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MGIC INVESTMENT CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

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Overview


Through our subsidiaries MGIC and MIC, we are the leading provider of private
mortgage insurance in the United States, as measured by insurance in force, 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,
2011. 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 composition of primary
default inventory table under "Results of Consolidated Operations-Losses-Losses
incurred" below. The discussion of our business in this document generally does
not apply to our Australian operations which have historically been immaterial.
The results of our operations in Australia are included in the consolidated
results disclosed. For additional information about our Australian operations,
see our risk factor titled "Our Australian operations may suffer significant
losses" and "Overview-Australia" in our 10-K MD&A.

Forward Looking and Other Statements


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

Outlook

At this time, we are facing the following particularly significant challenges:

· Whether we may continue to write insurance on new residential mortgage loans

due to actions our regulators or the GSEs could take based upon our capital

    position or based upon their projections of future deterioration in our
    capital position. This challenge is discussed under "Capital" below.




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· Whether we will prevail in legal proceedings challenging whether our

rescissions were proper or if we enter into material resolution arrangements.

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For additional information about this challenge and other potentially

significant challenges that we face, see "Rescissions" below as well as our

risk factors titled "Our losses could increase if rescission rates decrease

faster than we are projecting, we do not prevail in proceedings challenging

whether our rescissions were proper or we enter into material resolution

arrangements," "We are defendants in private and government litigation and are

subject to the risk of additional private litigation, government litigation

and regulatory proceedings in the future" and "Resolution of our dispute with

the Internal Revenue Service could adversely affect us." An adverse outcome in

these matters would negatively impact our capital position. See discussion of

    this challenge under "Capital" below.



  · Whether private mortgage insurance will remain a significant credit
    enhancement alternative for low down payment single family mortgages. A

definition of "qualified residential mortgages" ("QRM") that significantly

impacts the volume of low down payment mortgages available to be insured or a

possible restructuring or change in the charters of the GSEs could

significantly affect our business. This challenge is discussed under

"Qualified Residential Mortgages" and "GSE Reform" below. For another factor

that could decrease the demand for mortgage insurance see our risk factor

titled "The implementation of the Basel III capital accord, or other changes

to our customers' capital requirements, may discourage the use of mortgage

    insurance."



Capital

Insurance regulators

The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary
state, require a mortgage insurer to maintain a minimum amount of statutory
capital relative to the risk in force (or a similar measure) in order for the
mortgage insurer to continue to write new business. We refer to these
requirements as the "Capital Requirements." New insurance written in the
jurisdictions that have Capital Requirements represented approximately 50% of
new insurance written in 2011 and the first nine months of 2012. While
formulations of minimum capital vary among jurisdictions, the most common
formulation allows for a maximum risk-to-capital ratio of 25 to 1. A
risk-to-capital ratio will increase if the percentage decrease in capital
exceeds the percentage decrease in insured risk. Therefore, as capital
decreases, the same dollar decrease in capital will cause a greater percentage
decrease in capital and a greater increase in the risk-to-capital ratio.
Wisconsin does not regulate capital by using a risk-to-capital measure but
instead requires a minimum policyholder position ("MPP"). The "policyholder
position" of a mortgage insurer is its net worth or surplus, contingency reserve
and a portion of the reserves for unearned premiums.

At September 30, 2012, MGIC's preliminary risk-to-capital ratio was 31.5 to 1,
exceeding the maximum allowed by many jurisdictions, and its preliminary
policyholder position was $344 million below the required MPP of $1.3 billion.
We expect MGIC's risk-to-capital ratio to increase and to continue to exceed 25
to 1. At September 30, 2012, the preliminary risk-to-capital ratio of our
combined insurance operations (which includes reinsurance affiliates) was 34.1
to 1. A higher risk-to-capital ratio on a combined basis may indicate that, in
order for MGIC or MIC to continue to utilize reinsurance arrangements with its
subsidiaries or subsidiaries of our holding company, additional capital
contributions to the reinsurance affiliates could be needed. These reinsurance
arrangements permit MGIC and MIC to write insurance with a higher coverage
percentage than they could on their own under certain state-specific
requirements.


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Under Statement of Statutory Accounting Principles No. 101 ("SSAP No. 101"),
which became effective January 1, 2012, MGIC received no benefit to statutory
capital at June 30, 2012 for deferred tax assets because MGIC's risk-to-capital
ratio exceeded 25 to 1 before considering those assets. The exclusion of
deferred tax assets at June 30, 2012, negatively impacted our statutory capital.
Under a permitted practice effective September 30, 2012 and until further
notice, the Office of the Commissioner of Insurance of the State of Wisconsin
("OCI") has approved MGIC to report its net deferred tax asset as an admitted
asset in an amount not to exceed 10% of surplus as regards policyholders,
notwithstanding contrary provisions of SSAP No. 101. At September 30, 2012,
pursuant to the permitted practice, deferred tax assets of $90 million were
included in statutory capital.

Although MGIC does not meet the Capital Requirements of Wisconsin, the OCI has
waived them until December 31, 2013. In place of the Capital Requirements, the
OCI Order containing the waiver of Capital Requirements (the "OCI Order")
provides that MGIC can write new business as long as it maintains regulatory
capital that the OCI determines is reasonably in excess of a level that would
constitute a financially hazardous condition. The OCI Order requires MGIC
Investment Corporation, beginning January 1, 2012 and continuing through the
earlier of December 31, 2013 and the termination of the OCI Order (the "Covered
Period"), to make cash equity contributions to MGIC as may be necessary so that
its "Liquid Assets" are at least $1 billion (this portion of the OCI Order is
referred to as the "Keepwell Provision"). "Liquid Assets," which include those
of MGIC as well as those held in certain of our subsidiaries, excluding MIC and
its reinsurance affiliates, are the sum of (i) the aggregate cash and cash
equivalents, (ii) fair market value of investments and (iii) assets held in
trusts supporting the obligations of captive mortgage reinsurers to MGIC. As of
September 30, 2012, "Liquid Assets" were approximately $5.1 billion. Although we
do not expect that MGIC's Liquid Assets will fall below $1 billion during the
Covered Period, we do expect the amount of Liquid Assets to continue to decline
materially after September 30, 2012 and through the end of the Covered Period as
MGIC's claim payments and other uses of cash continue to exceed cash generated
from operations. For more information about factors that could negatively impact
MGIC's Liquid Assets, see our risk factors titled "We are defendants in private
and government litigation and are subject to the risk of additional private
litigation, government litigation and regulatory proceedings in the future," "We
have reported net losses for the last five years, expect to continue to report
annual net losses, and cannot assure you when we will return to profitability"
and "Resolution of our dispute with the Internal Revenue Service could adversely
affect us ."

