Bank Fees Deductible Irs

MGIC Investment Corporation Reports Fourth Quarter 2012 Results.

MILWAUKEE, Feb. 28, 2013 /PRNewswire/ — MGIC Investment Corporation
(NYSE:MTG) today reported a net loss for the quarter ended December 31,
2012 of $386.7 million, compared with a net loss of $135.3 million for
the same quarter a year ago. The quarterly loss includes a previously
announced one-time charge of $267.5 million which was recorded to
reflect the settlement of the Freddie Mac pool dispute. Additionally in
the fourth quarter, loss reserve estimates were increased by
approximately $100 million to reflect probable settlements regarding
previously disclosed rescission disputes with Countrywide and another
lender.

Curt S. Culver, CEO and Chairman of the Board of Mortgage Guaranty
Insurance Corporation (“MGIC”) and MTG, said that “I am
pleased that we have settled our Freddie Mac dispute and have made
substantial progress towards resolving the Countrywide dispute. In
tandem with these efforts we are continuing to execute our strategy of
writing new business through a combination of MGIC and, as it is needed,
its wholly owned subsidiary, MGIC Indemnity Corporation.” He added
that “our strategy, which is approved by the Office of the
Commissioner of Insurance for the State of Wisconsin, Fannie Mae and
Freddie Mac, provides borrowers with a more affordable insurance option,
for higher quality loans, than they could find with the FHA.”

Diluted loss per share was $1.91 for the quarter ending December 31,
2012, compared to diluted loss per share of $0.67 for the same quarter a
year ago. The net loss for the full year ending December 31, 2012 was
$927.1 million, compared to a net loss of $485.9 million for the full
year 2011. For the full year 2012, diluted loss per share was $4.59
compared to a diluted loss per share of $2.42 for the full year
2011.

Culver further added that, “while the weak employment market
continues to challenge the pace of recovery of the legacy books and our
financial results, I am pleased to report that new insurance written
volume is up 70% while delinquency notices are down 21% year over year,
and new business written since the second half of 2008 accounts for 33%
of our primary in force.”

Total revenues for the fourth quarter were $371.4 million, compared
with $447.0 million in the fourth quarter last year. Net premiums
written for the quarter were $260.7 million, compared with $263.8
million for the same period last year. Net premiums written for the full
year 2012 were $1.017 billion, compared with $1.064 billion for the full
year 2011. Realized gains in the fourth quarter of 2011 were $87.4
million compared to $104.5 million for the same period last year.

New insurance written in the fourth quarter was $7.0 billion,
compared to $4.2 billion in the fourth quarter of 2011. In addition, the
Home Affordable Refinance Program (“HARP”) accounted for $3.5
billion of insurance that is not included in the new insurance written
total for the quarter due to these transactions being treated as
modifications of the coverage on existing insurance in force. New
insurance written for full year 2012 was $24.1 billion compared to $14.2
billion for the full year 2011. HARP activity for 2012 totaled $11.2
billion compared to $2.9 billion 2011.

As of December 31, 2012, MGIC’s primary insurance in force was
$162.1 billion, compared with $172.9 billion at December 31, 2011, and
$191.3 billion at December 31, 2010. Persistency, or the percentage of
insurance remaining in force from one year prior, was 79.8 percent at
December 31, 2012, compared with 82.9 percent at December 31, 2011, and
84.4 percent at December 31, 2010. The fair value of MGIC Investment
Corporation’s investment portfolio, cash and cash equivalents was
$5.3 billion at December 31, 2012 compared with $6.8 billion at December
31, 2011, and $8.8 billion at December 31, 2010.

At December 31, 2012, the percentage of loans that were delinquent,
excluding bulk loans, was 11.87 percent, compared with 13.79 percent at
December 31, 2011, and 14.94 percent at December 31, 2010. Including
bulk loans, the percentage of loans that were delinquent at December 31,
2012 was 13.90 percent, compared to 16.11 percent at December 31, 2011,
and 17.48 percent at December 31, 2010.

Losses incurred in the fourth quarter were $688.6 million up from
$482.1 million reported for the same period last year due to the
previously announced one-time charge of $267.5 million which was
recorded to reflect the settlement of the Freddie Mac pool dispute and
an increase to loss reserve estimates of approximately $100 million to
reflect the settlement agreements discussed above. For the full year
2012, losses incurred were $2.067 billion compared to $1.715 billion in
2011. Net underwriting and other expenses were $51.5 million in the
fourth quarter as compared to $50.7 million reported for the same period
last year. For the full year 2012 net underwriting and other expenses
were $201.4 million compared to $214.8 million in 2011.

Conference Call and Webcast Details

MGIC Investment Corporation will hold a conference call today,
February 28, 2013 at 10 a.m. ET to allow securities analysts and
shareholders the opportunity to hear management discuss the
company’s quarterly results. The conference call number is
1-866-847-7859. The call is being webcast and can be accessed at the
company’s website at http://mtg.mgic.com. The webcast is also being
distributed over CCBN’s Investor Distribution Network to both
institutional and individual investors. Investors can listen to the call
through CCBN’s individual investor center at
www.companyboardroom.com or by visiting any of the investor sites in
CCBN’s Individual Investor Network. The webcast will be available
for replay on the company’s website through April 28, 2013 under
Investor Information.

About MGIC

MGIC (www.mgic.com), the principal subsidiary of MGIC Investment
Corporation, is the nation’s largest private mortgage insurer as
measured by $162.1 billion primary insurance in force covering 1.0
million mortgages as of December 31, 2012. MGIC serves lenders
throughout the United States, Puerto Rico, and other locations helping
families achieve homeownership sooner by making affordable
low-down-payment mortgages a reality.

This press release, which includes certain additional statistical
and other information, including non-GAAP financial information and a
supplement that contains various portfolio statistics and a summary of
excess claims paying resources are both available on the Company’s
website at http://mtg.mgic.com/ under Investor Information, Press
Releases or Presentations/Webcasts.

From time to time MGIC Investment Corporation releases important
information via postings on its corporate website without making any
other disclosure and intends to continue to do so in the future.
Investors and other interested parties are encouraged to enroll to
receive automatic email alerts and Really Simple Syndication (RSS) feeds
regarding new postings. Enrollment information can be found at
http://mtg.mgic.com under Investor Information.

Safe Harbor Statement

Forward Looking Statements and Risk Factors

As used below, “we,” “our” and “us”
refer to MGIC Investment Corporation’s consolidated operations or
to MGIC Investment Corporation, as the context requires;
“MGIC” refers to Mortgage Guaranty Insurance Corporation; and
“MIC” refers to MGIC Indemnity Corporation.

Our actual results could be affected by the risk factors below.
These risk factors should be reviewed in connection with this press
release and our periodic reports to the Securities and Exchange
Commission. These risk factors may also cause actual results to differ
materially from the results contemplated by forward looking statements
that we may make. Forward looking statements consist of statements which
relate to matters other than historical fact, including matters that
inherently refer to future events. Among others, statements that include
words such as “believe,” “anticipate,”
“will” or “expect,” or words of similar import, are
forward looking statements. We are not undertaking any obligation to
update any forward looking statements or other statements we may make
even though these statements may be affected by events or circumstances
occurring after the forward looking statements or other statements were
made. No investor should rely on the fact that such statements are
current at any time other than the time at which this press release was
issued.

Capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis.

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 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 December 31, 2012, MGIC’s risk-to-capital ratio was 44.7 to
1, exceeding the maximum allowed by many jurisdictions, and its
policyholder position was $640 million below the required MPP of $1.2
billion. We expect MGIC’s risk-to-capital ratio to increase above
its December 31, 2012 level. At December 31, 2012, the risk-to-capital
ratio of our combined insurance operations (which includes reinsurance
affiliates) was 47.8 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.

Statement of Statutory Accounting Principles No. 101 (“SSAP No.
101”) became effective January 1, 2012 and prescribed new standards
for determining the amount of deferred tax assets that can be recognized
as admitted assets for determining statutory capital. Under a permitted
practice effective September 30, 2012 and until further notice, the
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 December 31, 2012, had MGIC calculated its net deferred tax
assets based on the provisions of SSAP No. 101, no deferred tax assets
would have been admitted. Pursuant to the permitted practice, deferred
tax assets of $63 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, 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, including our Australian
subsidiaries, but 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 December 31,
2012, “Liquid Assets” were approximately $4.8 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 December 31, 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.
You should read the rest of these risk factors for additional
information about factors that could negatively affect MGIC’s
Liquid Assets.

