Edgar Filing: MGIC INVESTMENT CORP

form10q.htm

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 1-10816

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN		39-1486475
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

250 E. KILBOURN AVENUE		53202
MILWAUKEE, WISCONSIN		(Zip Code)
(Address of principal executive offices)

	(414) 347-6480
	(Registrant's telephone number, including area code)

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

YES x NO o

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

YESx NO o

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

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

YESo NO x

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

CLASS OF STOCK	PAR VALUE	DATE	NUMBER OF SHARES
Common stock	$1.00	10/31/11	201,171,528

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2011 and December 31, 2010

(Unaudited)

	September 30,			December 31,
	2011			2010
ASSETS	(In thousands)
Investment portfolio (notes 7 and 8):
Securities, available-for-sale, at fair value:
Fixed maturities (amortized cost, 2011 - $6,255,817; 2010 - $7,366,808)	$	6,455,521		$	7,455,238
Equity securities		2,699			3,044
Total investment portfolio		6,458,220			7,458,282
Cash and cash equivalents		866,614			1,304,154
Accrued investment income		67,104			70,305
Reinsurance recoverable on loss reserves (note 4)		166,874			275,290
Reinsurance recoverable on paid losses		15,320			34,160
Prepaid reinsurance premiums		1,782			2,637
Premium receivable		73,895			79,567
Home office and equipment, net		28,527			28,638
Deferred insurance policy acquisition costs		7,696			8,282
Other assets		61,271			72,327
Total assets	$	7,747,303		$	9,333,642

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (note 12)	$	4,791,560		$	5,884,171
Premium deficiency reserve (note 13)		146,525			178,967
Unearned premiums		166,703			215,157
Senior notes (note 3)		244,259			376,329
Convertible senior notes (note 3)		345,000			345,000
Convertible junior debentures (note 3)		336,694			315,626
Other liabilities		327,737			349,337
Total liabilities		6,358,478			7,664,587

Contingencies (note 5)

Shareholders' equity:
Common stock ($1 par value, shares authorized 460,000,000; shares issued, 2011 - 205,046,780; 2010 - 205,046,780; shares outstanding, 2011 - 201,171,528; 2010 - 200,449,588)		205,047			205,047
Paid-in capital		1,133,270			1,138,942
Treasury stock (shares at cost, 2011 - 3,875,252; 2010 - 4,597,192)		(162,542	)		(222,632	)
Accumulated other comprehensive income, net of tax (note 9)		89,393			22,136
Retained earnings		123,657			525,562
Total shareholders' equity		1,388,825			1,669,055

Total liabilities and shareholders' equity	$	7,747,303		$	9,333,642

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues:	(In thousands of dollars, except per share data)
Premiums written:
Direct	$	274,610		$	294,478		$	845,798		$	883,922
Assumed		(6,999	)		764			(5,569	)		2,340
Ceded		(11,866	)		(16,260	)		(39,622	)		(55,876	)

Net premiums written		255,745			278,982			800,607			830,386
Decrease in unearned premiums, net		19,349			17,514			47,487			47,236

Net premiums earned		275,094			296,496			848,094			877,622
Investment income, net of expenses		48,898			58,465			160,931			190,192
Realized investment gains, net		11,405			24,524			38,900			89,180
Total other-than-temporary impairment losses		(253	)		-			(253	)		(6,052	)
Portion of losses recognized in other comprehensive income, before taxes		-			-			-			-
Net impairment losses recognized in earnings		(253	)		-			(253	)		(6,052	)
Other revenue		2,025			2,840			9,617			8,508

Total revenues		337,169			382,325			1,057,289			1,159,450

Losses and expenses:
Losses incurred, net (note 12)		462,654			384,578			1,232,637			1,159,166
Change in premium deficiency reserve (note 13)		(12,388	)		(8,887	)		(32,441	)		(33,072	)
Amortization of deferred policy acquisition costs		1,762			1,750			5,210			5,243
Other underwriting and operating expenses, net		50,715			55,856			158,860			166,358
Interest expense		25,761			26,702			78,129			72,819

Total losses and expenses		528,504			459,999			1,442,395			1,370,514

Loss before tax		(191,335	)		(77,674	)		(385,106	)		(211,064	)
Benefit from income taxes (note 11)		(26,130	)		(26,146	)		(34,508	)		(33,996	)

Net loss	$	(165,205	)	$	(51,528	)	$	(350,598	)	$	(177,068	)

Loss per share (note 6):
Basic	$	(0.82	)	$	(0.26	)	$	(1.74	)	$	(1.05	)
Diluted	$	(0.82	)	$	(0.26	)	$	(1.74	)	$	(1.05	)


Weighted average common shares outstanding - diluted (note 6)		201,109			200,077			200,983			168,429

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Year Ended December 31, 2010 and Nine Months Ended September 30, 2011

(Unaudited)

									Accumulated
									other
	Common		Paid-in			Treasury			comprehensive			Retained			Comprehensive
	stock		capital			stock			income (loss)			earnings			loss
						(In thousands)

Balance, December 31, 2009	$	130,163	$	443,294		$	(269,738	)	$	74,155		$	924,707

Net loss		-		-			-			-			(363,735	)	$	(363,735	)
Change in unrealized investment gains and losses, net		-		-			-			(69,074	)		-			(69,074	)
Common stock shares issued		74,884		697,492			-			-			-
Reissuance of treasury stock, net		-		(14,425	)		47,106			-			(35,410	)
Equity compensation		-		12,581			-			-			-
Defined benefit plan adjustments, net		-		-			-			6,390			-			6,390
Unrealized foreign currency translation adjustment, net		-		-			-			10,665			-			10,665
Comprehensive loss		-		-			-			-			-		$	(415,754	)

Balance, December 31, 2010	$	205,047	$	1,138,942		$	(222,632	)	$	22,136		$	525,562


Net loss		-		-			-			-			(350,598	)	$	(350,598	)
Change in unrealized investment gains and losses, net (notes 7 and 8)		-		-			-			72,754			-			72,754
Reissuance of treasury stock, net		-		(14,577	)		60,090			-			(51,307	)
Equity compensation		-		8,905			-			-			-
Unrealized foreign currency translation adjustment		-		-			-			(5,497	)		-			(5,497	)
Comprehensive loss (note 9)		-		-			-			-			-		$	(283,341	)

Balance, September 30, 2011	$	205,047	$	1,133,270		$	(162,542	)	$	89,393		$	123,657

See accompanying notes to consolidated financial statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	Nine Months Ended September 30,

	2011			2010
	(In thousands)

Cash flows from operating activities:
Net loss	$	(350,598	)	$	(177,068	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		60,166			43,569
Decrease in deferred insurance policy acquisition costs		586			850
Decrease in accrued investment income		3,201			11,401
Decrease in reinsurance recoverable on loss reserves		108,416			32,988
Decrease (increase) in reinsurance recoverable on paid losses		18,840			(34,161	)
Decrease in prepaid reinsurance premiums		855			630
Decrease in premium receivable		5,672			2,826
Decrease in loss reserves		(1,092,611	)		(525,898	)
Decrease in premium deficiency reserve		(32,441	)		(33,072	)
Decrease in unearned premiums		(48,454	)		(46,560	)
Deferred tax benefit		(36,241	)		(38,152	)
(Decrease) increase in income taxes payable (current)		(1,732	)		293,723
Realized investment gains, excluding impairment losses		(38,900	)		(89,180	)
Net investment impairment losses		253			6,052
Other		(13,013	)		98,644
Net cash used in operating activities		(1,416,001	)		(453,408	)

Cash flows from investing activities:
Purchase of fixed maturities		(2,417,392	)		(3,544,492	)
Purchase of equity securities		(84	)		(82	)
Proceeds from sale of equity securities		504			-
Proceeds from sale of fixed maturities		2,429,143			3,213,002
Proceeds from maturity of fixed maturities		1,091,959			644,028
Net increase in payable for securities		3,509			14,565
Net cash provided by investing activities		1,107,639			327,021

Cash flows from financing activities:
Net proceeds from convertible senior notes		-			334,373
Common stock shares issued		-			772,376
Repayment of long-term debt		(129,178	)		-
Net cash (used in) provided by financing activities		(129,178	)		1,106,749

Net (decrease) increase in cash and cash equivalents		(437,540	)		980,362
Cash and cash equivalents at beginning of period		1,304,154			1,185,739
Cash and cash equivalents at end of period	$	866,614		$	2,166,101

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

Note 1 - Basis of presentation

MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation ("MGIC") and several other subsidiaries, is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities (“GSEs”) to protect against loss from defaults on low down payment residential mortgage loans.

