i —

i 2,375,053

i —

ABS

i 103,268

i —

i 103,268

i —

RMBS

i 222,549

i —

i 222,549

i —

CMBS

i 266,611

i —

i 266,611

i —

CLOs

i 327,411

i —

i 327,411

i —

Foreign government debt

i 3,746

i —

i 3,746

i —

Commercial paper

i 3,729

i —

i 3,729

i —

Total fixed income securities

i 5,712,820

i 105,652

i 5,607,168

i —

Equity securities

i 14,481

i —

Cash equivalents

i 399,062

i 394,273

i 4,789

i —

Total

i 6,126,363

i 514,406

i 5,611,957

i —

Assets carried at fair value by hierarchy level as of December 31, 2021

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

i 133,407

i 102,153

i 31,254

i —

Obligations of U.S. states and political subdivisions

i 2,534,653

i —

i 2,534,653

i —

Corporate debt securities

i 2,765,982

i —

i 2,765,982

i —

ABS

i 150,710

i —

i 150,710

i —

RMBS

i 309,110

i —

i 309,110

i —

CMBS

i 319,130

i —

i 319,130

i —

CLOs

i 360,939

i —

i 360,939

i —

Foreign government debt

i 13,650

i —

i 13,650

i —

Total fixed income securities

i 6,587,581

i 102,153

i 6,485,428

i —

Equity securities

i 16,068

i —

Cash equivalents

i 254,230

i —

Total

i 6,857,879

i 372,451

i 6,485,428

i —

Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”

In addition to the assets carried at fair value discussed above, we have embedded derivatives carried at fair value related to our Home Re Transactions that are classified as Other liabilities or Other assets in our consolidated balance sheets. The changes in the fair value of the embedded derivatives are reported within Net gains (losses) on investments and other financial instruments on the Consolidated Statement of Operations. The estimated fair value related to our embedded derivatives reflects the present value impact of the variation in investment income on the assets held by the reinsurance trusts and the contractual reference rate on the Home Re Transactions used to calculate the reinsurance premiums we will pay. These liabilities or assets are categorized in Level 3 of the fair value hierarchy. At June 30, 2022 and December 30, 2021, the fair value of the embedded derivatives was a liability of $ i 5.0 million and $ i 1.8 million, respectively. (See Note 4 - "Reinsurance" for more information about our reinsurance programs.)

MGIC Investment Corporation - Q2 2022 | 25

Real estate acquired through claim settlement is carried at fair values and is reported in “Other assets” on the consolidated balance sheet. These assets are categorized as Level 3 of the fair value hierarchy.

Activity related to the Level 3 assets and liabilities (including realized and unrealized gains and losses, purchases and sales) were immaterial for the three and six months ended June 30, 2022 and 2021.

Financial assets and liabilities not measured at fair value

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

Financial liabilities include our outstanding debt obligations. The fair values of our i 5.75% and i 5.25% Notes and i 9% Debentures were based on observable market prices. In all cases the fair values of the financial liabilities below are categorized as Level 2.

Table 8.2 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2022 and December 31, 2021.

Financial assets and liabilities not measured at fair value

Table

8.2

(In thousands)

Carrying Value

Fair Value

Carrying Value

Fair Value

Financial assets

Other invested assets

i 850

i 3,100

Financial liabilities

FHLB Advance

i —

i 155,000

i 157,585

5.75% Senior Notes

i 241,583

i 248,191

i 241,255

i 256,213

5.25% Senior Notes

i 640,989

i 583,044

i 640,253

i 686,875

9% Convertible Junior Subordinated Debentures

i 35,339

i 47,197

i 110,204

i 151,000

Total financial liabilities

i 917,911

i 878,432

i 1,146,712

i 1,251,673

MGIC Investment Corporation - Q2 2022 | 26

Note 9. i Other Comprehensive Income

The pretax and related income tax benefit (expense) components of our other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 are included in table 9.1 below.