MGIC applied for waivers in the other jurisdictions with Capital Requirements
and, at this time, has active waivers from eight of them, two of which allow a
maximum risk-to-capital ratio that we expect to exceed in the fourth quarter of
2012. Four jurisdictions have either denied our request for waivers, have laws
that do not allow for waivers or have granted waivers allowing risk-to-capital
ratios that MGIC has exceeded. We are awaiting a response from three other
jurisdictions, some of which may deny our request.

As part of our longstanding plan to write new business in MIC, a direct
subsidiary of MGIC, and pursuant to the OCI Order, MGIC has made capital
contributions to MIC, with $200 million contributed in January 2012. As of
September 30, 2012, MIC had statutory capital of $443 million. In the third
quarter of 2012, we began writing new mortgage insurance in MIC on the same
policy terms as MGIC, in those jurisdictions where we did not have active
waivers of Capital Requirements for MGIC. In the third quarter of 2012, MIC's
new insurance written was $587 million, which includes business from certain
jurisdictions for which new insurance is again being written in MGIC after it
received the necessary waivers, but excludes business in certain jurisdictions
in which we expect MIC to write new insurance in the fourth quarter of 2012,
after MGIC exceeds the risk-to-capital ratio limit included in the
jurisdictions' waivers. With the $443 million of statutory capital in MIC, we
have the capacity to write 100% of our new insurance written in MIC for at least
five years at current quality and volume levels of new insurance written if we
obtained GSE approval to do so. We are currently writing new mortgage insurance
in MIC in Florida, Idaho, New Jersey, New York, Ohio, Puerto Rico and Texas. MIC
is licensed to write business in all jurisdictions and, subject to the
conditions and restrictions discussed below, has received the necessary
approvals from Fannie Mae and Freddie Mac (the "GSEs") and the OCI to write
business in all of the jurisdictions that have not waived their Capital
Requirements for MGIC.


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Under an agreement in place with Fannie Mae, MIC will be eligible to write
mortgage insurance through December 31, 2013, only in those jurisdictions (other
than Wisconsin) in which MGIC cannot write new insurance due to MGIC's failure
to meet Capital Requirements and to obtain a waiver of them. The agreement with
Fannie Mae, including certain conditions and restrictions to its continued
effectiveness, 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
January 24, 2012. Such conditions include the continued effectiveness of the OCI
Order and the continued applicability of the Keepwell Provision of the OCI
Order.

Under a letter dated January 23, 2012, Freddie Mac approved MIC to write
business only in certain jurisdictions where MGIC does not meet the Capital
Requirements and does not obtain waivers of them. The January 23, 2012 approval
from Freddie Mac, including certain conditions and restrictions to its continued
effectiveness, is summarized more fully in, and included as an exhibit to, our
Form 8-K filed with the SEC on January 24, 2012. Such conditions, which remain
in effect, include requirements that while MIC is writing new business under the
Freddie Mac approval, MIC may not exceed a risk-to-capital ratio of 20:1 (at
September 30, 2012, MIC's preliminary risk-to-capital ratio was 0.3 to 1), MGIC
and MIC comply with all terms and conditions of the OCI Order, the OCI Order
remain effective, and that MIC provide MGIC access to the capital of MIC in an
amount necessary for MGIC to maintain sufficient liquidity to satisfy its
obligations under insurance policies issued by MGIC. As requested by the OCI, we
have notified Freddie Mac that the OCI has objected to this last requirement and
others contained in the Freddie Mac approval because those requirements do not
recognize the OCI's statutory authority and obligations. In this regard, see the
third condition to the September 28, 2012 Freddie Mac letter referred to in the
next paragraph.

Under a letter dated August 1, 2012, as amended by a letter dated September 28,
2012 (collectively, the "September Freddie Mac Letter"), Freddie Mac expanded
the jurisdictions in which MIC is approved to cover all of the 15 jurisdictions
besides Wisconsin that have Capital Requirements when MGIC is not able to write
new business in a jurisdiction because MGIC would not meet those Requirements,
after considering any waiver that may be granted. The approval in the September
Freddie Mac Letter is subject to the following conditions: (1) a $100 million
capital contribution to MGIC by our holding company be made on or before
December 1, 2012 (the "Contribution Condition"); (2) substantial agreement to a
settlement of our dispute with Freddie Mac regarding the interpretation of
certain pool policies be reached on or before October 31, 2012 (such condition
is the "Settlement Condition"; for more information about this dispute, see Note
5 "Litigation and Contingencies"); and (3) agreement by the OCI by December 31,
2012 that MIC's capital will be available to MGIC to support MGIC's policyholder
obligations without segregation of those obligations (the "OCI Condition"). The
approval in the September Freddie Mac Letter may be withdrawn at any time, ends
December 31, 2013 and is also subject to compliance with the conditions and
restrictions in Freddie Mac's January 23, 2012 letter. This approval is only
summarized above; the September Freddie Mac Letter was included as an exhibit to
our Form 8-K filed with the SEC on October 2, 2012.

The Settlement Condition has been met, and with the exception of drafting issues
that we consider minor, MGIC and Freddie Mac have agreed on the terms and text
of a definitive settlement agreement, subject to approval by the Boards of
Directors of MGIC and Freddie Mac and by the FHFA. Under the settlement
agreement, MGIC is to pay Freddie Mac $267.5 million in satisfaction of any
further obligations under the policies in dispute, of which $100 million is to
be paid upon effectiveness of the settlement and the remaining $167.5 million is
to be paid in 48 equal monthly installments thereafter.

The settlement will become effective if and when the definitive settlement
agreement is signed by all parties, including the FHFA. MGIC does not intend to
sign the settlement agreement unless MIC is approved by Freddie Mac and Fannie
Mae, for a period that MGIC and the GSEs need to agree on, to write business in
jurisdictions in which MGIC cannot due to failure to meet the Capital
Requirements (the "Further MIC Approvals"). If the Further MIC Approvals are
obtained, and there is a satisfactory resolution of the OCI Condition (which is
completely beyond our control), we are willing to satisfy the Contribution
Condition and MGIC is willing to sign the settlement agreement.

