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 June 30, 2013
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).
 
YES x
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).
 
YES o
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
07/31/13
337,758,169
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2013 and December 31, 2012
(Unaudited)

 
  
June 30,
    
December 31,
  
 
  
2013
    
2012
  
ASSETS
  
(In thousands)
  
Investment portfolio (notes 7 and 8):
  
   
 
Securities, available-for-sale, at fair value:
  
   
 
Fixed maturities (amortized cost, 2013 - $5,064,233; 2012 - $4,185,937)
  
$
4,996,131
    
$
4,227,339
  
Equity securities
    
2,860
      
2,936
  
Total investment portfolio
    
4,998,991
      
4,230,275
  
Cash and cash equivalents
    
571,464
      
1,027,625
  
Restricted cash and cash equivalents (note 1)
    
60,333
      
-
  
Accrued investment income
    
33,163
      
27,243
  
Reinsurance recoverable on loss reserves (note 4)
    
83,898
      
104,848
  
Reinsurance recoverable on paid losses
    
14,172
      
15,605
  
Premium receivable
    
62,578
      
67,828
  
Home office and equipment, net
    
26,566
      
27,190
  
Deferred insurance policy acquisition costs
    
12,378
      
11,245
  
Other assets
    
179,970
      
62,465
  
Total assets
  
$
6,043,513
    
$
5,574,324
  
LIABILITIES AND SHAREHOLDERS' EQUITY
                
Liabilities:
                
Loss reserves (note 12)
  
$
3,599,308
    
$
4,056,843
  
Premium deficiency reserve (note 13)
    
60,848
      
73,781
  
Unearned premiums
    
142,418
      
138,840
  
Senior notes (note 3)
    
82,742
      
99,910
  
Convertible senior notes (note 3)
    
845,000
      
345,000
  
Convertible junior debentures (note 3)
    
389,522
      
379,609
  
Other liabilities
    
243,013
      
283,401
  
Total liabilities
    
5,362,851
      
5,377,384
  
 
                
Contingencies (note 5)
                
 
                
Shareholders' equity (note 14):
                
Common stock (one dollar par value, shares authorized 680,000; shares issued 2013 - 340,047; 2012 - 205,047; shares outstanding 2013 - 337,758; 2012 - 202,032)
    
340,047
      
205,047
  
Paid-in capital
    
1,658,805
      
1,135,296
  
Treasury stock (shares at cost 2013 - 2,289; 2012 - 3,015)
    
(64,435
)
    
(104,959
)
Accumulated other comprehensive loss, net of tax (note 9)
    
(168,432
)
    
(48,163
)
Retained deficit
    
(1,085,323
)
    
(990,281
)
Total shareholders' equity
    
680,662
      
196,940
  
Total liabilities and shareholders' equity
  
$
6,043,513
    
$
5,574,324
  
 
See accompanying notes to consolidated financial statements.
2
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2013 and 2012
(Unaudited)

 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
Revenues:
  
(In thousands, except per share data)
  
Premiums written:
  
   
   
   
 
Direct
  
$
247,481
    
$
246,939
    
$
502,028
    
$
510,734
  
Assumed
    
531
      
614
      
1,082
      
1,255
  
Ceded
    
(11,390
)
    
(8,948
)
    
(17,988
)
    
(18,398
)
Net premiums written
    
236,622
      
238,605
      
485,122
      
493,591
  
Decrease (increase) in unearned premiums, net
    
1,155
      
4,023
      
(286
)
    
11,442
  
Net premiums earned
    
237,777
      
242,628
      
484,836
      
505,033
  
Investment income, net of expenses
    
20,883
      
32,178
      
39,211
      
69,586
  
Realized investment gains, net
    
2,485
      
26,611
      
3,744
      
104,172
  
Total other-than-temporary impairment losses
    
-
      
(339
)
    
-
      
(339
)
Portion of losses recognized in other comprehensive income, before taxes
    
-
      
-
      
-
      
-
  
Net impairment losses recognized in earnings
    
-
      
(339
)
    
-
      
(339
)
Other revenue
    
2,715
      
20,012
      
5,254
      
22,321
  
Total revenues
    
263,860
      
321,090
      
533,045
      
700,773
  
 
                                
Losses and expenses:
                                
Losses incurred, net (note 12)
    
196,274
      
551,408
      
462,482
      
888,496
  
Change in premium deficiency reserve (note 13)
    
(11,283
)
    
(27,358
)
    
(12,933
)
    
(41,541
)
Amortization of deferred policy acquisition costs
    
1,955
      
1,935
      
3,652
      
3,605
  
Other underwriting and operating expenses, net
    
45,607
      
46,975
      
93,922
      
95,648
  
Interest expense
    
17,942
      
24,912
      
44,348
      
49,539
  
Total losses and expenses
    
250,495
      
597,872
      
591,471
      
995,747
  
Income (loss) before tax
    
13,365
      
(276,782
)
    
(58,426
)
    
(294,974
)
Provision for (benefit from) income taxes (note 11)
    
990
      
(2,891
)
    
2,129
      
(1,528
)
 
                                
Net income (loss)
  
$
12,375
    
$
(273,891
)
  
$
(60,555
)
  
$
(293,446
)
 
                                
Income (loss) per share (note 6):
                                
Basic
  
$
0.04
    
$
(1.36
)
  
$
(0.21
)
  
$
(1.45
)
Diluted
  
$
0.04
    
$
(1.36
)
  
$
(0.21
)
  
$
(1.45
)
 
                                
Weighted average common shares outstanding - diluted (note 6)
    
339,341
      
202,013
      
285,336
      
201,770
  

See accompanying notes to consolidated financial statements.
3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2013 and 2012
(Unaudited)

 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
 
  
(In thousands)
  
 
  
   
   
   
 
Net income (loss)
  
$
12,375
    
$
(273,891
)
  
$
(60,555
)
  
$
(293,446
)
 
                                
Other comprehensive (loss) income, net of tax (note 9):
                                
 
                                
Change in unrealized investment gains and losses
    
(98,119
)
    
8,212
      
(108,073
)
    
(37,706
)
 
                                
Foreign currency translation adjustment
    
(12,512
)
    
(724
)
    
(12,196
)
    
359
  
 
                                
Other comprehensive (loss) income, net of tax
    
(110,631
)
    
7,488
      
(120,269
)
    
(37,347
)
 
                                
Comprehensive loss
  
$
(98,256
)
  
$
(266,403
)
  
$
(180,824
)
  
$
(330,793
)

See accompanying notes to consolidated financial statements.
4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED  STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2012 and Six Months Ended June 30, 2013
(Unaudited)

 
  
   
   
   
Accumulated
    
 
 
  
   
   
   
other
    
 
 
  
Common
    
Paid-in
    
Treasury
    
comprehensive
    
Retained
  
 
  
stock
    
capital
    
stock
    
income (loss)
    
deficit
  
 
  
(In thousands)
  
Balance, December 31, 2011
  
$
205,047
    
$
1,135,821
    
$
(162,542
)
  
$
30,124
    
$
(11,635
)
 
                                        
 
                                        
Net loss
                                    
(927,079
)
Change in unrealized investment gains and losses, net
    
-
      
-
      
-
      
(78,659
)
    
-
  
Reissuance of treasury stock, net
    
-
      
(8,749
)
    
57,583
      
-
      
(51,567
)
Equity compensation
    
-
      
8,224
      
-
      
-
      
-
  
Defined benefit plan adjustments, net
    
-
      
-
      
-
      
(1,221
)
    
-
  
Unrealized foreign currency translation adjustment
    
-
      
-
      
-
      
1,593
      
-
  
 
                                        
Balance, December 31, 2012
  
$
205,047
    
$
1,135,296
    
$
(104,959
)
  
$
(48,163
)
  
$
(990,281
)
 
                                        
Net loss
                                    
(60,555
)
Change in unrealized investment gains and losses, net (notes 7 and 8)
    
