# Mgic Investment Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Mgic Investment Corp](/companies/mtg.md) (CIK 876437)
- Form: 10-Q
- Filed: 2023-08-02
- Accepted by EDGAR: Aug 2, 2023, 16:03 ET
- Period: 2023-06-30
- Accession: 0000876437-23-000050
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/876437/000087643723000050/mtg-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/876437/000087643723000050/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $290.7m | us-gaap:Revenues |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $574.6m | us-gaap:Revenues |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $51.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $92.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $191.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $345.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.66 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.67 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 289,566,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 292,125,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $356.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $671.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $58.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $150.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $310.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $6.35bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $1.51bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $663.5m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $4.84bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 105,698 characters.

### Introduction

The following is management’s discussion and analysis of the financial condition and results of operations of MGIC Investment Corporation for the second quarter of 2023. As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. This form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. See the “Glossary of terms and acronyms” for definitions and descriptions of terms used throughout this MD&A. Our revenues and losses could be affected by the Risk Factors referred to under “Forward Looking Statements and Risk Factors” below, and they are an integral part of the MD&A.

#### Forward Looking and Other Statements

As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. These forward looking statements speak only as of the date of this filing and are subject to change without notice. We are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.

### Overview

*(In millions, except per share data, unaudited)*

| Summary financial results of MGIC Investment Corporation Selected statement of operations data | Three Months Ended June 30, 2023 | 2022 | % Change | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net premiums earned | **$242.8** | $255.7 | (5) | **$484.8** | $510.9 | (5) |
| Investment income, net of expenses | **52.3** | 40.3 | 30 | **101.6** | 78.6 | 29 |
| Losses incurred, net | **(17.7)** | (99.1) | (82) | **(11.2)** | (118.4) | (91) |
| Other underwriting and operating expenses, net | **54.0** | 53.4 | 1 | **124.1** | 108.2 | 15 |
| Loss on debt extinguishment | **—** | 6.4 | N/M | **—** | 28.5 | N/M |
| Income before tax | **242.4** | 315.9 | (23) | **438.0** | 535.3 | (18) |
| Provision for income taxes | **51.3** | 66.6 | (23) | **92.4** | 111.0 | (17) |
| Net income | **191.1** | 249.3 | (23) | **345.6** | 424.3 | (19) |
| **Diluted income per share** | **$0.66** | $0.80 | (18) | **$1.19** | $1.34 | (11) |
| **Non-GAAP Financial Measures (1)** |  |  |  |  |  |  |
| Adjusted pre-tax operating income | **$248.7** | $322.4 | (23) | **$448.4** | $564.4 | (21) |
| Adjusted net operating income | **196.0** | 254.4 | (23) | **353.8** | 447.3 | (21) |
| Adjusted net operating income per diluted share | **$0.68** | $0.81 | (16) | **$1.21** | $1.41 | (14) |

(1) See “Explanation and reconciliation of our use of Non-GAAP financial measures.”

### Summary of second quarter 2023 results

### Comparative quarterly results

We recorded second quarter 2023 net income of $191.1 million, or $0.66 per diluted share. Net income decreased by $58.2 million from net income of $249.3 million, or $0.80 per diluted share, in the prior year. The decrease is primarily due to increases in losses incurred and a decrease in net premiums earned. This was partially offset by an increase in investment income, net of expenses, a decrease in loss on debt extinguishment, and a decrease in the provision for income taxes. Diluted income per share decreased primarily due to a decrease in net income, partially offset by a decrease in the number of diluted weighted shares outstanding.

Adjusted net operating income for the second quarter 2023 was $196.0 million (Q2 2022: $254.4 million) and adjusted net operating income per diluted share was $0.68 (Q2 2022: $0.81). The decrease in 2023 adjusted net operating income compared to 2022 primarily reflects a decrease in a net income. The decrease in 2023 adjusted net operating income per diluted share compared to 2022 primarily reflects a decrease in adjusted net operating income, partially offset by a decrease in the number of diluted weighted shares outstanding.

Premiums earned for the three months ended June 30, 2023, were $242.8 million, compared with $255.7 million, for the same period last year. The decrease in premiums earned compared with the prior year is primarily due to an increase in ceded premiums that was the result of a decrease in the profit commission.

Net investment income in the three months ended June 30, 2023, was $52.3 million, compared with $40.3 million, in the prior year. The increase in net investment income was due to an increase of 80 basis points in the average investment yields.

Losses incurred, net for the second quarter of 2023 were $(17.7) million, compared with $(99.1) million for the same period last year. While new delinquency notices added approximately $42.2 million for the three months ended June 30, 2023, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of approximately $59.9 million. For the three months ended June 30, 2022, new delinquency notices added approximately $31.8 million, offset by our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $130.9 million. The favorable development for both periods primarily resulted from a decrease in the expected claim rate on previously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property.

We did not repurchase any of our outstanding debt obligations in the second quarter of 2023. For the three months ended June 30, 2022, we recorded a loss on debt extinguishment of $6.4 million, related to the repurchase of a portion our 9% Debentures at costs that were in excess of their carrying value.

The decrease in our provision for income taxes in the second quarter of 2023 as compared to the same period in the prior year was primarily due to a decrease in income before tax.

### Comparative year to date results

We recorded net income of $345.6 million, or $1.19 per diluted share. Net income decreased by $78.7 million, from net income of $424.3 million, or $1.34 per diluted share, in the prior year. The decrease is primarily due to increases in losses incurred and other underwriting and operating expenses, and a decrease in net premiums earned. This was partially offset by an increase in investment income, net of expenses, a decrease in loss on debt extinguishment, and a decrease in our provision for income taxes. Diluted income per share decreased primarily due to a decrease in net income, partially offset by a decrease in the number of diluted weighted shares outstanding.

Adjusted net operating income for the six months ended June 30, 2023, was $353.8 million (2022: $447.3 million) and adjusted net operating income per diluted share was $1.21 (2022: $1.41). The decrease in 2023 adjusted net operating income compared to 2022 primarily reflects a decrease in net income. The decrease in 2023 adjusted net operating income per diluted share compared to 2022 primarily reflects a decrease in adjusted net operating income, partially offset by a decrease in the number of diluted weighted shares outstanding.

Premiums earned for the six months ended June 30, 2023, were $484.8 million, compared with $510.9 million, for the same period last year. The decrease in premiums earned compared with the prior year is primarily due to an increase in ceded premiums that was the result of a decrease in the profit commission.

Net investment income in the six months ended June 30, 2023, was $101.6 million, compared with $78.6 million, in the prior year. The increase in net investment income was due to an increase of 80 bps in the average investment yields.

Losses incurred, net for the six months ended June 30, 2023 were $(11.2) million, compared with losses incurred of $(118.4) million for the prior year. While new delinquency notices added $89.5 million to losses incurred, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of $100.7 million. In the first six months of 2022, new delinquency notices added approximately $68.2 million to losses incurred, offset by re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of $186.6 million. The favorable development for both periods primarily resulted from a decrease in the expected claim rate on previously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property.

Underwriting and other expenses, net for the six months ended June 30, 2023, and 2022, were $124.1 million and $108.2 million, respectively. Underwriting and other expenses, net increased during the first half of 2023, compared with the same period in the prior year primarily due to an increase in pension expenses as a result of settlement accounting charges, an increase in performance based employee compensation, and an increase in postretirement benefit expenses, partially offset by a decrease in expenses related to professional and consulting services.

We did not repurchased any of our outstanding debt obligations in the first half 2023. For the six months ended June 30, 2022, we recorded a loss on debt extinguishment of $28.5 million, related to the repurchase of a portion our 9% Debentures in excess of their carrying value and a repayment fee on the repayment of the FHLB Advance.

The decrease in our provision for income taxes in the first half of 2023 as compared to the same period in the prior year was primarily due to a decrease in income before tax.

### Capital

MGIC dividend payments to our holding company

The ability of MGIC to pay dividends is restricted by insurance regulation. Amounts in excess of prescribed limits are deemed “extraordinary” and may not be paid if disapproved by the OCI. A dividend is extraordinary when the proposed dividend amount, plus dividends paid in the twelve months preceding the dividend payment date exceed the ordinary dividend level. In 2023, MGIC can pay $92 million of ordinary dividends without OCI approval, before taking into consideration dividends paid in the preceding twelve months. In the six months ended June 30, 2023, and 2022, we made dividend payments to the holding company of $300 million and $400 million, respectively. Future dividend payments to the holding company will continue to be determined in consultation with the board.

Share repurchase programs

Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. In the six months ended June 30, 2023, we repurchased 10.8 million shares of common stock, using approximately $150.9 million of holding company resources. As of June 30, 2023, we had $463 million of authorization remaining to repurchase our common stock through July 1, 2025 under a $500 million share repurchase program approved by our Board of Directors in April of 2023. As of June 30, 2023, we had approximately 283 million shares of common stock outstanding. We repurchased 15.7 million shares during the six months ended June 30, 2022, using approximately $222 million of holding company resources.

Dividends to shareholders

In the first and second quarters of 2023, we paid quarterly cash dividends of $0.10 per share which totaled $58.8 million. On July 27, 2023, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.115 per share to shareholders of record on August 10, 2023, payable on August 24, 2023.