While we are hopeful of making further progress regarding the settlement, there
are substantial risks the settlement will not be concluded. We have not made any
loss provision for a settlement and are unable to predict if and when a signed
and effective settlement will be reached. Effectiveness of the settlement would
negatively impact our statutory capital and materially worsen the current
non-compliance with Capital Requirements. Absent a settlement, such an effect
could also occur from changed circumstances that lead us to conclude a loss is
probable in litigation.


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If one GSE does not approve MIC in all jurisdictions that have not waived their
Capital Requirements for MGIC, MIC may be able to write insurance on loans that
will be sold to the other GSE or retained by private investors. However, because
lenders may not know which GSE will purchase their loans until mortgage
insurance has been procured, lenders may be unwilling to procure mortgage
insurance from MIC. Furthermore, if we are unable to write business on a
nationwide basis utilizing a combination of MGIC and MIC, lenders may be
unwilling to procure insurance from us anywhere. In addition, the terms of the
September Freddie Mac Letter may discourage some lenders from selecting MGIC or
MIC as a mortgage insurer.

Insurance departments, in their sole discretion, may modify, terminate or extend
their waivers of Capital Requirements. If an insurance department other than the
OCI modifies or terminates its waiver, or if it fails to grant a waiver or renew
its waiver after expiration, depending on the circumstances, MGIC could be
prevented from writing new business in that particular jurisdiction. Also,
depending on the level of losses that MGIC experiences in the future, it is
possible that regulatory action by one or more jurisdictions, including those
that do not have specific Capital Requirements, may prevent MGIC from continuing
to write new insurance in some or all of the jurisdictions in which MIC is not
eligible to insure loans purchased or guaranteed by Fannie Mae or Freddie Mac.
If this were to occur, we would need to seek the GSEs' approval to allow MIC to
write business in those jurisdictions.


                                                                            

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The OCI, in its sole discretion, may modify, terminate or extend its waiver of
Capital Requirements, although any modification or extension of the Keepwell
Provision requires our written consent. If the OCI modifies or terminates its
waiver, or if it fails to renew its waiver upon expiration, depending on the
circumstances, MGIC could be prevented from writing new business in all
jurisdictions if MGIC does not comply with the Capital Requirements. If MGIC
were prevented from writing new business in all jurisdictions, our insurance
operations in MGIC would be in run-off (meaning no new loans would be insured
but loans previously insured would continue to be covered, with premiums
continuing to be received and losses continuing to be paid on those loans) until
MGIC either met the Capital Requirements or obtained a necessary waiver to allow
it to once again write new business. Furthermore, if the OCI revokes or fails to
renew MGIC's waiver, MIC's ability to write new business would be severely
limited because the GSEs' approval of MIC is conditioned upon the continued
effectiveness of the OCI Order.

We cannot assure you that the OCI or any other jurisdiction that has granted a
waiver of its Capital Requirements will not modify or revoke the waiver, or will
renew the waiver when it expires; that the GSEs will approve MIC to write new
business in all jurisdictions in which MGIC is unable to do so; or that MGIC
could obtain the additional capital necessary to comply with the Capital
Requirements. At present the amount of additional capital we would need to
comply with the Capital Requirements would 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 debt convert that debt
into shares of our common stock."

For more information about factors that could negatively impact MGIC's
compliance with Capital Requirements, which depending on the severity of adverse
outcomes could exacerbate materially the current non-compliance with Capital
Requirements, see our risk factors titled "We are defendants in private and
government litigation and are subject to the risk of additional private
litigation, government litigation and regulatory proceedings in the future," "We
have reported net losses for the last five years, expect to continue to report
annual net losses, and cannot assure you when we will return to profitability"
and "Resolution of our dispute with the Internal Revenue Service could adversely
affect us ." As discussed above, we have not accrued an estimated loss in our
financial statements to reflect the satisfaction of the Settlement Condition. In
addition, as discussed below, in accordance with Accounting Standards
Codification ("ASC") 450-20, we have not accrued an estimated loss in our
financial statements to reflect possible adverse developments in other
litigation or other dispute resolution proceedings. An accrual, if required and
depending on the amount, could exacerbate materially MGIC's current
non-compliance with Capital Requirements. In addition to the factors listed
above, our statutory capital and compliance with Capital Requirements could be
negatively affected by an unfunded pension liability. An unfunded pension
liability for statutory capital purposes may result from increases in pension
benefit obligations due to a lower discount rate assumption or decreases to the
fair value of pension plan assets due to poor asset performance, as well as
changes in certain other actuarial assumptions.

Since mid-2011, two of our competitors, Republic Mortgage Insurance Company
("RMIC") and PMI Mortgage Insurance Co. ("PMI"), ceased writing new insurance
commitments, were placed under the supervision of the insurance departments of
their respective domiciliary states and are subject to partial claim payment
plans, with the remaining claim amounts deferred. (PMI's parent company
subsequently filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code.) In addition, in 2008, Triad Guaranty Insurance Corporation
ceased writing new business and entered into voluntary run-off. It is also
subject to a partial payment plan ordered by its domiciliary state.


                                                                            

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MGIC's failure to meet the Capital Requirements to insure new business does not
necessarily mean that MGIC does not have sufficient resources to pay claims on
its insurance liabilities. While we believe that MGIC has sufficient claims
paying resources to meet its claim obligations on its insurance in force on a
timely basis, even though it does not meet Capital Requirements, we cannot
assure you that the events that led to MGIC failing to meet Capital Requirements
would not also result in it not having sufficient claims paying resources.
Furthermore, our estimates of MGIC's claims paying resources and claim
obligations are based on various assumptions. These assumptions include the
timing of the receipt of claims on loans in our delinquency inventory and future
claims that we anticipate will ultimately be received, our anticipated
rescission activity, 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 when anticipated claims will be received, housing values, and unemployment
rates highly volatile in the sense that there is a wide range of reasonably
possible outcomes. Our anticipated rescission activity is also subject to
inherent uncertainty due to the difficulty of predicting the amount of claims
that will be rescinded and the outcome of any legal proceedings or settlement
discussions related to rescissions that we make, including those with
Countrywide. (For more information about the Countrywide legal proceedings, see
Note 5 - "Litigation and Contingencies" and our risk factor titled "We are
defendants in private and government litigation and are subject to the risk of
additional private litigation, government litigation and regulatory proceedings
in the future.")