-
      
-
      
-
      
(108,073
)
    
-
  
Common stock issuance (note 14)
    
135,000
      
528,392
      
-
      
-
      
-
  
Reissuance of treasury stock, net
    
-
      
(7,892
)
    
40,524
      
-
      
(34,487
)
Equity compensation
    
-
      
3,009
      
-
      
-
      
-
  
Unrealized foreign currency translation adjustment
    
-
      
-
      
-
      
(12,196
)
    
-
  
 
                                        
Balance, June 30, 2013
  
$
340,047
    
$
1,658,805
    
$
(64,435
)
  
$
(168,432
)
  
$
(1,085,323
)

See accompanying notes to consolidated financial statements.
5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2013 and 2012
(Unaudited)

 
  
Six Months Ended
  
 
  
June 30,
  
 
  
   
 
 
  
2013
    
2012
  
 
  
(In thousands)
  
Cash flows from operating activities:
  
   
 
Net loss
  
$
(60,555
)
  
$
(293,446
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and other amortization
    
37,517
      
51,505
  
Deferred tax (benefit) provision
    
(21
)
    
67
  
Realized investment gains, excluding impairment losses
    
(3,744
)
    
(104,172
)
Net investment impairment losses
    
-
      
339
  
Gain on repurchases of senior notes
    
-
      
(17,775
)
Other
    
(35,327
)
    
(22,259
)
Change in certain assets and liabilities:
                
Accrued investment income
    
(5,920
)
    
8,681
  
Reinsurance recoverable on loss reserves
    
20,950
      
27,775
  
Reinsurance recoverable on paid losses
    
1,433
      
782
  
Premium receivable
    
5,250
      
3,150
  
Deferred insurance policy acquisition costs
    
(1,133
)
    
(2,025
)
Loss reserves
    
(457,535
)
    
(448,922
)
Premium deficiency reserve
    
(12,933
)
    
(41,541
)
Unearned premiums
    
3,578
      
(11,679
)
Income taxes payable (current)
    
(179
)
    
(4,588
)
Net cash used in operating activities
    
(508,619
)
    
(854,108
)
 
                
Cash flows from investing activities:
                
Purchase of fixed maturities
    
(2,182,211
)
    
(3,121,280
)
Purchase of equity securities
    
(51
)
    
(51
)
Proceeds from sale of fixed maturities
    
483,171
      
2,698,825
  
Proceeds from maturity of fixed maturities
    
778,896
      
878,259
  
Net (decrease) increase in payable for securities
    
(97,868
)
    
18,808
  
Net change in restricted cash
    
(60,333
)
    
-
  
Net cash (used in) provided by investing activities
    
(1,078,396
)
    
474,561
  
 
                
Cash flows from financing activities:
                
Net proceeds from convertible senior notes
    
484,697
      
-
  
Common stock shares issued
    
663,392
      
-
  
Repurchases of long-term debt
    
(17,235
)
    
(53,107
)
Net cash provided by (used in) financing activities
    
1,130,854
      
(53,107
)
 
                
Net decrease in cash and cash equivalents
    
(456,161
)
    
(432,654
)
Cash and cash equivalents at beginning of period
    
1,027,625
      
995,799
  
Cash and cash equivalents at end of period
  
$
571,464
    
$
563,145
  

See accompanying notes to consolidated financial statements.
6
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 1 - Basis of Presentation

MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation ("MGIC"), MGIC Indemnity Corporation (“MIC”) 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 (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012 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, 2013.

Capital

The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to 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 they vary among jurisdictions, the most common Capital Requirements allow for a maximum 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 a minimum policyholder position (“MPP”). The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums.

During part of 2012 and 2013, MGIC’s risk-to-capital ratio exceeded 25 to 1. In March 2013, our holding company issued additional equity and convertible debt securities and transferred $800 million to increase MGIC’s capital. At June 30, 2013, MGIC’s risk-to-capital ratio was 20.2 to 1, below the maximum allowed by the jurisdictions with Capital Requirements, and its policyholder position was $175 million above the required MPP of $1.2 billion. At June 30, 2013, the risk-to-capital ratio of our combined insurance operations (which includes reinsurance affiliates) was 23.0 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.

7
At this time, we expect MGIC to continue to comply with the current Capital Requirements, although factors that could negatively affect such compliance are discussed throughout the financial statement footnotes. The remainder of the discussion in this footnote addresses circumstances that would be significant if we were not in such compliance.

The Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”) has waived MGIC’s compliance with Wisconsin’s Capital Requirements until December 31, 2013 (the “OCI Waiver”). The OCI, in its sole discretion, may modify, terminate or extend the OCI Waiver. If the OCI modifies or terminates its waiver, or if it fails to renew its waiver upon expiration, and if MGIC does not comply with the Capital Requirements at that time, MGIC could be prevented from writing new business in all jurisdictions. We cannot assure you that MGIC will comply with the Capital Requirements in the future. If MGIC 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 Requirements or obtained a necessary waiver to allow it to once again write new business.

MGIC applied for waivers in the other jurisdictions with Capital Requirements and received waivers from some of them. Insurance departments, in their sole discretion, may modify, terminate or extend their waivers of Capital Requirements. If an insurance department other than the OCI modifies or terminates its waiver, or if it fails to grant a waiver or renew its waiver after expiration, and if MGIC does not comply with the Capital Requirements at that time, MGIC could be prevented from writing new business in that particular jurisdiction. New insurance written in the jurisdictions that have Capital Requirements represented approximately 50% of our new insurance written in the first six months of 2013. Depending on the level of losses that MGIC experiences in the future, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific Capital Requirements, may prevent MGIC from continuing to write new insurance in that jurisdiction.

The National Association of Insurance Commissioners (“NAIC”) is reviewing the minimum capital and surplus requirements for mortgage insurers, although it has not established a date by which it must make proposals to change such requirements and no changes are expected to be proposed in 2013. Depending on the scope of proposals made by the NAIC, MGIC may be prevented from writing new business in the jurisdictions adopting such proposals. The GSEs, in conjunction with the Federal Housing Finance Agency (“FHFA”) are also developing mortgage insurer capital standards that would replace the use of external credit ratings. Revised capital standards are expected to be released in 2013. Freddie Mac has disclosed that it believes certain mortgage insurance counterparties may be unable to meet its expected new capital requirements within the timeframes for doing so. We have not been informed of the revised capital requirements or their timeframes for implementation. Once we are informed of the revised capital requirements, if we do not expect MGIC to meet them within the timeframes that Freddie Mac establishes, we would consider one or more alternatives to continue writing new business. These alternatives include contributing additional funds that are on hand today from our holding company to MGIC, entering into additional external reinsurance transactions, seeking approval to write business in MIC and raising additional capital. While there can be no assurance that MGIC would meet Freddie Mac’s revised capital requirements within such timeframes, we believe we could implement one or more of these alternatives so that we would continue to be an eligible Freddie Mac mortgage insurer after the revised capital requirements are fully effective.

A possible future failure by MGIC to meet the Capital Requirements will not necessarily mean that MGIC lacks sufficient resources to pay claims on its insurance liabilities. While we believe MGIC has sufficient claims paying resources to meet its claim obligations on its insurance in force on a timely basis, we cannot assure you that events that may lead MGIC to fail 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 the timing of the receipt of claims on loans in our delinquency inventory and future claims that we anticipate will ultimately be received, our anticipated rescission activity, premiums, housing values and unemployment rates. These assumptions are subject to inherent uncertainty and require judgment by management. Current conditions in the domestic economy make the assumptions about when anticipated claims will be received, 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 whose policies will be rescinded and the outcome of any legal proceedings or settlement discussions related to rescissions. Factors that could negatively affect MGIC’s claims paying resources are discussed throughout the financial statement footnotes.