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. We cannot assure you 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
“- 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.” 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 approval by Fannie Mae and Freddie Mac (the
“GSEs”) of MIC (discussed below) is conditioned upon the
continued effectiveness of the OCI Order.

MGIC applied for waivers in the other jurisdictions with Capital
Requirements and, at this time, has active waivers from seven of them.
MIC is writing new business in the jurisdictions where MGIC does not
have active waivers. As a result, MGIC and MIC are collectively writing
business on a nationwide basis.

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 that jurisdiction. As discussed
below, under certain conditions, this business would be written in MIC.
You should read the rest of these risk factors for additional
information about factors that could negatively affect MGIC’s
statutory capital and compliance with Capital Requirements.

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, 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, premiums,
housing values and unemployment rates. These assumptions are subject to
inherent uncertainty and require judgment by management. Current
conditions in the domestic economy make the assumptions about when
anticipated claims will be received, housing values, and unemployment
rates highly volatile in the sense that there is a wide range of
reasonably possible outcomes. Our anticipated rescission activity is
also subject to inherent uncertainty due to the difficulty of predicting
the amount of claims that will be rescinded and the outcome of any legal
proceedings or settlement discussions related to rescissions. You should
read the rest of these risk factors for additional information about
factors that could negatively affect MGIC’s claims paying
resources.

As part of our longstanding plan to write new business in MIC, a
direct subsidiary of MGIC, MGIC has made capital contributions to MIC.
As of December 31, 2012, MIC had statutory capital of $448 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
second half of 2012, MIC’s new insurance written was $2.4 billion,
which includes business from certain jurisdictions for which new
insurance is again being written in MGIC after it received the necessary
waivers. We are currently writing new mortgage insurance in MIC in
Florida, Idaho, Missouri, New Jersey, New York, North Carolina, Ohio and
Puerto Rico. Approximately 19% of new insurance written in 2011 and 2012
was from jurisdictions in which MIC is currently writing business. We
project MIC can write 100% of our new insurance for at least five years
if MGIC is unable to write new business. This projection is based on the
18:1 risk-to-capital limitation prescribed by Freddie Mac’s
approval of MIC (discussed below) and assumes the mix and level of new
insurance written in the future would be the same as we wrote in 2012.
It also assumes MIC’s GSE eligibility would extend throughout this
period. If we had to write substantially more of our business in MIC and
our levels of new insurance written were to increase materially, MIC may
require additional capital to stay below Freddie Mac’s prescribed
risk-to-capital limitation or a waiver of that limitation may be
required. MIC is licensed to write business in all jurisdictions and,
subject to the conditions and restrictions discussed below, has received
the necessary approvals from GSEs and the OCI to write business in all
of the jurisdictions that have not waived their Capital Requirements for
MGIC.

Under an agreement in place with Fannie Mae, as amended November 30,
2012, MIC will be eligible to write mortgage insurance through December
31, 2013, in those jurisdictions (other than Wisconsin) in which MGIC
cannot write new insurance due to MGIC’s failure to meet Capital
Requirements and to obtain a waiver of them. MIC is also approved to
write mortgage insurance for 60 days in jurisdictions that do not have
Capital Requirements if a jurisdiction notifies MGIC that, due to its
financial condition, it may no longer write new business. The agreement
provides that Fannie Mae may, in its discretion, extend such approval to
no later than December 31, 2013. 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 November 30, 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 from Freddie Mac that was amended and restated as of
November 30, 2012, Freddie Mac approved MIC to write business only in
those jurisdictions (other than Wisconsin) where either (a) MGIC is
unable to write business because it does not meet the Capital
Requirements and does not obtain waivers of them, or (b) MGIC received
notice that it may not write business because of that
jurisdiction’s view of MGIC’s financial condition. This
approval of MIC, which may be withdrawn at any time, expires December
31, 2013, or earlier if a financial examination by the OCI determines
that there is a reasonable probability that MGIC will be unable to honor
claim obligations at any time in the five years after the examination,
or if MGIC fails to honor claim payments. The approval from Freddie Mac,
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 November 30, 2012. Such
conditions include requirements that MIC not exceed a risk-to-capital
ratio of 18:1 (at December 31, 2012, MIC’s risk-to-capital ratio
was 1.2 to 1); MGIC and MIC comply with all terms and conditions of the
OCI Order; the OCI Order remain effective; we contribute $100 million to
MGIC on or before December 3, 2012 (which we did); MGIC enter into and
comply with the payment terms of the settlement agreement with Freddie
Mac and the FHFA dated December 1, 2012 (for more information about the
settlement agreement, see “- We are involved in legal proceedings
and are subject to the risk of additional legal proceedings in the
future”); the OCI issue the order described in the next paragraph
(which it did); and MIC provide MGIC access to the capital of MIC in an
amount necessary for MGIC to maintain sufficient liquidity to satisfy
its obligations under insurance policies issued by MGIC.

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

We cannot assure you that the GSEs will approve or continue to
approve MIC to write new business in all jurisdictions in which MGIC is
unable to do so. If one GSE does not approve MIC in all jurisdictions in
which MGIC is unable to write new business, MIC may be able to write
insurance on loans that will be sold to the other GSE or retained by
private investors. However, because lenders may not know which GSE will
purchase their loans until mortgage insurance has been procured, lenders
may be unwilling to procure mortgage insurance from MIC. Furthermore, if
we are unable to write business on a nationwide basis utilizing a
combination of MGIC and MIC, lenders may be unwilling to procure
insurance from us anywhere. In addition, new insurance written can be
influenced by a lender’s assessment of the financial strength of
our insurance operations. In this regard, see “- Competition or
changes in our relationships with our customers could reduce our
revenues or increase our losses.”

The amount of insurance we write could be adversely affected if the
definition of Qualified Residential Mortgage results in a reduction of
the number of low down payment loans available to be insured or if
lenders and investors select alternatives to private mortgage insurance.

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. None of our new risk written in
2012 was on loans that would qualify as QRMs under the March 2011
proposed rules.

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 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.

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. The public comment period for the proposed
rule expired in August 2011. At this time we do not know when a final
rule will be issued, although it was not expected that the final QRM
rule would be issued until the final rule defining Qualified Mortgages
(“QMs”)(discussed below) was issued. The Consumer Financial
Protection Bureau (the “CFPB”) issued the final QM rule on
January 10, 2013.

Depending on, among other things, (a) the final definition of QRM
and its requirements for LTV, seller contributions 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
“- 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.”

As noted above, on January 10, 2013, the CFPB issued the final rule
defining QM, in order to implement laws requiring lenders to consider a
borrower’s ability to repay a home loan before extending credit.
The QM rule prohibits loans with certain features, such as negative
amortization, points and fees in excess of 3% of the loan amount, and
terms exceeding 30 years, from being considered QMs. The rule also
establishes general underwriting criteria for QMs including that a
borrower have a total debt-to-income ratio of less than or equal to 43%.
The rule provides a temporary category of QMs that have more flexible
underwriting requirements so long as they satisfy the general product
feature requirements of QMs and so long as they meet the underwriting
requirements of the GSEs or those of the U.S. Department of Housing and
Urban Development, Department of Veterans Affairs or Rural Housing
Service (collectively, “Other Federal Agencies”). The
temporary category of QMs that meet the underwriting requirements of the
GSEs or the Other Federal Agencies will phase out when the GSEs or the
Other Federal Agencies issue their own qualified mortgage rules, if the
GSEs’ conservatorship ends, and in any case after seven years. We
expect that most lenders will be reluctant to make loans that do not
qualify as QMs because they will not be entitled to the presumptions
about compliance with the ability-to-pay requirements. Given the credit
characteristics presented to us, we estimate that 99% of our new risk
written in 2012 was for mortgages that would have met the QM definition
and 91% of our new risk written in 2012 was for mortgages that would
have met the QM definition even without the temporary category allowed
for mortgages that meet the GSEs’ underwriting requirements. In
making these estimates, we have not considered the limitation on points
and fees because the information is not available to us. We do not
believe such limitation would materially affect the percentage of our
new risk written meeting the QM definition. The QM rule is scheduled to
become effective in January 2014.

