form10q.htm


FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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   T
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 T
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   T

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
04/30/10
200,445,416
 


 
 

 

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2010 (Unaudited) and December 31, 2009

   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(In thousands of dollars)
 
Investment portfolio (notes 7 and 8):
           
Securities, available-for-sale, at fair value:
           
Fixed maturities (amortized cost, 2010-$7,301,464; 2009-$7,091,840)
  $ 7,467,294     $ 7,251,574  
Equity securities (cost, 2010-$2,922; 2009-$2,892)
    2,943       2,891  
                 
Total investment portfolio
    7,470,237       7,254,465  
                 
Cash and cash equivalents
    818,123       1,185,739  
Accrued investment income
    78,285       79,828  
Reinsurance recoverable on loss reserves (note 4)
    339,427       332,227  
Prepaid reinsurance premiums
    3,342       3,554  
Premiums receivable
    86,749       90,139  
Home office and equipment, net
    28,745       29,556  
Deferred insurance policy acquisition costs
    8,689       9,022  
Income taxes recoverable (note 11)
    266,905       275,187  
Other assets
    149,915       144,702  
Total assets
  $ 9,250,417     $ 9,404,419  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities:
               
Loss reserves (note 12)
  $ 6,648,106     $ 6,704,990  
Premium deficiency reserves (note 12)
    179,620       193,186  
Unearned premiums
    265,052       280,738  
Short- and long-term debt (note 2)
    377,156       377,098  
Convertible debentures (note 3)
    297,321       291,785  
Other liabilities
    325,208       254,041  
                 
Total liabilities
    8,092,463       8,101,838  
                 
Contingencies (note 5)
               
                 
Shareholders' equity:
               
Common stock, $1 par value, shares authorized 460,000,000; shares issued, 2010 - 130,163,060; 2009 - 130,163,060; shares outstanding, 2010 - 125,561,696; 2009 - 125,101,057
    130,163       130,163  
Paid-in capital
    431,532       443,294  
Treasury stock (shares at cost, 2010 - 4,601,364; 2009 - 5,062,003)
    (222,894 )     (269,738 )
Accumulated other comprehensive income, net of tax (note 9)
    79,945       74,155  
Retained earnings
    739,208       924,707  
                 
Total shareholders' equity
    1,157,954       1,302,581  
                 
Total liabilities and shareholders' equity
  $ 9,250,417     $ 9,404,419  

See accompanying notes to consolidated financial statements.

 
2

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2010 and 2009
(Unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In thousands of dollars, except per share data)
 
Revenues:
           
Premiums written:
           
Direct
  $ 275,134     $ 377,954  
Assumed
    797       1,463  
Ceded
    (19,873 )     (31,904 )
                 
Net premiums written
    256,058       347,513  
Decrease in unearned premiums, net
    15,894       8,317  
                 
Net premiums earned
    271,952       355,830  
Investment income, net of expenses
    68,859       77,173  
Realized investment gains, net
    32,954       8,441  
Total other-than-temporary impairment losses
    (6,052 )     (25,702 )
Portion of losses recognized in other comprehensive income, before taxes
    -       -  
Net impairment losses recognized in earnings
    (6,052 )     (25,702 )
Other revenue
    3,057       19,442  
                 
Total revenues
    370,770       435,184  
                 
Losses and expenses:
               
Losses incurred, net
    454,511       757,893  
Change in premium deficiency reserves (note 12)
    (13,566 )     (164,801 )
Underwriting and other expenses, net
    59,945       62,549  
Reinsurance fee
    -       26,407  
Interest expense
    21,018       23,926  
                 
Total losses and expenses
    521,908       705,974  
                 
Loss before tax
    (151,138 )     (270,790 )
Benefit from income taxes
    (1,047 )     (86,230 )
                 
Net loss
  $ (150,091 )   $ (184,560 )
                 
Loss per share (note 6):
               
Basic
  $ (1.20 )   $ (1.49 )
Diluted
  $ (1.20 )   $ (1.49 )
                 
Weighted average common shares outstanding - diluted (shares in thousands, note 6)
    124,889       123,999  

See accompanying notes to consolidated financial statements.

 
3

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED  STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2009 and Three Months Ended March 31, 2010 (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, 2008
  $ 130,119     $ 440,542     $ (276,873 )   $ (106,789 )   $ 2,247,234        
                                               
Net loss
    -       -       -       -       (1,322,277 )   $ (1,322,277 )
Change in unrealized investment gains and losses, net
    -       -       -       154,358       -       154,358  
Noncredit component of impairment losses, net
    -       -       -       (1,764 )     -       (1,764 )
Common stock shares issued upon debt conversion
    44       263       -       -       -          
Reissuance of treasury stock, net
    -       (11,613 )     7,135       -       (545 )        
Equity compensation
    -       14,102       -       -       -          
Defined benefit plan adjustments, net
    -       -       -       10,704       -       10,704  
Unrealized foreign currency translation adjustment
    -       -       -       17,646       -       17,646  
Other
    -       -       -       -       295          
Comprehensive loss
    -       -       -       -       -     $ (1,141,333 )
                                                 
Balance, December 31, 2009
  $ 130,163     $ 443,294     $ (269,738 )   $ 74,155     $ 924,707          
                                                 
                                                 
Net loss
    -       -       -       -       (150,091 )   $ (150,091 )
Change in unrealized investment gains and losses, net
    -       -       -       6,206       -       6,206  
Reissuance of treasury stock, net
    -       (14,148 )     46,844       -       (35,408 )        
Equity compensation
    -       2,386       -       -       -          
Unrealized foreign currency translation adjustment
    -       -       -       (416 )     -       (416 )
Comprehensive loss (note 9)
    -       -       -       -       -     $ (144,301 )
                                                 
Balance, March 31, 2010
  $ 130,163     $ 431,532     $ (222,894 )   $ 79,945     $ 739,208          

See accompanying notes to consolidated financial statements

 
4

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2010 and 2009
(Unaudited)

   
Three Months Ended
 
   
March 31,
 
             
             
   
2010
   
2009
 
   
(In thousands of dollars)
 
Cash flows from operating activities:
           
Net loss
  $ (150,091 )   $ (184,560 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Amortization of deferred insurance policy acquisition costs
    1,723       2,073  
Capitalized deferred insurance policy acquisition costs
    (1,390 )     (1,310 )
Depreciation and amortization
    12,627       17,350  
Decrease (increase) in accrued investment income
    1,543       (3,538 )
Increase in reinsurance recoverable on loss reserves
    (7,200 )     (70,562 )
Decrease in prepaid reinsurance premiums
    212       264  
Decrease in premium receivable
    3,390       683  
(Increase) decrease in real estate acquired
    (923 )     13,557  
(Decrease) increase in loss reserves
    (56,884 )     472,621  
Decrease in premium deficiency reserve
    (13,566 )     (164,801 )
Decrease in unearned premiums
    (15,686 )     (8,886 )
Deferred tax (benefit) provision
    (3,146 )     41,271  
Increase in income taxes recoverable (current)
    8,546       278,455  
Realized investment gains, excluding impairment losses
    (32,954 )     (8,441 )
Net investment impairment losses
    6,052       25,702  
Other
    50,698       19,786  
Net cash (used in) provided by operating activities
    (197,049 )     429,664  
                 
Cash flows from investing activities:
               
Purchase of fixed maturities
    (1,330,501 )     (1,142,507 )
Purchase of equity securities
    (30 )     (24 )
Proceeds from sale of fixed maturities
    986,547       738,040  
Proceeds from maturity of fixed maturities
    157,828       114,125  
Net increase (decrease) in payable for securities
    15,589       (4,513 )
Net cash used in investing activities
    (170,567 )     (294,879 )
                 
Cash flows from financing activities:
               
Repayment of long-term debt
    -       (19,422 )
Net cash used in financing activities
    -       (19,422 )
                 
Net (decrease) increase in cash and cash equivalents
    (367,616 )     115,363  
Cash and cash equivalents at beginning of period
    1,185,739       1,097,334  
Cash and cash equivalents at end of period
  $ 818,123     $ 1,212,697  

See accompanying notes to consolidated financial statements.