Components of other comprehensive income (loss)

Table

9.1

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2022

2021

2022

2021

Net unrealized investment gains arising during the period

( i 222,000)

i 57,030

( i 564,960)

( i 62,120)

Total income tax benefit (expense)

i 46,620

( i 11,976)

i 118,642

i 13,045

Net of taxes

( i 175,380)

i 45,054

( i 446,318)

( i 49,075)

Net changes in benefit plan assets and obligations

i 620

i 839

i 1,118

i 1,944

Total income tax benefit (expense)

( i 130)

( i 176)

( i 235)

( i 408)

Net of taxes

i 490

i 663

i 883

i 1,536

Total other comprehensive income (loss)

( i 221,380)

i 57,869

( i 563,842)

( i 60,176)

Total income tax benefit (expense)

i 46,490

( i 12,152)

i 118,407

i 12,637

Total other comprehensive income (loss), net of tax

( i 174,890)

i 45,717

( i 445,435)

( i 47,539)

The pretax and related income tax benefit (expense) components of the amounts reclassified from our accumulated other comprehensive income (loss) (“AOCI”) to our consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 are included in table 9.2 below.

Reclassifications from AOCI

Table

9.2

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2022

2021

2022

2021

Reclassification adjustment for net realized (losses) gains(1)

( i 2,433)

i 2,477

i 2,408

i 6,417

Income tax benefit (expense)

i 511

( i 520)

( i 506)

( i 1,347)

Net of taxes

( i 1,922)

i 1,957

i 1,902

i 5,070

Reclassification adjustment related to benefit plan assets and obligations (2)

( i 620)

( i 839)

( i 1,118)

( i 1,944)

Income tax benefit (expense)

i 130

i 176

i 235

i 408

Net of taxes

( i 490)

( i 663)

( i 883)

( i 1,536)

Total reclassifications

( i 3,053)

i 1,638

i 1,290

i 4,473

Income tax benefit (expense)

i 641

( i 344)

( i 271)

( i 939)

Total reclassifications, net of tax

( i 2,412)

i 1,294

i 1,019

i 3,534

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

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

A rollforward of AOCI for the six months ended June 30, 2022, including amounts reclassified from AOCI, are included in table 9.3 below.

Rollforward of AOCI

Table

9.3

Six Months Ended June 30, 2022

(In thousands)

Net unrealized gains and (losses) on available-for-sale securities

Net benefit plan assets and (obligations) recognized in shareholders' equity

Total accumulated other comprehensive income (loss)

Balance at December 31, 2021, net of tax

i 150,038

( i 30,341)

i 119,697

Other comprehensive income (loss) before reclassifications

( i 444,416)

i —

( i 444,416)

Less: Amounts reclassified from AOCI

i 1,902

( i 883)

i 1,019

Balance, June 30, 2022, net of tax

( i 296,280)

( i 29,458)

( i 325,738)

MGIC Investment Corporation - Q2 2022 | 27

Note 10. i Benefit Plans

Tables 10.1 and 10.2 provide the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the three and six months ended June 30, 2022 and 2021.

Components of net periodic benefit cost

Table

10.1

Three Months Ended June 30,

Pension and Supplemental Executive Retirement Plans

Other Postretirement Benefit Plans

(In thousands)

2022

2021

2022

2021

Service cost

i 3,626

i 3,816

i 654

i 754

Interest cost

i 5,725

i 5,589

i 348

i 324

Expected return on plan assets

( i 9,816)

( i 10,458)

( i 5,251)

( i 4,431)

Amortization of net actuarial losses (gains)

i 2,532

i 2,805

( i 1,552)

( i 848)

Amortization of prior service cost (credit)

( i 106)

( i 119)

i 244

i 106

Net periodic benefit cost (benefit)

i 1,961

i 1,633

( i 5,557)

( i 4,095)

In July 2022, we made a contribution totaling $ i 6.3 million to our qualified pension plan.

MGIC Investment Corporation - Q2 2022 | 28

Note 11. i Loss Reserves

We establish case reserves and LAE reserves on delinquent loans that were reported to us as two or more payments past due and have not become current or resulted in a claim payment. Such loans are referred to as being in our delinquency inventory. Case reserves are established by estimating the number of loans in our delinquency 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.