### GSEs

We must comply with a GSE’s PMIERs to be eligible to insure loans delivered to or purchased by that GSE. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of risk in force, calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a floor amount). Based on our interpretation of the PMIERs as of June 30, 2023, MGIC’s Available Assets totaled $5.8 billion, or $2.3 billion in excess of its Minimum Required Assets.

The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases.

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 NIW, the substantial majority of which is for loans delivered to or purchased by the GSEs. In addition to the increase in Minimum Required Assets associated with delinquent loans, factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:

|  |  |
| --- | --- |
| è | The GSEs may make the PMIERs more onerous in the future. The PMIERs provide that the factors that determine Minimum Required Assets will be updated periodically, or as needed if there is a significant change in macroeconomic conditions or loan performance. We do not anticipate that the regular periodic updates will occur more frequently than once every two years. The PMIERs state that the GSEs will provide notice 180 days prior to the effective date of updates to the factors; however, the GSEs may amend the PMIERs at any time. |
| è | The PMIERS may be changed in response to the final regulatory capital framework for the GSEs which was published in February 2022. |
| è | Our future operating results may be negatively impacted by the matters discussed in our Risk Factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets. |
| è | Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt. |

Our reinsurance transactions enable us to earn higher returns on our Minimum Required Assets than we would without them because they generally reduce the Minimum Required Assets, we must hold under PMIERs. However, reinsurance may not always be available to us; or available on similar terms, and our reinsurance subjects us to counterparty credit risk. Our access to reinsurance may be disrupted and the terms under which we are able to obtain reinsurance may be less attractive than in the past due to volatility stemming from circumstances such as higher interest rates, increased inflation, global events such as the Russia-Ukraine war, and other factors. Since 2022, execution of transactions for XOL reinsurance through the ILN market has been more challenging, with increased pricing, transactions being down-sized, and generally fewer transactions being executed by mortgage insurers.

The calculated credit for XOL Transactions under PMIERs is generally based on the PMIERs requirement of the covered loans and the attachment and detachment point of the coverage. PMIERs credit is generally not given for the reinsured risk above the PMIERs requirement. Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions without penalties.

### 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.

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. 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.

For additional information about the business practices of the GSEs, see our Risk Factor titled “Changes in the business practices of Fannie Mae and Freddie Mac *("the GSEs")*, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.”

### State Regulations

The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires an MPP. MGIC’s “policyholder position” includes its net worth or surplus and its contingency reserve.

At June 30, 2023, MGIC’s risk-to-capital ratio was 9.9 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $3.6 billion above the required MPP of $2.1 billion. The calculation of our risk-to-capital ratio and MPP reflect full credit for the risk ceded under our reinsurance transactions. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded under such transactions. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, refer to our risk factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis” for more information about matters that could negatively impact our compliance with State Capital Requirements.

The NAIC 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 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and a risk-based capital framework to establish capital requirements for mortgage insurers. Subsequent drafts and a final version released in May 2023 did not include changes to the capital requirements of the existing Model Act. In July 2023, the NAIC working group voted to adopt the version of the Model Act released in May 2023, with some additional changes, but no changes to the capital requirements. It is expected that the full NAIC will adopt the revised Model Act sometime during 2023, but it is uncertain when the revised Model Act will be adopted in any jurisdiction and whether any changes will be made by state legislatures prior to such adoption.

### Factors affecting our results

Our current and future business, results of operations and financial condition are impacted by macroeconomic conditions, such as rising interest rates, home prices, housing demand, level of employment, inflation, pandemics, restrictions and costs on mortgage credit, and other factors. For additional information on how our business may be impacted see our Risk Factor titled “Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.”

The future effects of changing climatic conditions on our business are uncertain. For information about possible effects, please refer to our Risk Factor titled “Pandemics, hurricanes and other natural disasters may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs.”

Our results of operations are affected by:

Premiums written and earned

Premiums written and earned in a year are influenced by:

- NIW, which increases IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages from the FHA, the VA, other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP.
- Cancellations, which reduce IIF. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, current home values compared to values when the loans in the in force book were insured and the terms on which mortgage credit is available. Home price appreciation can give homeowners the right to cancel mortgage insurance on their loans if sufficient home equity is achieved. Cancellations also result from policy rescissions, which require us to return any premiums received on the rescinded policies and claim payments, which require us to return any premium received on the related policies from the date of default on the insured loans. Cancellations of single premium policies, which are generally non-refundable, result in immediate recognition of any remaining unearned premium.
- Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans, the percentage of coverage on the insured loans, and PMIERs capital requirements. The substantial majority of our monthly and annual mortgage insurance premiums are under premium plans for which, for the first ten years of the policy, the amount of premium is determined by multiplying the initial premium rate by the original loan balance; thereafter, the premium rate resets to a lower rate used for the remaining life of the policy. 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 profit commission, under our QSR Transactions and premiums ceded under our XOL Transactions are primarily affected by the percentage of our IIF subject to our reinsurance transactions. The profit commission under our QSR Transactions also varies inversely with the level of ceded losses incurred on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than what we have experienced on our QSR Transactions. As a result, lower levels of losses incurred result in a higher profit commission and less benefit from ceded losses incurred; higher levels of losses incurred result in more benefit from ceded losses incurred and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). (See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance transactions.)

Premiums earned 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 the factors discussed above.

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 net premiums written, investment income, net claim payments and expenses, and cash provided by (or used for) non-operating activities, such as debt or stock issuances or repurchases, and dividends.

Losses incurred

Losses incurred are the current expense that reflects claim payments, costs of settling claims, and changes in our estimates of payments that will ultimately be made as a result of delinquencies on insured loans. As explained under “Critical Accounting Estimates” in our 2022 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. Prior to the COVID-19 pandemic, 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. The state of the economy, local housing markets and various other factors, including pandemics, may result in delinquencies not following the typical pattern. Losses incurred are generally affected by:

- The state of the economy, including unemployment and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency.
- The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
- The size of loans insured, with higher average loan amounts on delinquent loans tending to increase incurred losses.
- The percentage of coverage on insured loans, with deeper average coverage on delinquent loans tending to increase incurred losses.
- 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 such rescissions and denials as “rescissions” and variations of this term. We call reductions to claims “curtailments.”
- The distribution of claims over the life of a book. Historically, the first few years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining, although persistency, the condition of the economy, including unemployment and housing prices, and other factors can affect this pattern. For example, a weak economy or housing value declines can lead to claims from older books increasing, continuing at stable levels or experiencing a lower rate of decline. See further information under “Mortgage insurance earnings and cash flow cycle” below.
- Losses ceded under reinsurance transactions. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance transactions.

Underwriting and other expenses

Underwriting and other expenses includes items such as employee compensation, fees for professional and consulting services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions associated with our QSR Transactions. Employee compensation expenses are variable due to share-based compensation, changes in benefits, and changes in headcount (which can fluctuate due to volume of NIW). See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of ceding commission on our QSR Transactions.

Interest expense

Interest expense reflects the interest associated with our consolidated outstanding debt obligations discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” below.

Other

Certain activities that we do not consider being part of our fundamental operating activities may also impact our results of operations and are described below.

#### Gains (losses) on investments and other financial instruments

- Fixed income securities. Investment gains and losses reflect the difference between the amount received on the sale of a fixed income security and the fixed income security’s cost basis, as well as any credit allowances and any impairments on securities we intend to sell prior to recovery of its amortized cost basis. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
- Equity securities. Investment gains and losses are accounted for as a function of the periodic change in fair value.
- Financial instruments. Investment gains and losses on the embedded derivative on our Home Re Transactions reflect the present value impact of the variation in investment income on assets on the insurance-linked notes held by the reinsurance trusts and the contractual reference rate used to calculate the reinsurance premiums we estimate we will pay over the estimated remaining life.

#### Loss on debt extinguishment

Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt. Extinguishing our outstanding debt obligations early through these discretionary activities may result in losses primarily driven by the payment of consideration in excess of our carrying value, and the write off of unamortized debt issuance costs on the extinguished portion of the debt.

Refer to “Explanation and reconciliation of our use of Non-GAAP financial measures” below to understand how these items impact our evaluation of our core financial performance.

### Mortgage insurance earnings and cash flow cycle

In general, the majority of any underwriting profit that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year following the year the book was written. Subsequent years of a book may result in either underwriting profit or underwriting losses. This pattern of results typically occurs because relatively few of the incurred losses on delinquencies that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments) and increasing losses. The typical pattern is also a function of premium rates generally resetting to lower levels after ten years. The state of the economy, local housing markets and various other factors may result in delinquencies not following the typical pattern.

