UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission file number 1-10816

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN (State or other jurisdiction of incorporation or organization)		39-1486475 (I.R.S. Employer Identification No.)
250 E. KILBOURN AVENUE MILWAUKEE, WISCONSIN (Address of principal executive offices)		53202 (Zip Code)

(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 þ       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 o       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 þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

YES o       NO þ

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

CLASS OF STOCK		PAR VALUE				DATE		NUMBER OF SHARES
Common stock		$	1.00			10/31/09			125,101,817

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and December 31, 2008
(Unaudited)

						As adjusted
						(note 1)
		September 30,				December 31,
		2009				2008
		(In thousands of dollars)
ASSETS
Investment portfolio (notes 7 and 8):
Securities, available-for-sale, at fair value:
Fixed maturities (amortized cost, 2009-$7,572,232; 2008-$7,120,690)		$	7,851,897			$	7,042,903
Equity securities (cost, 2009-$2,861; 2008-$2,778)			2,894				2,633
Total investment portfolio			7,854,791				7,045,536
Cash and cash equivalents			869,722				1,097,334
Accrued investment income			90,447				90,856
Reinsurance recoverable on loss reserves			384,400				232,988
Prepaid reinsurance premiums			3,782				4,416
Premiums receivable			95,312				97,601
Home office and equipment, net			29,425				32,255
Deferred insurance policy acquisition costs			9,303				11,504
Income taxes recoverable			—				370,473
Other assets			143,809				163,771
Total assets		$	9,480,991			$	9,146,734
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves (note 12)		$	6,314,445			$	4,775,552
Premium deficiency reserves (note 12)			207,803				454,336
Unearned premiums			299,591				336,098
Short- and long-term debt (note 2)			384,690				698,446
Convertible debentures (note 3)			286,512				272,465
Income taxes payable			13,873				—
Other liabilities			324,976				175,604
Total liabilities			7,831,890				6,712,501
Contingencies (note 5)
Shareholders’ equity:
Common stock, $1 par value, shares authorized 460,000,000; shares issued, 09/30/2009 - 130,162,973 12/31/08 - 130,118,744; shares outstanding, 09/30/09 - 125,101,730 12/31/08 - 125,068,350			130,163				130,119
Paid-in capital			439,267				440,542
Treasury stock (shares at cost, 09/30/09 - 5,061,243 12/31/08 - 5,050,394)			(269,698	)			(276,873	)
Accumulated other comprehensive income (loss), net of tax (note 9)			144,545				(106,789	)
Retained earnings			1,204,824				2,247,234
Total shareholders’ equity			1,649,101				2,434,233
Total liabilities and shareholders’ equity		$	9,480,991			$	9,146,734

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
						As adjusted								As adjusted
						(note 1)								(note 1)
		2009				2008				2009				2008
		(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct		$	301,747			$	416,094			$	1,039,482			$	1,260,406
Assumed			826				3,315				3,133				9,317
Ceded			(24,319	)			(54,367	)			(86,465	)			(164,430	)
Net premiums written			278,254				365,042				956,150				1,105,293
Decrease (increase) in unearned premiums, net			15,261				(22,730	)			40,327				(67,201	)
Net premiums earned			293,515				342,312				996,477				1,038,092
Investment income, net of expenses			75,528				78,612				230,737				228,076
Realized investment gains, excluding other-than-temporary impairments (note 7)			33,483				59,582				65,844				56,633
Net investment impairment losses (note 7)			—				(31,669	)			(35,103	)			(40,177	)
Other revenue			10,811				12,795				45,048				27,416
Total revenues			413,337				461,632				1,303,003				1,310,040
Losses and expenses:
Losses incurred, net			971,043				788,272				2,498,567				2,168,063
Change in premium deficiency reserves (note 12)			(19,346	)			(204,240	)			(246,533	)			(626,919	)
Underwriting and other expenses, net			59,133				62,424				183,403				207,646
Reinsurance fee (note 4)			—				607				26,407				970
Interest expense			20,586				23,366				68,442				57,385
Total losses and expenses			1,031,416				670,429				2,530,286				1,807,145
Loss before tax and joint ventures			(618,079	)			(208,797	)			(1,227,283	)			(497,105	)
Benefit from income taxes (note 11)			(100,311	)			(90,060	)			(185,120	)			(222,852	)
Income from joint ventures, net of tax			—				3,352				—				24,486
Net loss		$	(517,768	)		$	(115,385	)		$	(1,042,163	)		$	(249,767	)
Loss per share (note 6):
Basic		$	(4.17	)		$	(0.93	)		$	(8.39	)		$	(2.26	)
Diluted		$	(4.17	)		$	(0.93	)		$	(8.39	)		$	(2.26	)
Weighted average common shares outstanding — diluted (shares in thousands, note 6)			124,296				123,834				124,180				110,647
Dividends per share		$	—			$	0.025			$	—			$	0.075

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Year Ended December 31, 2008 and Nine Months Ended September 30, 2009 (unaudited)