GSEs

The GSEs have approved MGIC as an eligible mortgage insurer, under remediation
plans, even though our insurer financial strength (IFS) rating is below the
published GSE minimum. The GSEs may change the requirements under our
remediation plans or fail to renew, when they expire, their approvals of MIC as
an eligible insurer. These possibilities could result from changes imposed on
the GSEs by their regulator or due to an actual or GSE-projected deterioration
in our capital position. For additional information about this challenge see our
risk factors titled "We may not continue to meet the GSEs' mortgage insurer
eligibility requirements," "Regulatory capital requirements may prevent us from
continuing to write new insurance on an uninterrupted basis" and "We have
reported losses for the last five years, expect to continue to report annual net
losses, and cannot assure you when we will return to profitability."

Rescissions


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.


                                                                            

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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 can 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. Prior to 2008, rescissions of coverage on loans for which claims have
been submitted to us were not a material portion of our claims resolved during a
year. However, beginning in 2008, our rescission of coverage on loans has
materially mitigated our paid losses. In each of 2009 and 2010, rescissions
mitigated our paid losses by approximately $1.2 billion; in 2011, rescissions
mitigated our paid losses by approximately $0.6 billion; and in the first nine
months of 2012, rescissions mitigated our paid losses by approximately $0.2
billion (in each case, the figure includes amounts that would have either
resulted in a claim payment or been charged to a deductible under a bulk or pool
policy, and may have been charged to a captive reinsurer). In recent quarters,
8% to 13% of claims received in a quarter have been resolved by rescissions,
down from the peak of approximately 28% in the first half of 2009.

As discussed in Note 5 - "Litigation and Contingencies" and noted in our risk
factor titled "We are defendants in private and government litigation and are
subject to the risk of additional private litigation, government litigation and
regulatory proceedings in the future," we are in mediation in an effort to
resolve our dispute with Countrywide. In connection with that mediation, we have
voluntarily suspended rescissions of coverage related to loans that we believe
could be included in a potential resolution. As of September 30, 2012, coverage
on approximately 1,700 loans, representing total potential claim payments of
approximately $125 million, that we had determined was rescindable was affected
by our decision to suspend such rescissions. Substantially all of these
potential rescissions relate to claims received beginning in the first quarter
of 2011 or later and, had we not suspended rescissions, most of these
rescissions would have been processed in the first nine months of 2012. In
addition, as of September 30, 2012, approximately 350 rescissions, representing
total potential claim payments of approximately $23 million, were affected by
our decision to suspend rescissions for customers other than Countrywide.
Although the loans with suspended rescissions are included in our delinquency
inventory, for purposes of determining our reserve amounts, it is assumed that
coverage on these loans will be rescinded. The decision to suspend these
potential rescissions does not represent the only reason for the recent decline
in the percentage of claims that have been resolved through rescissions and we
continue to expect that our rescissions will continue to decline.

Our loss reserving methodology incorporates the effect that rescission activity
is expected to have on the losses we will pay on our delinquent inventory.
Historically, the number of rescissions that we have reversed has been
immaterial. 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 cannot 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. The estimation of the impact of rescissions on incurred losses, as
shown in the table below, must be considered together with the various other
factors impacting incurred losses and not in isolation. At September 30, 2012,
we had 148,885 loans in our primary delinquency inventory; a significant portion
of these loans will cure their delinquency or be rescinded and will not involve
paid claims.


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The table below represents our estimate of the impact rescissions have had on reducing our loss reserves, paid losses and losses incurred.

                                               Three Months Ended               Nine Months Ended
                                                  September 30,                   September 30,
                                              2012             2011           2012             2011
                                                                  (In billions)

Estimated rescission reduction -
beginning reserve                          $      0.6       $      0.9     

$ 0.7 $ 1.3


Estimated rescission reduction - losses
incurred                                            -                -              -                -

Rescission reduction - paid claims                0.1              0.1            0.2              0.5
Amounts that may have been applied to a
deductible                                          -                -              -                -
Net rescission reduction - paid claims            0.1              0.1            0.2              0.5

Estimated rescission reduction - ending
reserve (1)                                $      0.5       $      0.8     $      0.5       $      0.8



(1) As noted in Note 5 - "Litigation and Contingencies" we are in mediation in
an effort to resolve our dispute with Countrywide. In connection with that
mediation, we have voluntarily suspended rescissions of coverage related to
loans that we believe could be included in a potential resolution. As of
September 30, 2012, coverage on approximately 1,700 loans, representing total
potential claim payments of approximately $125 million, that we had determined
was rescindable was affected by our decision to suspend such rescissions.
Substantially all of these potential rescissions relate to claims received
beginning in the first quarter of 2011 or later and, had we not suspended
rescissions, most of these rescissions would have been processed in the first
nine months of 2012. In addition, as of September 30, 2012, approximately 350
rescissions, representing total potential claim payments of approximately $23
million, were affected by our decision to suspend rescissions for customers
other than Countrywide. Although the loans with suspended rescissions are
included in our delinquency inventory, for purposes of determining our reserve
amounts, it is assumed that coverage on these loans will be rescinded, and thus
are included in the estimated $0.5 million estimated rescission reduction to
ending reserves at September 30, 2012. The decision to suspend these potential
rescissions does not represent the only reason for the recent decline in the
percentage of claims that have been resolved through rescissions and we continue
to expect that our rescissions will continue to decline.

At September 30, 2012, our loss reserves continued to be significantly impacted by expected rescission activity. We expect that the reduction of our loss reserves due to rescissions will continue to decline because our recent experience indicates new notices in our default inventory have a lower likelihood of being rescinded than those already in the inventory.


The liability associated with our estimate of premiums to be refunded on
expected future rescissions is accrued for separately. At September 30, 2012 and
December 31, 2011 the estimate of this liability totaled $49 million and $58
million, respectively. Separate components of this liability are included in
"Other liabilities" and "Premium deficiency reserve" on our consolidated balance
sheet. Changes in the liability affect premiums written and earned and change in
premium deficiency reserve.

If the insured disputes our right to rescind coverage, the outcome of the
dispute ultimately would be determined by legal proceedings. Under our policies,
legal proceedings disputing our right to rescind coverage may be brought up to
three years after the lender has obtained title to the property (typically
through a foreclosure) or the property was sold in a sale that we approved,
whichever is applicable, although in a few jurisdictions there is a longer time
to bring such an action. For the majority of our rescissions since the beginning
of 2009 that are not subject to a settlement agreement, this period in which a
dispute may be brought has not ended. We consider a rescission resolved for
financial reporting purposes even though legal proceedings have been initiated
and are ongoing. Although it is reasonably possible that, when the proceedings
are completed, there will be a determination that we were not entitled to
rescind in all cases, we are unable to make a reasonable estimate or range of
estimates of the potential liability. Under ASC 450-20, an estimated loss from
such proceedings is accrued for only if we determine that the loss is probable
and can be reasonably estimated. Therefore, when establishing our loss reserves,
we do not include additional loss reserves that would reflect an adverse outcome
from ongoing legal proceedings, including those with Countrywide. For more
information about these legal proceedings, see Note 5 - "Litigation and
Contingencies" and our risk factor titled "We are defendants in private and
government litigation and are subject to the risk of additional private
litigation, government litigation and regulatory proceedings in the future."


