FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For the quarterly period ended JUNE 30, 2008

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

For the transition period from                      to

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

(414) 347-6480
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ       NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES o       NO þ

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

CLASS OF STOCK		PAR VALUE		DATE		NUMBER OF SHARES
Common stock		$1.00		07/31/08		125,068,464

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2008 (Unaudited) and December 31, 2007

		June 30,				December 31,
		2008				2007
		(In thousands of dollars)
ASSETS
Investment portfolio (note 7):
Securities, available-for-sale, at fair value:
Fixed maturities (amortized cost, 2008-$6,730,358; 2007-$5,791,562)		$	6,728,330			$	5,893,591
Equity securities (cost, 2008-$2,733; 2007-$2,689)			2,651				2,642
Total investment portfolio			6,730,981				5,896,233
Cash and cash equivalents			1,060,663				288,933
Accrued investment income			86,465				72,829
Reinsurance recoverable on loss reserves			170,573				35,244
Prepaid reinsurance premiums			8,122				8,715
Premiums receivable			108,636				107,333
Home office and equipment, net			33,067				34,603
Deferred insurance policy acquisition costs			10,393				11,168
Investments in joint ventures			134,959				155,430
Income taxes recoverable			256,940				865,665
Other assets			169,785				240,208
Total assets		$	8,770,584			$	7,716,361
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves		$	3,401,170			$	2,642,479
Premium deficiency reserves			788,162				1,210,841
Unearned premiums			320,385				272,233
Short- and long-term debt (note 2)			798,368				798,250
Convertible debentures (note 3)			373,898				—
Other liabilities			222,203				198,215
Total liabilities			5,904,186				5,122,018
Contingencies (note 5)
Shareholders’ equity (note 10):
Common stock, $1 par value, shares authorized 300,000,000; shares issued, 6/30/08 - 130,118,744 12/31/07 - 123,067,426; shares outstanding, 6/30/08 - 125,068,464 12/31/07 - 81,793,185			130,119				123,067
Paid-in capital			358,782				316,649
Treasury stock (shares at cost, 6/30/08 - 5,050,280 12/31/07 - 41,274,241)			(276,873	)			(2,266,364	)
Accumulated other comprehensive income, net of tax			10,927				70,675
Retained earnings			2,643,443				4,350,316
Total shareholders’ equity			2,866,398				2,594,343
Total liabilities and shareholders’ equity		$	8,770,584			$	7,716,361

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended June 30, 2008 and 2007
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct		$	423,766			$	358,528			$	844,312			$	700,366
Assumed			3,239				757				6,002				1,441
Ceded			(55,208	)			(38,297	)			(110,063	)			(76,785	)
Net premiums written			371,797				320,988				740,251				625,022
Increase in unearned premiums, net			(21,505	)			(14,537	)			(44,471	)			(19,550	)
Net premiums earned			350,292				306,451				695,780				605,472
Investment income, net of expenses			76,982				61,927				149,464				124,897
Realized investment losses, net			(10,263	)			(9,829	)			(11,457	)			(12,839	)
Other revenue			7,522				10,490				14,621				21,151
Total revenues			424,533				369,039				848,408				738,681
Losses and expenses:
Losses incurred, net			688,143				235,226				1,379,791				416,984
Change in premium deficiency reserves			(158,898	)			—				(422,679	)			—
Underwriting and other expenses, net			68,236				75,330				145,222				150,402
Reinsurance fee (note 4)			363				—				363				—
Interest expense			19,891				8,594				30,805				19,553
Total losses and expenses			617,735				319,150				1,133,502				586,939
(Loss) income before tax and joint ventures			(193,202	)			49,889				(285,094	)			151,742
(Credit) provision for income tax			(84,146	)			5,073				(131,667	)			28,616
Income from joint ventures, net of tax			11,157				31,899				21,134				45,952
Net (loss) income		$	(97,899	)		$	76,715			$	(132,293	)		$	169,078
Earnings per share (note 6):
Basic		$	(0.79	)		$	0.94			$	(1.27	)		$	2.07
Diluted		$	(0.79	)		$	0.93			$	(1.27	)		$	2.05
Weighted average common shares outstanding — diluted (shares in thousands, note 6)			123,834				82,309				103,981				82,349
Dividends per share		$	0.025			$	0.25			$	0.050			$	0.50

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Year Ended December 31, 2007 and Six Months Ended June 30, 2008 (unaudited)

														Accumulated
														other
		Common				Paid-in				Treasury				comprehensive				Retained				Comprehensive
		stock				capital				stock				income (note 2)				earnings				(loss) income
										(In thousands of dollars)
Balance, December 31, 2006		$	123,029			$	310,394			$	(2,201,966	)		$	65,789			$	5,998,631
Net loss			—				—				—				—				(1,670,018	)		$	(1,670,018	)
Change in unrealized investment gains and losses, net			—				—				—				(17,767	)			—				(17,767	)
Dividends declared			—				—				—				—				(63,819	)
Common stock shares issued			38				2,205				—				—				—
Repurchase of outstanding common shares			—				—				(75,659	)			—				—
Reissuance of treasury stock			—				(14,187	)			11,261				—				—
Equity compensation			—				18,237				—				—				—
Defined benefit plan adjustments, net			—				—				—				14,561				—				14,561
Change in the liability for unrecognized tax benefits			—				—				—				—				85,522
Unrealized foreign currency translation adjustment			—				—				—				8,456				—				8,456
Other			—				—				—				(364	)			—				(364	)
Comprehensive loss			—				—				—				—				—			$	(1,665,132	)
Balance, December 31, 2007		$	123,067			$	316,649			$	(2,266,364	)		$	70,675			$	4,350,316
Net loss			—				—				—				—				(132,293	)		$	(132,293	)
Change in unrealized investment gains and losses, net			—				—				—				(67,304	)			—				(67,304	)
Dividends declared			—				—				—				—				(5,013	)
Common stock shares issued (note 10)			7,052				68,706				—				—				—
Repurchase of outstanding common shares			—				—				—				—				—
Reissuance of treasury stock (note 10)			—				(41,686	)			1,989,491				—				(1,569,567	)
Equity compensation			—				11,288				—				—				—
Unrealized foreign currency translation adjustment			—				—				—				7,845				—				7,845
Other			—				3,825				—				(289	)			—				(289	)
Comprehensive loss			—				—				—				—				—			$	(192,041	)
Balance, June 30, 2008		$	130,119			$	358,782			$	(276,873	)		$	10,927			$	2,643,443