														Accumulated
														other
		Common				Paid-in				Treasury				comprehensive				Retained				Comprehensive
		stock				capital				stock				income (loss)				earnings				(loss) income
										(In thousands of dollars)
Balance, December 31, 2007		$	123,067			$	316,649			$	(2,266,364	)		$	70,675			$	4,350,316
Net loss			—				—				—				—				(525,356	)		$	(525,356	)
Change in unrealized investment gains and losses, net			—				—				—				(116,939	)			—				(116,939	)
Dividends declared			—				—				—				—				(8,159	)
Common stock shares issued			7,052				68,706				—				—				—
Reissuance of treasury stock, net			—				(41,686	)			1,989,491				—				(1,569,567	)
Equity compensation			—				20,562				—				—				—
Defined benefit plan adjustments, net			—				—				—				(44,649	)			—				(44,649	)
Unrealized foreign currency translation adjustment			—				—				—				(16,354	)			—				(16,354	)
Convertible debentures issued (note 3)			—				77,300				—				—				—
Other			—				(989	)			—				478				—				478
Comprehensive loss			—				—				—				—				—			$	(702,820	)
Balance, December 31, 2008, as adjusted (note 1)		$	130,119			$	440,542			$	(276,873	)		$	(106,789	)		$	2,247,234
Net loss			—				—				—				—				(1,042,163	)		$	(1,042,163	)
Change in unrealized investment gains and losses, net			—				—				—				230,870				—				230,870
Common stock shares issued			44				167				—				—				—
Reissuance of treasury stock, net			—				(11,652	)			7,175				—				(541	)
Equity compensation			—				10,210				—				—				—
Unrealized foreign currency translation adjustment			—				—				—				20,464				—				20,464
Other			—				—				—				—				294
Comprehensive loss			—				—				—				—				—			$	(790,829	)
Balance, September 30, 2009		$	130,163			$	439,267			$	(269,698	)		$	144,545			$	1,204,824

See accompanying notes to consolidated financial statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008
(Unaudited)

		Nine Months Ended
		September 30,
		2009				As adjusted (note 1) 2008
		(In thousands of dollars)
Cash flows from operating activities:
Net loss		$	(1,042,163	)		$	(249,767	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred insurance policy acquisition			5,974				7,736
Increase in deferred insurance policy acquisition costs			(3,773	)			(9,019	)
Depreciation and amortization			47,376				23,058
Decrease (increase) in accrued investment income			409				(20,303	)
Increase in reinsurance recoverable on loss reserves			(151,412	)			(289,129	)
Decrease in prepaid reinsurance premiums			634				1,165
Decrease in premium receivable			2,289				6,625
Decrease in book value of real estate owned			29,595				95,755
Increase in loss reserves			1,538,893				1,370,772
Decrease in premium deficiency reserve			(246,533	)			(626,919	)
(Decrease) increase in unearned premiums			(36,507	)			63,851
Deferred tax provision			146,217				280,621
Decrease in income taxes recoverable (current)			108,785				268,919
Equity earnings in joint ventures			—				(33,794	)
Distributions from joint ventures			—				22,195
Realized investment gains, excluding other-than-temporary impairments			(65,844	)			(56,633	)
Net investment impairment losses			35,103				40,177
Other			48,422				(2,341	)
Net cash provided by operating activities			417,465				892,969
Cash flows from investing activities:
Purchase of fixed maturities			(3,362,579	)			(2,703,798	)
Purchase of equity securities			(1,356	)			(65	)
Additional investment in joint ventures			—				(546	)
Sale of investment in joint ventures			—				150,316
Proceeds from sale of equity securities			1,273				—
Proceeds from sale of fixed maturities			2,525,731				1,287,236
Proceeds from maturity of fixed maturities			411,445				324,093
Increase in payable for securities			68,334				120,139
Net cash used in investing activities			(357,152	)			(822,625	)
Cash flows from financing activities:
Dividends paid to shareholders			—				(8,159	)
Repayment of note payable			(200,000	)			(100,000	)
Repayment of long-term debt			(87,659	)			—
(Repayment of) net proceeds from convertible debentures			(477	)			377,199
Reissuance of treasury stock			—				383,959
Common stock issued			211				75,758
Net cash (used in) provided by financing activities			(287,925	)			728,757
Net (decrease) increase in cash and cash equivalents			(227,612	)			799,101
Cash and cash equivalents at beginning of period			1,097,334				288,933
Cash and cash equivalents at end of period		$	869,722			$	1,088,034

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

Note 1 — Basis of presentation and summary of certain significant accounting policies

The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2008 included in our Annual Report on Form 10-K.

In the opinion of management such financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly present our financial position and results of operations for the periods indicated. We have considered subsequent events through the date of this filing, November 9, 2009. The results of operations for the nine months ended September 30, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009.

Capital

At September 30, 2009, MGIC’s policyholders position exceeded the required regulatory minimum by approximately $456 million, and we exceeded the required minimum by approximately $543 million on a combined statutory basis. (The combined figures give effect to reinsurance with subsidiaries of our holding company.) At September 30, 2009 MGIC’s risk-to-capital was 17.3:1 and was 19.7:1 on a combined statutory basis.

For some time, we have been working to implement a plan to write new mortgage insurance in MGIC Indemnity Corporation (“MIC”), a wholly owned subsidiary of MGIC. This plan is driven by our belief that MGIC will not meet regulatory capital requirements in Wisconsin (which would prevent MGIC from writing new business anywhere) or in certain jurisdictions (which would prevent MGIC from writing business in the particular jurisdiction) and may not be able to obtain appropriate waivers of these requirements. This could occur in the first quarter of 2010, or earlier; the timing will primarily depend on the level of new loan default notices and the claim rate associated with loans in default. In addition to Wisconsin, these capital requirements are present in 16 jurisdictions while the remaining jurisdictions in which MGIC does business do not have specific capital requirements applicable to mortgage insurers. Before MIC can begin writing new business, the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) must specifically authorize MIC to do so and MIC must obtain or reactivate licenses in the jurisdictions where it will transact business. In addition, as a practical matter, MIC’s ability to write mortgage insurance depends on being approved as an eligible mortgage insurer by Fannie Mae and/or Freddie Mac (together, the “GSEs”).

On October 14, 2009, we, MGIC and MIC entered into an agreement (the “Agreement”) with Fannie Mae under which MGIC agreed to contribute $200 million to MIC and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Agreement. The contribution to MIC was made on October 21, 2009. Under the Agreement, MIC will be eligible to write mortgage insurance only if the OCI grants MGIC a waiver from Wisconsin’s capital requirements and only in those 16 jurisdictions in which MGIC cannot write new insurance due to MGIC’s failure to meet regulatory capital requirements applicable to mortgage insurers and if MGIC fails to obtain relief from those requirements or a specified waiver of them. We expect MGIC will be able to obtain waivers in a number of these jurisdictions such that MGIC, rather than MIC, will write new business there. The Agreement, including certain restrictions imposed on us, MGIC and MIC, is summarized more fully in, and included as an exhibit to, our Form 8-K filed with the Securities and Exchange Commission on October 16, 2009.