The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 included in our Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.

In the opinion of management the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our financial position and results of operations for the periods indicated. The results of operations for the interim period may not be indicative of the results that may be expected for the year ending December 31, 2011.

Capital

The insurance laws or regulations of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “Capital Requirements.” While formulations of minimum capital may vary in certain jurisdictions, the most common measure applied allows for a maximum permitted risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if the percentage decrease in capital exceeds the percentage decrease in insured risk. Therefore, as capital decreases, the same dollar decrease in capital will cause a greater percentage decrease in capital and a greater increase in the risk-to-capital ratio. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires us to maintain a minimum policyholder position (“MPP”). The “policyholder position” of a mortgage guaranty insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums.

At September 30, 2011, MGIC’s risk-to-capital ratio was 22.2 to 1 and its policyholder position exceeded the MPP by $50 million. At September 30, 2011, the risk-to-capital ratio of our combined insurance operations (which includes reinsurance affiliates) was 24.0 to 1. A higher risk-to-capital ratio on a combined basis may indicate that, in order for MGIC to continue to utilize reinsurance arrangements with its subsidiaries or subsidiaries of our holding company, additional capital contributions to the reinsurance affiliates could be needed. These reinsurance arrangements permit MGIC to write insurance with a higher coverage percentage than it could on its own under certain state-specific requirements. At December 31, 2010, MGIC'S risk-to-capital ratio was 19.8 to 1 and its policyholder position exceeded the MPP by $225 million. At December 31, 2010, the risk-to-capital ratio of our combined insurance operations was 23.2 to 1.

The National Association of Insurance Commissioners (“NAIC”) adopted a new Statement of Statutory Accounting Principles (“SSAP No. 101”) that will change, among other things, the statutory accounting rules for admitting deferred tax assets. These changes were introduced by the NAIC, and approved by various task forces and committees of the NAIC, in the third quarter of 2011. Under SSAP No. 101, effective January 1, 2012, as a mortgage insurer approaches the Capital Requirement limits, the benefit allowed for deferred tax assets will be eliminated. Such elimination would negatively impact our statutory capital for purposes of calculating compliance with the Capital Requirements. At September 30, 2011, our statutory deferred tax assets were $133 million. For more information about factors that could negatively impact our compliance with Capital Requirements, which depending on the severity of adverse outcomes could result in material non-compliance with Capital Requirements, see Note 5 – “Litigation and contingencies.”

In December 2009, the Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”) issued an order waiving, until December 31, 2011, its Capital Requirement. MGIC has also applied for waivers in all other jurisdictions that have Capital Requirements. MGIC has received waivers from some of these jurisdictions which expire at various times. One waiver expired on December 31, 2010 and has not been renewed because the need for a waiver was not considered imminent. MGIC may reapply for the waiver. The remaining waivers that MGIC received generally expire December 31, 2011. We expect to seek extensions of all waivers before they are needed, which could be after they expire. Some jurisdictions have denied the original request for a waiver and others may deny future requests, including for extensions. The OCI and insurance departments of other jurisdictions, in their sole discretion, may modify, terminate or extend their waivers. If the OCI or another insurance department modifies or terminates its waiver, or if it fails to renew its waiver after expiration, depending on the circumstances, MGIC could be prevented from writing new business anywhere, in the case of the waiver from the OCI, or in the particular jurisdiction, in the case of the other waivers, if MGIC does not comply with the Capital Requirements unless MGIC obtained additional capital to enable it to comply with the Capital Requirement. New insurance written in the jurisdictions that have a Capital Requirement represented approximately 50% of new insurance written in each of 2010 and the first three quarters of 2011. If we were prevented from writing new business in all jurisdictions, our insurance operations in MGIC would be in run-off (meaning no new loans would be insured but loans previously insured would continue to be covered, with premiums continuing to be received and losses continuing to be paid on those loans) until MGIC either met the Capital Requirement or obtained a necessary waiver to allow it to once again write new business.

We cannot assure you that the OCI or any other jurisdiction that has granted a waiver of its Capital Requirements will not modify or revoke the waiver, that it will renew the waiver when it expires or that MGIC could obtain the additional capital necessary to comply with the Capital Requirement. Depending on the circumstances, the amount of additional capital we might need could be substantial.

We have implemented a plan to write new mortgage insurance in MGIC Indemnity Corporation (“MIC”), a direct subsidiary of MGIC, in selected jurisdictions in order to address the likelihood that in the future MGIC will not meet the Capital Requirements discussed above and may not be able to obtain appropriate waivers of these requirements in all jurisdictions in which Capital Requirements are present. MIC has received the necessary approvals, including from the OCI, to write business in all of the jurisdictions in which MGIC would be prohibited from continuing to write new business in the event of MGIC’s failure to meet Capital Requirements and obtain waivers of those requirements.

In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the “Fannie Mae Agreement”) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write mortgage insurance, subject to the continued effectiveness of the waiver of Capital Requirements granted by the OCI to MGIC, and only in those jurisdictions (other than Wisconsin) in which MGIC cannot write new insurance due to MGIC’s failure to meet Capital Requirements and if MGIC fails to obtain relief from those requirements or a specific waiver of them. As noted above, we cannot assure you that the OCI will not modify or revoke its waiver, or that it will renew the waiver when it expires.

On February 11, 2010, Freddie Mac notified MGIC that it may utilize MIC to write new business in jurisdictions in which MGIC does not meet Capital Requirements to write new business and does not obtain appropriate waivers of those requirements. This conditional approval to use MIC as a “Limited Insurer” (the “Freddie Mac Notification”) will expire December 31, 2012. This conditional approval includes terms substantially similar to those in the Fannie Mae Agreement.

Under the Fannie Mae Agreement, Fannie Mae approved MIC as an eligible mortgage insurer only through December 31, 2011. We have initiated discussions with Fannie Mae regarding an extension of the Fannie Mae Agreement. Freddie Mac has approved MIC as a “Limited Insurer” only through December 31, 2012. Unless Fannie Mae and Freddie Mac extend or modify the terms of their approvals of MIC, whether MIC will continue as an eligible mortgage insurer after these dates will be determined by the applicable GSE’s mortgage insurer eligibility requirements then in effect. Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize MIC with more than the $200 million contribution already made without prior approval from each GSE, which, in future years, may limit the amount of business MIC would otherwise write assuming the Fannie Mae Agreement is extended and we meet the terms of the Freddie Mac Notification. Depending on the level of losses that MGIC experiences in the future, however, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific Capital Requirements applicable to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the jurisdictions in which MIC is not an eligible mortgage insurer.