Alternatives to private mortgage insurance include:

* lenders using government mortgage insurance programs, including
those of the Federal Housing Administration, or FHA, and the Veterans
Administration,

* lenders and other investors holding mortgages in portfolio and
self-insuring,

* investors using risk mitigation techniques other than private
mortgage insurance, using other risk mitigation techniques in
conjunction with reduced levels of private mortgage insurance coverage,
or accepting credit risk without credit enhancement, and

* lenders originating mortgages using piggyback structures to avoid
private mortgage insurance, such as a first mortgage with an 80%
loan-to-value ratio and a second mortgage with a 10%, 15% or 20%
loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans,
respectively) rather than a first mortgage with a 90%, 95% or 100%
loan-to-value ratio that has private mortgage insurance.

The FHA substantially increased its market share beginning in 2008,
and beginning in 2011, that market share began to gradually decline. We
believe that the FHA’s market share increased, in part, because
private mortgage insurers tightened their underwriting guidelines (which
led to increased utilization of the FHA’s programs) and because of
increases in the amount of loan level delivery fees that the GSEs assess
on loans (which result in higher costs to borrowers). In addition,
federal legislation and programs provided the FHA with greater
flexibility in establishing new products and increased the FHA’s
competitive position against private mortgage insurers. We believe that
the FHA’s current premium pricing, when compared to our current
credit-tiered premium pricing (and considering the effects of GSE
pricing changes), has allowed us to be more competitive with the FHA
than in the recent past for loans with high FICO credit scores. We
cannot predict, however, the FHA’s share of new insurance written
in the future due to, among other factors, different loan eligibility
terms between the FHA and the GSEs; future increases in guarantee fees
charged by the GSEs; changes to the FHA’s annual premiums; and the
total profitability that may be realized by mortgage lenders from
securitizing loans through Ginnie Mae when compared to securitizing
loans through Fannie Mae or Freddie Mac.

Changes in the business practices of the GSEs, federal legislation
that changes their charters or a restructuring of the GSEs could reduce
our revenues or increase our losses.

Substantially all of our insurance written is for loans sold to
Fannie Mae and Freddie Mac. The business practices of the GSEs affect
the entire relationship between them, lenders and mortgage insurers and
include:

* the level of private mortgage insurance coverage, subject to the
limitations of the GSEs’ charters (which may be changed by federal
legislation), when private mortgage insurance is used as the required
credit enhancement on low down payment mortgages,

* the amount of loan level delivery fees (which result in higher
costs to borrowers) that the GSEs assess on loans that require mortgage
insurance,

* whether the GSEs influence the mortgage lender’s selection of
the mortgage insurer providing coverage and, if so, any transactions
that are related to that selection,

* the underwriting standards that determine what loans are eligible
for purchase by the GSEs, which can affect the quality of the risk
insured by the mortgage insurer and the availability of mortgage
loans,

* the terms on which mortgage insurance coverage can be canceled
before reaching the cancellation thresholds established by law,

* the programs established by the GSEs intended to avoid or mitigate
loss on insured mortgages and the circumstances in which mortgage
servicers must implement such programs,

* the terms that the GSEs require to be included in mortgage
insurance policies for loans that they purchase, and

* the extent to which the GSEs intervene in mortgage insurers’
rescission practices or rescission settlement practices with lenders.
For additional information, see “- Our losses could increase if we
do not prevail in proceedings challenging whether our rescissions were
proper, we enter into material resolution arrangements or rescission
rates decrease faster than we are projecting.”

The FHFA is the conservator of the GSEs and has the authority to
control and direct their operations. The increased role that the federal
government has assumed in the residential mortgage market through the
GSE conservatorship may increase the likelihood that the business
practices of the GSEs change in ways that 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 in February 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. In 2012, Members
of Congress introduced several bills intended to scale back the GSEs,
however, no legislation was enacted. 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. Most meaningful 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 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 the GSEs in the
future choose charter coverage for loans that we insure, our revenues
would be reduced and we could experience other adverse effects.

We may not continue to meet the GSEs’ mortgage insurer
eligibility requirements.

Substantially all of our insurance written is for loans sold to
Fannie Mae and Freddie Mac, each of which has mortgage insurer
eligibility requirements to maintain the highest level of eligibility,
including a financial strength rating of Aa3/AA-. Because MGIC does not
meet such financial strength rating requirements of Fannie Mae and
Freddie Mac (its financial strength rating from Moody’s is B2 with
a negative outlook and from Standard & Poor’s is B- with a
negative outlook), MGIC is currently operating with each GSE as an
eligible insurer under a remediation plan. We believe that the GSEs view
remediation plans as a continuing process of interaction with a mortgage
insurer and MGIC will continue to operate under a remediation plan for
the foreseeable future. There can be no assurance that MGIC will be able
to continue to operate as an eligible mortgage insurer under a
remediation plan. In particular, the GSEs are currently in discussions
with mortgage insurers regarding their standard mortgage insurer
eligibility requirements. We also understand the FHFA and the GSEs are
separately developing mortgage insurer capital standards that would
replace the use of external credit ratings. The GSEs may include any new
eligibility requirements as part of our current remediation plan.
MIC’s financial strength rating from Moody’s is Ba3 with a
negative outlook and from Standard & Poor’s is B- with a
negative outlook Therefore, MIC also does not meet the financial
strength rating requirements of the GSEs and is currently operating with
each GSE as an eligible insurer under the approvals discussed above. See
“- Capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis.” If MGIC or MIC cease to be
eligible to insure loans purchased by one or both of the GSEs, it would
significantly reduce the volume of our new business writings.

We have reported net losses for the last six years, expect to
continue to report annual net losses, and cannot assure you when we will
return to profitability.

For the years ended December 31, 2012, 2011, 2010, 2009, 2008 and
2007, we had a net loss of $0.9 billion, $0.5 billion, $0.4 billion,
$1.3 billion, $0.5 billion and $1.7 billion, respectively. We currently
expect to continue to report annual net losses, the size of which will
depend primarily on the amount of our incurred and paid losses from our
business written prior to 2009. Our incurred and paid losses are
dependent on factors that make prediction of their amounts difficult and
any forecasts are subject to significant volatility. Although we
currently expect to return to profitability on an annual basis, we
cannot assure you when, or if, this will occur. Conditions that could
delay our return to profitability include high unemployment rates, low
cure rates, low housing values, changes to our current rescission
practices and unfavorable resolution of ongoing legal proceedings. You
should read the rest of these risk factors for additional information
about factors that could increase our net losses in the future. The net
losses we have experienced have eroded, and any future net losses will
erode, our shareholders’ equity and could result in equity being
negative.

Our losses could increase if we do not prevail in proceedings
challenging whether our rescissions were proper, we enter into material
resolution arrangements or rescission rates decrease faster than we are
projecting.

Prior to 2008, rescissions of coverage on loans were not a material
portion of our claims resolved during a year. However, beginning in
2008, our rescissions of coverage on loans have 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 2012, rescissions
mitigated our paid losses by approximately $0.3 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, less
than 10% of claims received in a quarter have been resolved by
rescissions, down from the peak of approximately 28% in the first half
of 2009.

Our loss reserving methodology incorporates our estimates of future
rescissions and reversals of rescissions. Historically, the number of
rescissions that we have reversed has been immaterial. A variance
between ultimate actual rescission and reversal rates and our estimates,
as a result of the outcome of claims investigations, litigation,
settlements or other factors, could materially affect our losses. See
“- Because loss reserve estimates are subject to uncertainties and
are based on assumptions that are currently very volatile, paid claims
may be substantially different than our loss reserves.” We estimate
rescissions mitigated our incurred losses by approximately $2.5 billion
in 2009 and $0.2 billion in 2010. In 2011, we estimate that rescissions
had no significant impact on our losses incurred. All of these figures
include the benefit of claims not paid in the period as well as the
impact of changes in our estimated expected rescission activity on our
loss reserves in the period. In the fourth quarter of 2012, we estimate
that our rescission benefit in loss reserves was reduced due to probable
rescission settlement agreements and that other rescissions had no
significant impact on our losses incurred in 2012. For more information
about the rescission benefit in loss reserves and the two settlements
that we believe are probable, as defined in ASC 450-20, see “- We
are involved in legal proceedings and are subject to the risk of
additional legal proceedings in the future.” The completion of
those settlements, assuming they occur, may encourage other customers to
seek remedies against us.