 
5

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(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, 2009 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. The results of operations for the three months ended March 31, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010.

Capital

At March 31, 2010, Mortgage Guaranty Insurance Corporation’s (“MGIC”) policyholders position exceeded the required regulatory minimum by approximately $143 million, and we exceeded the required minimum by approximately $215 million on a combined statutory basis. (The combined figures give effect to reinsurance with subsidiaries of our holding company.) At March 31, 2010 MGIC’s risk-to-capital was 20.2:1 and was 23.2:1 on a combined statutory basis.

The insurance laws or regulations of 17 states, including Wisconsin, 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 risk-to-capital requirement. While formulations of minimum capital may vary in certain states, the most common measure applied allows for a maximum permitted risk-to-capital ratio of 25 to 1.  Based upon internal company estimates, MGIC’s risk-to-capital ratio over the next few years, after giving effect to any contribution of the proceeds from the common stock and the concurrent convertible notes offering to MGIC discussed in Note 13 – “Subsequent Events”, could reach 40 to 1 or even higher.

In December 2009, the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) issued an order waiving, until December 31, 2011, the minimum risk-to-capital ratio. MGIC has also applied for waivers in all other jurisdictions that have risk-to-capital requirements. MGIC has received waivers from some of these states. These waivers expire at various times, with the earliest expiration being December 31, 2010. Some jurisdictions have denied the request because a waiver is not authorized under the jurisdictions’ statutes or regulations and others may deny the request on other grounds. The OCI and other state insurance departments, in their sole discretion, may modify, terminate or extend their waivers. If the OCI or other state insurance department modifies or terminates its waiver, or if it fails to renew its waiver after expiration, MGIC would be prevented from writing new business anywhere, in the case of the waiver from the OCI, or in the particular jurisdiction, in the case of the other waivers, if MGIC’s risk-to-capital ratio exceeds 25 to 1 unless MGIC raised additional capital to enable it to comply with the risk-to-capital requirement. New insurance written in the states that have risk-to-capital ratio limits represented approximately 50% of new insurance written in 2009. If we were prevented from writing new business in all states, our insurance operations 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 we either met the applicable risk-to-capital requirement or obtained a necessary waiver to allow us to once again write new business.

 
6

 

We cannot assure you that the OCI or any other jurisdiction that has granted a waiver of its risk-to-capital ratio requirements will not modify or revoke the waiver, that it will renew the waiver when it expires or that we could raise additional capital to comply with the risk-to-capital requirement.

We are in the final stages of implementing a plan to write new mortgage insurance in MIC in selected jurisdictions in order to address the likelihood that in the future MGIC will not meet the minimum regulatory capital requirements discussed above and may not be able to obtain appropriate waivers of these requirements in all jurisdictions in which minimum requirements are present. In December 2009, the OCI also approved a transaction under which MIC will be eligible to write new mortgage guaranty insurance policies only in jurisdictions where MGIC does not meet minimum capital requirements similar to those waived by the OCI and does not obtain a waiver of those requirements from that jurisdiction’s regulatory authority. MIC has received the necessary approvals to write business in all of the jurisdictions in which MGIC would be prohibited from continuing to write new business due to MGIC’s failure to meet applicable regulatory capital requirements and obtain waivers of those requirements.

In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the “Fannie Mae Agreement”) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write mortgage insurance only in those 16 other jurisdictions in which MGIC cannot write new insurance due to MGIC’s failure to meet regulatory capital requirements and if MGIC fails to obtain relief from those requirements or a specified waiver of them.

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

 
7

 

Under the Fannie Mae Agreement, Fannie Mae approved MIC as an eligible mortgage insurer only through December 31, 2011 and Freddie Mac has approved MIC as a “Limited Insurer” only through December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will be determined by the applicable GSE’s mortgage insurer eligibility requirements then in effect. Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize MIC with more than the $200 million contribution without prior approval from each GSE, which limits the amount of business MIC can write. We believe that the amount of capital that MGIC has contributed to MIC will be sufficient to write business for the term of the Fannie Mae Agreement in the jurisdictions in which MIC is eligible to do so. Depending on the level of losses that MGIC experiences in the future, however, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific 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 is not eligible to write business.

A failure to meet the specific minimum regulatory capital requirements to insure new business does not necessarily mean that MGIC does not have sufficient resources to pay claims on its insurance liabilities. While we believe that we have claims paying resources at MGIC that exceed our claim obligations on our insurance in force, even in scenarios in which we fail to meet regulatory capital requirements, we cannot assure you that the events that lead to us failing to meet regulatory capital requirements would not also result in our not having sufficient claims paying resources. Furthermore, our estimates of our claims paying resources and claim obligations are based on various assumptions. These assumptions include our anticipated rescission activity, future housing values and future unemployment rates. These assumptions are subject to inherent uncertainty and require judgment by management. Current conditions in the domestic economy make the assumptions about housing values and unemployment highly volatile in the sense that there is a wide range of reasonably possible outcomes. Our anticipated rescission activity is also subject to inherent uncertainty due to the difficulty of predicting the amount of claims that will be rescinded and the outcome of any dispute resolution proceedings related to rescissions that we make.

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, our rescissions of policies have materially mitigated our paid and incurred losses. In 2009, rescissions mitigated our paid losses by $1.2 billion and in the first quarter of 2010, rescissions mitigated our paid losses by $373 million (both of these figures include amounts that would have resulted in either a claim payment or been charged to a deductible under a bulk or pool policy, and may have been charged to a captive reinsurer). While we have a substantial pipeline of claims investigations that we expect will eventually result in future rescissions, we can give no assurance that rescissions will continue to mitigate paid losses at the same level we have recently experienced.

Our loss reserving methodology incorporates the effects rescission activity is expected to have on the losses we will pay on our delinquent inventory. A variance between ultimate actual rescission rates and these estimates, as a result of litigation, settlements or other factors, could materially affect our losses. We estimate rescissions mitigated our incurred losses by approximately $2.5 billion in 2009, compared to $0.6 billion in the first quarter of 2010; both of these figures include the benefit of claims not paid as well as the impact on our loss reserves.  In recent quarters, approximately 25% of claims received in a quarter have been resolved by rescissions.  At March 31, 2010, we had 241,244 loans in our primary delinquency inventory; the resolution of a material portion of these loans will not involve claims.

 
8

 

In addition, if the insured disputes our right to rescind coverage, whether the requirements to rescind are met ultimately would be determined by legal proceedings. Objections to rescission may be made several years after we have rescinded an insurance policy.  Countrywide Home Loans, Inc. and an affiliate (“Countrywide”) has filed a lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance claims. We have filed an arbitration case against Countrywide regarding rescissions and Countrywide has responded seeking material damages. For more information about this lawsuit and arbitration case, see Note 5. In addition, we continue to discuss with other lenders their objections to material rescissions and are involved in other arbitration proceedings with respect to rescissions that are not collectively material in amount.
 
Holding company liquidity

See Note 13 - “Subsequent Events” for information related to our proceeds from the sale of common stock and issuance of convertible senior notes in April 2010.