8
We have in place a longstanding plan to write new business in MIC, a direct subsidiary of MGIC, if MGIC is unable to write new business. During 2012, MIC began writing new business on the same policy terms as MGIC in the jurisdictions where MGIC did not have active waivers of the Capital Requirements. Because MGIC again meets the Capital Requirements, MGIC is again writing new business in all jurisdictions and MIC has suspended writing new business. As of June 30, 2013, MIC had statutory capital of $452 million and risk in force of approximately $950 million. MIC is licensed to write business in all jurisdictions and, subject to the conditions and restrictions discussed below, has received the necessary approvals from the GSEs and the OCI to write business in all of the jurisdictions where MGIC may become unable to do so because those jurisdictions have not waived their Capital Requirements for MGIC.

Under an agreement in place with Fannie Mae, as amended November 30, 2012, MIC will be eligible to write mortgage insurance through December 31, 2013, in those jurisdictions (other than Wisconsin) in which MGIC cannot write new insurance due to MGIC’s failure to meet Capital Requirements and to obtain a waiver of them. MIC is also approved to write mortgage insurance for 60 days in jurisdictions that do not have Capital Requirements if a jurisdiction notifies MGIC that, due to its financial condition, it may no longer write new business. The agreement with Fannie Mae contains certain conditions and restrictions to its continued effectiveness, including the continued effectiveness of the OCI Waiver.

Under a letter from Freddie Mac that was amended and restated as of November 30, 2012, Freddie Mac approved MIC to write business only in those jurisdictions (other than Wisconsin) where either (a) MGIC is unable to write business because it does not meet the Capital Requirements and does not obtain waivers of them, or (b) MGIC receives notice that it may not write business because of that jurisdiction’s view of MGIC’s financial condition. This approval of MIC, which may be withdrawn at any time, expires December 31, 2013, or earlier if a financial examination by the OCI determines that there is a reasonable probability that MGIC will be unable to honor claim obligations at any time in the five years after the examination, or if MGIC fails to honor claim payments. The approval from Freddie Mac, contains certain conditions and restrictions to its continued effectiveness, including requirements that MIC not exceed a risk-to-capital ratio of 18:1 (at June 30, 2013, MIC’s risk-to-capital ratio was 2.1 to 1); MGIC and MIC comply with all terms and conditions of the OCI Waiver; the OCI Waiver remain effective; and MIC provide MGIC access to the capital of MIC in an amount necessary for MGIC to maintain sufficient liquidity to satisfy its obligations under insurance policies issued by MGIC.

On November 29, 2012, the OCI issued an order, effective until December 31, 2013, establishing a procedure for MIC to pay a dividend to MGIC if either of the following two events occurs: (1) an OCI examination determines that there is a reasonable probability that MGIC will be unable to honor its policy obligations at any time during the five years after the examination, or (2) MGIC fails to honor its policy obligations that it in good faith believes are valid. If one of these events occurs, the OCI is to conduct a review (to be completed within 60 days after the triggering event) to determine the maximum single dividend MIC could prudently pay to MGIC for the benefit of MGIC’s policyholders, taking account of the interests of MIC’s policyholders and the general public and certain standards for dividends imposed by Wisconsin law. Upon the completion of the review, the OCI will authorize, and MIC will pay, such a dividend within 30 days.

9
We cannot assure you that the GSEs will approve or continue to approve MIC to write new business in all jurisdictions in which MGIC may become unable to do so, or that they will extend their approvals upon expiration. If one GSE does not approve MIC in all jurisdictions in which MGIC becomes unable to write new business, MIC may be able to write insurance on loans that will be sold to the other GSE or retained by private investors. However, because lenders may not know which GSE will purchase their loans until mortgage insurance has been procured, lenders may be unwilling to procure mortgage insurance from MIC. Furthermore, if we are unable to write business in all jurisdictions utilizing a combination of MGIC and MIC, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the financial strength of our insurance operations may affect its willingness to procure insurance from us.

Statement of Statutory Accounting Principles No. 101 (“SSAP No. 101”) became effective January 1, 2012 and prescribed new standards for determining the amount of deferred tax assets that can be recognized as admitted assets for determining statutory capital. Under a permitted practice effective September 30, 2012 and until further notice, the OCI has approved MGIC to report its net deferred tax asset as an admitted asset in an amount not to exceed 10% of surplus as regards policyholders, notwithstanding any contrary provisions of SSAP No. 101. Deferred tax assets of $133 million and $63 million were included in MGIC’s statutory capital at June 30, 2013 and December 31, 2012, respectively.

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2012 amounts to conform to 2013 presentation.

Restricted cash and cash equivalents

During the second quarter of 2013, approximately $60.3 million was placed in escrow in connection with the two agreements we entered into to resolve our dispute with Countrywide Home Loans (“CHL”) and its affiliate, Bank of America, N.A., as successor to Countrywide Home Loans Servicing LP (“BANA” and collectively with CHL, “Countrywide”) regarding rescissions. See additional discussion of these settlement agreements in Note 5 – “Litigation and contingencies.”

Subsequent events

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

Note 2 - New Accounting Guidance

In June 2011, as amended in December 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 was eliminated. Our disclosures reflected the requirements of this new guidance beginning with the first quarter of 2012. Other provisions of this guidance regarding reclassifications out of other comprehensive income were finalized in February 2013. Our disclosures reflect the requirements of this additional guidance beginning with the first quarter of 2013.

10
Note 3 – Debt

5.375% Senior Notes – due November 2015

At June 30, 2013 and December 31, 2012 we had outstanding $82.9 million and $100.1 million, respectively, of 5.375% Senior Notes due in November 2015. During the second quarter of 2013 we repurchased $17.2 million of those Senior Notes at par value. 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 any 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 June 30, 2013.

If we fail to meet any of the covenants of the 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; 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 Senior Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of our Senior Notes would have the right to accelerate the maturity of those notes.  In addition, the trustee of the Senior Notes could, independent of any action by holders of Senior Notes, accelerate the maturity of the Senior Notes. The amounts we owe under the Senior Notes would also be accelerated upon certain bankruptcy or insolvency-related events involving our holding company, including certain events involving the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar official (collectively, an “Insolvency Official”) of our holding company or any substantial part of its property or the consent of our holding company to such an appointment. The description above is not intended to be complete in all respects. Moreover, the description is qualified in its entirety by the terms of the notes, which are contained in the Indenture, dated as of October 15, 2000, between us and U.S. Bank, National Association, as trustee, and in an Officer's Certificate dated as of October 4, 2005, which specifies the interest rate, maturity date and other terms of the Senior Notes.

Interest payments on the Senior Notes were $2.8 million and $4.8 million for the six months ended June 30, 2013 and 2012, respectively.
11
5% Convertible Senior Notes – due May 2017

At June 30, 2013 and December 31, 2012 we had outstanding $345 million principal amount of 5% Convertible Senior Notes due in May 2017. Interest on the 5% Notes is payable semi-annually in arrears on May 1 and November 1 of each year. The 5% Notes will mature on May 1, 2017. Covenants in the 5% 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 any 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 5% Notes.

If an “event of default” under the 5% Notes occurs, including if: we fail to meet any of the covenants of the 5% Notes and such failure continues for 60 days after we receive notice from holders of 25% or more of the 5% Notes; there is a failure to pay when due at maturity or otherwise, or a default under any of our other debt 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 5% Notes when due or a payment of interest on the 5% Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the 5% Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of the 5% Notes would have the right to accelerate the maturity of those notes. In addition, the trustee of the 5% Notes could, independent of any action by holders, accelerate the maturity of the 5% Notes if an “event of default” occurs. The amounts we owe under the 5% Notes would also be accelerated upon certain bankruptcy or insolvency-related events involving our holding company or a Significant Subsidiary, including the failure to have dismissed or stayed a petition seeking relief under bankruptcy or insolvency laws or the consent of our holding company or a Significant Subsidiary to the appointment of an Insolvency Official for all or substantially all of their respective property. “Significant Subsidiary” is defined in Regulation S-X under the Securities Act of 1933 and is measured as of the most recently completed fiscal year. As of December 31, 2012, MGIC and MGIC Reinsurance Corporation of Wisconsin were our Significant Subsidiaries.