See accompanying notes to consolidated financial statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2008 and 2007
(Unaudited)

		Six Months Ended
		June 30,
		2008				2007
		(In thousands of dollars)
Cash flows from operating activities:
Net (loss) income		$	(132,293	)		$	169,078
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred insurance policy acquisition costs			4,393				5,556
Increase in deferred insurance policy acquisition costs			(3,618	)			(4,479	)
Depreciation and amortization			14,734				9,715
Increase in accrued investment income			(13,636	)			(790	)
(Increase) decrease in reinsurance recoverable on loss reserves			(135,329	)			608
Decrease in prepaid reinsurance premiums			593				984
Increase in premium receivable			(1,303	)			(4,902	)
Increase in loss reserves			758,691				62,533
Decrease in premium deficiency reserve			(422,679	)			—
Increase in unearned premiums			48,152				18,586
Decrease (increase) in income taxes recoverable			608,725				(32,569	)
Equity earnings in joint ventures			(29,363	)			(65,658	)
Distributions from joint ventures			22,010				51,512
Realized loss			11,457				12,839
Other			126,297				9,848
Net cash provided by operating activities			856,831				232,861
Cash flows from investing activities:
Purchase of fixed maturities			(2,040,723	)			(1,139,277	)
Purchase of equity securities			(43	)			(44	)
Increase in collateral under securities lending			—				(172,752	)
Additional investment in joint ventures			(490	)			(3,916	)
Sale of investment in joint ventures			27,594				—
Proceeds from sale of fixed maturities			852,957				845,607
Proceeds from maturity of fixed maturities			241,101				212,574
Other			2,496				(14,822	)
Net cash used in investing activities			(917,108	)			(272,630	)
Cash flows from financing activities:
Dividends paid to shareholders			(5,013	)			(41,546	)
Repayment of long-term debt			—				(200,000	)
Net proceeds from short-term debt			—				62,590
Net proceeds from convertible debentures			377,303				—
Increase in obligations under securities lending			—				172,752
Reissuance of treasury stock			383,959				1,300
Repurchase of common stock			—				(67,648	)
Common stock issued			75,758				2,009
Excess tax benefits from share-based payment arrangements			—				(39	)
Net cash provided by (used in) financing activities			832,007				(70,582	)
Net increase (decrease) in cash and cash equivalents			771,730				(110,351	)
Cash and cash equivalents at beginning of period			288,933				293,738
Cash and cash equivalents at end of period		$	1,060,663			$	183,387

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)

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

The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007 included in our Annual Report on Form 10-K.

In the opinion of management such financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly present our financial position and results of operations for the periods indicated. The results of operations for the six months ended June 30, 2008 may not be indicative of the results that may be expected for the year ending December 31, 2008.

New Accounting Standards

In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. We are currently evaluating the impact of the adoption of FSP APB 14-1 on our financial position, results of operations and cash flows. At this time, we believe the adoption will result in a net-of-tax increase to our shareholders’ equity of approximately $63 million on January 1, 2009 and will result in a net-of-tax increase to interest expense of approximately $11 million for the year ended December 31, 2008 and $15 million annually thereafter, through April 1, 2013. These increases result from our Convertible Junior Subordinated Debentures discussed in Note 3.

In March 2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the provisions of this statement and the impact, if any, this statement will have on our disclosures.

In February 2008, the FASB issued FSP FAS 157-2. This statement defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities measured on a non-recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are currently evaluating the requirements of this statement and the impact, if any, this statement will have on our financial position and results of operations.

Fair Value Measurements

Effective January 1, 2008, we adopted the fair value measurement provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. This statement defines fair value, expands disclosure requirements about fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect a company’s market assumptions. Fair value is used on a recurring basis for assets and liabilities in which fair value is the primary basis of accounting (i.e., available-for-sale securities). Additionally, fair value is used on a nonrecurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

Fair value is defined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, we use various valuation techniques and assumptions when estimating fair value. In accordance with SFAS No. 157, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 — Quoted prices for identical instruments in active markets that we have the ability to access. Financial assets utilizing Level 1 inputs include certain U.S. Treasury securities and obligations of the U.S. government.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs include certain municipal and corporate bonds.

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs include certain state, corporate and mortgage-backed securities. Non-financial assets which utilize Level 3 inputs include real estate acquired through claim settlement. Additionally, financial liabilities utilizing Level 3 inputs consist of derivative financial instruments.

The adoption of SFAS No. 157 resulted in no changes to January 1, 2008 retained earnings. (See note 7.)

Fair Value Option

In conjunction with the adoption of SFAS No. 157, we have adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement provides companies with an option to report selected financial assets and liabilities at fair value on an

instrument-by-instrument basis. After the initial adoption, the election to report a financial asset or liability at fair value is made at the time of acquisition and it generally may not be revoked. The objective of this statement is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The adoption of SFAS No. 159 resulted in no changes to January 1, 2008 retained earnings as we elected not to apply the fair value option to financial instruments not currently carried at fair value.

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2007 amounts to conform to 2008 presentation.

Note 2 — Short- and long-term debt

We have a $300 million bank revolving credit facility, expiring in March 2010 that was amended in June 2008. In the third quarter of 2007, we drew the entire amount available under this facility. At June 30, 2008 the entire $300 million was outstanding. In July 2008, we repaid $100 million borrowed under this facility. The amount that we repaid remains available for re-borrowing pursuant to the terms of our credit agreement.

The credit facility, as amended in June 2008, effective July 1, 2008, requires us to maintain Consolidated Net Worth of no less than $2.00 billion at all times. However, if as of June 30, 2009, Consolidated Net Worth equals or exceeds $2.75 billion, then the minimum Consolidated Net Worth under the facility will be increased to $2.25 billion at all times from and after June 30, 2009. Consolidated Net Worth is generally defined in our credit agreement as the sum of our consolidated shareholders’ equity plus the aggregate outstanding principal amount of our 9% Convertible Junior Subordinated Debentures due 2063, currently $390 million. The credit facility also requires Mortgage Guaranty Insurance Corporation (“MGIC”) to maintain a statutory risk-to-capital ratio of not more than 22:1 and maintain policyholders’ position (which includes MGIC’s statutory surplus and its contingency reserve) of not less than the amount required by Wisconsin insurance regulations. At June 30, 2008, these requirements were met, as was the shareholders’ equity requirement of $1.85 billion prior to this amendment. Our shareholders’ equity and Consolidated Net Worth at June 30, 2008 were approximately $2.86 billion and $3.25 billion, respectively.