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

In 2010, we entered into a settlement agreement with a lender-customer regarding
our rescission practices. In April 2011, Freddie Mac advised its servicers that
they must obtain its prior approval for rescission settlements and Fannie Mae
advised its servicers that they are prohibited from entering into such
settlements. In addition, in April 2011, Fannie Mae notified us that we must
obtain its prior approval to enter into certain settlements. We continue to
discuss with other lender-customers their objections to material rescissions and
have reached settlement terms with several of our significant lender-customers.
In connection with some of these settlement discussions, we have suspended
rescissions related to loans that we believe could be included in potential
settlements. As of September 30, 2012, approximately 350 rescissions,
representing total potential claim payments of approximately $23 million, were
affected by our decision to suspend rescissions for customers other than
Countrywide. Any definitive agreement with these customers would be subject to
GSE approval under announcements they made last year. Both GSEs approved our
proposed settlement agreement with one customer. We considered the terms of the
proposed agreement when establishing our loss reserves at September 30, 2012.
This agreement did not have a significant impact on our established loss
reserves. Neither GSE has approved our other settlement agreements, which were
structured in a different manner than the one that was approved by the GSEs, and
the terms of these other agreements were not considered when establishing our
loss reserves at September 30, 2012. We have also reached settlement agreements
that do not require GSE approval, but they have not been material in the
aggregate.

Qualified Residential Mortgages


The financial reform legislation that was passed in July 2010 (the "Dodd-Frank
Act" or "Dodd-Frank") requires a securitizer to retain at least 5% of the risk
associated with mortgage loans that are securitized, and in some cases the
retained risk may be allocated between the securitizer and the lender that
originated the loan. This risk retention requirement does not apply to mortgage
loans that are Qualified Residential Mortgages ("QRMs") or that are insured by
the FHA or another federal agency. In March 2011, federal regulators requested
public comments on a proposed risk retention rule that includes a definition of
QRM. The proposed definition of QRM contains many underwriting requirements,
including a maximum loan-to-value ratio ("LTV") of 80% on a home purchase
transaction, a prohibition on seller contributions toward a borrower's down
payment or closing costs, and certain limits on a borrower's debt-to-income
ratio. The LTV is to be calculated without including mortgage insurance. The
following table shows the percentage of our new risk written by LTV for 2011 and
the first nine months of 2012.


                                                                            

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                                   Percentage of new risk written
                                          YTD             Full Year
                                  September 30, 2012        2011
                  LTV:
                  80% and under           0%                 0%
                  80.1% - 85%             6%                 6%
                  85.1 - 90%              36%                41%
                  90.1 - 95%              54%                50%
                  95.1 - 97%              4%                 3%
                  > 97%                   0%                 0%



The regulators also requested public comments regarding an alternative QRM
definition, the underwriting requirements of which would allow loans with a
maximum LTV of 90% and higher debt-to-income ratios than allowed under the
proposed QRM definition, and that may consider mortgage insurance in determining
whether the LTV requirement is met. We estimate that approximately 22% of our
new risk written in 2011 and 21% in the first nine months of 2012 was on loans
that would have met the alternative QRM definition.

The regulators also requested that the public comments include information that
may be used to assess whether mortgage insurance reduces the risk of default. We
submitted a comment letter, including studies to the effect that mortgage
insurance reduces the risk of default.

The public comment period for the proposed rule expired on August 1, 2011. At
this time we do not know when a final rule will be issued, although the final
rule is not expected until, at the earliest, 2013. Under the proposed rule,
because of the capital support provided by the U.S. Government, the GSEs satisfy
the Dodd-Frank risk-retention requirements while they are in conservatorship.
Therefore, under the proposed rule, lenders that originate loans that are sold
to the GSEs while they are in conservatorship would not be required to retain
risk associated with those loans.

Depending on, among other things, (a) the final definition of QRM and its
requirements for LTV, seller contribution and debt-to-income ratio, (b) to what
extent, if any, the presence of mortgage insurance would allow for a higher LTV
in the definition of QRM, and (c) whether lenders choose mortgage insurance for
non-QRM loans, the amount of new insurance that we write may be materially
adversely affected. For other factors that could decrease the demand for
mortgage insurance, see our risk factor titled "If the volume of low down
payment home mortgage originations declines, the amount of insurance that we
write could decline, which would reduce our revenues" and "The implementation of
the Basel III capital accord, or other changes to our customers' capital
requirements, may discourage the use of mortgage insurance."


                                                                            

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GSE Reform


In September 2008, the Federal Housing Finance Agency ("FHFA") was appointed as
the conservator of the GSEs. As their conservator, FHFA has the authority to
control and direct the operations of the GSEs. The appointment of FHFA as
conservator, the increasing role that the federal government has assumed in the
residential mortgage market, our industry's inability, due to capital
constraints, to write sufficient business to meet the needs of the GSEs or other
factors may increase the likelihood that the business practices of the GSEs
change in ways that may have a material adverse effect on us. In addition, these
factors may increase the likelihood that the charters of the GSEs are changed by
new federal legislation. The Dodd-Frank Act required the U.S. Department of the
Treasury to report its recommendations regarding options for ending the
conservatorship of the GSEs. This report was released on February 11, 2011 and
while it does not provide any definitive timeline for GSE reform, it does
recommend using a combination of federal housing policy changes to wind down the
GSEs, shrink the government's footprint in housing finance, and help bring
private capital back to the mortgage market. Members of Congress have since
introduced several bills intended to scale back the GSEs. As a result of the
matters referred to above, it is uncertain what role the GSEs, FHA and private
capital, including private mortgage insurance, will play in the domestic
residential housing finance system in the future or the impact of any such
changes on our business. In addition, the timing of the impact on our business
is uncertain. Any changes would require Congressional action to implement and it
is difficult to estimate when Congressional action would be final and how long
any associated phase-in period may last.