At March 31, 2010, we had approximately $85 million in short-term investments at our holding company. Prior to the offerings referred to above, these investments were virtually all of our holding company’s liquid assets. As of March 31, 2010, our holding company’s obligations included $78.4 million of debt which is scheduled to mature in September 2011 and $300 million of Senior Notes due in November 2015, both of which must be serviced pending scheduled maturity.  On an annual basis, as of March 31, 2010 our use of funds at the holding company for interest payments on our Senior Notes approximated $21 million. As a result of the offering of Convertible Senior Notes referred to above, our annual interest payments increased by $17.3 million. See Note 3 for a discussion of our $389.5 million in junior convertible debentures due in 2063, including our election to defer payment of interest on these debentures.

The senior notes and convertible debentures, discussed in Notes 2, 3 and 13 are obligations of our holding company, and not of its subsidiaries. Payment of dividends from our insurance subsidiaries, which prior to raising capital in the public markets in 2008 and 2010 had been the principal source of our holding company cash inflow, is restricted by insurance regulation. MGIC is the principal source of dividend-paying capacity.  In 2010 and 2011, MGIC cannot pay any dividends to our holding company without approval from the OCI. There can be no assurances that such approvals can be obtained in order to service the debt at our holding company.
 
 
New Accounting Guidance

In January 2010 new accounting guidance was issued that expands the current disclosures on fair value measurements. The guidance will require the disclosure of transfers in and out of levels 1 and 2 of the fair value hierarchy and the reasons for those transfers and separate presentation of purchases, sales, issuances and settlements for level 3 securities, on a gross basis rather than as one net number. The new guidance also clarifies the level of disaggregation required to be disclosed for each class of assets and liabilities and provides clarification on the appropriate disclosures of inputs and valuation techniques used to measure fair value for both recurring and non recurring measurements in levels 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements for the level 3 securities. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We have evaluated the provisions of this guidance and there is no significant impact on our financial statements disclosures.

 
9

 

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 have evaluated the provisions of this guidance and there is no impact on our financial statements and disclosures.
 
 
Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2009 amounts to conform to 2010 presentation.
 
 
Note 2 - Short- and long-term debt, excluding convertible debentures discussed in Note 3

At March 31, 2010 and December 31, 2009 we had approximately $78.4 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 were in compliance with all covenants at March 31, 2010.

If we fail to meet any of the covenants of the Senior Notes discussed above or 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.

 
10

 

At March 31, 2010 and December 31, 2009, the fair value of the amount outstanding under our Senior Notes was $316.1 million and $293.2 million, respectively. 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 $2.2 million and $8.7 million for the three months ended March 31, 2010 and 2009, respectively.
 
 
Note 3 – Convertible debentures and related derivatives

At March 31, 2010 and December 31, 2009 we had $389.5 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063 outstanding. The debentures have an effective interest rate of 19% that reflects our non-convertible debt borrowing rate at the time of issuance. At March 31, 2010 and December 31, 2009 the amortized value of the principal amount of the debentures is reflected as a liability on our consolidated balance sheet of $297.3 million and $291.8 million, respectively, with the unamortized discount reflected in equity. At March 31, 2010 and December 31, 2009 we also had $55.0 million and $35.8 million, respectively, of deferred interest outstanding on the convertible debentures which is included in other liabilities on the consolidated balance sheet. The debentures rank junior to all of our existing and future senior indebtedness.

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 beginning with April 1, 2009 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.

 
11

 

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 common shares issued in April 2010, discussed in Note 13 “Subsequent Events”, are qualifying securities. We have 180 days from the date of issuance of these shares to use the proceeds to pay deferred interest if we elect to do so with such proceeds.

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.

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.

 
12

 

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 2009, we issued 44,316 shares of our common stock on conversion of $478,000 principal amount of our convertible debentures and related deferred interest.

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 $427.5 million and $254.3 million, respectively, at March 31, 2010 and December 31, 2009, as determined using available pricing for these debentures or similar instruments.

See Note 13 - “Subsequent Events” for information related to our sale of common stock and issuance of convertible senior notes in April 2010.
 
 
Note 4 – Reinsurance

The reinsurance recoverable on loss reserves related to captive agreements was approximately $304 million at March 31, 2010 and $297 million at December 31, 2009. The total fair value of the trust fund assets under our captive agreements at March 31, 2010 was $562 million, compared to $547 million at December 31, 2009. During 2009, $119 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. There were no captive terminations during the first quarter of 2010.
 
 
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.

 
13

 

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 addition, beginning in June 2008, we have received subpoenas from the Department of Housing and Urban Development, commonly referred to as HUD, seeking information about captive mortgage reinsurance similar to that requested by the 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.

 
14

 

Since October 2007, we have been involved in an investigation conducted by the Division of Enforcement of the SEC.  The investigation appears to involve disclosure and financial reporting by us and by a co-investor regarding our respective investments in our Credit-Based Asset Servicing and Securitization (“C-BASS”) joint venture.  We have provided documents to the SEC and a number of our executive officers, as well as other employees, have testified.  This matter is ongoing and no assurance can be given that the SEC staff will not recommend an enforcement action against our company or one or more of our executive officers or other employees.

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. Our motion to dismiss the Complaint was granted on February 18, 2010.  On March 18, 2010, plaintiffs filed a motion for leave to file an amended complaint. Attached to this motion was a proposed Amended Complaint (the “Amended Complaint”). The Amended Complaint alleges that we and two of our officers named in the Amended Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about C-BASS, including its liquidity, and by failing to properly account for our investment in C-BASS. The Amended Complaint also names two officers of C-BASS with respect to the Amended Complaint’s allegations regarding C-BASS.  The purported class period covered by the Complaint begins on February 6, 2007 and ends on August 13, 2007. The Amended 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 violations of federal securities laws. On April 12, 2010, we filed a motion in opposition to Plaintiff’s motion for leave to amend its complaint. 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 Amended Complaint. We are unable to predict the outcome of these consolidated cases or estimate our associated expenses or possible losses. Other lawsuits alleging violations of the securities laws could be brought against us.

Several law firms have issued press releases to the effect that they are investigating us, including whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plan’s investment in or holding of our common stock or whether we breached other legal or fiduciary obligations to our shareholders. With limited exceptions, our bylaws provide that our officers and 401(k) 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.

As we previously disclosed, for some time we have had discussions with lenders regarding their objections to rescissions that in the aggregate are material. On December 17, 2009, Countrywide filed a complaint for declaratory relief in the Superior Court of the State of California in San Francisco against MGIC. This complaint alleges that MGIC has denied, and continues to deny, valid mortgage insurance claims submitted by Countrywide and says it seeks declaratory relief regarding the proper interpretation of the flow insurance policies at issue. On January 19, 2010, we removed this case to the United States District Court for the Northern District of California. On March 30, 2010, the Court ordered the case remanded to the Superior Court of the State of California in San Francisco. We have appealed this decision to the United States Court of Appeals for the Ninth Circuit and asked the Court of Appeals to vacate the remand and stay proceedings in the District Court. On February 24, 2010, we commenced an arbitration action against Countrywide seeking a determination that MGIC was entitled to deny and/or rescind coverage on the loans involved in the arbitration demand, which numbered more than 1,400 loans as of the filing of the demand. On March 16, 2010, Countrywide filed a response to our arbitration action objecting to the arbitrator’s jurisdiction in view of the case initiated by Countrywide in the Superior Court of the State of California and asserting various defenses to the relief sought by MGIC in the arbitration.  The response also seeks damages of at least $150 million, exclusive of interest and costs, as a result of purported breaches of flow insurance policies issued by MGIC and additional damages, including exemplary damages, on account of MGIC’s purported breach of an implied covenant of good faith and fair dealing. We intend to defend MGIC against Countrywide’s complaint and arbitration response, and to pursue MGIC’s claims in the arbitration, vigorously. However, we are unable to predict the outcome of these proceedings or their effect on us.