At June 30, 2008 and December 31, 2007 we had $200 million, 5.625% Senior Notes due in September 2011 and $300 million, 5.375% Senior Notes due in November 2015, as well as $300 million outstanding under the credit facility. At June 30, 2008 and December 31, 2007, the fair value of this outstanding debt was $674.3 million and $772.0 million, respectively.

Interest payments on all long-term and short-term debt were $21.4 million and $21.6 million for the six months ended June 30, 2008 and 2007, respectively.

If we fail to maintain any of the requirements under the credit facility discussed above and are not successful in obtaining an agreement from banks holding a majority of the debt outstanding under the facility to change (or waive) the applicable requirement, then banks holding a majority of the debt outstanding under the facility would have the right to declare the entire amount of the outstanding debt due and payable. If the debt under our bank facility

were accelerated in this manner, the holders of 25% or more of our publicly traded $200 million 5.625% Senior Notes due in September 2011, and the holders of 25% or more of our publicly traded $300 million 5.375% Senior Notes due in November 2015, each would have the right to accelerate the maturity of that debt. In addition, the Trustee of these two issues of Senior Notes, which is also a lender under our bank credit facility, could, independent of any action by holders of Senior Notes, accelerate the maturity of the Senior Notes.

Note 3 — Convertible debentures and related derivative

In March 2008 we completed the sale of $365 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063. In April 2008, the initial purchasers exercised an option to purchase an additional $25 million aggregate principal amount of these debentures. The debentures were sold in private placements to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Interest on the debentures will be payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2008. We may defer interest, under an optional deferral provision, for one or more consecutive interest periods up to ten years without giving rise to an event of default. Deferred interest will accrue additional interest at the rate then applicable to the debentures.

The debentures rank junior to all of our existing and future senior indebtedness. The net proceeds of the debentures were approximately $377 million. A portion of the net proceeds of the debentures and a concurrent offering of common stock (see Note 10) was used to increase the capital of MGIC, our principal insurance subsidiary, in order to enable us to expand the volume of our new insurance written, and a portion will also be used for our general corporate purposes. Debt issuance costs are being amortized over the expected life of five years to interest expense.

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

The debentures are currently convertible, at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount of debentures at any time prior to the maturity date. This represents an initial conversion price of approximately $13.50 per share. The initial conversion price represents a 20% conversion premium based on the $11.25 per share price to the public in our concurrent common stock offering. (See Note 9.)

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

Our common stock is listed on the New York Stock Exchange, or NYSE. One of the NYSE’s rules limits the number of shares of our common stock that the convertible debentures may be converted into to less than 20% of the number of shares outstanding immediately before the issuance of the convertible debentures unless shareholders approve the issuance of the shares that would exceed the limit. We closed a sale of our common stock immediately prior to the sale of the convertible debentures, which resulted in approximately 124.9 million shares of our common stock outstanding prior to the debentures being issued. At the initial conversion rate the outstanding debentures are convertible into approximately 23.1% of our common stock outstanding, 3.9 million shares above the NYSE limit. At a special shareholders’ meeting held in June 2008, we received shareholder approval on the issuance of shares of our common stock sufficient to convert all of the convertible debentures.

At issuance approximately $52.8 million in face value of the convertible debentures could not be settled in our common shares without prior shareholder approval and thus required bifurcation of the embedded derivative related to those convertible debentures. The derivative value of $16.9 million was determined using the Black-Scholes model, and is treated as a discount on issuance of the convertible debentures and amortized over the expected life of five years to interest expense. Prior to shareholder approval, changes in the fair value of the derivative were reflected in our results of operations. Since the changes in fair value corresponded to changes in our stock price, a decrease in our stock price resulted in a decrease in the derivative liability. On the date of shareholder approval, June 27, 2008, the value of the derivative had decreased to $5.9 million. On this date the amount was re-classified from a liability to shareholders’ equity on the consolidated balance sheet, and subsequent changes in the fair value of the derivative will not be reflected on our financial statements. The change in fair value of the derivative from issuance to shareholder approval of approximately $11.0 million is included in other revenue on our statement of operations for the three and six months ended June 30, 2008.

The fair value of the convertible debentures was approximately $289.0 million at June 30, 2008.

Note 4 — Reinsurance

In June 2008 we entered into a reinsurance agreement with an affiliate of HCC Insurance Holdings, Inc. (“HCC”). The reinsurance agreement is effective on the risk associated with up to $50 billion of qualifying new insurance written each calendar year. The term of the reinsurance agreement begins April 1, 2008 and ends on December 31, 2010, subject to two one-year extensions that may be exercised by HCC.

The reinsurance agreement is expected to provide claims-paying resources in catastrophic loss environments for insurance written beginning April 1, 2008.

The agreement is accounted for under deposit accounting rather than reinsurance accounting, because under the guidance of SFAS 113 “Accounting for Reinsurance Contracts”, we concluded that the reinsurance agreement does not result in the reasonable possibility that the reinsurer will suffer a significant loss. The premium ceded to the reinsurer and the brokerage commission paid to an affiliate of the reinsurer, net of a profit commission to us, is recorded as reinsurance fee expense on our statement of operations. In non-catastrophic loss environments, we expect the net expense will be approximately 5% of premiums earned, net of premiums ceded under captive arrangements, on business covered by the agreement. The reinsurance fee for the second quarter of 2008 was approximately $0.4 million.

Note 5 — Litigation and contingencies

We are involved in litigation in the ordinary course of business that is not further described in this footnote. In our opinion, the ultimate resolution of this pending litigation will not have a material adverse effect on our financial position or results of operations. However, we are unable to predict the outcome of these cases or estimate our associated expenses or possible losses.

Consumers are bringing a growing number of lawsuits against home mortgage lenders and settlement service providers. In recent years, seven mortgage insurers, including MGIC, have been involved in litigation alleging violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. MGIC’s settlement of class action litigation against it under RESPA became final in October 2003. MGIC settled the named plaintiffs’ claims in litigation against it under FCRA in late December 2004 following denial of class certification in June 2004. Since December 2006, class action litigation was separately brought against a number of large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. While we are not a defendant in any of these cases, there can be no assurance that we will not be subject to future litigation under RESPA or FCRA or that the outcome of any such litigation would not have a material adverse effect on us.