The 5% 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 5% Notes will be equal in right of payment to our other senior debt, 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 5% Notes. The provisions of the 5% 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.

Interest payments on the 5% Notes were $8.6 million in each of the six months ended June 30, 2013 and 2012.
12
2% Convertible Senior Notes – due April 2020

At June 30, 2013, we had outstanding $500 million principal amount of 2% Convertible Senior Notes due in 2020 which we issued in March 2013. We received net proceeds of approximately $484.7 million after deducting underwriting discount and estimated offering expenses. See Note 14 – “Shareholders’ Equity” for information regarding the use of such proceeds. Interest on the 2% Notes will be payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2013. The 2% Notes will mature on April 1, 2020, unless earlier repurchased by us or converted. Subject to certain limitations the 2% Notes are convertible at the holder's option at an initial conversion rate, which is subject to adjustment, of 143.8332 shares per $1,000 principal amount. This represents an initial conversion price of approximately $6.95 per share. Before January 1, 2020, conversions may only occur under certain circumstances, including upon redemption of the 2% Notes. On or after January 1, 2020, holders may convert their notes at any time. These 2% Notes will be equal in right of payment to our other senior debt and will be senior in right of payment to our existing Convertible Junior Debentures. Debt issuance costs will be amortized to interest expense over the contractual life of the 2% Notes. Prior to April 10, 2017, the notes will not be redeemable. On any business day on or after April 10, 2017 we may redeem for cash all or part of the notes, at our option, at a redemption price equal to 100% of the principal amount of the notes 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 notes for at least 20 of the 30 trading days preceding notice of the redemption.

Covenants in the 2% 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 any 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 2% Notes.

If an “event of default” under the 2% Notes occurs, including if: we fail to meet any of the covenants of the 2% Notes and such failure continues for 60 days after we receive notice from holders of 25% or more of the 2% Notes; there is a failure to pay when due at maturity or otherwise, or a default under any of our other debt 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 2% Notes when due or a payment of interest on the 2% Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the 2% Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of the 2% Notes would have the right to accelerate the maturity of those notes. In addition, the trustee of the 2% Notes could, independent of any action by holders, accelerate the maturity of the 2% Notes if an “event of default” occurs. The amounts we owe under the 2% Notes would also be accelerated upon certain bankruptcy or insolvency-related events involving our holding company or a Significant Subsidiary, including the failure to have dismissed or stayed a petition seeking relief under bankruptcy or insolvency laws or the consent of our holding company or a Significant Subsidiary to the appointment of an Insolvency Official for all or substantially all of their respective property.

The provisions of the 2% 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 Second Supplemental Indenture, dated March 12, 2013, between us and U.S. Bank National Association, as trustee, and the Indenture dated as of October 15, 2000, between us and the trustee.
13
9% Convertible Junior Subordinated Debentures – due April 2063

At June 30, 2013 and December 31, 2012 we had outstanding $389.5 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063 (the “debentures”). At December 31, 2012 the amortized value of the principal amount of the debentures is reflected as a liability on our consolidated balance sheet of $379.6 million, with the unamortized discount reflected in equity. Beginning March 31, 2013, including at June 30, 2013, the full principal amount of the debentures was reflected as a liability on our consolidated balance sheet. The debentures rank junior to all of our existing and future senior indebtedness.

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, if we fail to pay principal or interest when due under the debentures, then the holders of 25% or more of the debentures would have the right to accelerate the maturity of them. In addition, the trustee of the debentures could, independent of any action by holders, accelerate the maturity of the debentures. The amounts we owe under the Convertible Junior Subordinated Debentures would also be accelerated upon certain bankruptcy or insolvency-related events involving our holding company, including the appointment of a custodian of it or any substantial part of its properties.

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.

Interest on the debentures that would have been payable on the scheduled interest payment date of October 1, 2012 had been deferred. During the deferral period the deferred interest continued to accrue and compound semi-annually at an annual rate of 9%.

On April 1, 2013 we paid the deferred interest payment, including the compound interest. The interest payment, totaling approximately $18.3 million, was made from the net proceeds of our March 2013 common stock offering. We also paid the regular April 1, 2013 interest payment due on the debentures of approximately $17.5 million. We continue to have the right to defer interest that is payable on subsequent scheduled interest payment dates. 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.
14
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 debentures 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 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.

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, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.

Interest payments on the debentures were $35.8 million and $17.5 for the six months ended June 30, 2013 and 2012, respectively.

15
All debt

The par value and fair value of our debt at June 30, 2013 and December 31, 2012 appears in the table below.
 
 
  
Par Value
    
Total Fair
Value
    
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
 
  
(In thousands)
  
June 30, 2013
  
   
   
   
   
 
Liabilities:
  
   
   
   
   
 
Senior Notes
  
$
82,883
    
$
83,753
    
$
83,753
    
$
-
    
$
-
  
Convertible Senior Notes due 2017
    
345,000
      
354,919
      
354,919
      
-
      
-
  
Convertible Senior Notes due 2020
    
500,000
      
580,000
      
580,000
      
-
      
-
  
Convertible Junior Subordinated Debentures
    
389,522
      
426,285
      
-
      
426,285
      
-
  
Total Debt
  
$
1,317,405
    
$
1,444,957
    
$
1,018,672
    
$
426,285
    
$
-
  
 
                                        
December 31, 2012
                                        
Liabilities:
                                        
Senior Notes
  
$
100,118
    
$
79,594
    
$
79,594
    
$
-
    
$
-
  
Convertible Senior Notes due 2017
    
345,000
      
242,880
      
242,880
      
-
      
-
  
Convertible Junior Subordinated Debentures
    
389,522
      
173,096
      
-
      
173,096
      
-
  
Total Debt
  
$
834,640
    
$
495,570
    
$
322,474
    
$
173,096
    
$
-
  

The fair value of our Senior Notes and Convertible Senior Notes was determined using publicly available trade information and are considered Level 1 securities as described in Note 8 – “Fair Value Measurements.” The fair value of our debentures was determined using available pricing for these debentures or similar instruments and are considered Level 2 securities as described in Note 8 – “Fair Value Measurements.”

The Senior Notes, Convertible Senior Notes and Convertible Junior Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. At June 30, 2013, we had approximately $592 million in cash and investments at our holding company. The net unrealized losses on our holding company investment portfolio were approximately $7.1 million at June 30, 2013. The modified duration of the holding company investment portfolio, excluding cash and cash equivalents, was 3.6 years at June 30, 2013.
16
Note 4 – Reinsurance

MGIC has obtained both captive and non-captive reinsurance in the past. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance.

Since June 2005, various state and federal regulators have conducted investigations or requested information regarding captive mortgage reinsurance arrangements in which we participated. In January 2012, we received correspondence from the Consumer Financial Protection Bureau (“CFPB”) indicating that it was investigating captive reinsurance arrangements in the mortgage insurance industry. The correspondence requested, among other things, certain information regarding captive mortgage reinsurance transactions in which we participated. In June 2012, we received a Civil Investigative Demand (“CID”) from the CFPB requiring additional information and documentation regarding captive mortgage reinsurance.

In April 2013, the U.S. District Court approved a settlement between MGIC and the CFPB that resolves a previously-disclosed, nearly five-year-old federal investigation of MGIC’s participation in captive reinsurance arrangements in the mortgage insurance industry. The settlement concludes the investigation with respect to MGIC without the CFPB making any findings of wrongdoing. Three other mortgage insurers agreed to similar settlements. As part of the settlements, MGIC and the three other mortgage insurers agreed that they would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years. In accordance with this settlement, all of our active captive arrangements have been placed into run-off.