### Cybersecurity

As part of our business, we maintain large amounts of confidential and proprietary information, including personal information of consumers and employees, on our servers and those of cloud computing services. Federal and state laws designed to promote the protection of such information require businesses that collect or maintain personal information to adopt information security programs, and to notify individuals, and in some jurisdictions, regulatory authorities, of security breaches involving personally identifiable information. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including by cyber attacks, such as those involving ransomware. The Company discovers vulnerabilities and regularly blocks a high volume of attempts to gain unauthorized access to its systems. Globally, attacks are expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques that will hinder the Company’s ability to identify, investigate and recover from incidents. Such attacks may also increase as a result of retaliation by Russia in response to actions taken by the U.S. and other countries in connection with Russia's military invasion of Ukraine. The Company operates under a hybrid workforce model and such model may be more vulnerable to security breaches.

While we have information security policies and systems in place to secure our information technology systems and to prevent unauthorized access to or disclosure of sensitive information, there can be no assurance with respect to our systems and those of our third-party vendors that unauthorized access to the systems or disclosure of the sensitive information, either through the actions of third parties or employees, will not occur. Due to our reliance on information technology systems, including ours and those of our customers and third-party service providers, and to the sensitivity of the information that we maintain, unauthorized access to the systems or disclosure of the information could adversely affect our reputation, severely disrupt our operations, result in a loss of business and expose us to material claims for damages and may require that we provide free credit monitoring services to individuals affected by a security breach.

### Explanation and reconciliation of our use of non-GAAP financial measures

### Non-GAAP financial measures

We believe that use of the Non-GAAP financial measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance.

**Adjusted pre-tax operating income (loss)** is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain and losses on debt extinguishment, and infrequent or unusual non-operating items where applicable.

**Adjusted net operating income (loss)** is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain and losses on debt extinguishment and infrequent or unusual non-operating items where applicable. The amounts of adjustments to components of pre-tax operating income (loss) are tax effected using a federal statutory tax rate of 21%.

**Adjusted net operating income (loss) per diluted share** is calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the “if-converted” method.

Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.

(1) *Net realized investment gains (losses).* The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.

(2) *Gains and losses on debt extinguishment.* Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt.

(3) *Infrequent or unusual non-operating items*. Items that are non-recurring in nature and are not part of our primary operating activities.

*(In thousands, except per share amounts)*

| Non-GAAP reconciliations Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | Three Months Ended June 30, 2023 Pre-tax Tax effect Net (after-tax) |  | 2022 Pre-tax Tax effect Net (after-tax) |  |
| --- | ---: | ---: | ---: | ---: |
| Income before tax / Net income | **$242,382** **51,328** **$191,054** |  | $315,891 66,623 $249,268 |  |
| Adjustments: |  |  |  |  |
| Loss on debt extinguishment | **—** **—** **—** |  | 6,391 1,342 5,049 |  |
| Net realized investment (gains) losses | **6,314** **1,326** **4,988** |  | 69 14 55 |  |
| Adjusted pre-tax operating income / Adjusted net operating income | **$248,696** **$52,654** **$196,042** |  | $322,351 $67,979 $254,372 |  |
| **Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share** |  |  |  |  |
| Weighted average diluted shares outstanding | **289,566** |  | 313,545 |  |
| Net income per diluted share | **$0.66** |  | $0.80 |  |
| Loss on debt extinguishment | **—** |  | 0.02 |  |
| Net realized investment (gains) losses | **0.02** |  | — |  |
| Adjusted net operating income per diluted share | **$0.68** |  | $0.81 | (1) |
| (1) Does not foot due to rounding. |  |  |  |  |
| **Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income** |  |  |  |  |
|  | **Six Months Ended June 30,** |  |  |  |
|  | **2023** |  | 2022 |  |
| (In thousands, except per share amounts) | **Pre-tax** **Tax effect** **Net (after-tax)** |  | Pre-tax Tax effect Net (after-tax) |  |
| Income before tax / Net income | **$437,986** **$92,385** **$345,601** |  | $535,330 $111,049 $424,281 |  |
| Adjustments: |  |  |  |  |
| Loss on debt extinguishment | **—** **—** **—** |  | 28,498 5,985 22,513 |  |
| Net realized investment (gains) losses | **10,382** **2,180** **8,202** |  | 581 122 459 |  |
| Adjusted pre-tax operating income / Adjusted net operating income | **$448,368** **$94,565** **$353,803** |  | $564,409 $117,156 $447,253 |  |
| **Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share** |  |  |  |  |
| Weighted average diluted shares outstanding | **292,125** |  | 319,012 |  |
| Net income per diluted share | **$1.19** |  | $1.34 |  |
| Loss on debt extinguishment | **—** |  | 0.07 |  |
| Net realized investment (gains) losses | **0.03** |  | — |  |
| Adjusted net operating income per diluted share | **$1.21** | (1) | $1.41 |  |
| (1) Does not foot due to rounding. |  |  |  |  |

MGIC Investment Corporation - Q2 2023 \| 42

### Mortgage Insurance Portfolio

### Mortgage originations

The total amount of mortgage originations is generally influenced by the level of home sales, interest rates, the percentage of homes purchased for cash, and the level of refinance activity. PMI market share of total mortgage originations is influenced by the mix of purchase and refinance originations. PMI market share is also impacted by the market share of total originations of the FHA, VA, USDA, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance.

NIW for the second quarter of 2023 was $12.4 billion (Q2 2022: $24.3 billion) and for the six months ended was $20.6 billion (YTD: $43.9 billion). We expect the decrease is reflective of a smaller origination market and our market position in the current year compared with the same period in the prior year. For the remainder of the year, we expect a smaller origination market to drive a decrease in our NIW compared to 2022.

The percentage of our NIW with DTI ratios over 45% and LTVs over 95% will fluctuate based on the mortgage conditions that could include the percentage of NIW from purchase transactions, changes in home prices, changes in mortgage rates, and GSE activities.

The following tables present characteristics of our primary NIW for the three and six months ended June 30, 2023 and 2022.

| Primary NIW by FICO score (% of primary NIW) | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| 760 and greater | **51.0%** | 41.2% | **48.5%** | 42.1% |
| 740 - 759 | **18.3%** | 19.3% | **18.6%** | 19.2% |
| 720 - 739 | **12.7%** | 15.3% | **13.5%** | 14.9% |
| 700 - 719 | **8.8%** | 11.1% | **9.4%** | 10.9% |
| 680 - 699 | **5.0%** | 7.5% | **5.4%** | 7.4% |
| 660 - 679 | **2.9%** | 3.6% | **2.9%** | 3.4% |
| 640 - 659 | **0.8%** | 1.2% | **1.2%** | 1.3% |
| 639 and less | **0.5%** | 0.8% | **0.5%** | 0.8% |

| Primary NIW by loan-to-value (% of primary NIW) | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| 95.01% and above | **11.4%** | 14.3% | **11.8%** | 13.0% |
| 90.01% to 95.00% | **47.1%** | 47.7% | **47.0%** | 49.6% |
| 85.01% to 90.00% | **30.4%** | 27.7% | **30.0%** | 27.2% |
| 80.01% to 85.00% | **11.1%** | 10.3% | **11.2%** | 10.2% |

| Primary NIW by debt-to-income ratio (% of primary NIW) | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| 45.01% and above | **23.6%** | 21.0% | **23.3%** | 19.3% |
| 38.01% to 45.00% | **31.2%** | 32.1% | **32.1%** | 31.9% |
| 38.00% and below | **45.2%** | 46.9% | **44.6%** | 48.8% |

| Primary NIW by policy payment type (% of primary NIW) | Three Months Ended June 30, 2023 2022 | Six Months Ended June 30, 2023 2022 |
| --- | ---: | ---: |
| Monthly premiums | **97.0%** 96.1% | **96.7%** 94.9% |
| Single premiums | **3.0%** 3.9% | **3.3%** 5.1% |
| Annual premiums | **0.0%** 0.0% | **0.0%** 0.0% |
| **Primary NIW by type of mortgage** |  |  |
|  | Three Months Ended June 30, | Six Months Ended June 30, |
| (% of primary NIW) | **2023** 2022 | **2023** 2022 |
| Purchases | **98.2%** 98.2% | **98.0%** 96.4% |
| Refinances | **1.8%** 1.8% | **2.0%** 3.6% |

MGIC Investment Corporation - Q2 2023 \| 43

We consider a variety of loan characteristics when assessing the risk of a loan. The following tables provides information about loans with one or more of the following characteristics associated with our NIW: LTV ratios greater than 95%, mortgages with borrowers having FICO scores below 680, including those with borrowers having FICO scores of 620-679, and mortgages with borrowers having DTI ratios greater than 45%, each attribute as determined at the time of loan origination.

*Primary NIW by number of attributes discussed above*

| (% of primary NIW) | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| One | **31.6%** | 32.7% | **32.0%** | 30.7% |
| Two or more | **3.7%** | 4.0% | **3.8%** | 3.5% |

### Insurance and risk in force

The amount of our IIF and RIF is impacted by the amount of NIW and cancellations of primary IIF during the period. Cancellation activity is primarily due to refinancing activity, but is also impacted by rescissions, cancellations due to claim payment, and policies cancelled when borrowers achieve the required amount of home equity. Refinancing activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction.