In June 2005, in response to a letter from the New York Insurance Department, we provided information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation. In February 2006, the New York Insurance Department requested MGIC to review its premium rates in New York and to file adjusted rates based on recent years’ experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the New York Insurance Department that it believes its premium rates are reasonable and that, given the nature of mortgage insurance risk, premium rates should not be determined only by the experience of recent years. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce, which regulates insurance, we provided the Department with information about captive mortgage reinsurance and certain other matters. We subsequently provided additional information to the Minnesota Department of Commerce, and in March 2008 that Department sought additional information as well as answers to interrogatories regarding captive mortgage reinsurance. In June 2008, we received a subpoena from the Department of Housing and Urban Development, commonly referred to as HUD, seeking information about captive mortgage reinsurance similar to that requested by the Minnesota Department of Commerce, but not limited in scope to the state of Minnesota. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

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

In October 2007, the Division of Enforcement of the Securities and Exchange Commission requested that we voluntarily furnish documents and information primarily relating to Credit-Based Asset Servicing and Securitization, C-BASS, the now-terminated merger with Radian Group Inc. and the subprime mortgage assets “in the Company’s various lines of business.” We are in the process of providing responsive documents and information to the Securities and Exchange Commission. As part of its initial information request, the SEC staff informed us that this investigation should not be construed as an indication by the SEC or its staff that any violation of the securities laws has occurred, or as a reflection upon any person, entity or security.

In the second and third quarters of 2008, complaints in four separate purported stockholder class action lawsuits were filed against us and several of our officers. The allegations in the complaints are generally that through these officers we violated the federal securities laws by failing to disclose or misrepresenting C-BASS’s liquidity, the impairment of our investment in C-BASS, the inadequacy of our loss reserves and that we were not adequately capitalized. The collective time period covered by these lawsuits begins on October 12, 2006 and ends on February 12, 2008. The complaints seek damages based on purchases of our stock during this time period at prices that were allegedly inflated as a result of the purported misstatements and omissions. With limited exceptions, our bylaws provide that our officers are entitled to indemnification from us for claims against them of the type alleged in the complaints. We believe, among other things, that the allegations in the complaints are not sufficient to prevent their dismissal and intend to defend against them vigorously. However, we are unable to predict the outcome of these cases or estimate our associated expenses or possible losses.

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

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

eliminate the further accrual of interest. Although the resolution of this issue is uncertain, we believe that sufficient provisions for income taxes have been made for potential liabilities that may result. If the resolution of this matter differs materially from our estimates, it could have a material impact on our effective tax rate, results of operations and cash flows.

Under our contract underwriting agreements, we may be required to provide certain remedies to our customers if certain standards relating to the quality of our underwriting work are not met. The cost of remedies provided by us to customers for failing to meet these standards has not been material to our financial position or results of operations for the six months ended June 30, 2008 and 2007.

Note 6 — Earnings per share

Our basic and diluted earnings per share (“EPS”) have been calculated in accordance with SFAS No. 128, Earnings Per Share. Basic EPS is based on the weighted average number of common shares outstanding. Typically, diluted EPS is based on the weighted average number of common shares outstanding plus common stock equivalents which include stock awards, stock options and the dilutive effect of our convertible debentures. In accordance with SFAS 128, if we report a net loss from continuing operations then our diluted EPS is computed in the same manner as the basic EPS. For the three and six months ended June 30, 2008 and 2007, our net (loss) income is the same for both basic and diluted EPS. The following is a reconciliation of the weighted average number of shares; however for the three and six months ended June 30, 2008 the basic weighted-average shares was used in the calculation of both the basic and diluted EPS since including the common stock equivalents would be anti-dilutive.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
						(in thousands)
Weighted-average shares — Basic			123,834				81,763				103,981				81,827
Common stock equivalents			—				546				—				522
Weighted-average shares — Diluted			123,834				82,309				103,981				82,349

Note 7 — Fair value measurements

As discussed in Note 1, we adopted SFAS No. 157 and SFAS No. 159 effective January 1, 2008. Both standards address aspects of the expanding application of fair-value accounting. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements regarding fair-value measurements. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value with changes in fair value reported in earnings. The option to account for selected financial assets and liabilities at fair value is made on an instrument-by-instrument basis at the time of acquisition. For the three and six month periods ended June 30, 2008, we did not elect the fair value option for any financial instruments acquired for which the primary basis of accounting is not fair value.

In accordance with SFAS No. 157, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 — Quoted prices for identical instruments in active markets that we have the ability to access. Financial assets utilizing Level 1 inputs include certain U.S. Treasury securities and obligations of the U.S. government.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs include certain municipal and corporate bonds.

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs include certain state, corporate and mortgage-backed securities. Non-financial assets which utilize Level 3 inputs include real estate acquired through claim settlement. Additionally, financial liabilities utilizing Level 3 inputs consist of derivative financial instruments.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy a variety of inputs are utilized including actual trade data, benchmark yield data, broker/dealer quotes, issuer spread data and other reference information. This information is evaluated using a multidimensional pricing model. This model combines all inputs to arrive at a value assigned to each security. We review the values generated by this model for reasonableness and, in some cases, further analyze and research values generated to ensure their accuracy, which includes reviewing other publicly available information. Securities whose fair value is primarily based on the use of our multidimensional pricing model are classified in Level 2 and include certain municipal and corporate bonds.

Assets and liabilities classified as Level 3 are as follows:

	•		Securities available-for-sale classified in Level 3 are not readily marketable and are valued using a combination of broker quotations and/or internally developed models based on the present value of expected cash flows utilizing data provided by the trustees.
	•		Real estate acquired through claim settlement is fair valued at the lower of our acquisition cost or a percentage of appraised value. The percentage applied to appraised value is based upon our historical sales experience.
	•		As discussed in Note 3 the derivative related to the outstanding debentures is valued using the Black-Scholes model. Remaining derivatives are valued internally, based on the present value of expected cash flows utilizing data provided by the trustees.