Captive agreements were 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 $84 million at June 30, 2013 which was supported by $254 million of trust assets, while at December 31, 2012 the reinsurance recoverable on loss reserves related to captives was $104 million which was supported by $303 million of trust assets. As of June 30, 2013 and December 31, 2012 there was an additional $22 million and $25 million, respectively, of trust assets in captive agreements where there was no related reinsurance recoverable on loss reserves. Trust fund assets of $3 million and $0.4 million were transferred to us as a result of captive terminations during the first six months of 2013 and 2012, respectively.

The CFPB's investigation involved captive reinsurance. In April 2013, we entered into a quota share reinsurance agreement with a group of unaffiliated reinsurers. These reinsurers are not captive reinsurers. This reinsurance agreement applies to new insurance written between April 1, 2013 and December 31, 2015 (with limited exclusions) and covers incurred losses, with renewal premium through December 31, 2018. Early termination is possible under specified scenarios. The structure of the reinsurance agreement is a 30% quota share, with a 20% ceding commission as well as a profit commission. The impact of the reinsurance agreement was not significant to our results for the second quarter of 2013.

17
Note 5 – Litigation and Contingencies

Consumers continue to bring 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’s settlement of class action litigation against it under RESPA became final 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. Beginning in December 2011, MGIC, together with various mortgage lenders and other mortgage insurers, has been named as a defendant in twelve lawsuits, alleged to be class actions, filed in various U.S. District Courts. Four of those cases have previously been dismissed by the applicable U.S. District Courts without any further opportunity to appeal and two additional cases have been dismissed by the applicable U.S. District Court but are now on appeal to the U.S. Court of Appeals. The complaints in all of the cases allege various causes of action related to the captive mortgage reinsurance arrangements of the mortgage lenders, including that the defendants violated RESPA by paying excessive premiums to the lenders’ captive reinsurer in relation to the risk assumed by that captive. MGIC denies any wrongdoing and intends to vigorously defend itself against the allegations in the lawsuits. There can be no assurance that we will not be subject to further litigation under RESPA (or FCRA) or that the outcome of any such litigation, including the lawsuits mentioned above, would not have a material adverse effect on us.

On April 5, 2013, the U.S. District Court approved a settlement with the CFPB that resolves a previously-disclosed, nearly five-year-old federal investigation of MGIC’s participation in captive reinsurance arrangements in the mortgage insurance industry. The settlement concludes the investigation with respect to MGIC without the CFPB making any findings of wrongdoing. As part of the settlement, MGIC agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years. MGIC had voluntarily suspended most of its captive arrangements in 2008 in response to market conditions and GSE requests. In connection with the settlement, MGIC paid a civil penalty of $2.65 million and the court issued an injunction prohibiting MGIC from violating any provision of RESPA.

We remain subject to various state investigations or information requests regarding captive mortgage reinsurance arrangements, including (1) a request received by MGIC in June 2005 from the New York Department of Financial Services for information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation; and (2) requests received from the Minnesota Department of Commerce beginning in February 2006 regarding captive mortgage reinsurance and certain other matters in response to which MGIC has provided information on several occasions, including as recently as May 2011. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

Various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring actions seeking various forms of relief in connection with violations 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 practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
18
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. As noted above, in early 2013, the CFPB issued rules to implement laws requiring mortgage lenders to make ability-to-pay determinations prior to extending credit. We are uncertain whether the CFPB will issue any other rules or regulations that affect our business. Such rules and regulations could have a material adverse effect on us.

We understand several law firms have, among other things, 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.

Since December 2009, we have been involved in legal proceedings with Countrywide in which Countrywide alleged that MGIC denied valid mortgage insurance claims. (In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term.) In addition to the claim amounts it alleged MGIC had improperly denied, Countrywide contended it was entitled to other damages of almost $700 million as well as exemplary damages. We sought a determination in those proceedings that we were entitled to rescind coverage on the applicable loans. From January 1, 2008 through June 30, 2013, rescissions of coverage on Countrywide-related loans mitigated our paid losses on the order of $445 million. This amount is the amount we estimate we would have paid had the coverage not been rescinded. In addition, in connection with mediation we were holding with Countrywide, we voluntarily suspended rescissions related to loans that we believed could be covered by a settlement. As of June 30, 2013, coverage on approximately 2,650 loans, representing total potential claim payments of approximately $195 million, that we had determined was rescindable, was affected by our decision to suspend such rescissions.

In April 2013, MGIC entered into separate settlement agreements with CHL and BANA, pursuant to which the parties will settle the Countrywide litigation as it relates to MGIC’s rescission practices.

The agreement with BANA covers loans which had been sold to the GSEs by CHL, including loans subsequently repurchased by BANA, as well as other CHL-originated loans currently owned by BANA or one of its affiliates.  Implementation of the BANA Agreement is subject to consent and approval by both GSEs. The agreement with CHL covers loans which were purchased by non-GSE investors, including securitization trusts (the “other investors”). The CHL Agreement will not be implemented until the implementation of the BANA Agreement and then will be implemented only as and to the extent that it is approved by or on behalf of the other investors. While there can be no assurance that the Agreements will be implemented, we have determined that their implementation is probable.

Under the Agreements, the parties are seeking to stay their pending arbitration proceedings. Upon implementation of the BANA Agreement, the pending arbitration proceedings concerning the loans covered by the BANA Agreement will be dismissed, and the parties will provide mutual releases. Upon obtaining a specified number of consents by or on behalf of the other investors and also upon the conclusion of the period in the CHL Agreement for obtaining consents by or on behalf of the other investors, all legal proceedings will be dismissed and the parties will provide mutual releases, in each case limited as to the loans held by the other investors that consent to the CHL Agreement.

19
We are also discussing a settlement of a dispute with another customer and have also determined that it is probable we will reach a settlement with this customer. As of June 30, 2013, coverage on approximately 310 loans, representing total potential claim payments of approximately $21 million, was affected by our decision to suspend rescissions for that customer.

We recorded the estimated impact of the two probable settlements referred to above in our financial statements for the quarter ending December 31, 2012. The aggregate impact to loss reserves for the probable settlement agreements was an increase of approximately $100 million. This impact was somewhat offset by impacts to our return premium accrual and premium deficiency reserve. If we are not able to implement the Agreements, we intend to defend MGIC against any related legal proceedings, vigorously.

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. The settlement with Countrywide may encourage other customers to pursue remedies against us. From January 1, 2008 through June 30, 2013, we estimate that total rescissions mitigated our incurred losses by approximately $2.9 billion, which included approximately $3.0 billion of mitigation on paid losses, excluding $0.6 billion that would have been applied to a deductible. At June 30, 2013, we estimate that our total loss reserves were benefited from anticipated rescissions by approximately $0.1 billion.

Before paying a claim, we review the loan and servicing files to determine the appropriateness of the claim amount. All of our insurance policies provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy, including the requirement to mitigate our loss by performing reasonable loss mitigation efforts or, for example, diligently pursuing a foreclosure or bankruptcy relief in a timely manner. We call such reduction of claims submitted to us “curtailments.” In 2012 and the first six months of 2013, curtailments reduced our average claim paid by approximately 4.1% and 5.1%, respectively. In addition, the claims submitted to us sometimes include costs and expenses not covered by our insurance policies, such as mortgage insurance premiums, hazard insurance premiums for periods after the claim date and losses resulting from property damage that has not been repaired. These other adjustments reduced claim amounts by less than the amount of curtailments.

After we pay a claim, servicers and insureds sometimes object to our curtailments and other adjustments. We review these objections if they are sent to us within 90 days after the claim was paid. Historically, we have not had material disputes regarding our curtailments or other adjustments.