 
15

 

In addition to the rescissions at issue with Countrywide, we have a substantial pipeline of claims investigations (including investigations involving loans related to Countrywide) that we expect will eventually result in future rescissions.

We provide an outsourced underwriting service to our customers known as contract underwriting. 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, we have an established reserve for such obligations.  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 three months ended March 31, 2010 and 2009. However, a generally positive economic environment for residential real estate that continued until approximately 2007 may have mitigated the effect of some of these costs, and claims for remedies may be made a number of years after the underwriting work was performed. A material portion of our new insurance written through the flow channel in recent years, including for 2006 and 2007, 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 may make a claim for a contract underwriting remedy more likely to occur. Beginning in the second half 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.

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

 
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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 for both the three months ended March 31, 2010 and 2009 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 March 31, 2010 and 2009 common stock equivalents of 34.1 million and 29.4 million, respectively, were not included because they were anti-dilutive.

   
Three Months Ended
 
   
March 31,
 
             
   
2010
   
2009
 
   
(in thousands)
 
             
Weighted-average shares - Basic
    124,889       123,999  
Common stock equivalents
    -       -  
                 
Weighted-average shares - Diluted
    124,889       123,999  

See Note 13 - “Subsequent Events” for information related to our sale of common stock and issuance of convertible senior notes in April 2010.
 
 
Note 7 – Investments

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at March 31, 2010 and December 31, 2009 are shown below. Debt securities consist of fixed maturities and short-term investments.

 
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Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2010:
 
Cost
   
Gains
   
Losses (1)
   
Value
 
   
(In thousands of dollars)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 1,159,323     $ 7,965     $ (1,079 )   $ 1,166,209  
Obligations of U.S. states and political subdivisions
    4,052,546       154,849       (39,473 )     4,167,922  
Corporate debt securities
    1,893,159       47,742       (7,426 )     1,933,475  
Residential mortgage-backed securities
    88,865       4,748       (1,506 )     92,107  
Debt securities issued by foreign sovereign governments
    107,571       1,211       (1,201 )     107,581  
Total debt securities
    7,301,464       216,515       (50,685 )     7,467,294  
Equity securities
    2,922       25       (4 )     2,943  
                                 
Total investment portfolio
  $ 7,304,386     $ 216,540     $ (50,689 )   $ 7,470,237  


         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2009:
 
Cost
   
Gains
   
Losses (1)
   
Value
 
   
(In thousands of dollars)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 736,668     $ 4,877     $ (6,357 )   $ 735,188  
Obligations of U.S. states and political subdivisions
    4,607,936       187,540       (59,875 )     4,735,601  
Corporate debt securities
    1,532,571       40,328       (9,158 )     1,563,741  
Residential mortgage-backed securities
    102,062       3,976       (1,986 )     104,052  
Debt securities issued by foreign sovereign governments
    112,603       1,447       (1,058 )     112,992  
Total debt securities
    7,091,840       238,168       (78,434 )     7,251,574  
Equity securities
    2,892       3       (4 )     2,891  
                                 
Total investment portfolio
  $ 7,094,732     $ 238,171     $ (78,438 )   $ 7,254,465  

(1) At March 31, 2010 and December 31, 2009, gross unrealized losses for residential mortgage-backed securities include $1.8 million in other-than-temporary impairment losses recorded in other comprehensive income, since the adoption of new guidance on other-than-temporary impairments.

The amortized cost and fair values of debt securities at March 31, 2010, 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.

 
18

 
 
   
Amortized
   
Fair
 
March 31, 2010
 
Cost
   
Value
 
   
(In thousands of dollars)
 
             
Due in one year or less
  $ 552,964     $ 554,561  
Due after one year through five years
    2,814,325       2,887,534  
Due after five years through ten years
    1,338,697       1,381,866  
Due after ten years
    1,995,238       2,062,366  
      6,701,224       6,886,327  
                 
Residential mortgage-backed securities
    88,865       92,107  
Auction rate securities (1)
    511,375       488,860  
                 
Total at March 31, 2010
  $ 7,301,464     $ 7,467,294  

(1) At March 31, 2010, 98% of auction rate securities had a contractual maturity greater than 10 years.

 
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At March 31, 2010 and December 31, 2009, the investment portfolio had gross unrealized losses of $50.7 million and $78.4 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
 
March 31, 2010
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
 
(In thousands of dollars)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 222,153     $ 1,079     $ -     $ -     $ 222,153     $ 1,079  
Obligations of U.S. states and political subdivisions
    784,176       22,407       338,587       17,066       1,122,763       39,473  
Corporate debt securities
    505,697       7,426       -       -       505,697       7,426  
Residential mortgage-backed securities
    8,715       1,323       870       183       9,585       1,506  
Debt issued by foreign sovereign governments
    53,056       1,122       6,788       79       59,844       1,201  
Equity securities
    1,130       4       -       -       1,130       4  
Total investment portfolio
  $ 1,574,927     $ 33,361     $ 346,245     $ 17,328     $ 1,921,172     $ 50,689  
                                                 
                                                 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
December 31, 2009
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
 
(In thousands of dollars)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 434,362     $ 6,357     $ -     $ -     $ 434,362     $ 6,357  
Obligations of U.S. states and political subdivisions
    926,860       29,390       398,859       30,485       1,325,719       59,875  
Corporate debt securities
    453,804       9,158       -               453,804       9,158  
Residential mortgage-backed securities
    8,743       1,764       870       222       9,613       1,986  
Debt issued by foreign sovereign governments
    56,122       1,058       -       -       56,122       1,058  
Equity securities
    2,398       4       -       -       2,398       4  
Total investment portfolio
  $ 1,882,289     $ 47,731     $ 399,729     $ 30,707     $ 2,282,018     $ 78,438  
 
There were 368 securities in an unrealized loss position at March 31, 2010. The unrealized losses in all categories of our investments were primarily caused by the difference in interest rates at March 31, 2010 and December 31, 2009, compared to the interest rates at the time of purchase as well as the illiquidity premium applied in our auction rate securities discounted cash flow model, offset by improvements in the credit spreads on non-governmental securities. Of those securities in an unrealized loss position greater than 12 months at March 31, 2010, 72 securities had a fair value greater than 80% of amortized cost and no securities had a fair value less than 80% of amortized cost.

 
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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 three months of 2010 we recognized OTTI in earnings of $6.1 million, compared to $25.7 million in the first three months of 2009. Our OTTI for the first quarter of 2010 was primarily related to securities for which we had the intent to sell.

The following table provides a rollforward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income (loss) for the three months ended March 31, 2010.
 
   
(In thousands of dollars)
 
       
Beginning balance at December 31, 2009
  $ 1,021  
Addition for the amount related to the credit loss for which an OTTI was not previously recognized
    -  
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized
    -  
Reductions for securities sold during the period (realized)
    -  
Ending balance at March 31, 2010
  $ 1,021  
 
We held approximately $489 million in auction rate securities (ARS) backed by student loans at March 31, 2010.  ARS are intended to behave like short-term debt instruments because their interest rates are reset periodically through an auction process, most commonly at intervals of 7, 28 and 35 days. The same auction process has historically provided a means by which we may rollover the investment or sell these securities at par in order to provide us with liquidity as needed.  The ARS we hold are collateralized by portfolios of student loans, all of which are ultimately 97% guaranteed by the United States Department of Education.  At March 31, 2010, 90% of our ARS portfolio was AAA/Aaa-rated by one or more of the following major rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings.

In mid-February 2008, auctions began to fail due to insufficient buyers, as the amount of securities submitted for sale in auctions exceeded the aggregate amount of the bids.  For each failed auction, the interest rate on the security moves to a maximum rate specified for each security, and generally resets at a level higher than specified short-term interest rate benchmarks.  At March 31, 2010, our entire ARS portfolio, consisting of 47 investments, was subject to failed auctions; however, we received calls at par for $29.2 million in ARS from the period when the auctions began to fail through March 31, 2010. To date, we have collected all interest due on our ARS.