Fair value measurements for items measured at fair value included the following as of June 30, 2008 (in thousands):

						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets
Securities available-for-sale		$	6,730,981			$	330,602			$	6,363,031			$	37,348
Real estate acquired (1)			64,619				—				—				64,619
Liabilities
Other liabilities (derivatives)		$	22,157			$	—			$	—			$	22,157

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

		Securities
		Available-				Real Estate				Other
		for-Sale				Acquired				Liabilities
Balance at March 31, 2008		$	32,513			$	110,698			$	(20,547	)
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment gains (losses), net			(3,339	)			—				—
Included in earnings and reported as other revenue			—				—				(3,350	)
Included in earnings and reported as losses incurred, net			—				(12,171	)			—
Included in other comprehensive income			5,482				—				—
Purchases, issuances and settlements			2,692				(33,908	)			1,740
Transfers in/and or out of Level 3			—				—				—
Balance at June 30, 2008		$	37,348			$	64,619			$	(22,157	)
Amount of total gains (losses) included in earnings for the three months ended June 30, 2008 attributable to the change in unrealized gains (losses) on assets (liabilities) still held at June 30, 2008		$	(3,339	)		$	(11,893	)		$	(14,416	)

		Securities
		Available-				Real Estate				Other
		for-Sale				Acquired				Liabilities
Balance at January 1, 2008		$	37,195			$	145,198			$	(12,132	)
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment gains (losses), net			(6,054	)			—				—
Included in earnings and reported as other revenue			—				—				(6,823	)
Included in earnings and reported as losses incurred, net			—				(17,758	)			—
Included in other comprehensive income			3,543				—				—
Purchases, issuances and settlements			2,664				(62,821	)			(3,202	)
Transfers in/and or out of Level 3			—				—				—
Balance at June 30, 2008		$	37,348			$	64,619			$	(22,157	)
Amount of total gains (losses) included in earnings for the six months ended June 30, 2008 attributable to the change in unrealized gains (losses) on assets (liabilities) still held at June 30, 2008		$	(6,054	)		$	(15,807	)		$	(17,888	)

Note 8 — Comprehensive income

Our total comprehensive income, as calculated per SFAS No. 130, Reporting Comprehensive Income, was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands of dollars)
Net (loss) income		$	(97,899	)		$	76,715			$	(132,293	)		$	169,078
Other comprehensive loss			(28,290	)			(50,046	)			(59,748	)			(54,714	)
Total comprehensive (loss) income		$	(126,189	)		$	26,669			$	(192,041	)		$	114,364
Other comprehensive (loss) income (net of tax):
Change in unrealized gains and losses on investments		$	(32,155	)		$	(53,664	)			(67,304	)			(59,578	)
Other			3,865				3,618				7,556				4,864
Other comprehensive loss		$	(28,290	)		$	(50,046	)		$	(59,748	)		$	(54,714	)

At June 30, 2008, accumulated other comprehensive income of $10.9 million included ($1.4) million of net unrealized losses on investments, $16.3 million relating to a foreign currency translation adjustment, ($3.2) million relating to defined benefit plans and ($0.8) million relating to the accumulated other comprehensive loss of the Company’s joint venture investments, all net of tax. At December 31, 2007, accumulated other comprehensive income of $70.7 million included $65.9 million of net unrealized gains on investments, ($3.2) million relating to defined benefit plans, $8.5 million relating to foreign currency translation adjustment and ($0.5) million relating to the accumulated other comprehensive loss of the Company’s joint venture investments.

Note 9 — Benefit Plans

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

		Three Months Ended
		June 30,
		Pension and Supplemental								Other Postretirement
		Executive Retirement Plans								Benefits
		2008				2007				2008				2007
		(In thousands of dollars)
Service cost		$	2,036			$	2,504			$	888			$	890
Interest cost			3,332				3,016				1,179				1,112
Expected return on plan assets			(4,805	)			(4,370	)			(941	)			(804	)
Recognized net actuarial loss			114				63				—				26
Amortization of transition obligation			—				—				71				71
Amortization of prior service cost			171				141				—				—
Net periodic benefit cost		$	848			$	1,354			$	1,197			$	1,295

		Six Months Ended
		June 30,
		Pension and Supplemental								Other Postretirement
		Executive Retirement Plans								Benefits
		2008				2007				2008				2007
		(In thousands of dollars)
Service cost		$	4,072			$	5,008			$	1,776			$	1,780
Interest cost			6,664				6,032				2,358				2,224
Expected return on plan assets			(9,610	)			(8,740	)			(1,882	)			(1,608	)
Recognized net actuarial loss			228				126				—				52
Amortization of transition obligation			—				—				142				142
Amortization of prior service cost			342				282				—				—
Net periodic benefit cost		$	1,696			$	2,708			$	2,394			$	2,590

We previously disclosed in our financial statements for the year ended December 31, 2007 that we expected to contribute approximately $9.3 million and $3.0 million, respectively, to our pension and postretirement plans in 2008. Consistent with prior years, as of June 30, 2008, none of these contributions have been made, but we expect to make these contributions in 2008.

Note 10 — Shareholders’ equity

In March 2008 we completed the public offering and sale of 42,933,333 shares of our common stock at a price of $11.25 per share. We received net proceeds of approximately $460 million, after deducting underwriting discount and estimated offering expenses. The number of shares and proceeds reflect the exercise in full of the underwriters’ option to purchase additional shares of common stock. Of the 42.9 million shares of common stock sold, 7.1 million were newly issued shares and 35.8 million were common shares issued out of treasury. The cost of the treasury shares issued exceeded the proceeds from the sale by approximately $1.6 billion, which resulted in a deficiency. The deficiency was charged to paid-in capital related to previous treasury share transactions, and the remainder was charged to retained earnings.

A portion of the net proceeds of the offering along with the net proceeds of the debentures (see Note 3) was used to increase the capital of MGIC, our principal insurance subsidiary, in order to enable us to expand the volume of our new insurance written and a portion will also be used for our general corporate purposes.

In June 2008 our shareholders approved an amendment to our Articles of Incorporation that will increase the number of authorized shares of common stock from 300 million to 460 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     Through our subsidiary MGIC, we are the leading provider of private mortgage insurance in the United States to the home mortgage lending industry. Our principal products are primary mortgage insurance and pool mortgage insurance. Primary mortgage insurance may be written through the flow market channel, in which loans are insured in individual, loan-by-loan transactions. Primary mortgage insurance may also be written through the bulk market channel, in which portfolios of loans are individually insured in single, bulk transactions.