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. Until a liability associated with a
settlement agreement or litigation becomes probable and can be
reasonably estimated, 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 sometimes 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
generally include additional loss reserves that would reflect an adverse
outcome from ongoing legal proceedings.

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. Since
those announcements, the GSEs have approved our settlement agreement
with one customer and have rejected settlement agreements that were
structured differently. We have reached and implemented settlement
agreements that do not require GSE approval, but they have not been
material in the aggregate.

As noted in “- We are involved in legal proceedings and are
subject to the risk of additional legal proceedings in the future,”
we have been in mediation with Countrywide Home Loans
(“Countrywide”) concerning our dispute regarding rescissions
and have made substantial progress in reaching an agreement to settle
it. 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. We continue to discuss
with other customers their objections to material rescissions and have
reached settlement terms with several of our significant 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 December 31, 2012, approximately 240
rescissions, representing total potential claim payments of
approximately $16 million, were affected by our decision to suspend
rescissions for customers other than the two customers for which we
consider a settlement agreement probable, as defined in ASC 450-20.
Although it is reasonably possible that, when the discussions or legal
proceedings with customers regarding rescissions 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.

We are involved in legal proceedings and are subject to the risk of
additional legal proceedings in the future.

Consumers continue to bring lawsuits against home mortgage lenders
and settlement service providers. Mortgage insurers, including MGIC,
have been involved in litigation alleging violations of the
anti-referral fee provisions of the Real Estate Settlement Procedures
Act, which is commonly known as RESPA, and the notice provisions of the
Fair Credit Reporting Act, which is commonly known as FCRA. MGIC’s
settlement of class action litigation against it under RESPA became
final in October 2003. MGIC settled the named plaintiffs’ claims in
litigation against it under FCRA in December 2004, following denial of
class certification in June 2004. Since December 2006, class action
litigation has been brought against a number of large lenders alleging
that their captive mortgage reinsurance arrangements violated RESPA.
Beginning in December 2011, MGIC, various mortgage lenders and various
other mortgage insurers have been named as defendants in twelve
lawsuits, alleged to be class actions, filed in various U.S. District
Courts. Three of those cases have previously been dismissed. The
complaints in all nine of the remaining cases allege various causes of
action related to the captive mortgage reinsurance arrangements of the
mortgage lenders, including that the defendants violated RESPA by paying
excessive premiums to the lenders’ captive reinsurer in relation to
the risk assumed by that captive. MGIC denies any wrongdoing and intends
to vigorously defend itself against the allegations in the lawsuits.
There can be no assurance that we will not be subject to further
litigation under RESPA (or FCRA) or that the outcome of any such
litigation, including the lawsuits mentioned above, would not have a
material adverse effect on us.

Since June 2005, various state and federal regulators have also
conducted investigations or requested information regarding captive
mortgage reinsurance arrangements, including (1) a request received by
MGIC in June 2005 from the New York Department of Financial Services for
information regarding captive mortgage reinsurance arrangements and
other types of arrangements in which lenders receive compensation; (2)
the Minnesota Department of Commerce (the “MN Department”),
which regulates insurance, began requesting information in February
2006, regarding captive mortgage reinsurance and certain other matters
in response to which MGIC has provided information on several occasions,
including as recently as May 2011; (3) various subpoenas received by
MGIC beginning in March 2008 from the U.S. Department of Housing and
Urban Development (“HUD”), seeking information about captive
mortgage reinsurance similar to that requested by the MN Department, but
not limited in scope to the state of Minnesota; and (4) correspondence
received by MGIC in January 2012 from the CFPB indicating that HUD had
transferred authority to the CFPB to investigate captive reinsurance
arrangements in the mortgage insurance industry and requesting, among
other things, certain information regarding captive mortgage reinsurance
transactions in which we participated. In June 2012, we received a Civil
Investigative Demand (“CID”) from the CFPB requiring
additional information and documentation regarding captive mortgage
reinsurance. We have met with, and expect to continue to meet with, the
CFPB to discuss the CID and how to resolve its investigation. MGIC has
also filed a petition to modify the CID which petition is currently
pending. While MGIC believes it would have strong defenses to any claims
the CFPB might bring against it as a result of the investigation, it
continues to work with the CFPB to try to resolve the investigation and
any concerns that the CFPB may have about MGIC’s past and current
captive reinsurance practices. If MGIC cannot resolve the concerns of
the CFPB, it is possible that the CFPB would assert various RESPA and
possibly other claims against it. Other insurance departments or other
officials, including attorneys general, may also seek information about
or investigate captive mortgage reinsurance.

Various regulators, including the CFPB, state insurance
commissioners and state attorneys general may bring actions seeking
various forms of relief, including civil penalties and injunctions
against violations of RESPA. The insurance law provisions of many states
prohibit paying for the referral of insurance business and provide
various mechanisms to enforce this prohibition. While we believe our
captive reinsurance arrangements are in conformity with applicable laws
and regulations, it is not possible to predict the eventual scope,
duration or outcome of any such reviews or investigations nor is it
possible to predict their effect on us or the mortgage insurance
industry.

We are subject to comprehensive, detailed regulation by state
insurance departments. These regulations are principally designed for
the protection of our insured policyholders, rather than for the benefit
of investors. Although their scope varies, state insurance laws
generally grant broad supervisory powers to agencies or officials to
examine insurance companies and enforce rules or exercise discretion
affecting almost every significant aspect of the insurance business.
Given the recent significant losses incurred by many insurers in the
mortgage and financial guaranty industries, our insurance subsidiaries
have been subject to heightened scrutiny by insurance regulators. State
insurance regulatory authorities could take actions, including changes
in capital requirements or termination of waivers of capital
requirements, that could have a material adverse effect on us. As noted
above, in January 2013, the CFPB issued rules to implement laws
requiring mortgage lenders to make ability-to-pay determinations prior
to extending credit. We are uncertain whether the CFPB will issue any
other rules or regulations that affect our business apart from any
action it may take as a result of its investigation of captive mortgage
reinsurance. Such rules and regulations could have a material adverse
effect on us.

In October 2010, a purported class action lawsuit was filed against
MGIC in the U.S. District Court for the Western District of Pennsylvania
by a loan applicant on whose behalf a now-settled action we previously
disclosed had been filed by the U.S. Department of Justice. In this
lawsuit, the loan applicant alleged that MGIC discriminated against her
and certain proposed class members on the basis of sex and familial
status when MGIC underwrote their loans for mortgage insurance. In May
2011, the District Court granted MGIC’s motion to dismiss with
respect to all claims except certain Fair Housing Act claims. On
November 29, 2012, the District Court granted final approval for a class
action settlement of the lawsuit. The settlement created a settlement
class of 265 borrowers. Under the terms of the settlement, MGIC
deposited $500,000 into an escrow account to fund possible payments to
affected borrowers. In addition, MGIC paid the named plaintiff an
“incentive fee” of $7,500 and paid class counsels’ fees
of $337,500. Any funds remaining in the escrow account after payment of
all claims approved under the procedures established by the settlement
will be returned to MGIC.

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

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

We have made substantial progress in reaching an agreement with
Countrywide to settle the dispute we have regarding rescissions. Since
December 2009, we have been involved in legal proceedings with
Countrywide in which Countrywide alleged that MGIC denied valid mortgage
insurance claims. (In our SEC reports, we refer to rescissions of
insurance and denials of claims collectively as “rescissions”
and variations of that term.) In addition to the claim amounts it
alleged MGIC had improperly denied, Countrywide contended it was
entitled to other damages of almost $700 million as well as exemplary
damages. We sought a determination in those proceedings that we were
entitled to rescind coverage on the applicable loans. From January 1,
2008 through December 31, 2012, rescissions of coverage on
Countrywide-related loans mitigated our paid losses on the order of $445
million. This amount is the amount we estimate we would have paid had
the coverage not been rescinded. In addition, in connection with
mediation we were holding with Countrywide, we voluntarily suspended
rescissions related to loans that we believed could be covered by a
settlement. As of December 31, 2012, coverage on approximately 2,150
loans, representing total potential claim payments of approximately $160
million, that we had determined was rescindable was affected by our
decision to suspend such rescissions. While there can no assurance that
we will actually enter into a settlement agreement with Countrywide, we
have determined that a settlement with Countrywide is probable.