The Agreements referred to above do not resolve assertions by Countrywide that MGIC has improperly curtailed numerous insurance coverage claims. Countrywide has asserted that the amount of disputed curtailments approximates $40 million. MGIC and Countrywide have agreed to mediate this matter and to enter into arbitration if the mediation does not resolve the matter. We do not believe a loss is probable regarding this curtailment dispute and have not accrued any reserves that would reflect an adverse outcome to this dispute. We intend to defend vigorously our position regarding the correctness of these curtailments under our insurance policy. Although we have not had other material objections to our curtailment and adjustment practices, there can be no assurances that we will not face additional challenges to such practices.

20
A non-insurance subsidiary of our holding company is a shareholder of the corporation that operates the Mortgage Electronic Registration System (“MERS”).  Our subsidiary, as a shareholder of MERS, has been named as a defendant (along with MERS and its other shareholders) in eight lawsuits asserting various causes of action arising from allegedly improper recording and foreclosure activities by MERS. One of those lawsuits remains pending and the other seven lawsuits have been dismissed without any further opportunity to appeal.  The damages sought in the remaining case are substantial. We deny any wrongdoing and intend to defend ourselves vigorously against the allegations in the lawsuits.

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

Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. These obligations have been primarily funded by contributions from our holding company and, in part, from the operations of the subsidiary. A generally positive economic environment for residential real estate that continued until approximately 2007 may have mitigated the effect of some of these costs in previous years. Historically, a material portion of our new insurance written through the flow channel has involved loans for which that subsidiary provided contract underwriting services, including new insurance written between 2006 and 2008. Claims for remedies may be made a number of years after the underwriting work was performed. We believe the rescission of mortgage insurance coverage on loans for which the subsidiary provided contract underwriting services may make a claim for a contract underwriting remedy more likely to occur. Beginning in the second half of 2009, our subsidiary experienced an increase in claims for contract underwriting remedies, which continued throughout 2012. The related contract underwriting remedy expense was approximately $27 million, $23 million and $19 million for the years ended December 31, 2012, 2011 and 2010. The underwriting remedy expense for the first six months of 2013 was not significant.

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 0.2 million for the six months ended June 30, 2013 and 1.1 million for each of  the three and six months ended June 30, 2012 because they were anti-dilutive due to our reported net loss. Participating securities of 0.1 million were included in our weighted average number of common shares outstanding for the three months ended June 30, 2013. 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 June 30, 2013 and 2012 common stock equivalents of 126.5 million and 55.4 million, respectively, and for the six months ended June 30, 2013 and 2012 common stock equivalents of 100.3 million and 55.7 million, respectively, were not included because they were anti-dilutive.
21
 
Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
 
 
 
 
 
 
2013
  
2012
  
2013
  
2012
  
 
(In thousands, except per share data)
  
 
 
 
 
 
Basic earnings per share:
 
 
 
 
Weighted average common shares outstanding
    
337,868
      
202,013
      
285,336
      
201,770
  
Net income (loss)
  
$
12,375
    
$
(273,891
)
  
$
(60,555
)
  
$
(293,446
)
Basic income (loss) per share
  
$
0.04
    
$
(1.36
)
  
$
(0.21
)
  
$
(1.45
)
 
                                
Diluted earnings per share:
                                
Weighted-average shares - Basic
    
337,868
      
202,013
      
285,336
      
201,770
  
Common stock equivalents
    
1,473
      
-
      
-
      
-
  
 
                                
Weighted-average shares - Diluted
    
339,341
      
202,013
      
285,336
      
201,770
  
 
                                
Net income (loss)
  
$
12,375
    
$
(273,891
)
  
$
(60,555
)
  
$
(293,446
)
Diluted income (loss) per share
  
$
0.04
    
$
(1.36
)
  
$
(0.21
)
  
$
(1.45
)

Note 7 – Investments

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at June 30, 2013 and December 31, 2012 are shown below.
22
 
  
   
Gross
    
Gross
    
 
 
  
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
June 30, 2013
  
Cost
    
Gains
    
Losses (1)
    
Value
  
 
  
(In thousands)
  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
923,585
    
$
1,935
$
(15,397
)
$
910,123
Obligations of U.S. states and political subdivisions
    
920,974
      
8,721
      
(13,616
)
    
916,079
  
Corporate debt securities
    
2,086,103
      
5,183
      
(29,548
)
    
2,061,738
  
Asset-backed securities
    
310,819
      
581
      
(872
)
    
310,528
  
Residential mortgage-backed securities
    
413,083
      
171
      
(21,167
)
    
392,087
  
Commercial mortgage-backed securities
    
230,935
      
40
      
(8,599
)
    
222,376
  
Collateralized loan obligations
    
61,335
      
-
      
(109
)
    
61,226
  
Debt securities issued by foreign sovereign governments
    
117,399
      
5,516
      
(941
)
    
121,974
  
Total debt securities
    
5,064,233
      
22,147
      
(90,249
)
    
4,996,131
  
Equity securities
    
2,848
      
25
      
(13
)
    
2,860
  
 
                                
Total investment portfolio
  
$
5,067,081
    
$
22,172
    
$
(90,262
)
  
$
4,998,991
  

 
  
   
Gross
    
Gross
    
 
 
  
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
December 31, 2012
  
Cost
    
Gains
    
Losses (1)
    
Value
  
 
  
(In thousands)
  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  
$
863,282
    
$
3,040
    
$
(71
)
  
$
866,251
  
Obligations of U.S. states and political subdivisions
    
795,935
      
16,965
      
(506
)
    
812,394
  
Corporate debt securities
    
1,469,844
      
13,813
      
(2,716
)
    
1,480,941
  
Asset-backed securities
    
322,802
      
1,657
      
(23
)
    
324,436
  
Residential mortgage-backed securities
    
451,352
      
871
      
(1,314
)
    
450,909
  
Commercial mortgage-backed securities
    
150,232
      
524
      
(414
)
    
150,342
  
Debt securities issued by foreign sovereign governments
    
132,490
      
9,784
      
(208
)
    
142,066
  
Total debt securities
    
4,185,937
      
46,654
      
(5,252
)
    
4,227,339
  
Equity securities
    
2,797
      
139
      
-
      
2,936
  
 
                                
Total investment portfolio
  
$
4,188,734
    
$
46,793
    
$
(5,252
)
  
$
4,230,275
  

(1) At June 30, 2013 and December 31, 2012, there were no other-than-temporary impairment losses recorded in other comprehensive income.

23
Our foreign investments primarily consist of the investment portfolio supporting our Australian domiciled subsidiary. This portfolio is comprised of Australian government and semi government securities, representing 87% of the market value of our foreign investments with the remaining 11% invested in corporate securities and 2% in cash equivalents. Ninety-two percent of the Australian portfolio is rated AAA, by one or more of Moody’s, Standard & Poor’s and Fitch Ratings, and the remaining 8% is rated AA.

The amortized cost and fair values of debt securities at June 30, 2013, 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 asset-backed and mortgage-backed securities and collateralized loan obligations provide for periodic payments throughout their lives, they are listed below in separate categories.
 