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

 
21

 

The net realized investment gains (losses) are as follows:
 
   
Three months ended
 
   
March 31,
 
   
2010
   
2009
 
 
(In thousands of dollars)
 
Net realized investment gains (losses) and OTTI on investments:
           
Fixed maturities
  $ 26,636     $ (17,409 )
Equity securities
    38       124  
Other
    228       24  
                 
    $ 26,902     $ (17,261 )
 
In the first quarter of 2010, there were gross realized gains on the sale of fixed income investments of $35.7 million offset by gross realized losses on the sale of fixed income securities of $3.0 million and OTTI losses of $6.1 million. In the first three months of 2009, there were gross realized gains on the sale of fixed income investments of $17.9 million offset by gross realized losses on the sale of fixed income securities of $9.5 million and OTTI losses of $25.7 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

Fair value measurements for items measured at fair value included the following as of March 31, 2010 and December 31, 2009:

 
22

 
 
   
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
(in thousand of dollars)
 
March 31, 2010
                       
Assets
                       
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 1,166,209     $ 1,166,209     $ -     $ -  
Obligations of U.S. states and political subdivisions
    4,167,922       -       3,800,006       367,916  
Corporate debt securities
    1,933,475       2,523       1,800,886       130,066  
Residential mortgage-backed securities
    92,107       20,617       71,490       -  
Debt securities issued by foreign sovereign governments
    107,581       98,420       9,161       -  
Total debt securities
    7,467,294       1,287,769       5,681,543       497,982  
Equity securities
    2,943       2,622       -       321  
Total investments
  $ 7,470,237     $ 1,290,391     $ 5,681,543     $ 498,303  
Real estate acquired (1)
    4,753       -       -       4,753  
                                 
                                 
December 31, 2009
                               
Assets
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 735,188     $ 735,188     $ -     $ -  
                                 
Obligations of U.S. states and political subdivisions
    4,735,601       -       4,365,260       370,341  
                                 
Corporate debt securities
    1,563,741       2,559       1,431,844       129,338  
Residential mortgage-backed securities
    104,052       23,613       80,439       -  
                                 
Debt securities issued by foreign sovereign governments
    112,992       101,983       11,009       -  
Total debt securities
    7,251,574       863,343       5,888,552       499,679  
Equity securities
    2,891       2,570       -       321  
Total investments
  $ 7,254,465     $ 865,913     $ 5,888,552     $ 500,000  
Real estate acquired (1)
    3,830       -       -       3,830  

(1)
Real estate acquired through claim settlement, which is held for sale, is reported in Other Assets on the consolidated balance sheet.
 
There were no significant transfers of securities between Level 1 and Level 2 during the first quarter of 2010.
 
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 months ended March 31, 2010 and 2009 is as follows:

 
23

 
 
   
Obligations of U.S. States and Political Subdivisions
   
Corporate Debt Securities
   
Equity Securities
   
Total Investments
   
Real Estate Acquired
 
   
(in thousand of dollars)
 
Balance at December 31, 2009
  $ 370,341     $ 129,338     $ 321     $ 500,000     $ 3,830  
Total realized/unrealized losses:
                                       
                                         
Included in earnings and reported as losses incurred, net
    -       -       -       -       (376 )
Included in other comprehensive income
    907       728       -       1,635       -  
                                         
Purchases, issuances and settlements
    (3,332 )     -       -       (3,332 )     1,299  
Transfers in and/or out of Level 3
    -       -       -       -       -  
Balance at March 31, 2010
  $ 367,916     $ 130,066     $ 321     $ 498,303     $ 4,753  
                                         
Amount of total losses included in earnings for the three months ended March 31, 2010 attributable to the change in unrealized losses on assets still held at March 31, 2010
  $ -     $ -     $ -     $ -     $ -  


   
Obligations of U.S. States and Political Subdivisions
   
Corporate Debt Securities
   
Equity Securities
   
Total Investments
   
Real Estate Acquired
 
   
(in thousand 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
    -       -       -       -       (153 )
                                         
Included in other comprehensive income
    -       751       -       751       -  
Purchases, issuances and settlements
    (1,876 )     (2,435 )     -       (4,311 )     (13,404 )
Transfers in and/or out of Level 3
    -       -       -       -       -  
Balance at March 31, 2009
  $ 393,512     $ 138,450     $ 321     $ 532,283     $ 19,301  
                                         
Amount of total losses included in earnings for the three months ended March 31, 2009 attributable to the change in unrealized losses on assets still held at March 31, 2009
  $ -     $ -     $ -     $ -     $ -  

 
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Additional fair value disclosures related to our investment portfolio are included in Note 7. Fair value disclosures related to our debt are included in Notes 2 and 3.


Note 9 - Comprehensive income

Our total other comprehensive income was as follows:

   
Three months ended
 
   
March 31,
 
             
   
2010
   
2009
 
   
(In thousands of dollars)
 
             
Net loss
  $ (150,091 )   $ (184,560 )
Other comprehensive income (loss)
    5,790       76,461  
                 
Total other comprehensive loss
  $ (144,301 )   $ (108,099 )
                 
Other comprehensive income (loss) (net of tax):
               
Change in unrealized gains and losses on investments
  $ 6,206     $ 77,234  
Noncredit component of impairment loss
    -       -  
Unrealized foreign currency translation adjustment
    (416 )     (773 )
                 
Other comprehensive income (loss)
  $ 5,790     $ 76,461  
 
At March 31, 2010, accumulated other comprehensive income of $79.9 million included $107.8 million of net unrealized gains on investments, ($37.2) million relating to defined benefit plans and $9.3 million related to foreign currency translation adjustment. At December 31, 2009, accumulated other comprehensive income of $74.2 million included $101.6 million of net unrealized gains on investments, ($37.2) million relating to defined benefit plans and $9.8 million related to foreign currency translation adjustment.


Note 10 - Benefit Plans

The following table provides the components of net periodic benefit cost for the pension, supplemental executive retirement and other postretirement benefit plans:

 
25

 

   
Three Months Ended
 
   
March 31,
 
                         
   
Pension and Supplemental
   
Other Postretirement
 
   
Executive Retirement Plans
   
Benefits
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands of dollars)
 
                         
Service cost
  $ 2,184     $ 2,045     $ 324     $ 301  
Interest cost
    3,821       3,672       340       400  
Expected return on plan assets
    (3,597 )     (3,821 )     (720 )     (553 )
Recognized net actuarial loss
    1,438       1,719       256       472  
Amortization of transition obligation
    -       -       -       -  
Amortization of prior service cost
    140       158       (1,535 )     (1,515 )
                                 
Net periodic benefit cost
  $ 3,986     $ 3,773     $ (1,335 )   $ (895 )
 
We previously disclosed in our financial statements for the year ended December 31, 2009 that we expected to contribute approximately $10.0 million and zero, respectively, to our pension and postretirement plans in 2010. We have not yet made any such contributions to the pension plan.


Note 11 – Income Taxes

Valuation Allowance

We review the need to establish a deferred tax asset valuation allowance on a quarterly basis. We include an analysis of several factors, among which are the severity and frequency of operating losses, our capacity for the carryback or carryforward of any losses, the expected occurrence of future income or loss and available tax planning alternatives. As discussed below, we have reduced our benefit from income tax by establishing a valuation allowance.