We are also discussing a settlement with another customer. We have
also determined that it is probable we will reach a settlement of our
dispute with this customer. As of December 31, 2012, coverage on
approximately 250 loans, representing total potential claim payments of
approximately $17 million, was affected by our decision to suspend
rescissions for that customer.

We are now able to reasonably estimate the probable loss associated
with each probable settlement and, as required by ASC 450-20, we have
recorded the estimated impact of the two probable settlements referred
to above in our financial statements for the quarter ending December 31,
2012. The aggregate impact to loss reserves for the probable settlement
agreements was an increase of approximately $100 million. This impact
was somewhat offset by impacts to our return premium accrual and premium
deficiency reserve. All of these impacts were reflected in the fourth
quarter 2012 financial results. If we are not able to reach settlement
with Countrywide, we intend to defend MGIC against any related legal
proceedings, vigorously.

The flow policies at issue with Countrywide are in the same form as
the flow policies that we use with all of our customers, and the bulk
policies at issue vary from one another, but are generally similar to
those used in the majority of our Wall Street bulk transactions. A
settlement with Countrywide may encourage other customers to pursue
remedies against us. From January 1, 2008 through December 31, 2012, we
estimate that total rescissions mitigated our incurred losses by
approximately $2.9 billion, which included approximately $2.9 billion of
mitigation on paid losses, excluding $0.6 billion that would have been
applied to a deductible. At December 31, 2012, we estimate that our
total loss reserves were benefited from anticipated rescissions by
approximately $0.2 billion.

Before paying a claim, we review the loan and servicing files to
determine the appropriateness of the claim amount. All of our insurance
policies provide that we can reduce or deny a claim if the servicer did
not comply with its obligations under our insurance policy, including
the requirement to mitigate our loss by performing reasonable loss
mitigation efforts or, for example, diligently pursuing a foreclosure or
bankruptcy relief in a timely manner. We call such reduction of claims
submitted to us “curtailments.” In 2012, curtailments reduced
our average claim paid by approximately 4%. In addition, the claims
submitted to us sometimes include costs and expenses not covered by our
insurance policies, such as mortgage insurance premiums, hazard
insurance premiums for periods after the claim date and losses resulting
from property damage that has not been repaired. These other adjustments
reduced claim amounts by less than the amount of curtailments.

After we pay a claim, servicers and insureds sometimes object to our
curtailments and other adjustments. We review these objections if they
are sent to us within 90 days after the claim was paid. Historically, we
have not had material disputes regarding our curtailments or other
adjustments. As part of our settlement discussions, Countrywide informed
us that they object to approximately $40 million of curtailment and
other adjustments. In connection with any settlement agreement with
Countrywide, we expect we would enter into a separate agreement with
them that would provide for a process to resolve this dispute. However,
we do not believe a loss is probable regarding this curtailment dispute
and have not accrued any reserves that would reflect an adverse outcome
to this dispute. We intend to defend vigorously our position regarding
the correctness of these curtailments under our insurance policy.
Although we have not had other material objections to our curtailment
and adjustment practices, there can be no assurances that we will not
face additional challenges to such practices.

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

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

Resolution of our dispute with the Internal Revenue Service could
adversely affect us.

The Internal Revenue Service (“IRS”) completed
examinations of our federal income tax returns for the years 2000
through 2007 and issued assessments for unpaid taxes, interest and
penalties related 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 indicated that it did not believe
that, for various reasons, we had established sufficient tax basis in
the REMIC residual interests to deduct the losses from taxable income.
The IRS assessment related to the REMIC issue is $190.7 million in taxes
and penalties. There would also be applicable interest which, when
computed on the amount of the assessment, is substantial. Depending on
the outcome of this matter, additional state income taxes along with any
applicable interest may become due when a final resolution is reached
and could also be substantial.

We appealed these assessments within the IRS and, in 2007, we made a
payment of $65.2 million to the United States Department of the Treasury
related to this assessment. In August 2010, we reached a tentative
settlement agreement with the IRS which was not finalized. We currently
expect to receive a statutory notice of deficiency (commonly referred to
as a “90-day letter”) for the disputed amounts after the first
quarter of 2013. We would then be required to litigate their validity in
order to avoid payment to the IRS of the entire amount assessed. Any
such litigation could be lengthy and costly in terms of legal fees and
related expenses. We continue to believe that our previously recorded
tax provisions and liabilities are appropriate. However, we would need
to make appropriate adjustments, which could be material, to our tax
provision and liabilities if our view of the probability of success in
this matter changes, and the ultimate resolution of this matter could
have a material negative impact on our effective tax rate, results of
operations, cash flows and statutory capital. In this regard, see
“- Capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis.”

Because we establish loss reserves only upon a loan default rather
than based on estimates of our ultimate losses on risk in force, losses
may have a disproportionate adverse effect on our earnings in certain
periods.

In accordance with accounting principles generally accepted in the
United States, commonly referred to as GAAP, we establish loss reserves
only for loans in default. Reserves are established for reported
insurance losses and loss adjustment expenses based on when notices of
default on insured mortgage loans are received. Reserves are also
established for estimated losses incurred on notices of default that
have not yet been reported to us by the servicers (this is often
referred to as “IBNR”). We establish reserves using estimated
claim rates and claim amounts in estimating the ultimate loss. Because
our reserving method does not take account of the impact of future
losses that could occur from loans that are not delinquent, our
obligation for ultimate losses that we expect to occur under our
policies in force at any period end is not reflected in our financial
statements, except in the case where a premium deficiency exists. As a
result, future losses may have a material impact on future results as
such losses emerge.

Because loss reserve estimates are subject to uncertainties and are
based on assumptions that are currently very volatile, paid claims may
be substantially different than our loss reserves.

We establish reserves using estimated claim rates and claim amounts
in estimating the ultimate loss on delinquent loans. The estimated claim
rates and claim amounts represent our best estimates of what we will
actually pay on the loans in default as of the reserve date and
incorporate anticipated mitigation from rescissions. We rescind coverage
on loans and deny claims in cases where we believe our policy allows us
to do so. Therefore, when establishing our loss reserves, unless we have
determined that a loss is probable and can be reasonably estimated, we
do not include additional loss reserves that would reflect an adverse
development from ongoing dispute resolution proceedings. For more
information regarding our legal proceedings, see “- We are involved
in legal proceedings and are subject to the risk of additional legal
proceedings in the future.”

The establishment of loss reserves is subject to inherent
uncertainty and requires judgment by management. Current conditions in
the housing and mortgage industries make the assumptions that we use to
establish loss reserves more volatile than they would otherwise be. The
actual amount of the claim payments may be substantially different than
our loss reserve estimates. Our estimates could be adversely affected by
several factors, including a deterioration of regional or national
economic conditions, including unemployment, leading to a reduction in
borrowers’ income and thus their ability to make mortgage payments,
a drop in housing values that could result in, among other things,
greater losses on loans that have pool insurance, and may affect
borrower willingness to continue to make mortgage payments when the
value of the home is below the mortgage balance, and mitigation from
rescissions being materially less than assumed. Changes to our estimates
could result in material impact to our results of operations, even in a
stable economic environment, and there can be no assurance that actual
claims paid by us will not be substantially different than our loss
reserves.

We rely on our management team and our business could be harmed if
we are unable to retain qualified personnel.

Our industry is undergoing a fundamental shift following the
mortgage crisis: long-standing competitors have gone out of business and
two newly capitalized, privately-held start-ups that are not encumbered
with a portfolio of pre-crisis mortgages, have been formed. Former
executives from other mortgage insurers have joined these two new
competitors. In addition, in February 2013, a worldwide insurer and
reinsurer with mortgage insurance operations in Europe announced that it
was purchasing CMG Mortgage Insurance Company. Our success depends, in
part, on the skills, working relationships and continued services of our
management team and other key personnel. The departure of key personnel
could adversely affect the conduct of our business. In such event, we
would be required to obtain other personnel to manage and operate our
business, and there can be no assurance that we would be able to employ
a suitable replacement for the departing individuals, or that a
replacement could be hired on terms that are favorable to us. We
currently have not entered into any employment agreements with our
officers or key personnel. Volatility or lack of performance in our
stock price may affect our ability to retain our key personnel or
attract replacements should key personnel depart.