 
  
Amortized
    
Fair
  
June 30, 2013
  
Cost
    
Value
  
 
  
(In thousands)
  
 
  
   
 
Due in one year or less
  
$
937,314
    
$
938,656
  
Due after one year through five years
    
1,745,300
      
1,743,411
  
Due after five years through ten years
     878,568      
854,727
  
Due after ten years
     486,879      
473,120
  
 
                
 
  
$
4,048,061
    
$
4,009,914
  
 
                
Asset-backed securities
    
310,819
      
310,528
  
Residential mortgage-backed securities
    
413,083
      
392,087
  
Commercial mortgage-backed securities
    
230,935
      
222,376
  
Collateralized loan obligations
    
61,335
      
61,226
  
 
                
Total at June 30, 2013
  
$
5,064,233
    
$
4,996,131
  
24
At June 30, 2013 and December 31, 2012, the investment portfolio had gross unrealized losses of $90.3 million and $5.3 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
  
June 30, 2013
  
Value
    
Losses
    
Value
    
Losses
    
Value
    
Losses
  
 
  
(In thousands)
  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  
$
484,399
    
$
15,397
    
$
-
    
$
-
    
$
484,399
    
$
15,397
  
Obligations of U.S. states and political subdivisions
    
456,902
      
13,616
      
-
      
-
      
456,902
      
13,616
  
Corporate debt securities
    
1,450,667
      
29,546
      
3,291
      
2
      
1,453,958
      
29,548
  
Asset-backed securities
    
164,559
      
872
      
-
      
-
      
164,559
      
872
  
Residential mortgage-backed securities
    
373,524
      
20,701
      
17,047
      
466
      
390,571
      
21,167
  
Commercial mortgage-backed securities
    
206,460
      
8,599
      
-
      
-
      
206,460
      
8,599
  
Collateralized loan obligations
    
28,266
      
109
      
-
      
-
      
28,266
      
109
  
Debt securities issued by foreign sovereign governments
    
32,037
      
941
      
-
      
-
      
32,037
      
941
  
Equity securities
    
988
      
13
      
-
      
-
      
988
      
13
  
Total investment portfolio
  
$
3,197,802
    
$
89,794
    
$
20,338
    
$
468
    
$
3,218,140
    
$
90,262
  
 
                                                
 
  
Less Than 12 Months
    
12 Months or Greater
    
Total
  
 
  
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
December 31, 2012
  
Value
    
Losses
    
Value
    
Losses
    
Value
    
Losses
  
 
  
(In thousands)
  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  
$
24,094
    
$
71
    
$
-
    
$
-
    
$
24,094
    
$
71
  
Obligations of U.S. states and political subdivisions
    
156,111
      
505
      
1,006
      
1
      
157,117
      
506
  
Corporate debt securities
    
280,765
      
2,714
      
3,353
      
2
      
284,118
      
2,716
  
Asset-backed securities
    
29,675
      
23
      
-
      
-
      
29,675
      
23
  
Residential mortgage-backed securities
    
315,000
      
982
      
19,939
      
332
      
334,939
      
1,314
  
Commercial mortgage-backed securities
    
72,689
      
414
      
-
      
-
      
72,689
      
414
  
Debt securities issued by foreign sovereign governments
    
14,695
      
208
      
-
      
-
      
14,695
      
208
  
Total investment portfolio
  
$
893,029
    
$
4,917
    
$
24,298
    
$
335
    
$
917,327
    
$
5,252
  

The unrealized losses in all categories of our investments at June 30, 2013 and December 31, 2012 were primarily caused by the difference in interest rates at June 30, 2013 and December 31, 2012, respectively, compared to interest rates at the time of purchase.

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 six months of 2012 there were other-than-temporary impairments (“OTTI”) recognized of $0.3 million. There were no OTTI during the first six months of 2013.
25
The net realized investment gains (losses) and OTTI on the investment portfolio are as follows:
 
 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
 
(In thousands)
  
Net realized investment gains (losses) and OTTI on investments:
  
   
   
   
 
Fixed maturities
  
$
1,891
    
$
26,095
    
$
3,148
    
$
101,434
  
Equity securities
    
594
      
12
      
596
      
394
  
Other
    
-
      
165
      
-
      
2,005
  
 
                                
 
  
$
2,485
    
$
26,272
    
$
3,744
    
$
103,833
  

 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
 
(In thousands)
  
Net realized investment gains (losses) and OTTI on investments:
  
   
   
   
 
Gains on sales
  
$
3,027
    
$
28,005
    
$
4,961
    
$
108,040
  
Losses on sales
    
(542
)
    
(1,394
)
    
(1,217
)
    
(3,868
)
Impairment losses
    
-
      
(339
)
    
-
      
(339
)
 
                                
 
  
$
2,485
    
$
26,272
    
$
3,744
    
$
103,833
  

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 can access. Financial assets utilizing Level 1 inputs primarily include certain U.S. Treasury securities and obligations of U.S. government corporations and agencies and Australian government and semi government securities.

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.
26
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 by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in 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 by the independent pricing sources 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, at December 31, 2012, primarily consisted of auction rate securities for which observable inputs or value drivers were unavailable. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value of these assets at December 31, 2012.  The DCF model for estimating the fair value of the auction rate securities as of December 31, 2012 was based on the following key assumptions:

o Nominal credit risk as substantially all of the underlying collateral of these securities is ultimately guaranteed by the United States Department of Education;
o Time to liquidity  through December 31, 2013;
o Continued receipt of contractual interest; and
o Discount rates ranging from 16.87% to 18.35%, which include a spread for liquidity risk.

During the first three months of 2013 we sold our remaining auction rate securities.  At June 30, 2013, the majority of the $3 million balance of Level 3 securities is state premium tax credit investments.  The state premium tax credit investments have an average maturity of under 5 years, credit ratings of AA+ or higher, and their balance reflects their remaining scheduled payments discounted at an average annual rate of 7.4%.

· 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.
27
Fair value measurements for assets measured at fair value included the following as of June 30, 2013 and December 31, 2012:

 
  
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)
  
June 30, 2013
  
   
   
   
 
 
  
   
   
   
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  
$
910,123
    
$
910,123
    
$
-
    
$
-
  
Obligations of U.S. states and political subdivisions
    
916,079
      
-
      
913,268
      
2,811
  
Corporate debt securities
    
2,061,738
      
-
      
2,061,738
      
-
  
Asset-backed securities
    
310,528
      
-
      
310,528
      
-
  
Residential mortgage-backed securities
    
392,087
      
-
      
392,087
      
-
  
Commercial mortgage-backed securities
    
222,376
      
-
      
222,376
      
-
  
Collateralized loan obligations
    
61,226
      
-
      
61,226
      
-
  
Debt securities issued by foreign sovereign governments
    
121,974
      
121,974
      
-
      
-
  
Total debt securities
    
4,996,131
      
1,032,097
      
3,961,223
      
2,811
  
Equity securities
    
2,860
      
2,539
      
-
      
321
  
Total investments
  
$
4,998,991
    
$
1,034,636
    
$
3,961,223
    
$
3,132
  
Real estate acquired (1)
  
$
8,741
    
$
-
    
$
-
    
$
8,741
  

28
 
  
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)
  
 
  
   
   
   
 
December 31, 2012
  
   
   
   
 
 
  
   
   
   
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  
$
866,251
    
$
866,251
    
$
-
    
$
-
  
Obligations of U.S. states and political subdivisions
    
812,394
      
-
      
809,264
      
3,130
  
Corporate debt securities
    
1,480,941
      
-
      
1,463,827
      
17,114
  
Asset-backed securities
    
324,436
      
-
      
324,436
      
-
  
Residential mortgage-backed securities
    
450,909
      
-
      
450,909
      
-
  
Commercial mortgage-backed securities
    
150,342
      
-
      
150,342
      
-
  
Debt securities issued by foreign sovereign governments
    
142,066
      
142,066
      
-
      
-
  
Total debt securities
    
4,227,339
      
1,008,317
      
3,198,778
      
20,244
  
Equity securities
    
2,936
      
2,615
      
-
      
321
  
Total investments
  
$
4,230,275
    
$
1,010,932
    
$
3,198,778
    
$
20,565
  
Real estate acquired (1)
  
$
3,463
    
$
-
    
$
-
    
$
3,463
  

(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 transfers of securities between Level 1 and Level 2 during the first six months of 2013 or 2012.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2013 and 2012 is as follows:

29
 
  
Obligations of U.S.
States and Political
Subdivisions
    
Corporate Debt
Securities
    
Equity
Securities
    
Total
Investments
    
Real Estate
Acquired
  
 
  
(In thousands)
  
Balance at March 31, 2013
  
$
2,957
    
$
-
    
$
321
    
$
3,278
    
$
7,524
  
Total realized/unrealized gains (losses):
                                        