### Persistency

Our persistency was 83.5% at June 30, 2023 compared to 79.8% at December 31, 2022 and 71.5% at June 30, 2022. Since 2000, our year-end persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003. Our persistency rate is primarily affected by the level of current mortgage interest rates compared to the mortgage coupon rates on our IIF, which affects the vulnerability of the IIF to refinancing; and the current amount of equity that borrowers have in the homes underlying our IIF.

*(In billions)*

| IIF and RIF | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| NIW | **$12.4** | $24.3 | **$20.6** | $43.9 |
| Cancellations | **(12.3)** | (14.8) | **(23.4)** | (31.5) |
| Increase (decrease) in primary IIF | **$0.1** | $9.5 | **$(2.8)** | $12.4 |
| Direct primary IIF as of June 30, | **$292.5** | $286.8 | **$292.5** | $286.8 |
| Direct primary RIF as of June 30, | **$76.4** | $73.6 | **$76.4** | $73.6 |

### Credit profile of our primary RIF

Our 2009 and later books possess significantly improved risk characteristics when compared to our 2005-2008 books. Modification and refinance programs, such as HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs, make outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures. As of June 30, 2023, loans associated with modification programs accounted for 3.9% of our total RIF, compared to 4.2% at December 31, 2022. Loans associated with 87.9% of all our modifications were current as of June 30, 2023.

The following table sets forth certain statistics associated with our primary IIF and RIF as of June 30, 2023:

*Primary insurance in force and risk in force by policy year*

*(in billions)*

| Policy Year | Insurance in Force (1) Total | % of Total | Risk In Force (1) Total | % of Total | Weighted Avg. Interest Rate | Delinquency Rate | Cede Rate % (2) | % of Original Remaining |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| 2004 and prior | $1.4 | 0.5% | $0.4 | 0.5% | 7.2% | 12.3% | —% | NM |
| 2005-2008 | 10.7 | 3.7% | 2.9 | 3.7% | 6.9% | 10.1% | —% | 4.4% |
| 2009-2015 | 5.3 | 1.8% | 1.4 | 1.9% | 4.3% | 4.5% | —% | 3.0% |
| 2016 | 5.4 | 1.8% | 1.4 | 1.9% | 3.9% | 2.9% | —% | 11.2% |
| 2017 | 7.1 | 2.4% | 1.9 | 2.4% | 4.3% | 3.4% | —% | 14.4% |
| 2018 | 7.3 | 2.5% | 1.9 | 2.5% | 4.8% | 4.0% | —% | 14.7% |
| 2019 | 15.7 | 5.4% | 4.1 | 5.4% | 4.1% | 1.9% | 1.6% | 24.2% |
| 2020 | 57.5 | 19.6% | 14.7 | 19.2% | 3.2% | 0.9% | 29.2% | 50.3% |
| 2021 | 94.1 | 32.2% | 24.5 | 32.1% | 3.1% | 1.0% | 29.4% | 79.8% |
| 2022 | 68.8 | 23.5% | 18.2 | 23.9% | 4.9% | 0.8% | 30.4% | 92.7% |
| 2023 | 19.2 | 6.6% | 5.0 | 6.5% | 6.2% | 0.1% | 26.9% | 98.2% |
| **Total** | **$292.5** |  | **$76.4** |  |  |  |  |  |

(1) May not foot due to rounding

(2) Cede Rate % is calculated as the risk in force ceded to our QSR transactions divided by the total risk in force.

### Pool and other insurance

MGIC has written no new pool insurance since 2008; however, for a variety of reasons, including responding to capital market alternatives to PMI and customer demands, MGIC may write pool risk in the future. Our direct pool risk in force was $264 million ($189 million on pool policies with aggregate loss limits and $75 million on pool policies without aggregate loss limits) at June 30, 2023 compared to $276 million ($196 million on pool policies with aggregate loss limits and $80 million on pool policies without aggregate loss limits) at December 31, 2022. If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF within the pool would be cancelled and any remaining delinquencies under the pool would be removed from our delinquency inventory.

In connection with the GSEs' CRT programs, an insurance subsidiary of MGIC provides insurance and reinsurance covering portions of the credit risk related to certain reference pools of mortgages acquired by the GSEs. Our RIF, as reported to us, related to these programs was approximately $307 million and $226 million as of June 30, 2023 and December 31, 2022, respectively.

### Consolidated Results of Operations

*The following section of the MD&A provides a comparative discussion of MGIC Investment Corporation’s Consolidated Results of Operations for the three and six months ended June 30, 2023 and 2022.*

### Revenues

*(in millions)*

|  | Three Months Ended June 30, 2023 | 2022 | % Change | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net premiums written | **$231.2** | $244.3 | (5) | **$461.4** | $487.0 | (5) |
| Net premiums earned | **$242.8** | $255.7 | (5) | **$484.8** | $510.9 | (5) |
| Investment income, net of expenses | **52.3** | 40.3 | 30 | **101.6** | 78.6 | 29 |
| Net gains (losses) on investments and other financial instruments | **(5.0)** | (4.7) | 6 | **(12.7)** | (5.5) | 131 |
| Other revenue | **0.5** | 1.9 | N/M | **0.9** | 3.7 | N/M |
| Total revenues (1) | **$290.7** | $293.1 | (1) | **$574.6** | $587.7 | (2) |
| (1) May not foot due to rounding |  |  |  |  |  |  |

### Net premiums written and earned

Comparative quarterly and year to date results

Premiums earned for the three and six months ended June 30, 2023 were $242.8 million and $484.8 million, respectively, compared with $255.7 million and $510.9 million, respectively, for the same periods last year. Net premiums written for three and six months ended June 30, 2023 were $231.2 million and $461.4 million, respectively, compared with $244.3 million and $487.0 million, respectively for the same comparable period last year.

The decrease in premiums written and earned for the three and six months ended June 30, 2023, compared with the prior year period is primarily due to an increase in ceded premiums that was the result of a decrease in the profit commission.

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

Premium yields

Net premium yield is net premiums earned divided by average IIF during the period. The following table presents the key drivers of our net premium yield for each of the three and six months ended June 30, 2023 and June 30, 2022.

| Premium Yield (in basis points) |  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| In force portfolio yield | (1) | **38.6** | 39.4 | **38.6** | 39.5 |
| Premium refunds |  | **(0.1)** | 0.2 | **(0.1)** | — |
| Accelerated earnings on single premium policies |  | **0.4** | 1.1 | **0.3** | 1.4 |
| Total direct premium yield |  | **38.9** | 40.7 | **38.8** | 40.9 |
| Ceded premiums earned, net of profit commission and assumed premiums | (2) | **(5.7)** | (4.5) | **(5.8)** | (4.5) |
| **Net premium yield** |  | **33.2** | 36.2 | **33.0** | 36.4 |

(1) Total direct premiums earned, excluding premium refunds and accelerated premiums from single premium policy cancellations divided by average primary insurance in force.

(2) Assumed premiums include those from our participation in GSE CRT programs, of which the impact on the net premium yield was 0.4 bps for the six months ended June 30, 2023 compared to 0.3 bps for the six months ended June 30, 2022.

Changes in the net premium yield for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 reflect the following:

|  |  |
| --- | --- |
| In force Portfolio Yield |  |
| è | A larger percentage of our IIF from book years with lower premium rates due to a decline in premium rates in recent years resulting from pricing competition, an in force book with lower risk characteristics, lower required capital, the availability of reinsurance, and certain policies undergoing premium rate resets on their ten-year anniversaries. |

MGIC Investment Corporation - Q2 2023 \| 46

|  |  |
| --- | --- |
| Premium Refunds |  |
| è | Premium refunds are primarily driven by claim activity and our estimate of refundable premiums on our delinquency inventory. The low level of claims received have resulted in a lower level of premium refunds. Our estimate of refundable premium on our delinquency inventory fluctuates with changes in our delinquency inventory and our estimate of the number of loans in our delinquency inventory that will result in a claim. |
| Accelerated earnings on single premium policies |  |
| è | The lower level of refinance transactions have reduced the benefit from accelerated earned premium from cancellation of single premium policies prior to their estimated policy life. |
| Ceded premiums earned, net of profit commission and assumed premiums |  |
| è | Ceded premiums earned, net of profit commission adversely impact our net premium yield. Ceded premiums earned, net of profit commission, are associated with the QSR Transactions and the XOL Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See “Reinsurance Transactions“ below for further discussion on our reinsurance transactions. |

As discussed in our Risk Factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses,” the private mortgage insurance industry is highly competitive and premium rates have declined over the past several years. With the smaller origination market, higher persistency rate, and continued high credit quality for NIW expected in 2023, we expect our in force portfolio premium yield to remain relatively flat during 2023.

### Reinsurance Transactions

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 inversely with the level of losses incurred on a “dollar for dollar” basis and can be eliminated at loss levels higher than what we are currently experiencing. As a result, lower levels of ceded losses incurred result in less benefit from ceded losses incurred and a higher profit commission; higher levels of ceded losses incurred result in more benefit from ceded losses incurred and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). |
| è | We receive the benefit of a ceding commission through a reduction in underwriting expenses equal to 20% of premiums ceded (before the effect of the profit commission). |
| è | We cede a fixed percentage of losses incurred on insurance covered by the agreements. |

The following table provides information related to our QSR Transactions for each of the three and six months ended June 30, 2023 and June 30, 2022.