Loan modification and other similar programs may not continue to
provide material benefits to us and our losses on loans that re-default
can be higher than what we would have paid had the loan not been
modified.

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 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 $1.2
billion, respectively, of estimated claim payments. As noted below, we
cannot predict with a high degree of confidence what the ultimate
re-default rate on these modifications will be. Although the recent
re-default rate has been lower, for internal reporting purposes, we
assume approximately 50% of these 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.

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
9,300 loans in our primary delinquent inventory at December 31, 2012 for
which the HAMP trial period has begun and which trial periods have not
been reported to us as completed or cancelled. Through December 31, 2012
approximately 44,400 delinquent primary loans have cured their
delinquency after entering HAMP and are not in default. In 2011 and
2012, approximately 18% and 17%, respectively, of our primary cures were
the result of a modification, with HAMP accounting for approximately 70%
of those modifications in each year. 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 since 2010. 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 2013.

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.
Approximately 11% of our primary insurance in force has benefitted from
HARP and is still in force.

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.

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.

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.

The factors that affect the volume of low down payment mortgage
originations include:

* restrictions on mortgage credit due to more stringent underwriting
standards, liquidity issues and risk-retention requirements associated
with non-QRM loans affecting lenders,

* the level of home mortgage interest rates and the deductibility of
mortgage interest for income tax purposes,

* the health of the domestic economy as well as conditions in
regional and local economies,

* housing affordability,

* population trends, including the rate of household formation,

* the rate of home price appreciation, which in times of heavy
refinancing can affect whether refinance loans have loan-to-value ratios
that require private mortgage insurance, and

* government housing policy encouraging loans to first-time
homebuyers.

As noted above, in January 2013, the CFPB issued rules to implement
laws requiring mortgage lenders to make ability-to-pay determinations
prior to extending credit. We are uncertain whether this Bureau will
issue any other rules or regulations that affect our business or the
volume of low down payment home mortgage originations. Such rules and
regulations could have a material adverse effect on our financial
position or results of operations.

A decline in the volume of low down payment home mortgage
originations could decrease demand for mortgage insurance, decrease our
new insurance written and reduce our revenues. For other factors that
could decrease the demand for mortgage insurance, see “- The amount
of insurance we write could be adversely affected if the definition of
Qualified Residential Mortgage results in a reduction of the number of
low down payment loans available to be insured or if lenders and
investors select alternatives to private mortgage insurance” and
“- The implementation of the Basel III capital accord, or other
changes to our customers’ capital requirements, may discourage the
use of mortgage insurance.”

Competition or changes in our relationships with our customers could
reduce our revenues or increase our losses.

As noted above, the FHA substantially increased its market share
beginning in 2008 and beginning in 2011, that market share began to
gradually decline. It is difficult to predict the FHA’s future
market share due to, among other factors, different loan eligibility
terms between the FHA and the GSEs, future increases in guarantee fees
charged by the GSEs, changes to the FHA’s annual premiums, and the
total profitability that may be realized by mortgage lenders from
securitizing loans through Ginnie Mae when compared to securitizing
loans through Fannie Mae or Freddie Mac.

In recent years, the level of competition within the private
mortgage insurance industry has been intense as many large mortgage
lenders reduced the number of private mortgage insurers with whom they
do business. At the same time, consolidation among mortgage lenders has
increased the share of the mortgage lending market held by large
lenders. During 2011 and 2012, approximately 9% and 10%, respectively,
of our new insurance written was for loans for which one lender was the
original insured, although revenue from such loans was significantly
less than 10% of our revenues during each of those periods. Our private
mortgage insurance competitors include:

* Genworth Mortgage Insurance Corporation,

* United Guaranty Residential Insurance Company,

* Radian Guaranty Inc.,

* CMG Mortgage Insurance Company (whose owners have agreed to sell
it to a worldwide insurer and reinsurer), and

* Essent Guaranty, Inc.

Until 2010 the mortgage insurance industry had not had new entrants
in many years. In 2010, Essent Guaranty, Inc. began writing new mortgage
insurance. Essent has publicly reported that one of our customers,
JPMorgan Chase, is one of its investors. During 2012, another new
company, NMI Holdings Inc., raised $550 million in order to enter the
mortgage insurance business. NMI Holdings has been approved as an
eligible mortgage insurer by the GSEs and we believe that NMI Holdings
expects to launch its business in the second quarter of 2013. In
addition, in February 2013, a worldwide insurer and reinsurer with
mortgage insurance operations in Europe announced that it was purchasing
CMG Mortgage Insurance Company. The perceived increase in credit quality
of loans that are being insured today, the deterioration of the
financial strength ratings of the existing mortgage insurance companies
and the possibility of a decrease in the FHA’s share of the
mortgage insurance market may encourage additional new entrants.

PMI Mortgage Insurance Company and Republic Mortgage Insurance
Company ceased writing business in 2011. Based on public disclosures,
these competitors approximated slightly more than 20% of the private
mortgage insurance industry volume in the first half of 2011. Most of
the market share of these two former competitors has gone to other
mortgage insurers and not to us because, among other reasons, some
competitors have materially lower premiums than we do on single premium
policies, one of these competitors also uses a risk weighted pricing
model that typically results in lower premiums than we charge on certain
loans and several of these competitors have streamlined their
underwriting to be closely aligned with that of the GSEs. We
continuously monitor the competitive landscape and make adjustments to
our pricing and underwriting guidelines as warranted.

Our relationships with our customers could be adversely affected by
a variety of factors, including tightening of and adherence to our
underwriting guidelines, which have resulted in our declining to insure
some of the loans originated by our customers and rescission of coverage
on loans that affect the customer. We have ongoing discussions with
lenders who are significant customers regarding their objections to our
rescissions. In the fourth quarter of 2009, Countrywide commenced
litigation against us as a result of its dissatisfaction with our
rescission practices shortly after Countrywide ceased doing business
with us. See “- We are involved in legal proceedings and are
subject to the risk of additional legal proceedings in the future”
for more information, including about the probable settlement of that
litigation.

We believe many lenders assess a mortgage insurer’s financial
strength rating and risk-to-capital ratio as important elements of the
process through which they select mortgage insurers. As a result of
MGIC’s and MIC’s less than investment grade financial strength
ratings and MGIC’s risk-to-capital ratio level being above the
maximum allowed by some jurisdictions, MGIC and MIC may be competitively
disadvantaged with these lenders. MGIC’s financial strength rating
from Moody’s is B2 with a negative outlook and from Standard &
Poor’s is B- with a negative outlook. MIC’s financial strength
rating from Moody’s is Ba3 with a negative outlook and from
Standard & Poor’s is B- with a negative outlook. It is possible
that MGIC’s financial strength ratings could decline from these
levels. MGIC’s risk-to-capital ratio exceeds 25:1 and the
applicable minimum capital requirement of certain states. We currently
expect to continue to report a risk-to-capital ratio in excess of 25:1.
Our risk-to-capital ratio will depend primarily on the level of incurred
losses, any settlement with the IRS, and the volume of new risk written.
Our incurred losses are dependent upon factors that make prediction of
their amounts difficult and any forecasts are subject to significant
volatility. Although we expect the risk-to-capital ratio to eventually
decline, we cannot assure you of when, or if, this will occur.
Conditions that could delay the decline in the risk-to-capital ratio
include high unemployment rates, low cure rates, low housing values,
changes to our current rescission practices, unfavorable resolution of
ongoing legal proceedings and the volume of new insurance written in
MIC.

Downturns in the domestic economy or declines in the value of
borrowers’ homes from their value at the time their loans closed
may result in more homeowners defaulting and our losses increasing.