Included in earnings and reported as losses incurred, net
    
-
      
-
      
-
      
-
      
(1,000
)
Purchases
    
-
      
-
      
-
      
-
      
9,530
  
Sales
    
(146
)
    
-
      
-
      
(146
)
    
(7,313
)
Transfers into Level 3
    
-
      
-
      
-
      
-
      
-
  
Transfers out of Level 3
    
-
      
-
      
-
      
-
      
-
  
Balance at June 30, 2013
  
$
2,811
    
$
-
    
$
321
    
$
3,132
    
$
8,741
  
 
                                        
Amount of total losses included in earnings for the three months ended June 30, 2013 attributable to the change in unrealized losses on assets still held at June 30, 2013
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  

30
 
  
Obligations of U.S.
States and Political
Subdivisions
    
Corporate Debt
Securities
    
Equity
Securities
    
Total
Investments
    
Real Estate
Acquired
  
 
  
(In thousands)
  
Balance at December 31, 2012
  
$
3,130
    
$
17,114
    
$
321
    
$
20,565
    
$
3,463
  
Total realized/unrealized gains (losses):
                                        
Included in earnings and reported as realized investment gains (losses), net
    
-
      
(225
)
    
-
      
(225
)
    
-
  
Included in earnings and reported as losses incurred, net
    
-
      
-
      
-
      
-
      
(2,302
)
Purchases
    
30
      
-
      
-
      
30
      
17,544
  
Sales
    
(349
)
    
(16,889
)
    
-
      
(17,238
)
    
(9,964
)
Transfers into Level 3
    
-
      
-
      
-
      
-
      
-
  
Transfers out of Level 3
    
-
      
-
      
-
      
-
      
-
  
Balance at June 30, 2013
  
$
2,811
    
$
-
    
$
321
    
$
3,132
    
$
8,741
  
 
                                        
Amount of total losses included in earnings for the three months ended June 30, 2013 attributable to the change in unrealized losses on assets still held at June 30, 2013
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  

31
 
  
Obligations of U.S.
States and Political
Subdivisions
    
Corporate Debt
Securities
    
Equity
Securities
    
Total
Investments
    
Real Estate
Acquired
  
 
  
(In thousands)
  
Balance at March 31, 2012
  
$
95,516
    
$
51,118
    
$
321
    
$
146,955
    
$
2,340
  
Total realized/unrealized gains (losses):
                                        
Included in earnings and reported as realized investment gains (losses), net
    
(575
)
    
(700
)
    
-
      
(1,275
)
    
-
  
Included in earnings and reported as impairment losses, net
    
-
      
(339
)
    
-
      
(339
)
    
-
  
Included in earnings and reported as losses incurred, net
    
-
      
-
      
-
      
-
      
(149
)
Included in other comprehensive income
    
(1,113
)
    
78
      
-
      
(1,035
)
    
-
  
Purchases
    
-
      
-
      
-
      
-
      
3,888
  
Sales
    
(9,847
)
    
(9,300
)
    
-
      
(19,147
)
    
(3,005
)
Transfers into Level 3
    
-
      
-
      
-
      
-
      
-
  
Transfers out of Level 3
    
-
      
-
      
-
      
-
      
-
  
Balance at June 30, 2012
  
$
83,981
    
$
40,857
    
$
321
    
$
125,159
    
$
3,074
  
 
                                        
Amount of total losses included in earnings for the three months ended June 30, 2012 attributable to the change in unrealized losses on assets still held at June 30, 2012
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
32
 
 
  
Obligations of U.S.
States and Political
Subdivisions
    
Corporate Debt
Securities
    
Equity
Securities
    
Total
Investments
    
Real Estate
Acquired
  
 
  
(In thousands)
  
Balance at December 31, 2011
  
$
114,226
    
$
60,228
    
$
321
    
$
174,775
    
$
1,621
  
Total realized/unrealized gains (losses):
                                        
Included in earnings and reported as realized investment gains (losses), net
    
(2,525
)
    
(1,081
)
    
-
      
(3,606
)
    
-
  
Included in earnings and reported as impairment losses, net
    
-
      
(339
)
    
-
      
(339
)
    
-
  
Included in earnings and reported as losses incurred, net
    
-
      
-
      
-
      
-
      
(465
)
Included in other comprehensive income
    
756
      
355
      
-
      
1,111
      
-
  
Purchases
    
27
      
-
      
-
      
27
      
5,970
  
Sales
    
(28,503
)
    
(18,306
)
    
-
      
(46,809
)
    
(4,052
)
Transfers into Level 3
    
-
      
-
      
-
      
-
      
-
  
Transfers out of Level 3
    
-
      
-
      
-
      
-
      
-
  
Balance at June 30, 2012
  
$
83,981
    
$
40,857
    
$
321
    
$
125,159
    
$
3,074
  
 
                                        
Amount of total losses included in earnings for the three months ended June 30, 2012 attributable to the change in unrealized losses on assets still held at June 30, 2012
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  

Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.” Fair value disclosures related to our debt are included in Note 3 – “Debt.”

Note 9 – Other Comprehensive Income

Our other comprehensive income for the three and six months ended June 30, 2013 and 2012 was as follows:

 
Three Months Ended
June 30, 2013
 
  
   
   
Valuation
    
 
 
  
Before tax
    
Tax effect
    
allowance
    
Net of tax
  
 
(In thousands)
  
 
  
   
   
   
 
Other comprehensive income (loss):
  
   
   
   
 
Change in unrealized gains and losses on investments
  
$
(99,092
)
  
$
34,520
    
$
(33,547
)
  
$
(98,119
)
Unrealized foreign currency translation adjustment
    
(19,255
)
    
6,743
      
-
      
(12,512
)
 
                                
Other comprehensive income (loss)
  
$
(118,347
)
  
$
41,263
    
$
(33,547
)
  
$
(110,631
)

33
 
Six Months Ended
June 30, 2013
 
  
   
   
Valuation
    
 
 
  
Before tax
    
Tax effect
    
allowance
    
Net of tax
  
 
(In thousands)
  
 
  
   
   
   
 
Other comprehensive income (loss):
  
   
   
   
 
Change in unrealized gains and losses on investments
  
$
(109,631
)
  
$
38,112
    
$
(36,554
)
  
$
(108,073
)
Unrealized foreign currency translation adjustment
    
(18,769
)
    
6,573
      
-
      
(12,196
)
 
                                
Other comprehensive income (loss)
  
$
(128,400
)
  
$
44,685
    
$
(36,554
)
  
$
(120,269
)

 
Three Months Ended
June 30, 2012
 
  
   
   
Valuation
    
 
 
  
Before tax
    
Tax effect
    
allowance
    
Net of tax
  
 
(In thousands)
  
 
  
   
   
   
 
Other comprehensive income (loss):
  
   
   
   
 
Change in unrealized gains and losses on investments
  
$
9,801
    
$
(3,166
)
  
$
1,577
    
$
8,212
  
Unrealized foreign currency translation adjustment
    
(1,116
)
    
392
      
-
      
(724
)
 
                                
Other comprehensive income (loss)
  
$
8,685
    
$
(2,774
)
  
$
1,577
    
$
7,488
  

 
Six Months Ended
June 30, 2012
 
  
   
   
Valuation
    
 
 
  
Before tax
    
Tax effect
    
allowance
    
Net of tax
  
 
(In thousands)
  
 
  
   
   
   
 
Other comprehensive income (loss):
  
   
   
   
 
Change in unrealized gains and losses on investments
  
$
(37,125
)
  
$
13,090
    
$
(13,671
)
  
$
(37,706
)
Unrealized foreign currency translation adjustment
    
551
      
(192
)
    
-
      
359
  
 
                                
Other comprehensive income (loss)
  
$
(36,574
)
  
$
12,898
    
$