*Quota Share Reinsurance*

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Ceded premiums written and earned, net of profit commission | **$27,442** | $14,995 | **$57,319** | $37,373 |
| % of direct premiums written | **10%** | 5% | **10%** | 7% |
| % of direct premiums earned | **10%** | 5% | **10%** | 6% |
| Profit commission | **$34,809** | $48,814 | **$66,520** | $87,794 |
| Ceding commissions | **$12,450** | $12,762 | **$24,768** | $25,034 |
| Ceded losses incurred | **$1,954** | $(10,430) | **$6,635** | $(12,415) |
| **Mortgage insurance portfolio:** |  |  |  |  |
| Ceded RIF (Dollars in millions) |  |  |  |  |
| 2015 QSR |  |  | **$—** | $694 |
| 2019 QSR |  |  | **—** | 1,302 |
| 2020 QSR |  |  | **3,605** | 4,311 |
| 2021 QSR |  |  | **6,462** | 7,101 |
| 2022 QSR |  |  | **4,853** | 3,019 |
| 2023 QSR |  |  | **1,093** | — |
| Credit Union QSR |  |  | **2,446** | 1,941 |
| Total ceded RIF |  |  | **$18,459** | $18,368 |

Ceded premiums written, and earned net of profit commission increased in the three and six months ended June 30, 2023 when compared with the prior year primarily due to a decrease in the profit commission, which increases ceded premiums written and earned. The decrease in profit commission was driven by the increase in losses incurred.

We terminated our 2015 and 2019 QSR Transactions effective December 31, 2022.

### Covered risk

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

*Quota Share Reinsurance*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| NIW subject to QSR Transactions | **87.5%** | 87.7% | **87.0%** | 87.6% |
| New Risk Written subject to QSR Transactions | **93.1%** | 93.3% | **92.9%** | 93.2% |
| IIF subject to QSR Transactions | **70.9%** | 75.5% | **70.9%** | 75.5% |
| RIF subject to QSR Transactions | **75.6%** | 81.4% | **75.6%** | 81.4% |

The decrease in IIF and RIF subject to quota share reinsurance for the three and six months ended June 30, 2023, compared to June 30, 2022, is primarily due to the termination of our 2015 and 2019 QSR Transactions at December 31, 2022.

As of June 30, 2023, the weighted average coverage percentage of our QSR transactions was 32% based on RIF.

Excess of loss reinsurance

We have Excess-of-loss transactions (“XOL Transactions”) with panels of unaffiliated reinsurers executed through the traditional reinsurance market (“Traditional XOL Transaction”) and with unaffiliated special purpose insurers (“Home Re Transactions”).

We have Traditional XOL Transactions with panels of third-party reinsurers. 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 2022 Traditional XOL Transaction provides $142.6 million of reinsurance coverage on eligible NIW in 2022. The 2023 Traditional XOL Transaction provides up to $116.0 million of reinsurance coverage on eligible NIW in 2023.

The Home Re Transactions are executed with unaffiliated special purpose entities (“Home Re Entities”) through the issuance of insurance linked notes (“ILNs”). As of June 30, 2023 our Home Re Transactions provided $1.4 billion of loss coverage on a portfolio of policies having an in force date from July 1, 2016 through March 31, 2019, and from January 1, 2020 through December 31, 2021; all dates inclusive. For this reinsurance coverage, 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 amount.

As of June 30, 2023 the premiums under most of our Home Re Transactions from 2018 through 2021 reference the one-month LIBOR rate. The ICE Benchmark Administration, the administrator of LIBOR, ceased publishing all USD LIBOR tenors on June 30, 2023. These Home Re Transactions transitioned to SOFR when the one-month LIBOR rate was no longer published.

The current attachment, current detachment, and PMIERs required asset credit for each of our XOL Transactions, excluding the 2023 Traditional XOL which is still in its fill up period, as of June 30, 2023, are as follows.

*($ In thousands)*

|  | Initial Attachment % (1) | Initial Detachment % (2) | Current Attachment % (1) | Current Detachment % (2) | PMIERs Required Asset Credit |
| --- | ---: | ---: | ---: | ---: | ---: |
| Home Re 2018-1 | 2.25% | 6.50% | 13.34% | 21.64% | $— |
| Home Re 2019-1 | 2.50% | 6.75% | 16.30% | 34.81% | — |
| Home Re 2020-1 | 3.00% | 7.50% | 6.94% | 8.76% | — |
| Home Re 2021-1 | 2.25% | 6.50% | 3.63% | 7.58% | 140,992 |
| Home Re 2021-2 | 2.10% | 6.50% | 2.84% | 7.31% | 223,437 |
| Home Re 2022-1 | 2.75% | 6.75% | 3.08% | 7.56% | 435,384 |
| 2022 Traditional XOL | 2.60% | 7.10% | 2.70% | 7.36% | 137,493 |

(1) The percentage represents the cumulative losses as a percentage of adjusted risk in force that MGIC retains prior to the XOL taking losses.

(2) The percentage represents the cumulative losses as a percentage of adjusted risk in force that must be reached before MGIC begins absorbing losses after the XOL layer.

Ceded premiums on our XOL Transactions were $17.4 million and $34.4 million, respectively, for the three and six months ended June 30, 2023, and $19.3 million and $31.1 million, respectively, for the three and six months ended June 30, 2022.

See Note 4 - “Reinsurance" to our consolidated financial statements for additional discussion of our QSR and XOL Transactions.

### Investment income

Comparative quarterly and year to date results

Net investment income in the three and six months ended June 30, 2023 was $52.3 million and $101.6 million, respectively, compared with $40.3 million and $78.6 million, in comparison to the corresponding periods in the prior year. The increase in net investment income was primarily due to an increase of 80 basis points in the average investment yields.

### Losses and expenses

*(In millions)*

|  | Three Months Ended June 30, 2023 | 2022 | % Change | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Losses incurred, net | **$(17.7)** | $(99.1) | 82 | **$(11.2)** | $(118.4) | (91) |
| Amortization of deferred policy acquisition costs | **2.6** | 3.0 | (13) | **5.1** | 5.7 | (11) |
| Other underwriting and operating expenses, net | **54.0** | 53.4 | 1 | **124.1** | 108.2 | 15 |
| Loss on debt extinguishment | **—** | 6.4 | N/M | **—** | 28.5 | N/M |
| Interest expense | **9.4** | 13.5 | (30) | **18.8** | 28.4 | (34) |
| Total losses and expenses | **$48.3** | $(22.8) | (312) | **$136.7** | $52.4 | 161 |

### Losses incurred, net

As discussed in “Critical Accounting Estimates” in our 2022 10-K MD&A, we establish case loss reserves for future claims on delinquent loans that were reported to us as two 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 loss reserves are established based on 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. Even in a stable environment, changes to our estimates could result in a material impact to our consolidated results of operations and financial position. 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, 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.

Prior to the COVID-19 pandemic, 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. The state of the economy, local housing markets and various other factors may result in delinquencies not following the typical pattern.

For information on how pandemics and other natural disasters could affect losses incurred, net see our Risk Factors titled “Pandemics, hurricanes and other natural disasters may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs". As discussed in our Risk Factor titled “Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses on risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods” if we have not received a notice of delinquency with respect to a loan and if we have not estimated the loan to be delinquent as of June 30, 2023 through our IBNR reserve, then we have not yet recorded an incurred loss with respect to that loan.

Our estimates are also affected by any agreements we enter into regarding our claims paying practices.

Comparative quarterly results

Losses incurred, net for the second quarter of 2023 were $(17.7) million, an increase of $81.4 million compared to the second quarter of 2022 losses incurred, net of $(99.1) million. While new delinquency notices added approximately $42.2 million for the three months ended June 30, 2023, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of approximately $59.9 million. For the three months ended June 30, 2022, new delinquency notices added approximately $31.8 million, offset by our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $130.9 million. The favorable development for both periods primarily resulted from a decrease in the expected claim rate on previously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property.

Comparative year to date results

Losses incurred, net for the six months ended June 30, 2023 were $(11.2) million, an increase of $107.2 million compared with losses incurred of $(118.4) million. While new delinquency notices added approximately $89.5 million for the six months ended June 30, 2023, our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $100.7 million. For the six months ended June 30, 2022, new delinquency notices added approximately $68.2 million, offset by our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $186.6 million. The favorable development for both periods primarily resulted from a decrease in the expected claim rate on previously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property.

*Composition of losses incurred*

*(in millions)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Current year / New notices | **$42.2** | $31.8 | **$89.5** | $68.2 |
| Prior year reserve development | **(59.9)** | (130.9) | **(100.7)** | (186.6) |
| Losses incurred, net | **$(17.7)** | $(99.1) | **$(11.2)** | $(118.4) |

### 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 loss ratio was (7.3)% and (2.3)% for the three and six months ended June 30, 2023, compared with (38.7%) and (23.2%), respectively, for the corresponding periods in the prior year. The increase in the loss ratio for the three and six months ended June 30, 2023 compared to the respective prior year period was primarily due to the increase in losses incurred discussed above.