The GSEs have different loan purchase programs that allow different levels of
mortgage insurance coverage. Under the "charter coverage" program, on certain
loans lenders may choose a mortgage insurance coverage percentage that is less
than the GSEs' "standard coverage" and only the minimum required by the GSEs'
charters, with the GSEs paying a lower price for such loans. In 2011 and the
first nine months of 2012, nearly all of our volume was on loans with GSE
standard coverage. We charge higher premium rates for higher coverage
percentages. To the extent lenders selling loans to GSEs in the future choose
charter coverage for loans that we insure, our revenues would be reduced and we
could experience other adverse effects.

Both of the GSEs have guidelines on terms under which they can conduct business
with mortgage insurers, such as MGIC, with financial strength ratings below
Aa3/AA-. (MGIC's financial strength rating from Moody's Investors Service is B2,
and is on review for further downgrade, and from Standard & Poor's Rating
Services is B-, with a negative outlook.) For information about how these
guidelines could affect us, see "Capital - GSEs" above and our risk factor
titled "We may not continue to meet the GSEs' mortgage insurer eligibility
requirements."

Loan Modification and Other Similar Programs


Beginning in the fourth quarter of 2008, the federal government, including
through the Federal Deposit Insurance Corporation and the GSEs, and several
lenders have adopted programs to modify loans to make them more affordable to
borrowers with the goal of reducing the number of foreclosures. During 2010,
2011 and the first nine months of 2012, we were notified of modifications that
cured delinquencies that had they become paid claims would have resulted in
approximately $3.2 billion, $1.8 billion and $895 million, respectively, of
estimated claim payments. As noted below, we cannot predict with a high degree
of confidence what the ultimate re-default rate will be. Although the recent
re-default rate on these modifications has been lower, for internal reporting
purposes, we assume approximately 50% of those modifications will ultimately
re-default, and those re-defaults may result in future claim payments. Because
modifications cure the defaults with respect to the previously defaulted loans,
our loss reserves do not account for potential re-defaults unless at the time
the reserve is established, the re-default has already occurred. Based on
information that is provided to us, most of the modifications resulted in
reduced payments from interest rate and/or amortization period adjustments; less
than 5% resulted in principal forgiveness.


                                                                            

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One loan modification program is the Home Affordable Modification Program
("HAMP"). Some of HAMP's eligibility criteria relate to the borrower's current
income and non-mortgage debt payments. Because the GSEs and servicers do not
share such information with us, we cannot determine with certainty the number of
loans in our delinquent inventory that are eligible to participate in HAMP. We
believe that it could take several months from the time a borrower has made all
of the payments during HAMP's three month "trial modification" period for the
loan to be reported to us as a cured delinquency.

We rely on information provided to us by the GSEs and servicers. We do not
receive all of the information from such sources that is required to determine
with certainty the number of loans that are participating in, or have
successfully completed, HAMP. We are aware of approximately 9,600 loans in our
primary delinquent inventory at September 30, 2012 for which the HAMP trial
period has begun and which trial periods have not been reported to us as
completed or cancelled. Through September 30, 2012 approximately 43,100
delinquent primary loans have cured their delinquency after entering HAMP and
are not in default. In 2011 and the first nine months of 2012, approximately 18%
and 16%, respectively, of our primary cures were the result of a modification,
with HAMP accounting for approximately 70% and 73% of those modifications,
respectively. By comparison, in 2010, approximately 27% of our primary cures
were the result of a modification, with HAMP accounting for approximately 60% of
those modifications. We believe that we have realized the majority of the
benefits from HAMP because the number of loans insured by us that we are aware
are entering HAMP trial modification periods has decreased significantly over
time. Recent announcements by the U.S. Treasury have extended the end date of
the HAMP program through 2013, expanded the eligibility criteria of HAMP and
increased lenders' incentives to modify loans through principal forgiveness.
Approximately 66% of the loans in our primary delinquent inventory are
guaranteed by the GSEs. The GSEs have informed us that they already use expanded
criteria (beyond the HAMP guidelines) for determining eligibility for loan
modification and currently do not offer principal forgiveness. Therefore, we
currently expect new loan modifications will continue to only modestly mitigate
our losses in 2012.

In 2009, the GSEs began offering the Home Affordable Refinance Program ("HARP").
HARP allows borrowers who are not delinquent but who may not otherwise be able
to refinance their loans under the current GSE underwriting standards, to
refinance their loans. We allow the HARP refinances on loans that we insure,
regardless of whether the loan meets our current underwriting standards, and we
account for the refinance as a loan modification (even where there is a new
lender) rather than new insurance written. To incent lenders to allow more
current borrowers to refinance their loans, in October 2011, the GSEs and their
regulator, FHFA, announced an expansion of HARP. The expansion includes, among
other changes, releasing certain representations in certain circumstances
benefitting the GSEs. We have agreed to allow these additional HARP refinances,
including releasing the insured in certain circumstances from certain rescission
rights we would have under our policy. While an expansion of HARP may result in
fewer delinquent loans and claims in the future, our ability to rescind coverage
will be limited in certain circumstances. We are unable to predict what net
impact these changes may have on our incurred or paid losses.

The effect on us of loan modifications depends on how many modified loans
subsequently re-default, which in turn can be affected by changes in housing
values. Re-defaults can result in losses for us that could be greater than we
would have paid had the loan not been modified. At this point, we cannot predict
with a high degree of confidence what the ultimate re-default rate will be. In
addition, because we do not have information in our database for all of the
parameters used to determine which loans are eligible for modification programs,
our estimates of the number of loans qualifying for modification programs are
inherently uncertain. If legislation is enacted to permit a portion of a
borrower's mortgage loan balance to be reduced in bankruptcy and if the borrower
re-defaults after such reduction, then the amount we would be responsible to
cover would be calculated after adding back the reduction. Unless a lender has
obtained our prior approval, if a borrower's mortgage loan balance is reduced
outside the bankruptcy context, including in association with a loan
modification, and if the borrower re-defaults after such reduction, then under
the terms of our policy the amount we would be responsible to cover would be
calculated net of the reduction.


                                                                            

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Eligibility under certain loan modification programs can also adversely affect
us by creating an incentive for borrowers who are able to make their mortgage
payments to become delinquent in an attempt to obtain the benefits of a
modification. New notices of delinquency increase our incurred losses.