     As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. The discussion below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2007. We refer to this Discussion as the “10-K MD&A.” In the discussion below, we classify, in accordance with industry practice, as “full documentation” loans approved by GSE and other automated underwriting systems under “doc waiver” programs that do not require verification of borrower income. For additional information about such loans, see footnote (3) to the delinquency table under “Results of Consolidated Operations—Losses—Losses Incurred.” The discussion of our business in this document generally does not apply to our international operations which began in 2007, are conducted only in Australia and are immaterial. The results of our operations in Australia are included in the consolidated results disclosed. For additional information about our Australian operations, see “We may not be able to realize benefits from our international initiative” in Item I A. of Part II of this Report.

Outlook

          We believe the mortgage insurance industry will experience material losses on the 2006 and 2007 books. The ultimate amount of these losses will depend in part on the direction of home prices in California, Florida and other distressed markets, 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, we cannot predict with confidence 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. Our view of potential losses on these books has trended upward since the first quarter of 2008 due in part to the absence of improvement in the cure rate.

          Recognizing that a risk-to-capital ratio does not differentiate between loans that have higher and lower probabilities of loss, we have historically considered our risk-to-capital ratio to be an important metric in assessing our financial strength and our ability to write new business. See “Liquidity and Capital Resources—Risk-to-Capital.” In recent years, our risk-to-capital ratio was materially below 15:1. Historically, we viewed a risk-to-capital ratio of around 15:1 as an optimal target ratio because we saw that level as striking an appropriate balance between maintaining resources to pay claims that would be adequate in even the most draconian loss scenarios; enabling us to write as much volume as could be generated in accordance with our underwriting guidelines; and providing acceptable returns on our capital. In light of the current loss environment and the extent of our claims paying resources (which are discussed below), we believe a more appropriate risk-to-capital ratio for us is around 20:1.

          We expect our risk-to-capital ratio will be materially below 20:1 for the remainder of 2008. Depending on future losses, and with levels of new insurance written that are somewhat lower than our projected volume for 2008, our risk-to-capital ratio could remain below 20:1 in 2009 and years thereafter or could be moderately above 20:1 in 2009 and materially above that level in later years. Due to this uncertainty, we are studying ways to mitigate this potential increase. These steps encompass obtaining additional reinsurance, including on older books of pool insurance on which we do not foresee material future losses but which consume relatively high amounts of capital, or reducing our volume, although the amount of volume reduction that would provide material capital relief could adversely affect our customer relationships. We cannot predict whether we will be successful in these efforts. At this time, we are not exploring mitigation alternatives that involve increasing our capital through sales of additional equity or debt securities.

          The Office of the Commissioner of Insurance of Wisconsin is MGIC’s principal insurance regulator. Wisconsin’s insurance regulations, which do not use a risk-to-capital ratio to assess a mortgage guaranty insurer’s capital adequacy, require that a mortgage guaranty insurance company maintain “policyholders position” of not less than a minimum computed under a formula. Policyholders position is the insurer’s net worth, contingency reserve and a portion of the reserves for unearned premiums, with credit given for authorized reinsurance. The minimum required by the formula (“MPP”) depends on the insurance in force and whether the loans insured are primary insurance or pool insurance and further depends on the LTV ratio of the individual loans and their coverage percentage (and in the case of pool insurance, the amount of any deductible). If a mortgage guaranty insurer does not meet MPP it cannot write new business until its policyholders position meets the minimum. At June 30, 2008, we exceeded MPP by more than $2 billion. In severe loss environments, we would have to take action to address a shortfall in MPP. The steps referred to above that would mitigate a potential increase in our risk-to-capital may also mitigate an MPP shortfall.

          We believe we have more than adequate resources to pay claims on our insurance in force, even in scenarios in which losses materially exceed those that would result in an MPP shortfall. Our claims paying resources principally consist of our investment portfolio, captive reinsurance trust funds and future premiums on our insurance in force, net of premiums ceded to captive and other reinsurers.

          We also believe we will be in compliance with the terms of our $300 million bank credit facility, under which $200 million is outstanding. This facility matures in March 2010.

General Business Environment

     Please refer to our Annual Report on Form 10-K for the year ended December 31, 2007 for our discussion of the general business environment. Except as discussed elsewhere below, there have been no material changes to that discussion.

Housing Legislation

     In late July the Housing and Economic Recovery Act of 2008 was enacted. Included in this legislation is the HOPE for Homeowners Act of 2008 which creates a new, temporary, voluntary program within FHA to back FHA-insured mortgages to distressed borrowers. The

new mortgages offered by FHA-approved lenders will refinance the loans of distressed owner-occupants at risk of losing their homes to foreclosure at significant discounts to the original value of the home. There can be no assurance that this legislation will materially reduced the level of delinquencies and claims we are currently experiencing or could experience in the future.

     Also included in the Act is the Federal Housing Finance Regulatory Reform Act of 2008 which establishes a new, independent, “world class” regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. This regulator has been given broad authority to ensure the safety and soundness of these entities, including the ability to establish new capital standards, restrict asset growth, establish standards for portfolio risk management, and review and approve new product offerings. There can be no assurance that any changes resulting from the implementation of this new regulatory regime will not alter our relationship or ability to conduct business with the GSEs in a materially adverse manner.

Factors Affecting Our Results

Our results of operations are affected by:

	•		Premiums written and earned
			Premiums written and earned in a year are influenced by:

	•		New insurance written, which increases the size of the in force book of insurance, is the aggregate principal amount of the mortgages that are insured during a period. Many factors affect new insurance written, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages, including competition from other mortgage insurers and alternatives to mortgage insurance.
	•		Cancellations, which reduce the size of the in force book of insurance that generates premiums. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, as well as by current home values compared to values when the loans in the in force book became insured.
	•		Premium rates, which are affected by the risk characteristics of the loans insured and the percentage of coverage on the loans.
	•		Premiums ceded to reinsurance subsidiaries of certain mortgage lenders (“captives”) and risk sharing arrangements with the GSEs.

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

•

Investment income

     Our investment portfolio is comprised almost entirely of fixed income securities rated “A” or higher. The principal factors that influence investment income are the size of the portfolio and its yield. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest rates), the size of the investment portfolio is mainly a function of cash generated from (or used in) operations, such as investment earnings and claim payments, less cash used for non-operating activities, such as share repurchases. Realized gains and losses are a function of the difference between the amount received on sale of a security and the security’s amortized cost. The amount received on sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.