Losses result from events that reduce a borrower’s ability to
continue to make mortgage payments, such as unemployment, and whether
the home of a borrower who defaults on his mortgage can be sold for an
amount that will cover unpaid principal and interest and the expenses of
the sale. In general, favorable economic conditions reduce the
likelihood that borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of homes, thereby reducing
and in some cases even eliminating a loss from a mortgage default. A
deterioration in economic conditions, including an increase in
unemployment, generally increases the likelihood that borrowers will not
have sufficient income to pay their mortgages and can also adversely
affect housing values, which in turn can influence the willingness of
borrowers with sufficient resources to make mortgage payments to do so
when the mortgage balance exceeds the value of the home. Housing values
may decline even absent a deterioration in economic conditions due to
declines in demand for homes, which in turn may result from changes in
buyers’ perceptions of the potential for future appreciation,
restrictions on and the cost of mortgage credit due to more stringent
underwriting standards, liquidity issues and risk-retention requirements
associated with non-QRM loans affecting lenders, higher interest rates
generally or changes to the deductibility of mortgage interest for
income tax purposes, or other factors. The residential mortgage market
in the United States has for some time experienced a variety of poor or
worsening economic conditions, including a material nationwide decline
in housing values, with declines continuing into early 2012 in a number
of geographic areas. Although housing values have recently been
increasing in certain markets, they generally remain significantly below
their early 2007 levels. Changes in housing values and unemployment
levels are inherently difficult to forecast given the uncertainty in the
current market environment, including uncertainty about the effect of
actions the federal government has taken and may take with respect to
tax policies, mortgage finance programs and policies, and housing
finance reform.

The mix of business we write also affects the likelihood of losses
occurring.

Even when housing values are stable or rising, mortgages with
certain characteristics have higher probabilities of claims. These
characteristics include loans with loan-to-value ratios over 95% (or in
certain markets that have experienced declining housing values, over
90%), FICO credit scores below 620, limited underwriting, including
limited borrower documentation, or higher total debt-to-income ratios,
as well as loans having combinations of higher risk factors. As of
December 31, 2012, approximately 24.2% of our primary risk in force
consisted of loans with loan-to-value ratios greater than 95%, 7.8% had
FICO credit scores below 620, and 8.5% had limited underwriting,
including limited borrower documentation, each attribute as determined
at the time of loan origination. A material portion of these loans were
written in 2005 – 2007 or the first quarter of 2008. In accordance with
industry practice, loans approved by GSEs and other automated
underwriting systems under “doc waiver” programs that do not
require verification of borrower income are classified by us as
“full documentation.” For additional information about such
loans, see footnote (1) to Additional Information at the end of this
press release.

From time to time, in response to market conditions, we change the
types of loans that we insure and the guidelines under which we insure
them. In addition, we make exceptions to our underwriting guidelines on
a loan-by-loan basis and for certain customer programs. Together, the
number of loans for which exceptions were made accounted for fewer than
5% of the loans we insured in 2011 and fewer than 2% of the loans we
insured in 2012. A large percentage of the exceptions were made for
loans with debt-to-income ratios slightly above our guidelines or
financial reserves slightly below our guidelines. While the
debt-to-income ratio contained in our guidelines exceeds the general
requirements of the Qualified Mortgage (“QM”) definition, it
is within the underwriting guidelines of the GSEs. The rule containing
the QM definition provides a temporary category of QMs that have more
flexible underwriting requirements so long as they satisfy the general
product feature requirements of QMs and so long as they meet the
underwriting requirements of certain agencies, including the GSEs. For
more information, see “- The amount of insurance we write could be
adversely affected if the definition of Qualified Residential Mortgage
results in a reduction of the number of low down payment loans available
to be insured or if lenders and investors select alternatives to private
mortgage insurance.” Beginning in September 2009, we have made
changes to our underwriting guidelines that have allowed certain loans
to be eligible for insurance that were not eligible prior to those
changes and we expect to continue to make changes in appropriate
circumstances in the future. As noted above in “- Competition or
changes in our relationships with our customers could reduce our
revenues or increase our losses,” in the first quarter of 2012, we
made changes to streamline our underwriting guidelines and lowered our
premium rates on loans with credit scores of 760 or higher. Our
underwriting guidelines are available on our website at
http://www.mgic.com/underwriting/index.html.

During the second quarter of 2012, we began writing a portion of our
new insurance under an endorsement to our master policy that limits our
ability to rescind coverage on loans that meet the conditions in that
endorsement, which is filed as Exhibit 99.7 to our quarterly report on
Form 10-Q for the quarter ended March 31, 2012 (filed with the SEC on
May 10, 2012). Availability of the endorsement is subject to approval in
specified jurisdictions. We estimate that approximately 33% of our new
insurance written in the fourth quarter of 2012 and 41% of our new
insurance written in December 2012, was written under this endorsement.
We expect that eventually a significant portion of our new insurance
written will have rescission terms equivalent to those in this
endorsement.

As of December 31, 2012, approximately 2.2% of our primary risk in
force written through the flow channel, and 27.5% of our primary risk in
force written through the bulk channel, consisted of adjustable rate
mortgages in which the initial interest rate may be adjusted during the
five years after the mortgage closing (“ARMs”). In the current
interest rate environment, interest rates resetting in the near future
are unlikely to exceed the interest rates at origination. We classify as
fixed rate loans adjustable rate mortgages in which the initial interest
rate is fixed during the five years after the mortgage closing. If
interest rates should rise between the time of origination of such loans
and when their interest rates may be reset, claims on ARMs and
adjustable rate mortgages whose interest rates may only be adjusted
after five years would be substantially higher than for fixed rate
loans. In addition, we have insured “interest-only” loans,
which may also be ARMs, and loans with negative amortization features,
such as pay option ARMs. We believe claim rates on these loans will be
substantially higher than on loans without scheduled payment increases
that are made to borrowers of comparable credit quality.

Although we attempt to incorporate these higher expected claim rates
into our underwriting and pricing models, there can be no assurance that
the premiums earned and the associated investment income will be
adequate to compensate for actual losses even under our current
underwriting guidelines. We do, however, believe that given the various
changes in our underwriting guidelines that were effective beginning in
the first quarter of 2008, our insurance written beginning in the second
quarter of 2008 will generate underwriting profits.

The premiums we charge may not be adequate to compensate us for our
liabilities for losses and as a result any inadequacy could materially
affect our financial condition and results of operations.

We set premiums at the time a policy is issued based on our
expectations regarding likely performance over the long-term. Our
premiums are subject to approval by state regulatory agencies, which can
delay or limit our ability to increase our premiums. Generally, we
cannot cancel the mortgage insurance coverage or adjust renewal premiums
during the life of a mortgage insurance policy. As a result, higher than
anticipated claims generally cannot be offset by premium increases on
policies in force or mitigated by our non-renewal or cancellation of
insurance coverage. The premiums we charge, and the associated
investment income, may not be adequate to compensate us for the risks
and costs associated with the insurance coverage provided to customers.
An increase in the number or size of claims, compared to what we
anticipate, could adversely affect our results of operations or
financial condition.

In January 2008, we announced that we had decided to stop writing
the portion of our bulk business that insures loans included in Wall
Street securitizations because the performance of such loans
deteriorated materially in the fourth quarter of 2007 and this
deterioration was materially worse than we experienced for loans insured
through the flow channel or loans insured through the remainder of our
bulk channel. As of December 31, 2007 we established a premium
deficiency reserve of approximately $1.2 billion. As of December 31,
2012, the premium deficiency reserve was $74 million, which reflects the
present value of expected future losses and expenses that exceeds the
present value of expected future premium and already established loss
reserves on these bulk transactions.

We continue to experience material losses, especially on the 2006
and 2007 books. The ultimate amount of these losses will depend in part
on general economic conditions, including unemployment, and the
direction of home prices, which in turn will be influenced by general
economic conditions and other factors. Because we cannot predict future
home prices or general economic conditions with confidence, there is
significant uncertainty surrounding what our ultimate losses will be on
our 2006 and 2007 books. Our current expectation, however, is that these
books will continue to generate material incurred and paid losses for a
number of years. There can be no assurance that an additional premium
deficiency reserve on Wall Street Bulk or on other portions of our
insurance portfolio will not be required.

It is uncertain what effect the extended timeframes in the
foreclosure process, due to moratoriums, suspensions or issues arising
from the investigation of servicers’ foreclosure procedures, will
have on us.

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.

We are susceptible to disruptions in the servicing of mortgage loans
that we insure.

We depend on reliable, consistent third-party servicing of the loans
that we insure. Over the last several years, the mortgage loan servicing
industry has experienced consolidation. The resulting reduction in the
number of servicers could lead to disruptions in the servicing of
mortgage loans covered by our insurance policies. In addition, current
housing market trends have led to significant increases in the number of
delinquent mortgage loans requiring servicing. These increases have
strained the resources of servicers, reducing their ability to undertake
mitigation efforts that could help limit our losses, and have resulted
in an increasing amount of delinquent loan servicing being transferred
to specialty servicers. The transfer of servicing can cause a disruption
in the servicing of delinquent loans. Future housing market conditions
could lead to additional increases in delinquencies. Managing a
substantially higher volume of non-performing loans could lead to
increased disruptions in the servicing of mortgages. Investigations into
whether servicers have acted improperly in foreclosure proceedings may
further strain the resources of servicers.