In response to the significant increase in the number of foreclosures that began
in 2009, various government entities and private parties have from time to time
enacted foreclosure (or equivalent) moratoriums and suspensions (which we
collectively refer to as moratoriums). In October 2010, a number of mortgage
servicers temporarily halted some or all of the foreclosures they were
processing after discovering deficiencies in their foreclosure processes and
those of their service providers. In response to the deficiencies, some states
changed their foreclosure laws to require additional review and verification of
the accuracy of foreclosure filings. Some states also added requirements to the
foreclosure process, including mediation processes and requirements to file new
affidavits. Certain state courts have issued rulings calling into question the
validity of some existing foreclosure practices. These actions halted or
significantly delayed foreclosures. Furthermore five of the nation's largest
mortgage servicers agreed to implement new servicing and foreclosure practices
as part of a settlement announced in February 2012, with the federal government
and the attorneys general of 49 states.

Past moratoriums or delays were designed to afford time to determine whether
loans could be modified and did not stop the accrual of interest or affect other
expenses on a loan, and we cannot predict whether any future moratorium or
lengthened timeframes would do so. Therefore, unless a loan is cured during a
moratorium or delay, at the completion of a foreclosure, additional interest and
expenses may be due to the lender from the borrower. In some circumstances, our
paid claim amount may include some additional interest and expenses. For
moratoriums or delays resulting from investigations into servicers and other
parties' actions in foreclosure proceedings, our willingness to pay additional
interest and expenses may be different, subject to the terms of our mortgage
insurance policies. The various moratoriums and extended timeframes may
temporarily delay our receipt of claims and may increase the length of time a
loan remains in our delinquent loan inventory.

We do not know what effect improprieties that may have occurred in a particular
foreclosure have on the validity of that foreclosure, once it was completed and
the property transferred to the lender. Under our policy, in general, completion
of a foreclosure is a condition precedent to the filing of a claim. Beginning in
2011 and from time to time, various courts have ruled that servicers did not
provide sufficient evidence that they were the holders of the mortgages and
therefore they lacked authority to foreclose. Some courts in other jurisdictions
have considered similar issues and reached similar conclusions, but other courts
have reached different conclusions. These decisions have not had a direct impact
on our claims processes or rescissions.


                                                                            

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Factors Affecting Our Results

Our results of operations are affected by:


                           · Premiums written and earned



Premiums written and earned in a year are influenced by:

· New insurance written, which increases insurance in force, and is the

aggregate principal amount of the mortgages that are insured during a period.

Many factors affect new insurance written, including the volume of low down

payment home mortgage originations and competition to provide credit

enhancement on those mortgages, including competition from the FHA, other

mortgage insurers, GSE programs that may reduce or eliminate the demand for

mortgage insurance and other alternatives to mortgage insurance. In addition,

new insurance written can be influenced by a lender's assessment of the

financial strength of our insurance operations and the matters in Freddie

Mac's August 1, 2012 letter, as amended by a letter dated September 28, 2012.

New insurance written does not include loans previously insured by us which

are modified, such as loans modified under the Home Affordable Refinance

    Program.



  · Cancellations, which reduce insurance in force. Cancellations due to

refinancings are affected by the level of current mortgage interest rates

compared to the mortgage coupon rates throughout the in force book.

Refinancings are also affected by current home values compared to values when

the loans in the in force book became insured and the terms on which mortgage

credit is available. Cancellations also include rescissions, which require us

to return any premiums received related to the rescinded policy, and policies

cancelled due to claim payment, which require us to return any premium

received from the date of default. Finally, cancellations are affected by home

price appreciation, which can give homeowners the right to cancel the mortgage

    insurance on their loans.


· Premium rates, which are affected by the risk characteristics of the loans

    insured and the percentage of coverage on the loans.



  · Premiums ceded to reinsurance subsidiaries of certain mortgage lenders
    ("captives") and risk sharing arrangements with the GSEs.



Premiums are generated by the insurance that is in force during all or a portion
of the period. A change in the average insurance in force in the current period
compared to an earlier period is a factor that will increase (when the average
in force is higher) or reduce (when it is lower) premiums written and earned in
the current period, although this effect may be enhanced (or mitigated) by
differences in the average premium rate between the two periods as well as by
premiums that are returned or expected to be returned in connection with claim
payments and rescissions, and premiums ceded to captives or the GSEs. Also, new
insurance written and cancellations during a period will generally have a
greater effect on premiums written and earned in subsequent periods than in the
period in which these events occur.

                                · Investment income



Our investment portfolio is comprised almost entirely of investment grade fixed
income securities. The principal factors that influence investment income are
the size of the portfolio and its yield. As measured by amortized cost (which
excludes changes in fair market value, such as from changes in interest rates),
the size of the investment portfolio is mainly a function of cash generated from
(or used in) operations, such as net premiums received, investment earnings, net
claim payments and expenses, less cash provided by (or used for) non-operating
activities, such as debt or stock issuances or repurchases or dividend payments.
Realized gains and losses are a function of the difference between the amount
received on the sale of a security and the security's amortized cost, as well as
any "other than temporary" impairments recognized in earnings. The amount
received on the sale of fixed income securities is affected by the coupon rate
of the security compared to the yield of comparable securities at the time of
sale.


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  · Losses incurred



Losses incurred are the current expense that reflects estimated payments that
will ultimately be made as a result of delinquencies on insured loans. As
explained under "Critical Accounting Policies" in our 10-K MD&A, except in the
case of a premium deficiency reserve, we recognize an estimate of this expense
only for delinquent loans. Losses incurred are generally affected by:

· The state of the economy, including unemployment, and housing values, each of

which affects the likelihood that loans will become delinquent and whether

loans that are delinquent cure their delinquency. The level of new

delinquencies has historically followed a seasonal pattern, with new

delinquencies in the first part of the year lower than new delinquencies in

the latter part of the year, though this pattern can be affected by the state

    of the economy and local housing markets.



  · The product mix of the in force book, with loans having higher risk
    characteristics generally resulting in higher delinquencies and claims.



  · The size of loans insured, with higher average loan amounts tending to
    increase losses incurred.


· The percentage of coverage on insured loans, with deeper average coverage

    tending to increase incurred losses.


· Changes in housing values, which affect our ability to mitigate our losses

through sales of properties with delinquent mortgages as well as borrower

willingness to continue to make mortgage payments when the value of the home

    is below the mortgage balance.


· The rate at which we rescind policies. Our estimated loss reserves reflect

mitigation from rescissions of policies and denials of claims. We collectively

refer to such rescissions and denials as "rescissions" and variations of this

    term.