### New notice claim rate

The table below presents our new delinquency notices received, delinquency inventory, and the average number of missed payments for the loans in our delinquency inventory by policy year:

*New notices and delinquency inventory during the three and six months ended and as of:*

*June 30, 2023*

| Policy Year | New Notices for the Three Months Ended | New Notices for the Six Months Ended | Delinquency Inventory | Avg. Number of Missed Payments of Delinquency Inventory |
| --- | ---: | ---: | ---: | ---: |
| 2004 and prior | 817 | 1,660 | 2,166 | 19 |
| 2005-2008 | 2,569 | 5,269 | 7,209 | 19 |
| 2009-2015 | 678 | 1,378 | 1,620 | 12 |
| 2016 | 403 | 895 | 955 | 10 |
| 2017 | 568 | 1,196 | 1,390 | 10 |
| 2018 | 714 | 1,500 | 1,717 | 9 |
| 2019 | 677 | 1,464 | 1,515 | 9 |
| 2020 | 1,085 | 2,352 | 2,137 | 7 |
| 2021 | 1,948 | 4,004 | 3,474 | 6 |
| 2022 | 1,079 | 2,117 | 1,614 | 4 |
| 2023 | 42 | 42 | 26 | 2 |
| **Total** | **10,580** | **21,877** | **23,823** | **12** |
| **Claim rate on new notices (1)** | **8%** |  |  |  |
| June 30, 2022 |  |  |  |  |
| Policy Year | New Notices for the Three Months Ended | New Notices for the Six Months Ended | Delinquency Inventory | Avg. Number of Missed Payments of Delinquency Inventory |
| 2004 and prior | 832 | 1,834 | 2,526 | 20 |
| 2005-2008 | 2,728 | 5,855 | 9,158 | 20 |
| 2009-2015 | 690 | 1,550 | 2,391 | 13 |
| 2016 | 475 | 1,030 | 1,450 | 12 |
| 2017 | 637 | 1,356 | 1,966 | 12 |
| 2018 | 738 | 1,553 | 2,314 | 11 |
| 2019 | 682 | 1,544 | 2,146 | 11 |
| 2020 | 1,113 | 2,428 | 2,643 | 8 |
| 2021 | 1,364 | 2,812 | 2,156 | 5 |
| 2022 | 137 | 137 | 105 | 2 |
| **Total** | **9,396** | **20,099** | **26,855** | **14** |
| Claim rate on new notices (1) | 8% |  |  |  |
| (1) Claim rate is the respective quarter to date weighted average rate and is rounded to the nearest whole percent. |  |  |  |  |

### Claims severity

Factors that impact claim severity include:

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

As discussed in Note 11 - “Loss Reserves,” our loss reserves estimates take into consideration trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend. An increase in third party property sales prior to claim settlement has resulted in a decrease in the average claim paid and the average claim paid as a percentage of exposure in recent years. At the start of the COVID-19 pandemic, the level of claims received decreased. Claim activity and the average claims paid as a percentage of exposure has not yet returned to pre-COVID-19 levels. The magnitude and timing of the increases are uncertain.

The majority of loans insured prior to 2009 (which represent 39% of the loans in the delinquency inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim.

Under our current master policy terms, an insured can include accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the insured must comply with its obligations under the terms of the applicable master policy.

*Claims severity trend for claims paid during the period*

| Period | Average exposure on claim paid | Average claim paid | % Paid to exposure | Average number of missed payments at claim received date |
| --- | ---: | ---: | ---: | ---: |
| **Q2 2023** | **40,013** | **29,803** | **74.5%** | **43** |
| Q1 2023 | 37,412 | 28,227 | 75.4% | 42 |
| Q4 2022 | 38,903 | 28,492 | 73.2% | 41 |
| Q3 2022 | 37,625 | 23,461 | 62.4% | 46 |
| Q2 2022 | 44,106 | 27,374 | 62.1% | 41 |
| Q1 2022 | 38,009 | 27,662 | 72.8% | 45 |
| Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies. |  |  |  |  |

The length of time a loan is in the delinquency inventory (see Note 11 - “Loss Reserves,” table 11.4) can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. Generally, a defaulted loan with more missed payments is more likely to result in a claim. The number of payments that a borrower is delinquent is shown in the following table.

*Delinquency inventory - number of payments delinquent*

|  | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| --- | ---: | ---: | ---: |
| 3 payments or less | **10,694** | 11,484 | 9,198 |
| 4-11 payments | **7,437** | 8,026 | 8,138 |
| 12 payments or more (1) | **5,692** | 6,877 | 9,519 |
| Total | **23,823** | 26,387 | 26,855 |
| 3 payments or less | **45%** | 44% | 35% |
| 4-11 payments | **31%** | 30% | 30% |
| 12 payments or more | **24%** | 26% | 35% |
| Total | **100%** | 100% | 100% |

(1) Approximately 34%, 28%, and 21% of the primary delinquency inventory with 12 payments or more delinquent has at least 36 payments delinquent as of June 30, 2023, December 31, 2022, and June 30, 2022, respectively.

### Net losses and LAE paid

Net losses and LAE paid in the three and six months ended June 30, 2023 were consistent with the same period in the prior year. Our claims paid activity slowed at the start of the COVID-19 pandemic primarily due to forbearance and foreclosure moratoriums put in place, and it has not yet appreciably increased from those suppressed levels. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property. In addition, an increase in third party property sales prior to claim settlement, has resulted in a decrease in the average claim paid on the claims we do receive. We expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain.

The following table presents our net losses and LAE paid for the three and six months ended June 30, 2023 and 2022.

*(In millions)*

| Net losses and LAE paid | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Total primary (excluding settlements) | **$10** | $9 | **$19** | $18 |
| Claims paying practices and NPL settlements | **—** | 4 | **—** | 4 |
| Direct losses paid | **10** | 13 | **19** | 22 |
| Reinsurance | **—** | (1) | **—** | (1) |
| Net losses paid | **10** | 12 | **19** | 21 |
| LAE | **2** | 2 | **3** | 4 |
| Net losses and LAE paid | **$12** | $14 | **$22** | $25 |
| Average Claim Paid | **$29,803** | $27,374 | **$29,059** | $27,519 |

The primary average claim paid can vary materially from period to period based upon a variety of factors, including the local market conditions, average loan amount, average coverage percentage, the amount of time between delinquency and claim filing, and our loss mitigation efforts on loans for which claims are paid.

The primary average RIF on delinquent loans at June 30, 2023, December 31, 2022 and June 30, 2022 for the top 5 jurisdictions (based on the June 30, 2023 delinquency inventory) appears in the following table.

*Primary average RIF - delinquent loans*

|  | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| --- | ---: | ---: | ---: |
| Florida | **$60,930** | $59,515 | $56,308 |
| Texas | **56,151** | 53,364 | 50,900 |
| Illinois | **42,163** | 41,640 | 41,193 |
| Pennsylvania | **42,371** | 40,993 | 39,408 |
| New York | **75,897** | 74,760 | 74,784 |
| All other jurisdictions | **54,079** | 51,693 | 50,603 |
| All jurisdictions | **$54,591** | $52,511 | $51,197 |

The primary average RIF on all loans was $66,099, $64,784, and $62,735 at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.

### Loss reserves

The gross reserves at June 30, 2023, December 31, 2022, and June 30, 2022 appear in the table below.

*Gross reserves*

| Primary: | June 30, 2023 |  | December 31, 2022 |  | June 30, 2022 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Direct case loss reserves (in millions) | **$472** |  | $498 |  | $656 |  |
| Direct IBNR and LAE reserves | **55** |  | 56 |  | 66 |  |
| **Total primary direct loss reserves** | **$527** |  | $554 |  | $722 |  |
| Ending delinquent inventory |  | **23,823** |  | 26,387 |  | 26,855 |
| Percentage of loans delinquent (delinquency rate) |  | **2.05%** |  | 2.22% |  | 2.28% |
| Average total primary loss reserves per delinquency |  | **$22,123** |  | $20,994 |  | $26,890 |
| Primary claims received inventory included in ending delinquent inventory |  | **291** |  | 267 |  | 254 |
| **Other gross reserves (1) (in millions)** | **$4** |  | $4 |  | $5 |  |

(1) Other Gross Reserves includes direct and assumed reserves that are not included within our primary loss reserves.

The primary delinquency inventory for the top 15 jurisdictions (based on June 30, 2023 delinquency inventory) at June 30, 2023, December 31, 2022 and June 30, 2022 appears in the following table.

*Primary delinquency inventory by jurisdiction*

|  | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| --- | ---: | ---: | ---: |
| Florida \* | **1,940** | 2,414 | 2,155 |
| Texas | **1,808** | 1,935 | 2,004 |
| Illinois \* | **1,483** | 1,640 | 1,756 |
| Pennsylvania \* | **1,386** | 1,525 | 1,488 |
| New York \* | **1,332** | 1,399 | 1,499 |
| California | **1,267** | 1,336 | 1,370 |
| Ohio \* | **1,171** | 1,322 | 1,201 |
| Michigan | **990** | 965 | 932 |
| Georgia | **896** | 954 | 983 |
| New Jersey \* | **736** | 841 | 916 |
| Maryland | **672** | 719 | 782 |
| North Carolina | **610** | 753 | 788 |
| Indiana | **599** | 622 | 612 |
| Minnesota | **530** | 573 | 600 |
| Wisconsin | **499** | 542 | 570 |
| All other jurisdictions | **7,904** | 8,847 | 9,199 |
| Total | **23,823** | 26,387 | 26,855 |

Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.