IBNR reserves are established for estimated losses from delinquencies we estimate have occurred prior to the close of an accounting period, but have not yet been reported to us. IBNR reserves are also established using estimated claim rates and claim severities.

Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between delinquency and claim filing (all else being equal, the longer the period between delinquency and claim filing, the greater the severity); 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 and the continued impact of the COVID-19 pandemic, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance programs and foreclosure moratoriums), 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. Loss reserves in future periods will also be dependent on the number of loans reported to us as delinquent.

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. Given the uncertainty surrounding the long-term impact of COVID-19, it is difficult to predict the ultimate effect of the COVID-19 related delinquencies and forbearances on our loss incidence.

In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or claim severity could have a material impact on loss reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of June 30, 2022, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately +/- $ i 13 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $ i 16 million.

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 claim severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and claim 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 claim severity is the result of our review of current trends in the delinquency 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 were flat in the first half of 2022 compared to the same period last year.

For the six months ended June 30, 2022 we experienced favorable loss development of $ i 186.6 million on previously received notices primarily related to a decrease in the estimated claim rate. The favorable development resulted from greater than expected cures on delinquency notices received during the COVID-19 pandemic as well as delinquency notices received prior to the COVID-19 pandemic. For the six months ended June 30, 2021 we experienced adverse loss development of $ i 1.7 million.

MGIC Investment Corporation - Q2 2022 | 29

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. In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums and forbearance plans, the average time it takes to receive a claim has increased.

Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the six months ended June 30, 2022 and 2021.

Development of reserves for losses and loss adjustment expenses

Table

11.1

Six Months Ended June 30,

(In thousands)

2022

2021

Reserve at beginning of period

i 883,522

i 880,537

Less reinsurance recoverable

i 66,905

i 95,042

Net reserve at beginning of period

i 816,617

i 785,495

Losses incurred:

Losses and LAE incurred in respect of delinquency notices received in:

Current year

i 68,210

i 67,068

Prior years (1)

( i 186,582)

i 1,732

Total losses incurred

( i 118,372)

i 68,800

Losses paid:

Losses and LAE paid in respect of delinquency notices received in:

Current year

i 116

i 48

Prior years

i 24,909

i 29,164

Total losses paid

i 25,025

i 29,212

Net reserve at end of period

i 673,220

i 825,083

Plus reinsurance recoverable

i 53,958

i 111,153

Reserve at end of period

i 727,178

i 936,236

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

The prior year loss reserve development for the six months of June 30, 2022 and 2021 is reflected in table 11.2 below.

Reserve development on previously received delinquencies

Table

11.2

Six Months Ended June 30,

(In thousands)

2022

2021

Increase (decrease) in estimated claim rate on primary defaults

( i 186,163)

( i 356)

Increase (decrease) in estimated severity on primary defaults

( i 9,945)

i 512

Change in estimates related to pool reserves, LAE reserves, reinsurance, and other

i 9,526

i 1,576

Total prior year loss development (1)

( i 186,582)

i 1,732

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

MGIC Investment Corporation - Q2 2022 | 30

Delinquency inventory

A rollforward of our primary delinquency inventory for the three and six months ended June 30, 2022 and 2021 appears in table 11.3 below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.

Delinquency inventory rollforward

Table

11.3

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

Delinquency inventory at beginning of period

i 30,462

i 52,775

i 33,290

i 57,710

New notices

i 9,396

i 9,036

i 20,099

i 22,047

Cures

( i 12,677)

( i 18,460)

( i 25,877)

( i 36,088)

Paid claims

( i 319)

( i 346)

( i 641)

( i 658)

Rescissions and denials

( i 7)

( i 6)

( i 16)

( i 12)

Delinquency inventory at end of period

i 26,855

i 42,999

i 26,855

i 42,999

Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it is more likely to result in a claim.

Primary delinquency inventory - consecutive months delinquent

Table

11.4