One of our competitors, Republic Mortgage Insurance Company (“RMIC”), ceased writing new insurance commitments after the waiver of Capital Requirements that it received from its domiciliary state expired on August 31, 2011. RMIC had not received approval from its domiciliary state or the GSEs to write new business in a separately capitalized affiliate (“RMIC-NC”) that we understand is a sister entity, and not a subsidiary, of RMIC. In October 2011, both RMIC and RMIC-NC went into run-off. Another competitor, PMI Mortgage Insurance Co. (“PMI”) and the subsidiary it established to write new business if PMI was no longer able to do so (“PMAC”), ceased issuing new mortgage insurance commitments effective August 19, 2011 when PMI was placed under the supervision of the insurance department of its domiciliary state. In October 2011, a state court entered an order directing the insurance department to take possession and control of PMI pending a later hearing. In addition, pursuant to the order, the insurance department issued a partial claim payment plan, under which PMI’s claim payments will be made at 50%, with the remaining amount deferred as a policyholder claim. Both Fannie Mae and Freddie Mac suspended RMIC, RMIC-NC, PMI and PMAC as approved mortgage insurers. We are uncertain how such events, including the actions taken by the GSEs, will impact the status of MGIC’s waivers and approvals to utilize MGIC’s direct subsidiary, MIC. Because it is wholly owned by MGIC, the operating results from business written by MIC would positively (in the case of profitable business) or negatively (in the case of unprofitable business) impact MGIC.

A failure to meet the Capital Requirements to insure new business does not necessarily mean that MGIC does not have sufficient resources to pay claims on its insurance liabilities. While we believe that MGIC has sufficient claims paying resources to meet its claim obligations on its insurance in force, even in scenarios in which it fails to meet Capital Requirements, we cannot assure you that the events that led to MGIC failing to meet Capital Requirements would not also result in it not having sufficient claims paying resources. Furthermore, our estimates of MGIC’s claims paying resources and claim obligations are based on various assumptions. These assumptions include our anticipated rescission activity, future housing values and future unemployment rates. These assumptions are subject to inherent uncertainty and require judgment by management. Current conditions in the domestic economy make the assumptions about housing values and unemployment rates highly volatile in the sense that there is a wide range of reasonably possible outcomes. Our anticipated rescission activity is also subject to inherent uncertainty due to the difficulty of predicting the amount of claims that will be rescinded and the outcome of any legal proceedings related to rescissions that we make, including those with Countrywide (for more information about the Countrywide legal proceedings, see Note 5 – “Litigation and contingencies”).

Historically, rescissions of policies for which claims have been submitted to us were not a material portion of our claims resolved during a year. However, beginning in 2008, our rescissions of policies have materially mitigated our paid losses. In each of 2009 and 2010, rescissions mitigated our paid losses by approximately $1.2 billion and in the first three quarters of 2011, rescissions mitigated our paid losses by approximately $0.5 billion (in each case, the figure includes amounts that would have either resulted in a claim payment or been charged to a deductible under a bulk or pool policy, and may have been charged to a captive reinsurer). In recent quarters, 18% to 21% of claims received in a quarter have been resolved by rescissions, down from the peak of approximately 28% in the first half of 2009. While we have a substantial pipeline of claims investigations that we expect will eventually result in future rescissions, we expect that the percentage of claims that will be resolved through rescissions will continue to decline.

In addition, our loss reserving methodology incorporates the effects we expect rescission activity to have on the losses we will pay on our delinquent inventory. A variance between ultimate actual rescission rates and these estimates, as a result of the outcome of claims investigations, litigation, settlements or other factors, could materially affect our losses. We estimate rescissions mitigated our incurred losses by approximately $2.5 billion in 2009 and $0.2 billion in 2010. For the first three quarters of 2011, we estimate that rescissions had no significant impact on our losses incurred. All of these figures include the benefit of claims not paid in the period as well as the impact of changes in our estimated expected rescission activity on our loss reserves in the period. At September 30, 2011, we had 180,894 loans in our primary delinquency inventory; the resolution of a significant portion of these loans will not involve paid claims.

If the insured disputes our right to rescind coverage, the outcome of the dispute ultimately would be determined by legal proceedings. Legal proceedings disputing our right to rescind coverage may be brought up to three years after the lender has obtained title to the property (typically through a foreclosure) or the property was sold in a sale that we approved, whichever is applicable, although in a few jurisdictions there is a longer time to bring such an action. For nearly all of our rescissions that are not subject to a settlement agreement, the period in which a dispute may be brought has not ended. We consider a rescission resolved for reporting purposes even though legal proceedings have been initiated and are ongoing. Although it is reasonably possible that, when the proceedings are completed, there will be a determination that we were not entitled to rescind in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. Under Accounting Standards Codification (“ASC”) 450-20, an estimated loss from such proceedings is accrued for only if we determine that the loss is probable and can be reasonably estimated. Therefore, when establishing our loss reserves, we do not include additional loss reserves that would reflect an adverse outcome from ongoing legal proceedings, including those with Countrywide. For more information about these legal proceedings, see Note 5 – “Litigation and contingencies.”

In 2010, we entered into a settlement agreement with a lender-customer regarding our rescission practices and we may, subject to GSE approval, enter into additional settlement agreements with other lenders in the future. In April 2011, Freddie Mac advised its servicers that they must obtain its prior approval for rescission settlements and Fannie Mae advised its servicers that they are prohibited from entering into such settlements. In addition, in April 2011, Fannie Mae notified us that we must obtain its prior approval to enter into certain settlements. We continue to discuss with other lenders their objections to material rescissions and have reached settlement terms with several of our significant lender customers. Any definitive agreement with these customers would be subject to GSE approval. There can be no assurances that the GSEs will approve any settlement agreements and we are not aware that they have approved any settlement agreements after April 2011.

In addition to the proceedings involving Countrywide, we are involved in legal proceedings with respect to rescissions that we do not consider to be collectively material in amount. Although it is reasonably possible that, when these discussions or proceedings are completed, there will be a conclusion or determination that we were not entitled to rescind in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability.

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2010 amounts to conform to 2011 presentation.

Subsequent events

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

Note 2 - New Accounting Guidance

In June 2011, new guidance was issued requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The new requirements are generally effective for public entities in fiscal years (including interim periods) beginning after December 15, 2011. Early adoption is permitted. Full retrospective application is required. We are currently evaluating the provisions of this guidance and intend to meet the new requirements beginning in the first quarter of 2012.

In May 2011, new guidance was issued regarding fair value measurement. The guidance in the new standard is intended to harmonize the fair value measurement and disclosure requirements for United States and International standards. Many of the changes in the standard represent clarifications to existing guidance, but the standard also includes some new guidance and new required disclosures. The guidance is effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the provisions of this guidance and the impact on our financial statements and disclosures.

In October 2010, new guidance was issued on accounting for costs associated with acquiring or renewing insurance contracts. The new guidance will likely change how insurance companies account for acquisition costs, particularly in determining what costs are deferrable. The new requirements are effective for fiscal years beginning after December 15, 2011, either prospectively or by retrospective adjustment. We are currently evaluating the provisions of this guidance, however we do not expect the new guidance to have a material impact on our financial statements and disclosures.

Note 3 – Debt

Senior Notes

In September 2011 we repaid our $77.4 million, 5.625% Senior Notes that came due. At September 30, 2011 we had outstanding $245 million, 5.375% Senior Notes due in November 2015. In the second quarter of 2011 we repurchased $55 million in par value of our 5.375% Senior Notes due in November 2015. We recognized a gain on the repurchases of approximately $3.2 million, which is included in other revenue on the Consolidated Statements of Operations for the nine months ended September 30, 2011. At December 31, 2010 we had outstanding $77.4 million, 5.625% Senior Notes due in September 2011 and $300 million, 5.375% Senior Notes due in November 2015. Covenants in the Senior Notes include the requirement that there be no liens on the stock of the designated subsidiaries unless the Senior Notes are equally and ratably secured; that there be no disposition of the stock of designated subsidiaries unless all of the stock is disposed of for consideration equal to the fair market value of the stock; and that we and the designated subsidiaries preserve our corporate existence, rights and franchises unless we or such subsidiary determines that such preservation is no longer necessary in the conduct of its business and that the loss thereof is not disadvantageous to the Senior Notes. A designated subsidiary is any of our consolidated subsidiaries which has shareholders’ equity of at least 15% of our consolidated shareholders’ equity. We were in compliance with all covenants at September 30, 2011.