Under the Agreement, MIC has been approved as an eligible mortgage insurer by Fannie Mae only though December 31, 2011. Whether MIC will continue as an eligible mortgage insurer after that date will be determined by Fannie Mae’s mortgage insurer eligibility requirements then in effect. Further, under the Agreement we cannot capitalize MIC with more than a $200 million contribution, without prior approval from Fannie Mae, which limits the amount of business MIC can write. We believe that the amount of capital that we have contributed to MIC will be more than sufficient to write business for the term of the Agreement in the jurisdictions in which, giving effect to our expectation that MGIC will obtain waivers of regulatory capital requirements in certain jurisdictions as referred to above, MIC is eligible to do so under the Agreement. There can be no assurances, however, that in fact MIC’s capital will be sufficient to permit this level of writings.

We have been working closely with Freddie Mac to approve MIC as an eligible mortgage insurer. Freddie Mac has informed us that they will need additional analysis prior to approving MIC as an eligible mortgage insurer. This analysis could take some time to complete. There can be no assurance that Freddie Mac will approve MIC as an eligible mortgage insurer.

We are also working closely with the OCI to receive the approvals that MIC requires to begin writing new insurance. While in July 2009 the OCI approved a transaction under which we would have contributed more than $200 million to MIC and MIC would have written mortgage insurance in all jurisdictions in place of MGIC, the OCI has not approved the plan to write mortgage insurance through MIC contemplated by the Agreement nor has it yet granted MGIC a waiver from the regulatory capital requirements in Wisconsin. There can be no assurance that we will be able to obtain, in a timely fashion or at all, the approvals from OCI necessary to allow MGIC to continue to write new insurance or the approvals necessary for MIC to write new insurance in any jurisdiction. Similarly, there can be no assurances that MIC will receive the necessary approvals from any or all of the jurisdictions in which MGIC would be prohibited from doing so due to MGIC’s failure to meet applicable regulatory capital requirements.

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 regulatory capital requirements applicable to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the jurisdictions in which MIC

will not write business. It is also possible that the OCI could take actions that would prohibit MGIC and/or MIC from writing new business in any jurisdiction.

A failure to meet regulatory capital requirements does not mean that MGIC does not have sufficient resources to pay claims on its insurance. Even in scenarios in which losses materially exceed those that would result in not meeting regulatory requirements, we believe that we have claims paying resources at MGIC that exceed our claim obligations on our insurance in force. Our estimates of our claims paying resources and claim obligations are based on various assumptions, including our anticipated rescission activity.

Beginning with this quarterly filing, our financial statement disclosures have been modified to eliminate references to legacy accounting pronouncements in accordance with the Codification of accounting standards issued by the Financial Accounting Standards Board (FASB). The Codification, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009, is now the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.

In June 2009 new accounting guidance intended to improve financial reporting by companies involved with variable interest entities was issued. The guidance is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the provisions of this guidance and the impact, if any, on our financial statements and disclosures.

In May 2009 new accounting guidance regarding subsequent events was issued. The objective of the guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. We have applied these requirements beginning with the quarter ended June 30, 2009.

Effective January 1, 2009 we adopted new accounting guidance regarding accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. The guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The guidance requires retrospective application. As such, amounts relating to 2008 have been retrospectively adjusted to reflect our adoption of this guidance.

The following tables show the impact of our adoption of this guidance on our 2008 financial results:

     CONSOLIDATED BALANCE SHEET

						As originally
		As adjusted				reported
		December 31,				December 31,
		2008				2008
		(Unaudited)				(Audited)
		(in thousand of dollars)
Income taxes recoverable		$	370,473			$	406,568
Convertible debentures			272,465				375,593
Shareholders’ equity			2,434,233				2,367,200

     CONSOLIDATED STATEMENT OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30, 2008								September 30, 2008
						As originally								As originally
		As adjusted				reported				As adjusted				reported
						(Unaudited)
						(in thousand of dollars, except per share data)
Interest expense		$	23,366			$	20,119			$	57,385			$	50,924
Benefit from income taxes			(90,060	)			(88,924	)			(222,852	)			(220,591	)
Net loss			(115,385	)			(113,274	)			(249,767	)			(245,567	)
Diluted loss per share			(0.93	)			(0.91	)			(2.26	)			(2.22	)

In addition the adoption of this guidance will result in an increase to interest expense of $16.3 million for 2009, $20.4 million for 2010, $25.5 million for 2011, $31.7 million for 2012 and $9.0 million for 2013. These increases, and those shown in the tables above, result from our Convertible Junior Subordinated Debentures issued in 2008 and discussed in Note 3.

Effective January 1, 2009 we adopted new accounting guidance regarding participating securities. The standard clarifies that share-based payment awards that entitle holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the calculation of basic earnings per share. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, interim periods within those years, and on a retrospective basis for all historical periods presented. The adoption of this guidance did not have an impact on our calculations of basic and diluted earnings per share due to our current net loss position.

During the second quarter of 2009, we adopted new accounting guidance regarding the recognition and presentation of other-than-temporary impairments. The new guidance revises the recognition and reporting requirements for other-than-temporary impairments on our fixed income securities. In the second quarter of 2009, we also adopted additional application guidance on measuring fair value in less active markets.

The adoption of this guidance did not have a material impact on our financial condition or results of operations. (See Note 7.)

In December 2008, new guidance that provides additional information on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan was issued. The guidance is effective for fiscal years ending after December 15, 2009. We are currently evaluating the provisions of this statement and the impact this statement will have on our disclosures.

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2008 amounts to conform to 2009 presentation.