If interest rates decline, house prices appreciate or mortgage
insurance cancellation requirements change, the length of time that our
policies remain in force could decline and result in declines in our
revenue.

In each year, most of our premiums are from insurance that has been
written in prior years. As a result, the length of time insurance
remains in force, which is also generally referred to as persistency, is
a significant determinant of our revenues. The factors affecting the
length of time our insurance remains in force include:

* the level of current mortgage interest rates compared to the
mortgage coupon rates on the insurance in force, which affects the
vulnerability of the insurance in force to refinancings, and

* mortgage insurance cancellation policies of mortgage investors
along with the current value of the homes underlying the mortgages in
the insurance in force.

Our persistency rate was 79.8% at December 31, 2012, compared to
82.9% at December 31, 2011 and 84.4% at December 31, 2010. During the
1990s, our year-end persistency ranged from a high of 87.4% at December
31, 1990 to a low of 68.1% at December 31, 1998. Since 2000, our
year-end persistency ranged from a high of 84.7% at December 31, 2009 to
a low of 47.1% at December 31, 2003.

Current mortgage interest rates are at or near historic lows. The
high-quality mortgages insured by us in recent years that have not
experienced significant declines in underlying home prices, are
especially vulnerable to refinancing. Future premiums on our insurance
in force represent a material portion of our claims paying resources. We
are unsure what the impact on our revenues will be as mortgages are
refinanced, because the number of policies we write for replacement
mortgages may be more or less than the terminated policies associated
with the refinanced mortgages.

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.

As noted above under “- Capital requirements may prevent us
from continuing to write new insurance on an uninterrupted basis,”
we may need to raise additional equity capital. Any future issuance of
equity securities may substantially dilute your ownership interest in
our company. In addition, the market price of our common stock could
decline as a result of sales of a large number of shares or similar
securities in the market or the perception that such sales could
occur.

We have $389.5 million principal amount of 9% Convertible Junior
Subordinated Debentures outstanding. The principal amount of the
debentures is 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. This represents
an initial conversion price of approximately $13.50 per share. We have
elected to defer the payment of approximately $17.5 million of interest
on these debentures that was scheduled to be paid on October 1, 2012. We
expect to defer additional interest in the future. If a holder elects to
convert its debentures, the interest that has been deferred on the
debentures being converted is also converted into shares of our common
stock. The conversion rate for such 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 the associated debentures.
We also have $345 million principal amount of 5% Convertible Senior
Notes outstanding. The Convertible Senior Notes are convertible, at the
holder’s option, at an initial conversion rate, which is subject to
adjustment, of 74.4186 shares per $1,000 principal amount at any time
prior to the maturity date. This represents an initial conversion price
of approximately $13.44 per share. We do not have the right to defer
interest on these Convertible Senior Notes.

Our common stock could be delisted from the NYSE

The listing of our common stock on the New York Stock Exchange, or
NYSE, is subject to compliance with NYSE’s continued listing
standards. Among other things, those standards require that the average
closing price of our common stock during any consecutive 30-day trading
period not fall below $1.00. Although we have not failed this standard,
on three trading days in August 2012, the closing price of our stock
fell below $1.00. If we are notified by the NYSE that we have not
satisfied this stock price standard, then we would have a period of time
in which to cure the deficiency, such as by effecting a reverse stock
split. The NYSE can also, in its discretion, discontinue listing our
common stock under certain circumstances. For example, if we cease
writing new insurance, our common stock could be delisted from the NYSE
unless we cure the deficiency during the time provided by the NYSE. If
the NYSE were to delist our common stock, it likely would result in a
significant decline in the trading price, trading volume and liquidity
of our common stock. We also expect that the suspension and delisting of
our common stock would lead to decreases in analyst coverage and
market-making activity relating to our common stock, as well as reduced
information about trading prices and volume. As a result, it could
become significantly more difficult for our shareholders to sell their
shares of our common stock at prices comparable to those in effect prior
to delisting or at all.

Our debt obligations materially exceed our holding company cash and
investments

At December 31, 2012, we had approximately $315 million in cash and
investments at our holding company and our holding company’s debt
obligations were $835 million in par value, consisting of $100 million
of Senior Notes due in November 2015, $345 million of Convertible Senior
Notes due in 2017, and $390 million of Convertible Junior Debentures due
in 2063. Annual debt service on the debt outstanding as of December 31,
2012, is $58 million, including approximately $35 million on the
Convertible Junior Debentures for which we have deferred the interest
that was scheduled to be paid on October 1, 2012. Any deferred interest
compounds at the stated rate of 9%.

The Senior Notes, Convertible Senior Notes and Convertible Junior
Debentures are obligations of our holding company, MGIC Investment
Corporation, and not of its subsidiaries. Our holding company has no
material sources of cash inflows other than investment income. The
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. Since 2008, MGIC has not paid any dividends to our holding
company. Through 2013, MGIC cannot pay any dividends to our holding
company without approval from the OCI. In connection with the approval
of MIC as an eligible mortgage insurer, Freddie Mac and Fannie Mae have
imposed dividend restrictions on MGIC and MIC through December 31, 2013.
Any additional capital contributions to our subsidiaries, including our
non-insurance subsidiaries, would further decrease our holding company
cash and investments. See Note 8 – “Debt” to our consolidated
financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2011 for additional information about the
holding company’s debt obligations, including restrictive covenants
in our Senior Notes and our right to defer interest on our Convertible
Junior Debentures.

We could be adversely affected if personal information on consumers
that we maintain is improperly disclosed.

As part of our business, we maintain large amounts of personal
information on consumers. While we believe we have appropriate
information security policies and systems to prevent unauthorized
disclosure, there can be no assurance that unauthorized disclosure,
either through the actions of third parties or employees, will not
occur. Unauthorized disclosure could adversely affect our reputation and
expose us to material claims for damages.

The implementation of the Basel III capital accord, or other changes
to our customers’ capital requirements, may discourage the use of
mortgage insurance.

In 1988, the Basel Committee on Banking Supervision (the “Basel
Committee”) developed the Basel Capital Accord (Basel I), which set
out international benchmarks for assessing banks’ capital adequacy
requirements. In June 2005, the Basel Committee issued an update to
Basel I (as revised in November 2005, Basel II). Basel II was
implemented by many banks in the United States and many other countries
in 2009 and 2010.

In December 2010, the Basel Committee released the nearly final
version of Basel III. In June 2012, federal regulators requested public
comments on proposed rules to implement Basel III. The proposed Basel
III rules would increase the capital requirements of many banking
organizations. Among other provisions, the proposed rules contain a
range of risk weightings for residential mortgages held for investment
by certain banking organizations, with the specific weighting dependent
upon, among other things, a loan’s LTV. Unlike previous Basel
rules, the proposed Basel III rules do not consider mortgage insurance
when calculating a loan’s risk weighting. The rules, if implemented
as proposed, may reduce the incentive of banking organizations to
purchase mortgage insurance for loans held for investment. The proposed
Basel III rules continue to afford FHA-insured loans and Ginnie Mae
mortgage-backed securities (“MBS”) a lower risk weighting than
Fannie Mae and Freddie Mac MBS. Therefore, with respect to capital
requirements, FHA-insured loans will continue to have a competitive
advantage over loans insured by private mortgage insurance and then sold
to and securitized by the GSEs. Public comments to the proposed rules
were due by October 22, 2012. It is uncertain what form the final rules
will take. We are continuing to evaluate the potential effects of the
proposed Basel III rules on our business.

Our Australian operations may suffer significant losses.

We began international operations in Australia, where we started to
write business in June 2007. Since 2008, we are no longer writing new
business in Australia. Our existing risk in force in Australia is
subject to the risks described in the general economic and insurance
business-related factors discussed above. In addition to these risks, we
are subject to a number of other risks from having deployed capital in
Australia, including foreign currency exchange rate fluctuations and
interest-rate volatility particular to Australia.

SOURCE MGIC Investment Corporation