If we fail to meet any of the covenants of the Senior Notes discussed above; there is a failure to pay when due at maturity, or a default results in the acceleration of maturity of, any of our other debt in an aggregate amount of $40 million or more; or we fail to make a payment of principal on the Senior Notes when due or a payment of interest on the Senior Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the applicable series of Senior Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of either series of our Senior Notes each would have the right to accelerate the maturity of that series. In addition, the trustee, U.S. Bank National Association, of these two issues of Senior Notes could, independent of any action by holders of Senior Notes, accelerate the maturity of the Senior Notes.

At September 30, 2011 and December 31, 2010, the fair value of the amount outstanding under our Senior Notes was $177.6 million and $355.6 million, respectively. The fair value was determined using publicly available trade information.

Interest payments on the Senior Notes were $12.5 million in each of the nine months ended September 30, 2011 and 2010.

Convertible Senior Notes

At September 30, 2011 and December 31, 2010 we had outstanding $345 million principal amount of 5% Convertible Senior Notes due in 2017. Interest on the Convertible Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year. We do not have the right to defer interest payments on the Convertible Senior Notes. The Convertible Senior Notes will mature on May 1, 2017, unless earlier converted by the holders or repurchased by us. Covenants in the Convertible Senior Notes include a requirement to notify holders in advance of certain events and that we and the designated subsidiaries (defined above) preserve our corporate existence, rights and franchises unless we or such subsidiary determines that such preservation is no longer necessary in the conduct of its business and that the loss thereof is not disadvantageous to the Convertible Senior Notes.

If we fail to meet any of the covenants of the Convertible Senior Notes; there is a failure to pay when due at maturity, or a default results in the acceleration of maturity of, any of our other debt in an aggregate amount of $40 million or more; a final judgment for the payment of $40 million or more (excluding any amounts covered by insurance) is rendered against us or any of our subsidiaries which judgment is not discharged or stayed within certain time limits; or we fail to make a payment of principal on the Convertible Senior Notes when due or a payment of interest on the Convertible Senior Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the Convertible Senior Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of the Convertible Senior Notes would have the right to accelerate the maturity of those notes. In addition, the trustee of the Convertible Senior Notes could, independent of any action by holders, accelerate the maturity of the Convertible Senior Notes.

The Convertible Senior Notes are convertible, at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.4186 shares per $1,000 principal amount at any time prior to the maturity date. This represents an initial conversion price of approximately $13.44 per share. These Convertible Senior Notes will be equal in right of payment to our existing Senior Notes, discussed above, and will be senior in right of payment to our existing Convertible Junior Debentures, discussed below. Debt issuance costs are being amortized to interest expense over the contractual life of the Convertible Senior Notes. The provisions of the Convertible Senior Notes are complex. The description above is not intended to be complete in all respects. Moreover, that description is qualified in its entirety by the terms of the notes, which are contained in the Supplemental Indenture, dated as of April 26, 2010, between us and U.S. Bank National Association, as trustee, and the Indenture dated as of October 15, 2000, between us and the trustee.

At September 30, 2011 and December 31, 2010, the fair value of the amount outstanding under our Convertible Senior Notes was $193.2 million and $400.5 million, respectively. The fair value was determined using publicly available trade information.

Interest payments on the Convertible Senior Notes were $8.6 million in the nine months ended September 30, 2011. There were no interest payments on the Convertible Senior Notes in the nine months ended September 30, 2010.

Convertible Junior Subordinated Debentures

At September 30, 2011 and December 31, 2010 we had outstanding $389.5 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063 (the “debentures”). The debentures have an effective interest rate of 19% that reflects our non-convertible debt borrowing rate at the time of issuance. At September 30, 2011 and December 31, 2010 the amortized value of the principal amount of the debentures is reflected as a liability on our consolidated balance sheet of $336.7 million and $315.6 million, respectively, with the unamortized discount reflected in equity. The debentures rank junior to all of our existing and future senior indebtedness.

Interest on the debentures is payable semi-annually in arrears on April 1 and October 1 of each year. As long as no event of default with respect to the debentures has occurred and is continuing, we may defer interest, under an optional deferral provision, for one or more consecutive interest periods up to ten years without giving rise to an event of default. Deferred interest will accrue additional interest at the rate then applicable to the debentures. During an optional deferral period we may not pay or declare dividends on our common stock. Violations of the covenants under the Indenture governing the debentures, including covenants to provide certain documents to the trustee, are not events of default under the Indenture and would not allow the acceleration of amounts that we owe under the debentures. Similarly, events of default under, or acceleration of, any of our other obligations, including those described above, would not allow the acceleration of amounts that we owe under the debentures. However, violations of the events of default under the Indenture, including a failure to pay principal when due under the debentures and certain events of bankruptcy, insolvency or receivership involving our holding company would allow acceleration of amounts that we owe under the debentures.

Interest on the debentures that would have been payable on the scheduled interest payment dates of April 1, 2009, October 1, 2009 and April 1, 2010 had been deferred past the scheduled payment date. During this deferral period the deferred interest continued to accrue and compound semi-annually at an annual rate of 9%.

On October 1, 2010 we paid each of those deferred interest payments, including the compound interest on each. The interest payments, totaling approximately $57.5 million, were made from the net proceeds of our April 2010 common stock offering. We have remained current on these interest payments since October 1, 2010. We continue to have the right to defer interest that is payable on subsequent scheduled interest payment dates if we give the required 15 day notice. Any deferral of such interest would be on terms equivalent to those described above.

When interest on the debentures is deferred, we are required, not later than a specified time, to use reasonable commercial efforts to begin selling qualifying securities to persons who are not our affiliates. The specified time is one business day after we pay interest on the debentures that was not deferred, or if earlier, the fifth anniversary of the scheduled interest payment date on which the deferral started. Qualifying securities are common stock, certain warrants and certain non-cumulative perpetual preferred stock. The requirement to use such efforts to sell such securities is called the Alternative Payment Mechanism.

The net proceeds of Alternative Payment Mechanism sales are to be applied to the payment of deferred interest, including the compound portion. We cannot pay deferred interest other than from the net proceeds of Alternative Payment Mechanism sales, except at the final maturity of the debentures or at the tenth anniversary of the start of the interest deferral. The Alternative Payment Mechanism does not require us to sell common stock or warrants before the fifth anniversary of the interest payment date on which that deferral started if the net proceeds (counting any net proceeds of those securities previously sold under the Alternative Payment Mechanism) would exceed the 2% cap. The 2% cap is 2% of the average closing price of our common stock times the number of our outstanding shares of common stock. The average price is determined over a specified period ending before the issuance of the common stock or warrants being sold, and the number of outstanding shares is determined as of the date of our most recent publicly released financial statements.

We are not required to issue under the Alternative Payment Mechanism a total of more than 10 million shares of common stock, including shares underlying qualifying warrants. In addition, we may not issue under the Alternative Payment Mechanism qualifying preferred stock if the total net proceeds of all issuances would exceed 25% of the aggregate principal amount of the debentures.