In periods prior to 2008, we deducted significant amounts of statutory contingency reserves on our federal income tax returns. The reserves were deducted to the extent we purchased tax and loss bonds in an amount equal to the tax benefit of the deduction. The reserves are included in taxable income in future years when they are released for statutory accounting purposes or when the taxpayer elects to redeem the tax and loss bonds that were purchased in connection with the deduction for the reserves. Since the tax effect on these reserves exceeded the gross deferred tax assets less deferred tax liabilities, we believe that all gross deferred tax assets recorded in periods prior to the quarter ended March 31, 2009 were fully realizable. Therefore, we established no valuation reserve.

In the first quarter of 2009, we redeemed the remaining balance of our tax and loss bonds of $431.5 million. Therefore, the remaining contingency reserves were released for tax purposes and are no longer available to support any net deferred tax assets. Beginning with the first quarter of 2009, any benefit from income taxes, relating to operating losses, has been reduced or eliminated by the establishment of a valuation allowance.  We have reduced our benefit from income taxes due to the establishment of a valuation allowance for the three months ended March 31, 2010 and March 31, 2009 as follows:

 
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Three months ended
 
   
March 31,
 
   
2010
   
2009
 
   
($ in millions)
 
Benefit from income taxes
  $ (60.7 )   $ (117.2 )
Valuation allowance
    59.7       31.0  
                 
Tax provision (benefit)
  $ (1.0 )   $ (86.2 )
 
The total valuation allowance as of March 31, 2010 and December 31, 2009 is $298.2 million and $238.5 million, respectively.

Recently enacted legislation expands the carryback period for certain net operating losses from 2 years to 5 years. A total benefit for income taxes of $282.0 million has been recorded during 2009 in the Consolidated Statement of Operations for the carryback of 2009 losses.
 
Giving full effect to the carryback of net operating losses for federal income tax purposes, we have approximately $1.1 billion of net operating loss carryforwards on a regular tax basis and $323 million of net operating loss carryforwards for computing the alternative minimum tax as of March 31, 2010. Any unutilized carryforwards are scheduled to expire at the end of tax years 2029 and 2030.

The Internal Revenue Service (“IRS”) has completed separate examinations of our federal income tax returns for the years 2000 through 2004 and 2005 through 2007 and has issued assessments for unpaid taxes, interest and penalties. The primary adjustment in both examinations 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”). This portfolio has been managed and maintained during years prior to, during and subsequent to the examination period. 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 is ongoing and may last for an extended period of time, but at this time it is difficult to predict with any certainty when it may conclude. The assessment for unpaid taxes related to the REMIC issue for these years is $197.1 million in taxes and accuracy-related penalties, plus applicable interest. Other adjustments during taxable years 2000 through 2007 are not material, and have been agreed to with the IRS. On July 2, 2007, we made a payment on account of $65.2 million with the United States Department of the Treasury to eliminate the further accrual of interest. We believe, after discussions with outside counsel about the issues raised in the examinations and the procedures for resolution of the disputed adjustments, that an adequate provision for income taxes has been made for potential liabilities that may result from these assessments. If the outcome 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.

 
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Note 12 – Loss Reserves and Premium Deficiency Reserve

Loss Reserves

Our loss estimates are established based upon historical experience. Losses incurred for the first quarter of 2010 decreased compared to the first quarter of 2009. The default inventory decreased by 9,196 delinquencies in the first quarter of 2010, compared to an increase of 13,530 in the first quarter of 2009. The estimated severity remained relatively stable in the first quarter of 2010 and increased in the first quarter of 2009. The estimated claim rate remained relatively flat in both the first quarter of 2010 and the first quarter of 2009.

The decrease in delinquencies experienced during the first quarter of 2010 was generally across all markets and all book years. However the age of the default inventory continues to increase, as shown in the table below. Historically as a default ages it becomes more likely to result in a claim.

Aging of the Primary Default Inventory

     Q1 2009      Q2 2009      Q3 2009      Q4 2009      Q1 2010  
                                                                       
Missed payments
                                                                     
3 payments or less
    49,638       25 %     50,297       24 %     53,615       23 %     48,252       19 %     36,256       15 %
4 - 11 payments
    89,861       46 %     93,704       44 %     97,435       41 %     98,210       39 %     90,816       38 %
12 payments or more
    56,219       29 %     68,236       32 %     84,560       36 %     103,978       42 %     114,172       47 %
                                                                                 
Total primary default inventory (1)
    195,718       100 %     212,237       100 %     235,610       100 %     250,440       100 %     241,244       100 %

(1)
At March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009 and March 31, 2010 14,805, 15,337, 16,802, 16,389 and 17,384 loans in default, respectively, were in our claims received inventory.
 
Before paying a claim, we can review the loan file to determine whether we are required, under the applicable insurance policy, to pay the claim or whether we are entitled to reduce the amount of the claim. For example, all of our insurance policies provide that we can reduce or deny a claim if the servicer did not comply with its obligation to mitigate our loss by performing reasonable loss mitigation efforts or diligently pursuing a foreclosure or bankruptcy relief in a timely manner. We also do not cover losses resulting from property damage that has not been repaired. We are currently reviewing the loan files for the majority of the claims submitted to us.

 
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In addition, subject to rescission caps in certain of our Wall Street bulk transactions, all of our insurance policies allow us to rescind coverage under certain circumstances. Because we review the loan origination documents and information as part of our normal processing when a claim is submitted to us, rescissions occur on a loan by loan basis most often after we have received a claim. Historically, claim rescissions and denials, which we collectively refer to as rescissions, were not a material portion of our claims resolved during a year. However, beginning in 2008 our rescissions of policies have materially mitigated our paid and incurred losses. While we have a substantial pipeline of claims investigations that we expect will eventually result in rescissions, we can give no assurance that rescissions will continue to mitigate paid and incurred losses at the same level we have recently experienced. In addition, if an insured disputes our right to rescind coverage, whether the requirements to rescind are met ultimately would be determined by legal proceedings. Rescissions mitigated our paid losses by approximately $373 million in the first quarter of 2010, compared to approximately $163 million in the first quarter of 2009. These figures include amounts that would have resulted in either a claim payment or been charged to a deductible under a bulk or pool policy, and may have been charged to a captive reinsurer. In the first quarter of 2010, $81 million, of the $373 mitigated, would have been applied to a deductible had the policy not been rescinded. In the first quarter of 2009, $34 million, of the $163 million mitigated, would have been applied to a deductible. The amounts that would have been applied to a deductible do not take into account previous rescissions that may have been applied to a deductible. While we have a substantial pipeline of claims investigations that we expect will eventually result in future rescissions, we can give no assurance that rescissions will continue to mitigate paid losses at the same level we have recently experienced.

In addition, our loss reserving methodology incorporates the effect that rescission activity is expected to have on the losses we will pay on our delinquent inventory. We do not utilize an explicit rescission rate in our reserving methodology, but rather our reserving methodology incorporates the effects rescission activity has had on our historical claim rate and claim severities. A variance between ultimate actual rescission rates and these estimates could materially affect our losses incurred. Our estimation process does not include a direct correlation between claim rates and severities to projected rescission activity or other economic conditions such as changes in unemployment rates, interest rates or housing values. Our experience is that analysis of that nature would not produce reliable results, as the change in one condition can not be isolated to determine its sole effect on our ultimate paid losses as our ultimate paid losses are also influenced at the same time by other economic conditions. Based upon the increase in rescission activity during 2008 and 2009, the effects rescissions have on our losses incurred have become material. While we do not incorporate an explicit rescission rate into our reserving methodology, we have estimated the effects rescissions have had on our incurred losses based upon recent rescission history, as shown in the table that follows labeled “Ever to Date Rescission Rates on Claims Received”. We estimate that rescissions mitigated our incurred losses by approximately $0.6 billion in the first quarter of 2010, compared to approximately $0.4 billion in the first quarter of 2009; both of these figures include the benefit of claims not paid as well as the impact on our loss reserves. The liability associated with our estimate of premiums to be refunded on expected future rescissions is accrued for separately. At March 31, 2010 and December 31, 2009 the estimate of this liability totaled $142 million and $88 million, respectively. Separate components of this liability are included in “Other liabilities” and “Premium deficiency reserves” on our consolidated balance sheet. Changes in the liability affect premiums written and earned.