· The distribution of claims over the life of a book. Historically, the first

two years after loans are originated are a period of relatively low claims,

with claims increasing substantially for several years subsequent and then

declining, although persistency (percentage of insurance remaining in force

from one year prior), the condition of the economy, including unemployment and

housing prices, and other factors can affect this pattern. For example, a weak

economy or housing price declines can lead to claims from older books

increasing, continuing at stable levels or experiencing a lower rate of

    decline. See further information under "Mortgage Insurance Earnings and Cash
    Flow Cycle" below.




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  · Changes in premium deficiency reserve



Each quarter, we re-estimate the premium deficiency reserve on the remaining
Wall Street bulk insurance in force. The premium deficiency reserve primarily
changes from quarter to quarter as a result of two factors. First, it changes as
the actual premiums, losses and expenses that were previously estimated are
recognized. Each period such items are reflected in our financial statements as
earned premium, losses incurred and expenses. The difference between the amount
and timing of actual earned premiums, losses incurred and expenses and our
previous estimates used to establish the premium deficiency reserve has an
effect (either positive or negative) on that period's results. Second, the
premium deficiency reserve changes as our assumptions relating to the present
value of expected future premiums, losses and expenses on the remaining Wall
Street bulk insurance in force change. Changes to these assumptions also have an
effect on that period's results.

· Underwriting and other expenses

The majority of our operating expenses are fixed, with some variability due to contract underwriting volume. Contract underwriting generates fee income included in "Other revenue."

· Interest expense




Interest expense reflects the interest associated with our outstanding debt
obligations. The principal amount of our long-term debt obligations at September
30, 2012 is comprised of $100.1 million of 5.375% Senior Notes due in November
2015, $345 million of 5% Convertible Senior Notes due in 2017 and $389.5 million
of 9% Convertible Junior Subordinated Debentures due in 2063 (interest on these
debentures accrues and compounds even if we defer the payment of interest), as
discussed in Note 3 - "Debt" to our consolidated financial statements and under
"Liquidity and Capital Resources" below. At September 30, 2012, the convertible
debentures are reflected as a liability on our consolidated balance sheet at the
current amortized value of $370.2 million, with the unamortized discount
reflected in equity.

Mortgage Insurance Earnings and Cash Flow Cycle


In our industry, a "book" is the group of loans insured in a particular calendar
year. In general, the majority of any underwriting profit (premium revenue minus
losses) that a book generates occurs in the early years of the book, with the
largest portion of any underwriting profit realized in the first year following
the year the book was written. Subsequent years of a book generally result in
modest underwriting profit or underwriting losses. This pattern of results
typically occurs because relatively few of the claims that a book will
ultimately experience typically occur in the first few years of the book, when
premium revenue is highest, while subsequent years are affected by declining
premium revenues, as the number of insured loans decreases (primarily due to
loan prepayments), and increasing losses.


                                                                            

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Summary of 2012 Third Quarter Results

Our results of operations for the third quarter of 2012 were principally affected by the factors referred to below.

· Net premiums written and earned




Net premiums written during the third quarter of 2012 increased when compared to
the same period in 2011 due to a decrease in premium refunds related to
rescissions and paid claims (when a claim is paid we return any premium received
since the date of default) as well as the continued decline of premiums ceded to
captives. Also, in the third quarter of 2011 there was a termination of a
reinsurance agreement that resulted in a return of premium of approximately $7
million. These items were partially offset by our lower average insurance in
force.

Net premiums earned during the third quarter of 2012 decreased when compared to
the same period in 2011. The decrease was due to our lower average insurance in
force, partially offset by a decrease in premium refunds related to rescissions
and paid claims as well as the continued decline of premiums ceded to captives.

                               · Investment income


Investment income in the third quarter of 2012 was lower when compared to the same period in 2011 due to a decrease in our average invested assets as we continue to meet our claim obligations as well as a decrease in our average investment yield.

· Realized gains (losses) and other-than-temporary impairments




Net realized gains for the third quarter of 2012 included $6.2 million in net
realized gains on the sale of investments, compared to $11.4 million in net
gains on sales during the third quarter of 2011. There were no
other-than-temporary impairments recognized in the third quarter of 2012,
compared to $0.3 million in other-than-temporary impairments recognized during
the third quarter of 2011. The gross unrealized gains on our investment
portfolio were approximately $136 million at September 30, 2012. In October
2012, we realized $79 million in gains on the sale of investments. The gross
unrealized gains on our investment portfolio were approximately $55 million at
October 31, 2012.

                                 · Other revenue


Other revenue for the third quarter of 2012 increased compared to the third quarter of 2011 primarily due to an increase in contract underwriting fees.

· Losses incurred




Losses incurred for the third quarter of 2012 increased compared to the same
period in 2011 primarily due to a redundancy in pool reserves experienced during
the third quarter of 2011, offset by fewer new primary notices, net of cures.
The estimated claim rate increased slightly and the estimated severity decreased
slightly in each of the third quarters of 2012 and 2011. The primary default
inventory decreased by 5,105 delinquencies in the third quarter of 2012,
compared to a decrease of 3,558 in the third quarter of 2011. Losses incurred
for the third quarter of 2012 decreased compared to the second quarter of 2012
primarily due to a smaller increase in the estimated claim rate compared to the
second quarter of 2012.

                     · Change in premium deficiency reserve




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During the third quarter of 2012 the premium deficiency reserve on Wall Street
bulk transactions declined from $93 million, as of June 30, 2012, to $84 million
as of September 30, 2012. The decrease in the premium deficiency reserve
represents the net result of actual premiums, losses and expenses as well as a
change in net assumptions for the period. The change in assumptions for the
third quarter of 2012 is primarily related to higher estimated ultimate losses.
The $84 million premium deficiency reserve as of September 30, 2012 reflects the
present value of expected future losses and expenses that exceeds the present
value of expected future premium and already established loss reserves.

                        · Underwriting and other expenses



Underwriting and other expenses for the third quarter of 2012 decreased when
compared to the same period in 2011. The decrease reflects our reductions in
headcount.

                               · Interest expense



Interest expense for the third quarter of 2012 decreased slightly when compared
to the same period in 2011. The decrease is primarily due to lower interest on
our Senior Notes due to repayments and repurchases, partially offset by an
increase in amortization on our junior debentures.

                          · Provision for income taxes



We had a benefit from income taxes of ($3.0) and ($26.1) million in the third
quarter of 2012 and 2011, respectively. The benefit from income taxes was
reduced by $86.1 million and $47.9 million due to the recognition of a valuation
allowance for the three months ended September 30, 2012 and 2011, respectively.
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