The Alternative Payment Mechanism does not apply during any period between scheduled interest payment dates if there is a “market disruption event” that occurs over a specified portion of such period. Market disruption events include any material adverse change in domestic or international economic or financial conditions.

The provisions of the Alternative Payment Mechanism are complex. The description above is not intended to be complete in all respects. Moreover, that description is qualified in its entirety by the terms of the debentures, which are contained in the Indenture, dated as of March 28, 2008, between us and U.S. Bank National Association, as trustee.

We may redeem the debentures prior to April 6, 2013, in whole but not in part, only in the event of a specified tax or rating agency event, as defined in the Indenture. In any such event, the redemption price will be equal to the greater of (1) 100% of the principal amount of the debentures being redeemed and (2) the applicable make-whole amount, as defined in the Indenture, in each case plus any accrued but unpaid interest. On or after April 6, 2013, we may redeem the debentures in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount of the debentures being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds 130% of the then prevailing conversion price of the debentures for at least 20 of the 30 trading days preceding notice of the redemption. We will not be able to redeem the debentures, other than in the event of a specified tax event or rating agency event, during an optional deferral period.

The debentures are currently convertible, at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.0741 common shares per $1,000 principal amount of debentures at any time prior to the maturity date. This represents an initial conversion price of approximately $13.50 per share. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert. In lieu of issuing shares of common stock upon conversion of the debentures occurring after April 6, 2013, we may, at our option, make a cash payment to converting holders equal to the value of all or some of the shares of our common stock otherwise issuable upon conversion.

The fair value of the debentures was approximately $170.7 million and $432.4 million, respectively, at September 30, 2011 and December 31, 2010, as determined using available pricing for these debentures or similar instruments.

Interest payments on the debentures were $17.5 million in the nine months ended September 30, 2011. There were no interest payments on the debentures in the nine months ended September 30, 2010, as we were in a deferral period that ended on October 1, 2010 as discussed above.

Note 4 – Reinsurance

The reinsurance recoverable on loss reserves as of September 30, 2011 and December 31, 2010 was approximately $167 million and $275 million, respectively. Captive agreements are written on an annual book of business and the captives are required to maintain a separate trust account to support the combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trust, and the trust account is made up of capital deposits by the lender captive, premium deposits by MGIC, and investment income earned. These amounts are held in the trust account and are available to pay reinsured losses. The reinsurance recoverable on loss reserves related to captive agreements was approximately $150 million at September 30, 2011 which was supported by $367 million of trust assets, while at December 31, 2010 the reinsurance recoverable on loss reserves related to captives was $248 million which was supported by $484 million of trust assets. As of September 30, 2011 and December 31, 2010 there was an additional $25 million and $26 million, respectively, of trust assets in captive agreements where there was no related reinsurance recoverable on loss reserves. Trust fund assets of $39 million were transferred to us as a result of captive terminations during the first nine months of 2011.

In the third quarter of 2011, our Australian writing company terminated a reinsurance agreement under which it had assumed business from a third party. As a result of that termination, it returned approximately $7 million in unearned premium and it has no further obligations under this reinsurance agreement. The termination of this reinsurance agreement had no significant impact on our remaining risk in force in Australia.

Note 5 – Litigation and contingencies

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

Consumers are bringing a growing number of lawsuits against home mortgage lenders and settlement service providers. Mortgage insurers, including MGIC, have been involved in litigation alleging violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. MGIC settled class action litigation against it under RESPA in October 2003. MGIC settled the named plaintiffs’ claims in litigation against it under FCRA in December 2004 following denial of class certification in June 2004. Since December 2006, class action litigation has been brought against a number of large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. On November 29, 2010, six mortgage insurers (including MGIC) and a large mortgage lender (which was the named plaintiffs’ lender) were named as defendants in a complaint, alleged to be a class action, filed in Federal District Court for the District of Columbia. The complaint alleged various causes of action related to the captive mortgage reinsurance arrangements of this mortgage lender, including that the defendants violated RESPA by paying the lender’s captive reinsurer excessive premiums in relation to the risk assumed by that captive. In March 2011, the complaint was voluntarily dismissed by the plaintiffs as to MGIC and all of the other mortgage insurers. There can be no assurance that we will not be subject to future litigation under RESPA (or FCRA) or that the outcome of any such litigation would not have a material adverse effect on us.

We are subject to comprehensive, detailed regulation by state insurance departments. These regulations are principally designed for the protection of our insured policyholders, rather than for the benefit of investors. Although their scope varies, state insurance laws generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. Given the recent significant losses incurred by many insurers in the mortgage and financial guaranty industries, our insurance subsidiaries have been subject to heightened scrutiny by insurance regulators. State insurance regulatory authorities could take actions, including changes in capital requirements or termination of waivers of capital requirements, that could have a material adverse effect on us. In addition, the Dodd-Frank Act establishes the Bureau of Consumer Financial Protection to regulate the offering and provision of consumer financial products or services under federal law. We are uncertain whether this Bureau will issue any rules or regulations that affect our business. Such rules and regulations could have a material adverse effect on us.

In June 2005, in response to a letter from the New York Insurance Department, we provided information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation. In February 2006, the New York Insurance Department requested MGIC to review its premium rates in New York and to file adjusted rates based on recent years’ experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the New York Insurance Department that it believes its premium rates are reasonable and that, given the nature of mortgage insurance risk, premium rates should not be determined only by the experience of recent years. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce (the “MN Department”), which regulates insurance, we provided the MN Department with information about captive mortgage reinsurance and certain other matters. We subsequently provided additional information to the MN Department, and beginning in March 2008 the MN Department has sought additional information as well as answers to questions regarding captive mortgage reinsurance on several occasions, including as recently as May 2011. In addition, beginning in June 2008, we have received subpoenas from the Department of Housing and Urban Development, commonly referred to as HUD, seeking information about captive mortgage reinsurance similar to that requested by the MN Department, but not limited in scope to the state of Minnesota. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

The anti-referral fee provisions of RESPA provide that HUD as well as the insurance commissioner or attorney general of any state may bring an action to enjoin violations of these provisions of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our captive reinsurance arrangements are in conformity with applicable laws and regulations, it is not possible to predict the outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.

In September 2010, a housing discrimination complaint was filed against MGIC with the U.S. Department of Housing and Urban Development (“HUD”) alleging that MGIC violated the Fair Housing Act and discriminated against the complainant on the basis of her sex and familial status when MGIC underwrote her loan for mortgage insurance. In May 2011, HUD commenced an administrative action against MGIC and two of its employees, seeking, among other relief, aggregate fines of $48,000. The HUD complainant elected to have charges in the administrative action proceed in federal court and on July 5, 2011, the U.S. Department of Justice (“DOJ”) filed a civil complaint in the U.S. District Court for the Western District of Pennsylvania against MGIC and these employees on behalf of the complainant. The complaint seeks redress for the alleged housing discrimination, including compensatory and punitive damages for the alleged victims and a civil penalty payable to the United States. MGIC denies that any unlawful discrimination occurred and disputes many of the allegations in the complaint. In October 2010, a separate purported class action lawsuit was filed against MGIC by the HUD complainant in the same District Court in which the DOJ action is pending alleging that MGIC discriminated against her on the basis of her sex and familial status when MGIC underwrote her loan for mortgage insurance. In May 2011, the District Court granted MGIC’s motion to dismiss with respect to all claims except certain Fair Housing Act claims.

MGIC intends to vigorously defend itself against the allegations in both the class action lawsuit and the DOJ lawsuit. Based on the facts known at this time, we do not foresee the ultimate resolution of these legal proceedings having a material adverse effect on us.