 
29

 

If the insured disputes our right to rescind coverage, whether the requirements to rescind are met ultimately would be determined by legal proceedings. Objections to rescission may be made several years after we have rescinded an insurance policy.  Countrywide has filed a lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance claims.  We have filed an arbitration case against Countrywide regarding rescissions and Countrywide has responded seeking material damages. For more information about this lawsuit and arbitration case, see Note 5 – “Litigation and contingencies.”  In addition, we continue to discuss with other lenders their objections to material rescissions and are involved in other arbitration proceedings with respect to rescissions that are not collectively material in amount.

Information regarding the ever-to-date rescission rates by the quarter in which the claim was received appears in the table below. No information is presented for claims received in the most recent two quarters to allow sufficient time for a substantial percentage of the claims received in those two quarters to reach resolution.

As of March 31, 2010
Ever to Date Rescission Rates on Claims Received
(based on count)

Quarter in Which the
   
ETD Rescission
   
ETD Claims Resolution
 
Claim was Received
   
Rate (1)
   
Percentage (2)
 
               
  Q1 2008       12.6 %     100.0 %
  Q2 2008       16.0 %     100.0 %
  Q3 2008       21.3 %     100.0 %
  Q4 2008       25.1 %     99.9 %
  Q1 2009       29.3 %     99.5 %
  Q2 2009       26.1 %     98.0 %
  Q3 2009       24.6 %     93.0 %

(1) This percentage is claims received during the quarter shown that have been rescinded as of our most recently completed quarter divided by the total claims received during the quarter shown.
(2) This percentage is claims received during the quarter shown that have been resolved as of our most recently completed quarter divided by the total claims received during the quarter shown. Claims resolved principally consist of claims paid plus claims rescinded.
 
A rollforward of our primary insurance default inventory for the three months ended March 31, 2010 and 2009 appears in the table below.

 
30

 
 
   
Three months ended
 
   
March 31,
 
             
   
2010
   
2009
 
             
             
Default inventory at beginning of period
    250,440       182,188  
Plus: New Notices
    53,393       68,912  
Less: Cures
    (49,210 )     (47,337 )
Less: Paids (including those charged to a deductible or captive)
    (9,194 )     (6,348 )
Less: Rescissions and denials
    (4,185 )     (1,697 )
Default inventory at end of period
    241,244       195,718  
 
Information about the composition of the primary insurance default inventory at March 31, 2010, December 31, 2009 and March 31, 2009 appears in the table below. Within the tables below, reduced documentation loans only appear in the reduced documentation category and do not appear in any of the other categories.
 
   
March 31,
   
December 31,
   
March 31,
 
   
2010
   
2009
   
2009
 
                   
                   
Total loans delinquent (1)
    241,244       250,440       195,718  
Percentage of loans delinquent (default rate)
    18.14 %     18.41 %     13.51 %
                         
Prime loans delinquent (2)
    148,101       150,642       106,184  
Percentage of prime loans delinquent(default rate)
    13.33 %     13.29 %     8.88 %
                         
A-minus loans delinquent (2)
    34,821       37,711       31,633  
Percent of A-minus loans delinquent(default rate)
    38.63 %     40.66 %     30.91 %
                         
Subprime credit loans delinquent (2)
    12,536       13,687       12,666  
Percentage of subprime credit loans delinquent (default rate)
    47.80 %     50.72 %     42.69 %
                         
Reduced documentation loans delinquent (3)
    45,786       48,400       45,235  
Percentage of reduced documentation loans delinquent (default rate)
    44.58 %     45.26 %     37.31 %
 
(1) At March 31, 2010, December 31, 2009 and March 31, 2009 41,727, 45,907 and 45,174 loans in default, respectively, related to Wall Street bulk transactions and 17,384 16,389 and 14,805 loans in default, respectively, were in our claims received inventory.
(2) We define prime loans as those having FICO credit scores of 620 or greater, A-minus loans as those having FICO credit scores of 575-619, and subprime credit loans as those having FICO credit scores of less than 575, all as reported to us at the time a commitment to insure is issued. Most A-minus and subprime credit loans were written through the bulk channel. However, we classify all loans without complete documentation as “reduced documentation” loans regardless of FICO score rather than as a prime, “A-minus” or “subprime” loan.

 
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(3) In accordance with industry practice, loans approved by GSE and other automated underwriting (AU) systems under "doc waiver" programs that do not require verification of borrower income are classified by MGIC as "full documentation." Based in part on information provided by the GSEs, we estimate full documentation loans of this type were approximately 4% of 2007 NIW. Information for other periods is not available. We understand these AU systems grant such doc waivers for loans they judge to have higher credit quality.  We also understand that the GSEs terminated their “doc waiver” programs, with respect to new commitments, in the second half of 2008.

Pool insurance notice inventory decreased from 44,231 at December 31, 2009 to 42,664 at March 31, 2010. The pool insurance notice inventory was 35,154 at March 31, 2009.

Premium Deficiency Reserve

The components of the premium deficiency reserve at March 31, 2010, December 31, 2009 and March 31, 2009 appear in the table below.
 
   
March 31,
   
December 31,
   
March 31,
 
   
2010
   
2009
   
2009
 
   
($ millions)
Present value of expected future paid losses and expenses, net of expected future premium
    (1,590 )     (1,730 )     (2,112 )
                         
Established loss reserves
    1,410       1,537       1,822  
                         
Net deficiency
  $ (180 )   $ (193 )   $ (290 )
 
The decrease in the premium deficiency reserve for the three months ended March 31, 2010 was $13 million as shown in the chart below, which represents the net result of actual premiums, losses and expenses as well as a net change in assumptions for these periods. The change in assumptions for the first quarter of 2010 is primarily related to lower estimated ultimate losses. The lower estimated ultimate losses are primarily due to lower estimated ultimate claim rates.

 
32

 

   
($ millions)
 
             
Premium Deficiency Reserve at December 31, 2009
        $ (193 )
               
Paid claims and LAE
    121          
Decrease in loss reserves
    (127 )        
Premium earned
    (32 )        
Effects of present valuing on future premiums, losses and expenses
    (15 )        
                 
Change in premium deficiency reserve to reflect actual premium, losses and expenses recognized
            (53 )
                 
Change in premium deficiency reserve to reflect change in assumptions relating to future premiums, losses and expenses and discount rate (1)
            66  
                 
Premium Deficiency Reserve at March 31, 2010
          $ (180 )
 
(1)  A positive number for changes in assumptions relating to premiums, losses, expenses and discount rate indicates a redundancy of prior premium deficiency reserves.


Note 13 – Subsequent Events

In April 2010 we completed the public offering and sale of 74,883,720 shares of our common stock at a price of $10.75 per share. We received net proceeds of approximately $772.3 million, after deducting underwriting discount and estimated offering expenses. The number of shares and proceeds reflect the exercise in full of the underwriters’ option to purchase additional shares of common stock. The shares of common stock sold were newly issued shares.