The primary delinquency inventory by policy year at June 30, 2023, December 31, 2022 and June 30, 2022 appears in the following table.

*Primary delinquency inventory by policy year*

| Policy year: | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| --- | ---: | ---: | ---: |
| 2004 and prior | **2,166** | 2,471 | 2,526 |
| 2004 and prior % | **9%** | 9% | 9% |
| 2005 | **1,257** | 1,438 | 1,512 |
| 2006 | **2,117** | 2,388 | 2,504 |
| 2007 | **3,125** | 3,680 | 4,140 |
| 2008 | **710** | 811 | 1,002 |
| 2005 - 2008 % | **30%** | 32% | 34% |
| 2009 | **54** | 51 | 65 |
| 2010 | **32** | 31 | 47 |
| 2011 | **23** | 43 | 58 |
| 2012 | **65** | 72 | 89 |
| 2013 | **180** | 243 | 323 |
| 2014 | **498** | 633 | 751 |
| 2015 | **768** | 944 | 1,058 |
| 2009 - 2015 % | **7%** | 8% | 9% |
| 2016 | **955** | 1,249 | 1,450 |
| 2017 | **1,390** | 1,719 | 1,966 |
| 2018 | **1,717** | 2,060 | 2,314 |
| 2019 | **1,515** | 1,823 | 2,146 |
| 2020 | **2,137** | 2,558 | 2,643 |
| 2021 | **3,474** | 3,307 | 2,156 |
| 2022 | **1,614** | 866 | 105 |
| 2023 | **26** | — | — |
| 2016 and later % | **54%** | 51% | 48% |
| Total | **23,823** | 26,387 | 26,855 |

MGIC Investment Corporation - Q2 2023 \| 54

On our primary business, the highest claim frequency years have typically been the third and fourth year after loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Deteriorating economic conditions can result in increasing claims following a period of declining claims. As of June 30, 2023, 63% of our primary RIF was written subsequent to December 31, 2020, 82% of our primary RIF was written subsequent to December 31, 2019, and 87% of our primary RIF was written subsequent to December 31, 2018.

### Underwriting and other expenses, net

Underwriting and other expenses includes items such as employee compensation costs, fees for professional and consulting services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions.

Underwriting and other expenses, net for the three and six months ended June 30, 2023, were $54.0 million and $124.1 million, respectively, compared with $53.4 million and $108.2 million, for the corresponding periods in the prior year. Underwriting and other expenses, net increased during the six months ended June 30, 2023 compared with the same period in the prior year primarily due to an increase in pension expenses as a result of settlement accounting charges, an increase in performance based employee compensation, and an increase in postretirement benefit expenses, offset partially by a decrease in expenses related to professional and consulting services. We will incur additional settlement accounting charges during the remainder of 2023; however, the magnitude and timing is uncertain.

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Underwriting expense ratio | **24.1%** | 22.4% | **27.6%** | 22.7% |

The underwriting expense ratio is the ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance subsidiaries) to net premiums written. The underwriting expense ratio for the three months ended June 30, 2023, increased compared with the same period in the prior year primarily due to a decrease in net premiums written. The underwriting expense ratio for the six months ended June 30, 2023 increased compared with the same period in the prior year primarily due to an increase in underwriting expenses and a decrease in net premiums written.

### Loss on debt extinguishment

We have not repurchased any of our outstanding debt obligations in 2023. For the six months ended June 30, 2022, we recorded a loss on debt extinguishment of $27.2 million, related to the repurchase of a portion our 9% Debenture, at costs in excess of their carrying value and a prepayment fee of $1.3 million on the outstanding principal balance of the FHLB Advance.

### Provision for income taxes and effective tax rate

*(In millions, except rate)*

| Income tax provision and effective tax rate | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Income before tax | **$242.4** | $315.9 | **$438.0** | $535.3 |
| Provision for income taxes | **$51.3** | $66.6 | **$92.4** | $111.0 |
| Effective tax rate | **21.2%** | 21.1% | **21.1%** | 20.7% |

Our effective tax rate for the three and six months ended June 30, 2023 and 2022 approximated the statutory tax rate of 21%.

### Balance Sheet Review

The following sections mainly focus on the major developments on our Consolidated Balance Sheet since December 31, 2022.

### Consolidated balance sheets - Assets

*(in thousands)*

|  | June 30, 2023 | December 31, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Investments | **$5,618,272** | $5,424,688 | 4 |
| Cash and cash equivalents | **310,720** | 327,384 | (5) |
| Premiums receivable | **57,066** | 58,000 | (2) |
| Reinsurance recoverable on loss reserves | **34,475** | 28,240 | 22 |
| Reinsurance recoverable on paid losses | **240** | 18,081 | (99) |
| Deferred incomes taxes, net | **110,782** | 124,769 | (11) |
| Other assets | **221,892** | 232,631 | (5) |
| **Total Assets** | **$6,353,447** | $6,213,793 | 2 |

Investments - Our investments increased to $5.6 billion as of June 30, 2023 from $5.4 billion as of December 31, 2022. The increase is primarily due to net investment purchases and an improvement in the unrealized loss on our investment portfolio in 2023.

The average duration and investment yield of our investment portfolio as of June 30, 2023 and December 31, 2022 are shown in the table below.

*Portfolio duration and embedded investment yield*

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Duration (in years) | **4.2** | 4.3 |
| Pre-tax yield (1) | **3.4%** | 3.0% |
| After-tax yield (1) | **2.8%** | 2.5% |

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

The security ratings of our fixed income investments as of June 30, 2023 and December 31, 2022 are shown in the following table.

*Fixed income security ratings*

| Period | Security Ratings (1) AAA | AA | A | BBB |
| --- | ---: | ---: | ---: | ---: |
| **June 30, 2023** | **21%** | **25%** | **35%** | **19%** |
| December 31, 2022 | 18% | 28% | 34% | 20% |

(1) Ratings are provided by one or more of: Moody's, Standard & Poor's and Fitch Ratings. If three ratings are available, the middle rating is used; if two FICO scores are available, the lower of the two is used; if only one FICO score is available, it is used.

Cash and cash equivalents - Our cash and cash equivalents balance decreased to $310.7 million as of June 30, 2023, from $327.4 million as of December 31, 2022, as net cash generated from operating activities was offset by cash used in investing and financing activities.

Reinsurance recoverable on paid losses - Reinsurance recoverable on paid losses decreased to $0.2 million at June 30, 2023, from $18.1 million at December 31, 2022. At December 31, 2022 the reinsurance recoverable on paid losses is primarily composed of losses recoverable from reinsurers at the time of termination of the 2015 and 2019 QSR Transactions. In a reinsurance termination, amounts for any incurred but unpaid losses are due to us from the reinsurers.

Income Taxes - Our current income tax liability was $2.6 million at June 30, 2023 and is included as a component of other liabilities in our consolidated balance sheets. Our current income tax receivable was $5.3 million at December 31, 2022 and is included as a component of other assets in our consolidated balance sheets. Our deferred tax asset was $110.8 million and $124.8 million at June 30, 2023 and December 31, 2022, respectively. The change in our deferred income tax asset was primarily due to the tax effect of unrealized gains generated by the investment portfolio during the first six months of 2023. We owned $744.2 million and $661.7 million of tax and loss bonds at June 30, 2023 and December 31, 2022, respectively.

### Consolidated balance sheets - Liabilities and equity

*(in thousands)*

|  | June 30, 2023 | December 31, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Loss reserves | **$530,681** | $557,988 | (5) |
| Unearned premiums | **171,879** | 195,289 | (12) |
| Long-term debt | **663,546** | 662,810 | — |
| Other liabilities | **143,079** | 154,966 | (8) |
| Total Liabilities | **$1,509,185** | $1,571,053 | (4) |
| Common stock | **371,353** | 371,353 | — |
| Paid-in capital | **1,799,444** | 1,798,842 | — |
| Treasury stock | **(1,192,783)** | (1,050,238) | 14 |
| Accumulated other comprehensive income (loss), net of tax | **(424,887)** | (481,511) | 12 |
| Retained earnings | **4,291,135** | 4,004,294 | 7 |
| Shareholders’ equity | **$4,844,262** | $4,642,740 | 4 |

Loss reserves and Reinsurance recoverable on loss reserves - Our loss reserves include estimates of losses and settlement expenses on (1) loans in our delinquency inventory (known as case reserves), (2) IBNR delinquencies, and (3) LAE. Our gross reserves are reduced by reinsurance recoverable on loss reserves to calculate a net reserve balance. Loss reserves decreased to $530.7 million as of June 30, 2023, from $558.0 million as of December 31, 2022. The decrease in loss reserves is primarily from favorable development of $100.7 million on previously received delinquency notices, partially offset by loss reserves established on new notices. Reinsurance recoverables on loss reserves were $34.5 million and $28.2 million as of June 30, 2023 and December 31, 2022, respectively.