Five previously-filed purported class action complaints filed against us and several of our executive officers were consolidated in March 2009 in the United States District Court for the Eastern District of Wisconsin and Fulton County Employees’ Retirement System was appointed as the lead plaintiff. The lead plaintiff filed a Consolidated Class Action Complaint (the “Complaint”) on June 22, 2009. Due in part to its length and structure, it is difficult to summarize briefly the allegations in the Complaint but it appears the allegations are that we and our officers named in the Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about (i) loss development in our insurance in force, and (ii) C-BASS, including its liquidity. The Complaint also named two officers of C-BASS with respect to the Complaint’s allegations regarding C-BASS. Our motion to dismiss the Complaint was granted on February 18, 2010. On March 18, 2010, plaintiffs filed a motion for leave to file an amended complaint. Attached to this motion was a proposed Amended Complaint (the “Amended Complaint”). The Amended Complaint alleged that we and two of our officers named in the Amended Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about C-BASS, including its liquidity, and by failing to properly account for our investment in C-BASS. The Amended Complaint also named two officers of C-BASS with respect to the Amended Complaint’s allegations regarding C-BASS. The purported class period covered by the Amended Complaint began on February 6, 2007 and ended on August 13, 2007. The Amended Complaint sought damages based on purchases of our stock during this time period at prices that were allegedly inflated as a result of the purported violations of federal securities laws. On December 8, 2010, the plaintiffs’ motion to file an amended complaint was denied and the Complaint was dismissed with prejudice. On January 6, 2011, the plaintiffs appealed the February 18, 2010 and December 8, 2010 decisions to the United States Court of Appeals for the Seventh Circuit. On June 6, 2011, the plaintiffs filed a motion with the District Court for relief from that court’s judgment of dismissal on the ground of newly discovered evidence consisting of transcripts the plaintiffs obtained of testimony taken by the Securities and Exchange Commission in its now-terminated investigation regarding C-BASS. We are opposing this motion and the matter is awaiting decision by the District Court. We are unable to predict the outcome of these consolidated cases or estimate our associated expenses or possible losses. Other lawsuits alleging violations of the securities laws could be brought against us.

Several law firms have issued press releases to the effect that they are investigating us, including whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plan’s investment in or holding of our common stock or whether we breached other legal or fiduciary obligations to our shareholders. We intend to defend vigorously any proceedings that may result from these investigations.

With limited exceptions, our bylaws provide that our officers and 401(k) plan fiduciaries are entitled to indemnification from us for claims against them.

From January 1, 2008 through September 30, 2011, rescissions of Countrywide-related loans mitigated our paid losses on the order of $400 million. This amount is the amount we estimate we would have paid had the loans not been rescinded. On a per loan basis, the average amount that we would have paid had the loans not been rescinded was approximately $71,500. On December 17, 2009, Countrywide filed a complaint for declaratory relief in the Superior Court of the State of California in San Francisco against MGIC. This complaint alleges that MGIC has denied, and continues to deny, valid mortgage insurance claims submitted by Countrywide and says it seeks declaratory relief regarding the proper interpretation of the insurance policies at issue. On October 18, 2011, the United States District Court for the Northern District of California, to which the case had been removed, entered an order staying the litigation in favor of the arbitration proceeding we commenced against Countrywide on February 24, 2010.

In the arbitration proceeding we are seeking a determination that MGIC is entitled to rescind coverage on the loans involved in the proceeding. Various materials exchanged by MGIC and Countrywide bring within the proceeding loans on which MGIC rescinded coverage subsequent to those specified at the time MGIC began the proceeding (including loans insured through the bulk channel), and set forth Countrywide’s contention that, in addition to the claim amounts it alleges MGIC has improperly rescinded, Countrywide is entitled to other damages of almost $700 million as well as exemplary damages. Countrywide and MGIC have each selected 12 loans for which a three-member arbitration panel will determine coverage. While the panel’s determination will not be binding on the other loans at issue, the panel will identify the issues for these 24 “bellwether” loans and strive to set forth findings of fact and conclusions of law in such a way as to aid the parties to apply them to the other loans at issue. The hearing before the panel on the bellwether loans is scheduled to begin in September 2012.

We intend to defend MGIC against any further proceedings arising from Countrywide’s complaint and to advocate MGIC’s position in the arbitration, vigorously. Although it is reasonably possible that, when the proceedings are completed, there will be a determination that we were not entitled to rescind in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. Under ASC 450-20, an estimated loss is accrued for only if we determine that the loss is probable and can be reasonably estimated. Therefore, we have not accrued any reserves that would reflect an adverse outcome in this proceeding. An accrual for an adverse outcome in this (or any other) proceeding would be a reduction to our capital.

At September 30, 2011, 38,099 loans in our primary delinquency inventory were Countrywide-related loans (approximately 21% of our primary delinquency inventory). Of these 38,099 loans, some will cure their delinquency and the remainder will either become paid claims or will be rescinded. From January 1, 2008 through September 30, 2011, of the claims on Countrywide-related loans that were resolved (a claim is resolved when it is paid or rescinded; claims that are submitted but which are under review are not resolved until one of these two outcomes occurs), approximately 77% were paid and the remaining 23% were rescinded. We do not believe that the settlement agreement announced in June 2011 between Bank of America and certain investors in certain Countrywide residential mortgage backed securities will have a material impact on our Countrywide rescissions, if it becomes effective.

The flow policies at issue with Countrywide are in the same form as the flow policies that we use with all of our customers, and the bulk policies at issue vary from one another, but are generally similar to those used in the majority of our Wall Street bulk transactions. Because our rescission practices with Countrywide do not differ from our practices with other servicers with which we have not entered into settlement agreements, an adverse result in the Countrywide proceeding may adversely affect the ultimate result of rescissions involving other servicers and lenders. From January 1, 2008 through September 30, 2011, we estimate that total rescissions mitigated our incurred losses by approximately $3.1 billion, which included approximately $2.5 billion of mitigation on paid losses, excluding $0.6 billion that would have been applied to a deductible. At September 30, 2011, we estimate that our total loss reserves were benefited from rescissions by approximately $0.8 billion.

In addition to the rescissions at issue with Countrywide, we have a substantial pipeline of claims investigations (including investigations involving loans related to Countrywide) that we expect will eventually result in future rescissions. In 2010, we entered into a settlement agreement with a lender-customer regarding our rescission practices. We continue to discuss with other lenders their objections to material rescissions and have reached settlement terms (which are subject to GSE approval) with several of our significant lender customers. In addition to the proceedings involving Countrywide, we are involved in legal proceedings with respect to rescissions that we do not consider to be collectively material in amount.

MGIC and Freddie Mac disagree on the amount of the aggregate loss limit under certain pool insurance policies insuring Freddie Mac that share a single aggregate loss limit. The aggregate loss limit is approximately $535 million higher under Freddie Mac’s interpretation than under our interpretation. We account for losses under our interpretation although it is reasonably possible that were the matter to be decided by a third party our interpretation would not prevail. The differing interpretations had no effect on our results until the second quarter of 2011. For the second and third quarters of 2011, our incurred losses would have been $126 million higher in the aggregate had they been recorded based on Freddie Mac’s interpretation, and our capital and Capital Requirements would have been negatively impacted at each quarter end. We expect the incurred losses that would have been recorded under Freddie Mac’s interpretation will continue to increase in future quarters. We are discussing the disagreement with Freddie Mac in an effort to resolve it.