•

Losses incurred

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

	•		The state of the economy and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency. The level of delinquencies has historically followed a seasonal pattern, with a reduction in delinquencies in the first part of the year, followed by an increase in the latter part of the year. However, although this pattern has continued, the default inventory has increased each quarter since the second quarter of 2007 because the seasonal pattern has been more than offset by the development of the 2006 and 2007 books of business.
	•		The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
	•		The size of loans insured. Higher average loan amounts tend to increase losses incurred.
	•		The percentage of coverage on insured loans. Deeper average coverage tends to increase incurred losses.
	•		Changes in housing values, which affect our ability to mitigate our losses through sales of properties with delinquent mortgages as well as borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance.
	•		The distribution of claims over the life of a book. Historically, the first two years after a loan is originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining, although persistency, the condition of the economy and other factors can affect this pattern.

•

Changes in premium deficiency reserves

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

•

Underwriting and other expenses

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

•

Income (loss) from joint ventures

     Our results of operations are also affected by the results of our joint ventures, which are accounted for under the equity method. Historically, joint venture income principally consisted of the aggregate results of our investment in two less than majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC, C-BASS, and Sherman Financial Group LLC. In 2007, joint venture losses included an impairment charge equal to our entire equity interest in C-BASS, as well as equity losses incurred by C-BASS in the fourth quarter that reduced the carrying value of our $50 million note from C-BASS to zero. As a result, beginning in the first quarter of 2008, our joint venture income principally consists of income from Sherman.

     At the time this Quarterly Report was finalized we were seeking to finalize a definitive agreement for a transaction with Sherman under which Sherman could acquire our entire interest in Sherman. There can be no assurances that we will enter into a definitive agreement on this sale or if we do that the transaction will close.

Sherman: Sherman is principally engaged in purchasing and collecting for its own account delinquent consumer receivables, which are primarily unsecured, and in originating and servicing subprime credit card receivables. The borrowings used to finance these activities are included in Sherman’s balance sheet. During the second and third quarters of 2007 Sherman acquired several portfolios of performing subprime second mortgages for an approximate aggregate purchase price of $415 million.

Sherman’s consolidated results of operations are primarily affected by:

•

Revenues from delinquent receivable portfolios

			These revenues are the cash collections on the portfolios, and depend on the aggregate amount of delinquent receivables owned by Sherman, the type of receivable and the length of time that the receivable has been owned by Sherman.
	•		Amortization of delinquent receivable portfolios
			Amortization is the recovery of the cost to purchase the receivable portfolios. Amortization expense is a function of estimated collections from the portfolios over their estimated lives. If estimated collections cannot be reasonably predicted, cost is fully recovered before any net revenue, calculated as the difference between revenues from a receivable portfolio and that portfolio’s amortization, is recognized.
	•		Credit card interest and fees, along with the related provision for losses for uncollectible amounts.
	•		Costs of collection, which include servicing fees paid to third parties to collect receivables.

C-BASS: In 2007, C-BASS ceased its operations and is managing its portfolio pursuant to a consensual, non-bankruptcy restructuring, under which its assets are to be paid out over time to its secured and unsecured creditors.

Mortgage Insurance Earnings and Cash Flow Cycle

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

     2008 Second Quarter Results

     Our results of operations in the second quarter of 2008 were principally affected by:

•

Premiums written and earned

     Premiums written and earned during the second quarter of 2008 increased compared to the same period in 2007. The increase in premiums resulted from the continued increase in the average insurance in force; however the effect of the higher in force has been somewhat offset by lower average premium yields due to a shift in the mix of new writings to loans with lower loan-to-value ratios, higher FICO scores and full documentation, which carry lower premium rates.

•

Investment income

     Investment income in the second quarter of 2008 was higher when compared to the same period in 2007 due to an increase in the average amortized cost of invested assets, offset by a decrease in the pre-tax yield.

•

Losses incurred

     Losses incurred for the second quarter of 2008 significantly increased compared to the same period in 2007 primarily due to a significant increase in the default inventory as well as an increase in the estimates regarding how much will be paid on claims, or severity, when compared to the same period in 2007. The default inventory increased by approximately 14,600 delinquencies in the second quarter of 2008, compared to an increase of approximately 4,500 in the second quarter of 2007. The increase in estimated severity was primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as our inability to mitigate losses through the sale of properties due to slowing home price appreciation or home price declines in some areas.

•

Premium deficiency

     During the second quarter of 2008 the premium deficiency reserve on Wall Street bulk transactions declined by $159 million from $947 million, as of March 31, 2008, to $788 million as of June 30, 2008. The $788 million premium deficiency reserve as of June 30, 2008 reflects the present value of expected future losses and expenses that exceeded the present value of expected future premium and already established loss reserves.

•

Underwriting and other expenses

     Underwriting and other expenses for the second quarter of 2008 decreased when compared to the same period in 2007. The decrease is primarily due to lower accrued employee compensation costs and non insurance expenses.

•

Income from joint ventures

     Income from joint ventures decreased in the second quarter of 2008 compared to the same period in 2007. The decrease was primarily due to no equity earnings related to C-BASS in the second quarter of 2008, compared to $23.2 million in the same period last year. Our decrease was also due to a decrease in equity earnings from Sherman, resulting from a decrease in our ownership percentage from approximately 41% during the second quarter of 2007 to approximately 24% during the second quarter of 2008.

Results of Consolidated Operations

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

New insurance written

     The amount of our primary new insurance written during the three and six months ended June 30, 2008 and 2007 was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		($ billions)
NIW — Flow Channel		$	13.4			$	17.3			$	31.5			$	27.7
NIW — Bulk Channel			0.6				1.7				1.6				4.0
Total Primary NIW		$	14.0			$	19.0			$	33.1			$	31.7
Refinance volume as a % of primary flow NIW			26	%			23	%			31	%			24	%

     The decrease in new insurance written on a flow basis in the second quarter of 2008, compared to the same period in 2007, was primarily due to changes in our underwriting guidelines discussed below. The higher volume of new insurance written on a flow basis in the first half of 2008, compared to the same period in 2007, was primarily due to the level of new insurance written in the first quarter of 2008 prior to our underwriting guideline changes. For a discussion of new insurance written through the bulk channel, see “Bulk transactions” below.