Unearned premiums - Our unearned premium decreased to $171.9 million as of June 30, 2023 from $195.3 million as of December 31, 2022 primarily due to the run-off of our existing portfolio of single premium policies outpacing the level of NIW from single premium policies.

Shareholder’s equity - The increase in shareholders’ equity represents an improvement in the unrealized loss on our investment portfolio and net income, partially offset by repurchases of our common stock and dividends paid in the first six months of 2023.

### Liquidity and Capital Resources

### Consolidated Cash Flow Analysis

We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our insurance operations and income earned on our investment portfolio, less amounts paid for claims, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and purchases of property and equipment and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding, and dividend payments. The following table summarizes our consolidated cash flows from operating, investing and financing activities:

*Summary of consolidated cash flows*

*(In thousands)*

| Total cash provided by (used in): | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | **$356,948** | $361,679 |
| Investing activities | **(157,028)** | 289,586 |
| Financing activities | **(216,109)** | (536,962) |
| Increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | **$(16,189)** | $114,303 |

Net cash provided by operating activities for the six months ended June 30, 2023 decreased when compared with the same period of 2022 primarily due to an increase in losses paid, net of the reinsurance recoverable on paid losses and a decrease in net premiums received, offset by a decrease in interest expense paid on our outstanding debt obligations.

We also have purchase obligations totaling approximately $12.9 million which consist primarily of contracts related to our continued investment in our information technology infrastructure in the normal course of business. The majority of these obligations are under contracts that give us cancellation rights with notice. In the next twelve months we anticipate we will pay approximately $5.3 million for our purchase obligations.

Net cash used in investing activities for the six months ended June 30, 2023 primarily reflects purchases of fixed income and equity securities during the period that exceeded sales and maturities of fixed income and equity securities during the period as cash from operations was available for additional investment. Net cash provided by investing activities for the six months ended June 30, 2022 primarily reflects sales and maturities of fixed income and equity securities during the period that exceeded purchases as proceeds were used in financing activities.

Net cash used in financing activities for the six months ended June 30, 2023 primarily reflects the repurchases of our common stock and dividends to shareholders. Net cash used in financing activities for the six months ended June 30, 2022 primarily reflects the repurchase of our common stock, repayment of our FHLB Advance, the repurchase of a portion of our 9% Debentures and dividends to shareholders.

### Capitalization

Debt - holding company

As of June 30, 2023, our holding company’s debt obligations were $671.0 million in aggregate principal amount consisting of our 5.25% Notes and 9% Debentures.

Liquidity analysis - holding company

As of June 30, 2023, we had approximately $816.5 million in cash and investments at our holding company. Resources are maintained to service our debt interest expense, pay debt maturities, repurchase debt, and to settle intercompany obligations. We also use holding company resources to repurchase shares and pay dividends to shareholders. While these assets are held, we generate investment income that serves to offset a portion of our cash requirements. The payment of dividends from MGIC are the principal sources of holding company cash inflow and their payment is restricted by insurance regulation. See Note 14 - “Statutory Information” to our consolidated financial statement for additional information about MGIC’s dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of PMIERs Available Assets to maintain in excess of Minimum Required Assets. Other sources of holding company liquidity include raising capital in the public markets. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness.

In the first half of 2023, we paid $58.8 million in dividends to shareholders. On July 27, 2023, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.115 per share to shareholders of record on August 10, 2023, payable on August 24, 2023.

In the first six months of 2023, our holding company cash and investments increased by $170.0 million. The net unrealized losses on our holding company investment portfolio were approximately $9.5 million at June 30, 2023, and the portfolio had a modified duration of approximately 1.1 years.

Significant cash and investments *inflows at our holding company* during the first six months:

- $300.0 million dividend received from MGIC
- $73.5 million intercompany tax receipts, and
- $8.5 million of investment income.

Significant cash *outflows at our holding company* during the first six months:

- $148.8 million of net share repurchase transactions,
- $58.8 million of cash dividends paid to shareholders, and
- $18.0 million of interest payments on our outstanding debt obligations.

MGIC paid $300.0 million in dividends to our holding company in the six months ended June 30, 2023. Future dividend payments from MGIC to the holding company will be determined in consultation with the board, and after considering any updated estimates about our business. We ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company.

In the first six months of 2023, we repurchased 10.8 million shares of our common stock using $150.9 million of holding company cash. As of June 30, 2023 we had remaining authorization to repurchase $463.0 million of our common stock through July 1, 2025 under a share repurchase program approved by our Board of Directors in April 2023. In July 2023, we repurchased an additional 1.1 million shares totaling $18.5 million under the remaining authorization.

Scheduled debt maturities beyond the next twelve months include $650.0 million of our 5.25% Notes due in 2028, and $21.1 million of our 9% Debentures due in 2063. 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 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, 2022 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.

Over the next twelve months the principal demand on our holding company resources will be interest payments on our 5.25% Notes and 9% Debentures approximating $36.0 million and dividends to shareholders. We believe our holding company has sufficient sources of liquidity to meet its payment obligations for the foreseeable future.

We may also use additional holding company cash to repurchase additional shares or to repurchase our outstanding debt obligations. Such repurchases may be material, may be made for cash (funded by debt) and/or exchanges for other securities, and may be made in open market purchases (including through 10b5-1 plans), privately negotiated acquisitions or other transactions. See "Overview-Capital" of this MD&A for a discussion of our share repurchase programs.

### Debt at subsidiaries

MGIC did not have any outstanding debt obligations at June 30, 2023. MGIC is a member of the FHLB, which provides MGIC access to an additional source of liquidity via a secured lending facility. We may borrow from the FHLB at any time.

### Capital Adequacy

PMIERs

As of June 30, 2023, MGIC’s Available Assets under the PMIERs totaled approximately $5.8 billion, an excess of approximately $2.3 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. Our reinsurance transactions provided an aggregate of approximately $2.2 billion of capital credit under the PMIERs as of June 30, 2023. Refer to Note 4 - “Reinsurance” to our consolidated financial statements for additional information on our reinsurance transactions.

The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases.

Refer to “Overview - Capital - GSEs” of this MD&A and our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility” 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 operations 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, net of reinsurance and excludes risk on policies that are currently in default and for which case loss reserves have been established and the risk covered by reinsurance. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. MGIC’s 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 loss reserve. The statutory contingency loss reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to a contingency loss reserve of approximately 50% of 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 loss reserve when incurred losses exceed 35% of earned premiums in a calendar year.

The table below presents our risk-to-capital calculation:

*Risk-to-capital - MGIC*

*(In millions, except ratio)*

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| RIF - net (1) | **55,738** | $56,292 |
| Statutory policyholders’ surplus | **775** | 921 |
| Statutory contingency loss reserve | **4,866** | 4,597 |
| Statutory policyholders’ position | **$5,641** | $5,518 |
| Risk-to-capital | **9.9:1** | 10.2:1 |

(1) RIF – net, as shown in the table above is net of reinsurance and exposure on policies currently delinquent ($1.4 billion at both June 30, 2023 and December 31, 2022) for which loss reserves have been established.

For additional information regarding regulatory capital see Note 14 – “Statutory Information” to our consolidated financial statements as well as our Risk Factor titled “State Capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.”

### Financial Strength Ratings

*MGIC financial strength ratings*

|  |  |  |
| --- | --- | --- |
| **Rating Agency** | **Rating** | **Outlook** |
| Moody’s Investor Services | A3 | Stable |
| Standard and Poor’s Rating Services | BBB+ | Stable |
| A.M. Best | A- | Stable |

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

For further information about the importance of MGIC’s ratings, see our Risk Factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.”

### Forward Looking Statements and Risk Factors

*General*: Our business, results of operations, and financial condition could be affected by the Risk Factors referred to under “Location of Risk Factors” below. These Risk Factors are an integral part of Management’s Discussion and Analysis.

These factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact. Among others, statements that include words such as we “believe,” “anticipate” or “expect,” or words of similar import, are forward looking statements. These Risk Factors speak only as of the date of this filing and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. We are not undertaking any obligation to update any forward looking statements 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, 2022, as supplemented by Part II, Item 1 A of our quarterly report on Form 10Q for the quarter ended March 31, 2023, and Part II, Item 1 A of this Quarterly Report on Form 10-Q. The Risk Factors in the 10-K, as supplemented by this 10‑Qs and through updating of various statistical and other information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.

## Market risk

As filed, 1,844 characters.

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 E, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2022.

**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 30, 2023, the modified duration of our fixed income investment portfolio was 4.2 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.2% 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.

## Controls and procedures

As filed, 735 characters.

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 quarter of 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Aug 2, 2023.
Source: SEC EDGAR, the filing index for accession 0000876437-23-000050. Last ingested by Listed: Nov 10, 2026, 01:49 ET. No prices; not investment advice.