Our mortgage insurance business utilizes its underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of our contract underwriting activities, we are responsible for the quality of our underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. We may be required to provide certain remedies to our customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such obligations. Through September 30, 2011, the cost of remedies provided by us to customers for failing to meet the standards of the contracts has not been material. However, a generally positive economic environment for residential real estate that continued until approximately 2007 may have mitigated the effect of some of these costs, and claims for remedies may be made a number of years after the underwriting work was performed. A material portion of our new insurance written through the flow channel in recent years, including for 2006 and 2007, has involved loans for which we provided contract underwriting services. We believe the rescission of mortgage insurance coverage on loans for which we provided contract underwriting services may make a claim for a contract underwriting remedy more likely to occur. Beginning in the second half of 2009, we experienced an increase in claims for contract underwriting remedies, which has continued into 2011. Hence, there can be no assurance that contract underwriting remedies will not be material in the future.

See Note 11 – “Income taxes” for a description of federal income tax contingencies.

Note 6 – Earnings (loss) per share

Our basic EPS is based on the weighted average number of common shares outstanding, which excludes participating securities of 1.0 million and 1.8 million, respectively, for the three months ended September 30, 2011 and 2010 and 1.1 million and 1.8 million, respectively, for the nine months ended September 30, 2011 and 2010 because they were anti-dilutive due to our reported net loss. Typically, diluted EPS is based on the weighted average number of common shares outstanding plus common stock equivalents which include certain stock awards, stock options and the dilutive effect of our convertible debt. In accordance with accounting guidance, if we report a net loss from continuing operations then our diluted EPS is computed in the same manner as the basic EPS. In addition if any common stock equivalents are anti-dilutive they are excluded from the calculation. The following includes a reconciliation of the weighted average number of shares; however for the three months ended September 30, 2011 and 2010 common stock equivalents of 55.5 million and 62.3 million, respectively, and for the nine months ended September 30, 2011 and 2010 common stock equivalents of 55.6 million and 51.3 million, respectively, were not included because they were anti-dilutive.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2011			2010				2011			2010
	(In thousands, except per share data)

Basic earnings per share:
Average common shares outstanding		201,109			200,077				200,983			168,429

Net loss	$	(165,205	)	$	(51,528	)		$	(350,598	)	$	(177,068	)

Basic loss per share	$	(0.82	)	$	(0.26	)		$	(1.74	)	$	(1.05	)


Diluted earnings per share:
Weighted-average shares - Basic		201,109			200,077				200,983			168,429
Common stock equivalents		-			-				-			-

Weighted-average shares - Diluted		201,109			200,077				200,983			168,429

Net loss	$	(165,205	)	$	(51,528	)		$	(350,598	)	$	(177,068	)
Diluted loss per share	$	(0.82	)	$	(0.26	)		$	(1.74	)	$	(1.05	)

Note 7 –Investments

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2011 and December 31, 2010 are shown below.

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2011	Cost		Gains		Losses (1)			Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	744,560	$	32,365	$	(671	)	$	776,254
Obligations of U.S. states and political subdivisions		2,888,541		128,230		(17,139	)		2,999,632
Corporate debt securities		2,247,489		53,439		(7,822	)		2,293,106
Commercial mortgage-backed securities		194,795		1,859		(1,621	)		195,033
Residential mortgage-backed securities		47,182		2,653		-			49,835
Debt securities issued by foreign sovereign governments		133,250		8,415		(4	)		141,661
Total debt securities	$	6,255,817	$	226,961	$	(27,257	)	$	6,455,521

Equity securities		2,624		76		(1	)		2,699

Total investment portfolio	$	6,258,441	$	227,037	$	(27,258	)	$	6,458,220

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2010	Cost		Gains		Losses (1)			Value
	(In thousands)

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,092,890	$	16,718	$	(6,822	)	$	1,102,786
Obligations of U.S. states and political subdivisions		3,549,355		85,085		(54,374	)		3,580,066
Corporate debt securities		2,521,275		54,975		(11,291	)		2,564,959
Residential mortgage-backed securities		53,845		3,255		-			57,100
Debt securities issued by foreign sovereign governments		149,443		1,915		(1,031	)		150,327
Total debt securities	$	7,366,808	$	161,948	$	(73,518	)	$	7,455,238

Equity securities		3,049		40		(45	)		3,044

Total investment portfolio	$	7,369,857	$	161,988	$	(73,563	)	$	7,458,282

(1) At September 30, 2011 and December 31, 2010, there were no other-than-temporary impairment losses recorded in other comprehensive income.

The amortized cost and fair values of debt securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most auction rate and mortgage-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.

	Amortized		Fair
September 30, 2011	Cost		Value
	(In thousands)

Due in one year or less	$	1,113,140	$	1,118,319
Due after one year through five years		2,659,868		2,739,392
Due after five years through ten years		905,459		975,609
Due after ten years		1,035,075		1,091,339
	$	5,713,542	$	5,924,659

Commercial mortgage-backed securities		194,795		195,033
Residential mortgage-backed securities		47,182		49,835
Auction rate securities (1)		300,298		285,994

Total at September 30, 2011	$	6,255,817	$	6,455,521

(1) At September 30, 2011, approximately 97% of auction rate securities had a contractual maturity greater than 10 years.

At September 30, 2011 and December 31, 2010, the investment portfolio had gross unrealized losses of $27.3 million and $73.6 million, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:

	Less Than 12 Months						12 Months or Greater						Total
	Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
September 30, 2011	Value			Losses			Value			Losses			Value			Losses
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	72,954		$	671		$	-		$	-		$	72,954		$	671
Obligations of U.S. states and political subdivisions			222,494			2,635			260,374			14,504			482,868			17,139
Corporate debt securities			694,931			6,901			24,564			921			719,495			7,822
Commercial mortgage-backed securities			77,131			1,621			-			-			77,131			1,621
Residential mortgage-backed securities			-			-			-			-			-			-
Debt issued by foreign sovereign governments			376			4			-			-			376			4
Equity securities			58			1			-			-			58			1
Total investment portfolio		$	1,067,944		$	11,833		$	284,938		$	15,425		$	1,352,882		$	27,258

	Less Than 12 Months						12 Months or Greater						Total
	Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
December 31, 2010	Value			Losses			Value			Losses			Value			Losses
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	258,235		$	6,822		$	-		$	-		$	258,235		$	6,822
Obligations of U.S. states and political subdivisions			1,160,877			32,415			359,629			21,959			1,520,506			54,374
Corporate debt securities			817,471			9,921			28,630			1,370			846,101			11,291
Residential mortgage-backed securities			-			-			-			-			-			-
Debt issued by foreign sovereign governments			105,724			1,031			-			-			105,724			1,031
Equity securities			2,723			45			-			-			2,723			45
Total investment portfolio		$	2,345,030		$	50,234		$	388,259		$	23,329		$	2,733,289		$	73,563

The unrealized losses in all categories of our investments were primarily caused by the difference in interest rates at September 30, 2011 and December 31, 2010, respectively, compared to the interest rates at the time of purchase as well as the discount rate applied in our auction rate securities discounted cash flow model. The securities in an unrealized loss position for 12 months or greater are primarily auction rate securities (“ARS”) backed by student loans. See further discussion of these securities below.

We held $286.0 million in ARS backed by student loans at September 30, 2011. ARS are intended to behave like short-term debt instruments because their interest rates are reset periodically through an auction process, most commonly at intervals of 7, 28 and 35 days. The same auction process has historically provided a means by which we may rollover the investment or sell these securities at par in order to provide us with liquidity as needed. The ARS we hold are collateralized by portfolios of student loans, substantially all of which are ultimately 97% guaranteed by the United States Department of Education. At September 30, 2011, approximately 87% of our ARS portfolio was rated AAA/Aaa by one or more of the following major rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings.