Note 2 — Short- and long-term debt, excluding convertible debentures discussed in Note 3

In June 2009 we repaid the $200 million that was then outstanding under our bank revolving credit facility and terminated the facility. At December 31, 2008 we had $200 million outstanding under that facility, which was scheduled to expire in March 2010.

In 2009, through September 30, 2009, we repurchased approximately $113.9 million in par value of our 5.625% Senior Notes due in September 2011. We recognized a gain on the repurchases of approximately $26.3 million, which is included in other revenue on the Consolidated Statement of Operations for the nine months ended September 30, 2009. At September 30, 2009 we had approximately $86.1 million, 5.625% Senior Notes due in September 2011 and $300 million, 5.375% Senior Notes due in November 2015 outstanding. At December 31, 2008 we had $200 million, 5.625% Senior Notes due in September 2011 and $300 million, 5.375% Senior Notes due in November 2015 outstanding. Covenants in the Senior Notes include the requirement that there be no liens on the stock of the designated subsidiaries unless the Senior Notes are equally and ratably secured; that there be no disposition of the stock of designated subsidiaries unless all of the stock is disposed of for consideration equal to the fair market value of the stock; and that we and the designated subsidiaries preserve our corporate existence, rights and franchises unless we or such subsidiary determines that such preservation is no longer necessary in the conduct of its business and that the loss thereof is not disadvantageous to the Senior Notes. A designated subsidiary is any of our consolidated subsidiaries which has shareholder’s equity of at least 15% of our consolidated shareholders equity. We believe we were in compliance with all covenants at September 30, 2009.

If (i) we fail to meet any of the covenants of the Senior Notes discussed above or (ii) we fail to make a payment of principal of the Senior Notes when due or a payment of interest on the Senior Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the applicable series of Senior Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of either series of our Senior Notes each would have the right to accelerate the maturity of that debt. In addition, the Trustee of these two issues of

Senior Notes could, independent of any action by holders of Senior Notes, accelerate the maturity of the Senior Notes.

At September 30, 2009 and December 31, 2008, the fair value of the amount outstanding under our Senior Notes was $288.9 million and $338.3 million, respectively. The fair value of amounts outstanding under our credit facility at December 31, 2008 was $200 million. The fair value of our credit facility was approximated at par and the fair value of our Senior Notes was determined using publicly available trade information.

Interest payments on all long-term and short-term debt, excluding the convertible debentures, were $22.7 million and $29.8 million for the nine months ended September 30, 2009 and 2008, respectively.

Note 3 — Convertible debentures and related derivatives

In March and April 2008 we completed the sale of $390 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063. The debentures have an effective interest rate of 19% that reflects our non-convertible debt borrowing rate at the time of issuance. For more information about the effective interest rate and related effect on interest expense, see the discussion of convertible debt instruments in Note 1 — New Accounting Guidance. At September 30, 2009 and December 31, 2008 we had $389.5 million and $390.0 million, respectively, of principal amount outstanding on the convertible debentures with the amortized value reflected as a liability on our consolidated balance sheet of $286.5 million and $272.5 million, respectively, with the unamortized discount reflected in equity. At September 30, 2009 we also had $18.3 million of deferred interest outstanding on the convertible debentures which is included in other liabilities on the consolidated balance sheet.

The debentures were sold in private placements to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. 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. 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 in “Note 2 — Short- and long-term debt, excluding convertible debentures discussed in Note 3” would not allow the acceleration of amounts that we owe under the debentures. However, violations of the events of default under the Indenture, including a failure to pay principal when due under the debentures and certain events of bankruptcy, insolvency or receivership involving our holding company would allow acceleration of amounts that we owe under the debentures.

Interest on the debentures that would have been payable on the scheduled interest payment dates has been deferred for 10 years past the scheduled payment date. During this 10-year deferral period the deferred interest will continue to accrue and

compound semi-annually to the extent permitted by applicable law at an annual rate of 9%. We also have the right to defer interest that is payable on subsequent scheduled interest payment dates if we give notice as required by the debentures. Any deferral of such interest would be on terms equivalent to those described above.

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

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

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

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

The provisions of the Alternative Payment Mechanism are complex. The description above is not intended to be complete in all respects. Moreover, that description is qualified in its entirety by the terms of the debentures, which are contained in the Indenture, dated as of March 28, 2008, between us and U.S. Bank National Association. The Indenture is filed as Exhibit 4.6 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

The debentures rank junior to all of our existing and future senior indebtedness. The net proceeds of the debentures were approximately $377 million. A portion of the net proceeds of the debentures and a concurrent offering of common stock was used to increase the capital of MGIC and a portion was used for our general corporate purposes. Debt issuance costs are being amortized over the expected life of five years to interest expense.

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

The debentures are currently convertible, at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 common shares per $1,000 principal amount of debentures at any time prior to the maturity date. This represents an initial conversion price of approximately $13.50 per share. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for the 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 the second quarter of 2009, we issued 44,220 shares of our common stock on conversion of $477,000 principal amount of our convertible debentures.

In lieu of issuing shares of common stock upon conversion of the debentures occurring after April 6, 2013, we may, at our option, make a cash payment to converting holders equal to the value of all or some of the shares of our common stock otherwise issuable upon conversion.

The fair value of the convertible debentures was approximately $290.2 million and $145.7 million, respectively, at September 30, 2009 and December 31, 2008, as determined using available pricing for these debentures or similar instruments.

Note 4 — Reinsurance

Effective January 1, 2009, we are no longer ceding new business under excess of loss reinsurance treaties with lender captive reinsurers. Loans reinsured on an excess of loss basis through December 31, 2008 will run off pursuant to the terms of the particular captive arrangement. New business remains eligible to be ceded under quota share reinsurance arrangements, limited to a 25% cede rate.