In April 2010 we also concurrently completed the sale of $345 million principal amount of 5% Convertible Senior Notes due in 2017.  We received net proceeds of approximately $334.5 million after deducting underwriting discount and estimated offering expenses. The principal amount and proceeds reflect the exercise in full of the underwriters’ option to purchase additional Convertible Senior Notes. Interest on the Convertible Senior Notes will be payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2010. We do not have the right to defer interest payments on the Convertible Senior Notes. The Convertible Senior Notes will mature on May 1, 2017, unless earlier converted or repurchased by us. The Senior Notes are convertible, at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.4186 shares per $1,000 principal amount at any time prior to the maturity date. This represents an initial conversion price of approximately $13.44 per share. The initial conversion price represents a 25% conversion premium based on the $10.75 per share price to the public in our concurrent common stock offering. These Senior Notes will be equal in right of payment to our existing senior debt and will be senior in right of payment to our existing convertible junior debt. Debt issuance costs will be amortized over the expected life to interest expense.

 
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We intend to use the net proceeds from the offerings to provide funds to repay at maturity or repurchase prior to maturity the $78.4 million outstanding principal amount of our 5.625% Senior Notes due in September 2011 and for our general corporate purposes, which may include improving liquidity by providing funds for debt service and increasing the capital of MGIC and other subsidiaries.

 
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Overview

Through our subsidiary MGIC, we are the leading provider of private mortgage insurance in the United States to the home mortgage lending industry.

As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. The discussion below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2009.  We refer to this Discussion as the “10-K MD&A.” In the discussion below, we classify, in accordance with industry practice, as “full documentation” loans approved by GSE and other automated underwriting systems under “doc waiver” programs that do not require verification of borrower income. For additional information about such loans, see footnote (3) to the delinquency table under “Results of Consolidated Operations-Losses-Losses Incurred”. The discussion of our business in this document generally does not apply to our Australian operations which are immaterial. The results of our operations in Australia are included in the consolidated results disclosed. For additional information about our Australian operations, see “Overview—Australia” in our 10-K MD&A.
 
 
Forward Looking Statements

As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore no reader of this document should rely on these statements being accurate as of any time other than the time at which this document was filed with the Securities and Exchange Commission.
 
 
Outlook

At this time, we are facing two particularly significant challenges:

 
·
Whether we will have sufficient capital to continue to write new business.  This challenge is discussed under “Capital” below.

 
·
Whether private mortgage insurance will remain a significant credit enhancement alternative for low down payment single family mortgages.  This challenge is discussed under “Fannie Mae and Freddie Mac” below.

 
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Capital

At March 31, 2010, MGIC’s policyholders position exceeded the required regulatory minimum by approximately $143 million, and we exceeded the required minimum by approximately $215 million on a combined statutory basis. (The combined figures give effect to reinsurance with subsidiaries of our holding company.) At March 31, 2010, MGIC’s risk-to-capital was 20.2:1 and was 23.2:1 on a combined statutory basis. For additional information about how we calculate risk-to-capital, see “Liquidity and Capital Resources – Risk to Capital” below.

The insurance laws or regulations of 17 states, including Wisconsin, 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 risk-to-capital requirement. While formulations of minimum capital may vary in certain states, the most common measure applied allows for a maximum permitted risk-to-capital ratio of 25 to 1.  Based upon internal company estimates, MGIC’s risk-to-capital ratio over the next few years, after giving effect to any contribution of the proceeds from our April 2010 common stock and concurrent convertible notes offering to MGIC, could reach 40 to 1 or even higher.

In December 2009, the OCI issued an order waiving, until December 31, 2011, the minimum risk-to-capital ratio. MGIC has also applied for waivers in all other jurisdictions that have risk-to-capital requirements. MGIC has received waivers from some of these states. These waivers expire at various times, with the earliest expiration being December 31, 2010. Some jurisdictions have denied the request because a waiver is not authorized under the jurisdictions’ statutes or regulations and others may deny the request on other grounds. The OCI and other state insurance departments, in their sole discretion, may modify, terminate or extend their waivers. If the OCI or other state insurance department modifies or terminates its waiver, or if it fails to renew its waiver after expiration, MGIC would be prevented from writing new business anywhere, in the case of the waiver from the OCI, or in the particular jurisdiction, in the case of the other waivers, if MGIC’s risk-to-capital ratio exceeds 25 to 1 unless MGIC raised additional capital to enable it to comply with the risk-to-capital requirement. New insurance written in the states that have risk-to-capital ratio limits represented approximately 50% of new insurance written in 2009. If we were prevented from writing new business in all states, our insurance operations 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 we either met the applicable risk-to-capital requirement or obtained a necessary waiver to allow us to once again write new business.

We cannot assure you that the OCI or any other jurisdiction that has granted a waiver of its risk-to-capital ratio requirements will not modify or revoke the waiver, that it will renew the waiver when it expires or that we could raise additional capital to comply with the risk-to-capital requirement. Depending on the circumstances, the amount of additional capital we might need could be substantial. See our risk factor titled “Your ownership in our company may be diluted by additional capital that we raise or if the holders of our outstanding convertible debentures convert their debentures into shares of our common stock”.

We are in the final stages of implementing a plan to write new mortgage insurance in MIC in selected jurisdictions in order to address the likelihood that in the future MGIC will not meet the minimum regulatory capital requirements discussed above and may not be able to obtain appropriate waivers of these requirements in all jurisdictions in which minimum requirements are present. In December 2009, the OCI also approved a transaction under which MIC will be eligible to write new mortgage guaranty insurance policies only in jurisdictions where MGIC does not meet minimum capital requirements similar to those waived by the OCI and does not obtain a waiver of those requirements from that jurisdiction’s regulatory authority. MIC has received the necessary approvals to write business in all of the jurisdictions in which MGIC would be prohibited from continuing to write new business due to MGIC’s failure to meet applicable regulatory capital requirements and obtain waivers of those requirements.

 
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In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the “Fannie Mae Agreement”) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write mortgage insurance only in those 16 other jurisdictions in which MGIC cannot write new insurance due to MGIC’s failure to meet regulatory capital requirements and if MGIC fails to obtain relief from those requirements or a specified waiver of them. The Fannie Mae 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 (the “SEC”) on October 16, 2009.

On February 11, 2010, Freddie Mac notified MGIC (the “Freddie Mac Notification”) that it may utilize MIC to write new business in states in which MGIC does not meet minimum regulatory capital requirements to write new business and does not obtain appropriate waivers of those requirements. This conditional approval to use MIC as a “Limited Insurer” will expire December 31, 2012. This conditional approval includes terms substantially similar to those in the Fannie Mae Agreement and is summarized more fully in our Form 8-K filed with the SEC on February 16, 2010.

Under the Fannie Mae Agreement, Fannie Mae approved MIC as an eligible mortgage insurer only through December 31, 2011 and Freddie Mac has approved MIC as a “Limited Insurer” only through December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will be determined by the applicable GSE’s mortgage insurer eligibility requirements then in effect. For more information, see our risk factor titled “MGIC may not continue to meet the GSEs’ mortgage insurer eligibility requirements”. Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize MIC with more than the $200 million contribution without prior approval from each GSE, which limits the amount of business MIC can write. We believe that the amount of capital that MGIC has contributed to MIC will be sufficient to write business for the term of the Fannie Mae Agreement in the jurisdictions in which MIC is eligible to do so. Depending on the level of losses that MGIC experiences in the future, however, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific 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 is not eligible to write business.

A failure to meet the specific minimum regulatory capital requirements to insure new business does not necessarily mean that MGIC does not have sufficient resources to pay claims on its insurance liabilities. While we believe that we have claims paying resources at MGIC that exceed our claim obligations on our insurance in force, even in scenarios in which we fail to meet regulatory capital requirements, we cannot assure you that the events that lead to us failing to meet regulatory capital requirements would not also result in our not having sufficient claims paying resources. Furthermore, our estimates of our claims paying resources and claim obligations are based on various assumptions. These assumptions include our anticipated rescission activity, future housing values and future unemployment rates. These assumptions are subject to in