In mid-February 2008, auctions began to fail due to insufficient buyers, as the amount of securities submitted for sale in auctions exceeded the aggregate amount of the bids. For each failed auction, the interest rate on the security moves to a maximum rate specified for each security, and generally resets at a level higher than specified short-term interest rate benchmarks. At September 30, 2011, our entire ARS portfolio, consisting of 28 investments, was subject to failed auctions; however, from the period when the auctions began to fail through September 30, 2011, $237.4 million in par value of ARS was either sold or called, with the average amount we received being approximately 99% of par which approximated the aggregate fair value prior to redemption. To date, we have collected all interest due on our ARS.

As a result of the persistent failed auctions, and the uncertainty of when these investments could be liquidated at par, the investment principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, or final payments come due according to the contractual maturities of the debt issues. However, we continue to believe we will have liquidity to our ARS portfolio by December 31, 2014.

Under the current guidance a debt security impairment is deemed other than temporary if we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery or we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security. During the first nine months of 2011 we recognized other-than-temporary impairments (“OTTI”) of $0.3 million compared to $6.1 million during the first nine months of 2010.

The following table provides a rollforward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2010.

	Three Months		Nine Months
	Ended		Ended
	September 30, 2010
	(In thousands)

Beginning balance	$	-	$	1,021
Addition for the amount related to the credit loss for which an OTTI was not previously recognized		-		-
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized		-		-
Reductions for securities sold during the period (realized)		-		(1,021	)
Ending balance	$	-	$	-

The net realized investment gains (losses) and OTTI on the investment portfolio are as follows:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2011		2010		2011		2010
	(In thousands)
Net realized investment gains (losses) and OTTI on investments:
Fixed maturities		$	10,263	$	24,503	$	37,741	$	82,819
Equity securities			12		15		51		72
Other			877		6		855		237

		$	11,152	$	24,524	$	38,647	$	83,128

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
	(In thousands)
Net realized investment gains (losses) and OTTI on investments:
Gains on sales		$	12,007		$	26,305		$	43,952		$	98,893
Losses on sales			(602	)		(1,781	)		(5,052	)		(9,713	)
Impairment losses			(253	)		-			(253	)		(6,052	)

		$	11,152		$	24,524		$	38,647		$	83,128

The net realized gains on investments during the first nine months of 2010 and 2011 were a result of the continued restructuring of the portfolio into shorter duration, taxable securities. Such sales were made to reduce the proportion of our investment portfolio held in tax-exempt municipal securities and to increase the proportion held in taxable securities principally since the tax benefits of holding tax exempt municipal securities are no longer available based on our recent net operating losses and to shorten the duration of the portfolio to provide liquidity to meet our anticipated claim payment obligations.

Note 8 – Fair value measurements

In accordance with fair value guidance, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 – Quoted prices for identical instruments in active markets that we have the ability to access. Financial assets utilizing Level 1 inputs primarily include certain U.S. Treasury securities and obligations of the U.S. government.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs primarily include certain municipal and corporate bonds.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs include certain state and auction rate (backed by student loans) securities. Non-financial assets which utilize Level 3 inputs include real estate acquired through claim settlement.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. We have not made any adjustments to the prices obtained from the independent pricing sources.

Assets classified as Level 3 are as follows:

Securities available-for-sale classified in Level 3 are not readily marketable and are valued using internally developed models based on the present value of expected cash flows. Our Level 3 securities primarily consist of auction rate securities as observable inputs or value drivers are unavailable due to events described in Note 7 – “Investments.” Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value of these assets at September 30, 2011 and December 31, 2010. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with them. The DCF model is based on the following key assumptions:

Nominal credit risk as substantially all of the underlying collateral of these securities is ultimately guaranteed by the United States Department of Education;

Liquidity by December 31, 2012 through December 31, 2014;

Continued receipt of contractual interest; and

Discount rates ranging from 2.24% to 4.24%, which include a spread for liquidity risk.

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

Fair value measurements for assets measured at fair value included the following as of September 30, 2011 and December 31, 2010:

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2011

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	776,254	$	776,254	$	-	$	-
Obligations of U.S. states and political subdivisions		2,999,632		-		2,778,425		221,207
Corporate debt securities		2,293,106		2,476		2,220,340		70,290
Commercial mortgage-backed securities		195,033		-		195,033		-
Residential mortgage-backed securities		49,835		-		49,835		-
Debt securities issued by foreign sovereign governments		141,661		132,382		9,279		-
Total debt securities		6,455,521		911,112		5,252,912		291,497
Equity securities		2,699		2,378		-		321
Total investments	$	6,458,220	$	913,490	$	5,252,912	$	291,818

Real estate acquired (1)	$	2,324	$	-	$	-	$	2,324

December 31, 2010

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,102,786	$	1,102,786	$	-	$	-
Obligations of U.S. states and political subdivisions		3,580,066		-		3,284,376		295,690
Corporate debt securities		2,564,959		2,563		2,492,343		70,053
Residential mortgage-backed securities		57,100		-		57,100		-
Debt securities issued by foreign sovereign governments		150,327		135,457		14,870		-
Total debt securities		7,455,238		1,240,806		5,848,689		365,743
Equity securities		3,044		2,723		-		321
Total investments	$	7,458,282	$	1,243,529	$	5,848,689	$	366,064

Real estate acquired (1)	$	6,220	$	-	$	-	$	6,220

(1) Real estate acquired through claim settlement, which is held for sale, is reported in Other Assets on the consolidated balance sheet.

There were no significant transfers of securities between Level 1 and Level 2 during the first nine months of 2011 or 2010.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2011 and 2010 is as follows:

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2011	$	223,402		$	70,039		$	321	$	293,762		$	2,828
Total realized/unrealized gains (losses):
Included in earnings and reported as net impairment losses recognized in earnings		-			(200	)		-		(200	)		-

Included in earnings and reported as losses incurred, net		-			-			-		-			(85	)

Included in other comprehensive income		342			451			-		793			-

Purchases		-			-			-		-			1,148
Sales		(2,537	)		-			-		(2,537	)		(1,567	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2011	$	221,207		$	70,290		$	321	$	291,818		$	2,324

Amount of total losses included in earnings for the three months ended September 30, 2011 attributable to the change in unrealized losses on assets still held at September 30, 2011	$	-		$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2010	$	295,690		$	70,053		$	321	$	366,064		$	6,220
Total realized/unrealized gains (losses):
Included in earnings and reported as net impairment losses recognized in earnings		-			(200	)		-		(200	)		-

Included in earnings and reported as losses incurred, net		-			-			-		-			(180	)

Included in other comprehensive income		(845	)		437			-		(408	)		-

Purchases		-			-			-		-			3,944
Sales		(73,638	)		-			-		(73,638	)		(7,660	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2011	$	221,207		$	70,290		$	321	$	291,818		$	2,324

Amount of total losses included in earnings for the nine months ended September 30, 2011 attributable to the change in unrealized losses on assets still held at September 30, 2011	$	-		$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2010	$	321,050		$	94,564		$	321	$	415,935		$	5,671
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment losses, net		-			(1,057	)		-		(1,057	)		-

Included in earnings and reported as losses incurred, net		-			-			-		-			(701	)

Included in other comprehensive income		3,504			2,528			-		6,032			-

Purchases, issuances and settlements		(12,858	)		(15,793	)		-		(28,651	)		1,893
Transfers in and/or out of Level 3		-			-			-		-			-
Balance at September 30, 2010	$	311,696		$	80,242		$	321	$	392,259		$	6,863

Amount of total losses included in earnings for the three months ended September 30, 2010 attributable to the change in unrealized losses on assets still held at September 30, 2010	$	-		$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions		Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2009	$	370,341	$	129,338		$	321	$	500,000		$	3,830
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment losses, net		-		(2,455	)		-		(2,455	)		-

Included in earnings and reported as losses incurred, net		-		-			-		-			(1,635	)

Included in other comprehensive income		3,547