The reinsurance recoverable on loss reserves related to captive agreements was approximately $354 million at September 30, 2009. The total fair value of the trust fund assets under our captive agreements at September 30, 2009 was approximately $604 million. During the first nine months of 2009, $41 million of trust fund assets were transferred to us as a result of captive terminations. The transferred funds resulted in an increase in our investment portfolio (including cash and cash equivalents) and there was a corresponding decrease in our reinsurance recoverable on loss reserves, which is offset by a decrease in our net losses paid. Subsequent to the third quarter of 2009, through the date that this quarterly report was finalized, an additional $74 million of trust fund assets were transferred to us as a result of captive terminations.

In June 2008 we entered into a reinsurance agreement that was effective on the risk associated with up to $50 billion of qualifying new insurance written each calendar year. The term of the reinsurance agreement began April 1, 2008 and was scheduled to end on December 31, 2010, subject to two one-year extensions that could have been exercised by the reinsurer. Effective March 20, 2009, we terminated this reinsurance agreement. The termination resulted in a reinsurance fee of $26.4 million as reflected in our results of operations for the nine months ended September 30, 2009. There are no further obligations under this reinsurance agreement.

Note 5 — Litigation and contingencies

In addition to the matters described below, we are involved in other litigation in the ordinary course of business. In our opinion, the ultimate resolution of this ordinary course litigation will not have a material adverse effect on our financial position or results of operations.

Consumers are bringing a growing number of lawsuits against home mortgage lenders and settlement service providers. Seven 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 late December 2004 following denial of class certification in June 2004. Since December 2006, class action litigation was separately brought against a number of large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. While we are not a defendant in any of these cases, there can be no assurance that we will not be subject to future litigation under RESPA or FCRA or that the outcome of any such litigation would not have a material adverse effect on us.

We are subject to comprehensive, detailed regulation by state insurance departments. These regulations are principally designed for the protection of our insured policyholders, rather than for the benefit of investors. Although their scope varies, state insurance laws generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. Given the recent significant losses incurred by many insurers in the mortgage and financial guaranty industries, our insurance subsidiaries have been subject to heightened scrutiny by insurance regulators. State insurance regulatory authorities could take actions, including changes in capital requirements or termination of waivers of capital requirements, that could have a material adverse effect on us.

In June 2005, in response to a letter from the New York Insurance Department, we provided information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation. In February 2006, the New York Insurance Department requested MGIC to review its premium rates in New York and to file adjusted rates based on recent years’ experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the New York Insurance Department that it believes its premium rates are reasonable and that, given the nature of mortgage insurance risk, premium rates should not be determined only by the

experience of recent years. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce, which regulates insurance, we provided the Department with information about captive mortgage reinsurance and certain other matters. We subsequently provided additional information to the Minnesota Department of Commerce, and beginning in March 2008 that Department has sought additional information as well as answers to questions regarding captive mortgage reinsurance on several occasions. In June 2008, we received a subpoena from the Department of Housing and Urban Development, commonly referred to as HUD, seeking information about captive mortgage reinsurance similar to that requested by the Minnesota Department of Commerce, but not limited in scope to the state of Minnesota. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

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

In October 2007, the Division of Enforcement of the Securities and Exchange Commission requested that we voluntarily furnish documents and information primarily relating to C-BASS, the now-terminated merger with Radian and the subprime mortgage assets “in the Company’s various lines of business.” We have provided responsive documents and/or other information to the Securities and Exchange Commission and understand this matter is ongoing.

Five previously-filed purported class action complaints filed against us and several of our executive officers were consolidated in March 2009 in the United States District Court for the Eastern District of Wisconsin and Fulton County Employees’ Retirement System was appointed as the lead plaintiff. The lead plaintiff filed a Consolidated Class Action Complaint (the “Complaint”) on June 22, 2009. Due in part to its length and structure, it is difficult to summarize briefly the allegations in the Complaint but it appears the allegations are that we and our officers named in the Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about (i) loss development in our insurance in force, and (ii) C-BASS, including its liquidity. The Complaint also names two officers of C-BASS with respect to the Complaint’s allegations regarding C-BASS. The purported class period covered by the Complaint begins on October 12, 2006 and ends on February 12, 2008. The Complaint seeks damages based on purchases of our stock during this time period at prices that were allegedly inflated as a result of the purported misstatements and omissions. With limited exceptions, our bylaws provide that our officers are entitled to indemnification from us for claims against them of the type alleged in the Complaint. We filed a motion to dismiss the Complaint in August 2009 and briefing is expected to be completed in November 2009. We are unable to predict the outcome of these consolidated cases or estimate our associated expenses or possible losses. Other lawsuits alleging violations of the securities laws could be brought against us.

Two law firms have issued press releases to the effect that they are investigating whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plan’s investment in or holding of our common stock. With limited exceptions, our bylaws provide that the plan fiduciaries are entitled to indemnification from us for claims against them. We intend to defend vigorously any proceedings that may result from these investigations.

Historically, claims submitted to us on policies we rescinded were not a material portion of our claims resolved during a year. However, beginning in 2008 rescissions have materially mitigated our paid losses. If an insured disputes our right to rescind coverage, whether the requirements to rescind are met ultimately would be determined by arbitration or judicial proceedings. Objections to rescission may be made several years after we have rescinded an insurance policy. We are not involved in arbitration or judicial proceedings regarding a material amount of our rescissions. However, we continue to have discussions with lenders regarding their objections to rescissions that in the aggregate are material.

On June 1, 2007, as a result of an examination by the Internal Revenue Service (“IRS”) for taxable years 2000 through 2004, we received a Revenue Agent Report (“RAR”). The adjustments reported on the RAR substantially increase taxable income for those tax years and resulted in the issuance of an assessment for unpaid taxes totaling $189.5 million in taxes and accuracy-related penalties, plus applicable interest. We have agreed with the IRS on certain issues and paid $10.5 million in additional taxes and interest. The remaining open issue relates to our treatment of the flow through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). The IRS has indicated that it does not believe that, for various reasons, we have established sufficient tax basis in the REMIC residual interests to deduct the losses from taxable income. We disagree with this conclusion and believe that the flow through income and loss from these investments was properly reported on our federal income tax returns in accordance with applicable tax laws and regulations in effect during the periods involved and have appealed these adjustments. The appeals process may take some time and a final resolution may not be reached until a date many months or years into the future. On July 2, 2007, we made a payment of $65.2 million to the United States Department of the Treasury to eliminate the further accrual of interest. Although the resolution of this issue is uncertain, we believe that sufficient provisions for income taxes have been made for potential liabilities that may result. If the resolution of this matter differs materially from our estimates, it could have a material impact on our effective tax rate, results of operations and cash flows.

The IRS is presently examining our federal income tax returns for 2005 through 2007. We have not received any proposed adjustments to taxable income or assessments from the IRS related to these years. We believe that income taxes related to these years have been properly provided for in our financial statements.

Under our contract underwriting agreements, we may be required to provide certain remedies to our customers if certain standards relating to the quality of our underwriting work are not met. The cost of remedies provided by us to customers for failing to meet these standards has not been material to our financial position or results of operations for the nine months ended September 30, 2009 and 2008. However, a generally positive economic environment for residential real estate that continued until

approximately 2007 may have mitigated the effect of some of these costs, and claims for remedies may be made a number of years after the underwriting work was performed. A material portion of our new insurance written through the flow channel in recent years involved loans for which we provided contract underwriting services. We believe the rescission of mortgage insurance coverage on loans on which we also provided contract underwriting services makes a claim for a contract underwriting remedy more likely to occur. In the third quarter of 2009, we experienced an increase in claims for contract underwriting remedies, which may continue. Hence, there can be no assurance that contract underwriting remedies will not be material in the future.

Note 6 — Earnings (loss) per share

Our basic EPS is based on the weighted average number of common shares outstanding, which excludes participating securities with non-forfeitable rights to dividends of 1.8 million and 1.6 million, respectively, for the three months ended September 30, 2009 and 2008 and 1.9 million and 1.4 million, respectively for the nine months ended September 30, 2009 and 2008 because they were anti-dilutive due to our reported net loss. Typically, diluted EPS is based on the weighted average number of common shares outstanding plus common stock equivalents which include certain stock awards, stock options and the dilutive effect of our convertible debentures (issued in March 2008). 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. The following is a reconciliation of the weighted average number of shares; however for the three months ended September 30, 2009 and 2008 common stock equivalents of 32.1 million and 27.3 million, respectively, and for the nine months ended September 30, 2009 and 2008 common stock equivalents of 33.5 million and 20.8 million, respectively, were not included because they were anti-dilutive.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(in thousands)
Weighted-average shares — Basic			124,296				123,834				124,180				110,647
Common stock equivalents			—				—				—				—
Weighted-average shares — Diluted			124,296				123,834				124,180				110,647

Note 7 — Investments

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2009 and December 31, 2008 are shown below. Debt securities consist of fixed maturities and short-term investments.

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
September 30, 2009		Cost				Gains				Losses (1)				Value
		(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	569,285			$	9,364			$	(1,333	)		$	577,316
Obligations of U.S. states and political subdivisions			5,165,290				268,570				(36,179	)			5,397,681
Corporate debt securities			1,599,410				45,135				(5,243	)			1,639,302
Residential mortgage-backed securities			126,566				4,485				(6,731	)			124,320
Debt securities issued by foreign sovereign governments			111,681				2,180				(583	)			113,278
Total debt securities			7,572,232				329,734				(50,069	)			7,851,897
Equity securities			2,861				34				(1	)			2,894
Total investment portfolio		$	7,575,093			$	329,768			$	(50,070	)		$	7,854,791

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
December 31, 2008:		Cost				Gains				Losses				Value
		(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	168,917			$	21,297			$	(405	)		$	189,809
Obligations of U.S. states and political subdivisions			6,401,903				141,612				(237,575	)			6,305,940
Corporate debt securities			314,648				6,278				(4,253	)			316,673
Residential mortgage-backed securities			151,774				3,307				(14,251	)			140,830
Debt securities issued by foreign sovereign governments			83,448				6,203				—				89,651
Total debt securities			7,120,690				178,697				(256,484	)			7,042,903
Equity securities			2,778				—				(145	)			2,633
Total investment portfolio		$	7,123,468			$	178,697			$	(256,629	)		$	7,045,536

The amortized cost and fair values of debt securities at September 30, 2009 and December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most auction rate and mortgage-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.

		Amortized				Fair
September 30, 2009		Cost				Value
		(In thousands of dollars)
Due in one year or less		$	48,591			$	49,009
Due after one year through five years			2,297,023				2,361,658
Due after five years through ten years			1,658,842				1,737,149
Due after ten years			2,925,260				3,079,805
			6,929,716				7,227,621
Auction rate securities (1)			515,950				499,956
Residential mortgage-backed securities			126,566				124,320
Total at September 30, 2009		$	7,572,232			$	7,851,897

		Amortized				Fair
December 31, 2008		Cost				Value
		(In thousands of dollars)
Due in one year or less		$	432,727			$	435,045
Due after one year through five years			1,606,915				1,630,086
Due after five years through ten years			1,230,379				1,283,317
Due after ten years			3,174,995				3,029,725
			6,445,016				6,378,173
Auction rate securities (1)			523,900				523,900
Residential mortgage-backed securities			151,774				140,830
Total at December 31, 2008		$	7,120,690			$	7,042,903

At September 30, 2009 and December 31, 2008, the investment portfolio had gross unrealized losses of $50.1 million and $256.6 million, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:

		Less Than 12 Months								12 Months or Greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
September 30, 2009		Value				Losses				Value				Losses				Value				Losses
		(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	150,178			$	1,161			$	1,459			$	172			$	151,637			$	1,333
Obligations of U.S. states and political subdivisions			460,684				12,638				484,067				23,541				944,751				36,179
Corporate debt securities			260,662				5,189				1,540				54				262,202				5,243
Residential mortgage-backed securities			—				—				33,479				6,731				33,479				6,731
Debt issued by foreign sovereign governments			30,542				583				—				—				30,542				583
Equity securities			1,285				1				—				—				1,285				1
Total investment portfolio		$	903,351			$	19,572			$	520,545			$	30,498			$	1,423,896			$	50,070

		Less Than 12 Months								12 Months or Greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2008		Value				Losses				Value				Losses				Value				Losses
		(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	13,106			$	245			$	1,242			$	160			$	14,348			$	405
Obligations of U.S. states and political subdivisions			1,640,406				102,437				552,191				135,138				2,192,597				237,575
Corporate debt securities			72,711				4,127				1,677				126				74,388				4,253
Residential mortgage-backed securities			41,867				14,251				—				—				41,867				14,251
Debt issued by foreign sovereign governments			—				—				—				—				—				—
Equity securities			227				10				2,062				135				2,289				145
Total investment portfolio		$	1,768,317			$	121,070			$	557,172			$	135,559			$	2,325,489			$	256,629

There were 261 securities in an unrealized loss position at September 30, 2009. The unrealized losses in all categories of our investments were primarily caused by the difference in interest rates at September 30, 2009 and December 31, 2008, compared to the interest rates at the time of purchase. Of those securities in an unrealized loss position greater than 12 months at September 30, 2009, 109 securities had a fair value greater than 80% of amortized cost and 7 securities had a fair value less than 80% of amortized cost.

In April 2009, new accounting guidance regarding the recognition and presentation of other-than-temporary impairments were issued. The new guidance require us to separate an other-than-temporary impairment (“OTTI”) of a debt security into two components when there are credit related losses associated with the impaired debt security for which we assert that we do not have the intent to sell the security, and it is more likely than not that we will not be required to sell the security before recovery of

our cost basis. Under this guidance the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors (such as changes in interest rates or market conditions) is recorded as a component of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that we will have to sell the debt security prior to the anticipated recovery, the decline in fair value below amortized cost is recognized as an OTTI in earnings. In periods after recognition of an OTTI on debt securities, we account for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income. This guidance was effective beginning with the quarter ending June 30, 2009.

Each quarter we perform reviews of our investments in order to determine whether declines in fair value below amortized cost were considered other-than-temporary in accordance with applicable guidance. In evaluating whether a decline in fair value is other-than-temporary, we consider several factors including, but not limited to:

	•		our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery;
	•		extent and duration of the decline;
	•		failure of the issuer to make scheduled interest or principal payments;
	•		change in rating below investment grade; and
	•		adverse conditions specifically related to the security, an industry, or a geographic area.

Under the current guidance a debt security impairment is deemed other than temporary if (1) we either intend to sell the security, or its is more likely than not that we will be required to sell the security before recovery or (2) we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security. During the third quarter of 2009 we had no OTTI recognized in earnings. During the first nine months of 2009 we recognized OTTI in earnings of $35.1 million.

The net realized investment gains (losses) are as follows:

		Three months ended								Nine months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands of dollars)
Net realized investment gains (losses) and OTTI on investments:
Fixed maturities		$	33,074			$	(34,209	)		$	30,035				(45,097	)
Equity securities			40				58				181				51
Joint ventures			—				62,769				—				62,495
Other			369				(705	)			525				(993	)
		$	33,483			$	27,913			$	30,741				16,456

In the third quarter of 2009, there were gross realized gains on the sale of fixed income investments of $34.8 million offset by gross realized losses on the sale of fixed income securities of $1.3 million. In the first nine months of 2009, there were gross realized gains on the sale of fixed income investments of $82.2 million offset by gross realized losses on the sale of fixed income securities of $16.4 million and OTTI impairments of $35.1 million. The net realized gains on investments during 2009 was primarily the result of reducing the proportion of our investment portfolio in tax exempt municipal securities while increasing the proportion of taxable securities principally since the tax benefits of holding tax exempt municipal securities are no longer available based on our current net loss position. The majority of the gross realized losses on sales during 2009 were due to credit concerns related to these securities which became more pronounced in the first half of 2009.

Note 8 — Fair value measurements

We adopted fair value accounting guidance that became effective January 1, 2008. This guidance address aspects of the expanding application of fair-value accounting. The guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements regarding fair-value measurements and provides companies with an option to report selected financial assets and liabilities at fair value with changes in fair value reported in earnings. The option to account for selected financial assets and liabilities at fair value is made on an instrument-by-instrument basis at the time of acquisition. For the nine months ended September 30, 2009 and 2008, we did not elect the fair value option for any financial instruments acquired for which the primary basis of accounting is not fair value.

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

			Level 1 — Quoted prices for identical instruments in active markets that we have the ability to access. Financial assets utilizing Level 1 inputs include certain U.S. Treasury securities and obligations of the U.S. government.
			Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs,

			other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs 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, corporate, auction rate (backed by student loans) and mortgage-backed securities. Non-financial assets which utilize Level 3 inputs include real estate acquired through claim settlement. Additionally, financial liabilities utilizing Level 3 inputs consisted of derivative financial instruments.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed throughout this process which includes 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. 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 and liabilities classified as Level 3 are as follows:

•

Securities available-for-sale classified in Level 3 are not readily marketable and are valued using internally developed models based on the present value of expected cash flows. Our Level 3 securities primarily consist of auction rate securities as observable inputs or value drivers are unavailable due to events described in Note 4 of our Notes to Financial Statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K. 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, 2008 and September 30, 2009. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such

securities given the current liquidity risk associated with them. The DCF model is based on the following key assumptions.

	•		Nominal credit risk as securities are ultimately guaranteed by the United States Department of Education;
	•		Liquidity by December 31, 2012;
	•		Continued receipt of contractual interest; and
	•		Discount rates incorporating at least a 2.00% spread for liquidity risk.

The remainder of our level 3 securities are valued based on the present value of expected cash flows utilizing data provided by the trustees.

•

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

Fair value measurements for items measured at fair value included the following as of September 30, 2009 and December 31, 2008:

						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
						(in thousand of dollars)
September 30, 2009
Assets
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	577,316			$	577,316			$	—			$	—
Obligations of U.S. states and political subdivisions			5,397,681				—				5,019,180				378,501
Corporate debt securities			1,639,302				2,329				1,505,141				131,832
Residential mortgage-backed securities			124,320				26,698				97,622				—
Debt securities issued by foreign sovereign governments			113,278				102,147				11,131				—
Total debt securities			7,851,897				708,490				6,633,074				510,333
Equity securities			2,894				2,573				—				321
Total investments		$	7,854,791			$	711,063			$	6,633,074			$	510,654
Real estate acquired (1)			3,263				—				—				3,263
December 31, 2008
Assets
Total investments		$	7,045,536			$	281,248			$	6,218,338			$	545,950
Real estate acquired (1)			32,858				—				—				32,858

For assets and liabilities measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2009 and 2008 is as follows:

		Obligations of U.S.
		States and Political				Corporate Debt				Equity				Total				Real Estate
		Subdivisions				Securities				Securities				Investments				Acquired
						(in thousand of dollars)
Balance at June 30, 2009		$	386,338			$	134,070			$	321			$	520,729			$	7,858
Total realized/unrealized losses:
Included in earnings and reported as realized investment losses, net			—				—				—				—				—
Included in earnings and reported as losses incurred, net			—				—				—				—				585
Included in other comprehensive income			(5,674	)			(2,038	)			—				(7,712	)			—
Purchases, issuances and settlements			(2,163	)			(200	)			—				(2,363	)			(5,180	)
Transfers in and/or out of Level 3			—				—				—				—				—
Balance at September 30, 2009		$	378,501			$	131,832			$	321			$	510,654			$	3,263
Amount of total losses included in earnings for the three month period ended September 30, 2009 attributable to the change in unrealized losses on assets still held at September 30, 2009		$	—			$	—			$	—			$	—			$	(122	)

		Obligations of U.S.
		States and Political				Corporate Debt				Equity				Total				Real Estate
		Subdivisions				Securities				Securities				Investments				Acquired
						(in thousands of dollars)
Balance at December 31, 2008		$	395,388			$	150,241			$	321			$	545,950			$	32,858
Total realized/unrealized losses:
Included in earnings and reported as realized investment losses, net			—				(10,107	)			—				(10,107	)			—
Included in earnings and reported as losses incurred, net			—				—				—				—				(1,304	)
Included in other comprehensive income			(11,777	)			(3,467	)			—				(15,244	)			—
Purchases, issuances and settlements			(5,110	)			(4,835	)			—				(9,945	)			(28,291	)
Transfers in and/or out of Level 3			—				—				—				—				—
Balance at September 30, 2009		$	378,501			$	131,832			$	321			$	510,654			$	3,263
Amount of total losses included in earnings for the nine month period ended September 30, 2009 attributable to the change in unrealized losses on assets still held at September 30, 2009		$	—			$	(10,107	)		$	—			$	(10,107	)		$	(413	)

						Real Estate
		Total Investments				Acquired				Other Liabilities
		(in thousands of dollars)
Balance at June 30, 2008		$	37,348			$	64,619			$	(22,157	)
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment losses, net			(8,157	)			—				—
Included in earnings and reported as other revenue			—				—				—
Included in earnings and reported as losses incurred, net			—				(837	)			—
Included in other comprehensive income			(750	)			—				—
Purchases, issuances and settlements			323				(14,339	)			22,157
Transfers in and/or out of Level 3			—				—				—
Balance at September 30, 2008		$	28,764			$	49,443			$	—
Amount of total losses included in earnings for the three month period ended September 30, 2008 attributable to the change in unrealized gains (losses) on assets (liabilities) still held at September 30, 2008		$	(6,278	)		$	(4,230	)		$	—

						Real Estate
		Total Investments				Acquired				Other Liabilities
		(in thousands of dollars)
Balance at January 1, 2008		$	37,195			$	145,198			$	(12,132	)
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment losses, net			(14,211	)			—				—
Included in earnings and reported as other revenue			—				—				(6,823	)
Included in earnings and reported as losses incurred, net			—				(18,595	)			—
Included in other comprehensive income			2,793				—				—
Purchases, issuances and settlements			2,987				(77,160	)			18,955
Transfers in and/or out of Level 3			—				—				—
Balance at September 30, 2008		$	28,764			$	49,443			$	—
Amount of total losses included in earnings for the nine month period ended September 30, 2008 attributable to the change in unrealized gains (losses) on assets (liabilities) still held at September 30, 2008		$	(12,156	)		$	(12,388	)		$	—

Note 9 — Comprehensive income

Our total comprehensive income was as follows:

		Three Months Ended								Nine Months Ended
		Septemer 30,								September 30,
		2009				2008				2009				2008
						(In thousands of dollars)
Net loss		$	(517,768	)		$	(115,385	)		$	(1,042,163	)		$	(249,767	)
Other comprehensive income (loss)			146,004				(126,219	)			251,334				(185,967	)
Total comprehensive loss		$	(371,764	)		$	(241,604	)		$	(790,829	)		$	(435,734	)
Other comprehensive income (loss) (net of tax):
Change in unrealized gains and losses on investments		$	140,193			$	(110,989	)			230,870				(178,293	)
Unrealized foreign currency translation adjustment			5,811				(15,607	)			20,464				(7,761	)
Other			—				377				—				87
Other comprehensive income (loss)		$	146,004			$	(126,219	)		$	251,334			$	(185,967	)