     Despite the increased volume of new insurance written in the first half of 2008, we anticipate our flow new insurance written for the full year 2008 to be significantly below the level written in 2007, due to changes in our underwriting guidelines discussed below as well as premium rate increases that are being implemented in the third quarter of 2008. Our level of new insurance written could also be affected by other items, as noted in our Risk Factors, which are an integral part of this Management’s Discussion and Analysis.

     As we had disclosed for some time in our Risk Factors, the percentage of our volume written on a flow basis that includes segments we view as having a higher probability of claim continued to increase through 2007. In particular, the percentage of our flow new insurance written with loan-to-value ratios greater than 95% grew to 42% in 2007, compared to 34% in 2006. For the second quarter of 2008 the percentage of our flow new insurance written with loan-to-value ratios greater than 95% declined to 15%, compared to 45% for the same period a year ago. For the first half of 2008 the percentage with loan-to-value ratios greater than 95% was 24%, compared to 43% for the first half of 2007.

     We continue to implement changes to our underwriting guidelines that are designed to improve the credit risk profile of our new insurance written. The changes primarily affect borrowers who have multiple risk factors such as a high loan-to-value ratio, a lower FICO score and limited documentation or are financing a home in a market we categorize as higher risk. We are also implementing premium rate increases. Several underwriting guidelines and premium rate changes were implemented in the first half of 2008, although a significant portion of our new business in the first quarter of 2008 was committed to prior to the effective date of these changes.

Cancellations and insurance in force

     New insurance written and cancellations of primary insurance in force during the three and six months ended June 30, 2008 and 2007 were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
						($ billions)
NIW		$	14.0			$	19.0			$	33.1			$	31.7
Cancellations			(9.0	)			(11.2	)			(18.4	)			(22.1	)
Change in primary insurance in force		$	5.0			$	7.8			$	14.7			$	9.6

     Direct primary insurance in force was $226.4 billion at June 30, 2008 compared to $211.7 billion at December 31, 2007 and $186.1 billion at June 30, 2007.

     As shown in the table above, in the second quarter of 2008, insurance in force increased $5.0 billion. This was the ninth consecutive quarter of growth, which was preceded by a period of 13 consecutive quarters, during 2003 through the first quarter of 2006, in which our insurance in force declined.

     Cancellation activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction. Our persistency rate (percentage of insurance remaining in force from one year prior) was 79.7% at June 30, 2008, an increase from 76.4% at December 31, 2007 and 72.0% at June 30, 2007. These persistency rate improvements reflect the more restrictive credit policies of lenders (which make it more difficult to refinance loans), as well as the declining rate of home price appreciation in some markets and declines in housing values in other markets.

Bulk transactions

     New insurance written for bulk transactions was $0.6 billion and $1.6 billion, respectively, for the second quarter and first six months of 2008 compared to $1.7 billion and $4.0 billion, respectively, for the second quarter and first six months of 2007. The decrease in bulk writings was primarily due to our decision in the fourth quarter of 2007 to stop insuring Wall Street bulk transactions. The majority of the bulk business in the first half of 2008 was lender paid transactions that included high quality prime loans and the remainder was bulk business with the GSEs, which also included prime loans. We expect new insurance written for bulk transactions in 2008 and thereafter to be significantly lower than the $16.0 billion average volume written through the bulk channel during the last three years. Wall Street bulk transactions represented approximately 41%, 66% and 89% of our new insurance written for bulk transactions during 2007, 2006 and 2005, respectively, and at June 30, 2008 included approximately 129,900 loans with insurance in force of approximately $22.0 billion and risk in force of approximately $6.5 billion, which is approximately 65% of our bulk risk in force.

Pool insurance

     In addition to providing primary insurance coverage, we also insure pools of mortgage loans. New pool risk written during the three months ended June 30, 2008 and 2007 was $44 million and $45 million, respectively. Our direct pool risk in force was $2.4 billion, $2.8 billion and $3.0 billion at June 30, 2008, December 31, 2007 and June 30, 2007, respectively. These risk amounts represent pools of loans with contractual aggregate loss limits and in some cases those without these limits. For pools of loans without these limits, risk is estimated based on the amount that would credit enhance the loans in the pool to a “AA” level based on a rating agency model. Under this model, at June 30, 2008, December 31, 2007 and June 30, 2007, for $2.8 billion, $4.1 billion and $4.3 billion, respectively, of risk without these limits, risk in force is calculated at $306 million, $475 million and $474 million, respectively. For the three months ended June 30, 2008 and 2007 for $9 million and $7 million, respectively, of risk without contractual aggregate loss limits, new risk written under this model was $0.4 million and $0.4 million, respectively.

     New pool risk written during the six months ended June 30, 2008 and 2007 was $101 million and $87 million, respectively. Under the model described above, for the six months ended June 30, 2008 and 2007 for $22 million and $15 million, respectively, of risk without contractual aggregate loss limits, new risk written during those periods was calculated at $0.9 million and $0.7 million, respectively.

Net premiums written and earned

     Net premiums written and earned during the second quarter and first six months of 2008 increased compared to the same periods in 2007. The average insurance in force continued to increase, however the effect of the higher in force has been somewhat offset by lower average premium yields due to a shift in the mix of new writings to loans with lower loan-to- value ratios, higher FICO scores and full documentation, which carry lower premium rates. We expect our average insurance in force to continue to be higher in 2008, compared to 2007, with our insurance in force balance to begin to stabilize through the remainder of 2008. We believe the anticipated decrease in the total mortgage origination market will be partially offset by our expectation that private mortgage insurance will be used on a greater percentage of mortgage originations, although private mortgage insurance penetration could be negatively impacted by usage of FHA insurance programs.

     Despite our premium rate increases, we expect our premium yields to continue to be lower in 2008, compared to 2007, due to the fact that we are no longer insuring Wall Street Bulk transactions and, as a result of our underwriting changes, we will be insuring fewer loans with loan-to-value ratios greater than 95%, loans classified as A-minus and reduced documentation loans, which carry higher premium rates.

Risk sharing arrangements

     For the three months ended March 31, 2008, approximately 44.7% of our flow new insurance written was subject to arrangements with captives or risk sharing arrangements with the GSEs compared to 47.7% for the year ended December 31, 2007 and 49.7% for the three months ended June 30, 2007. The percentage of new insurance written covered by these arrangements is shown only for the period ended March 31, 2008 because this percentage normally increases after the end of a quarter. Such increases can be caused by, among other things, the transfer of a loan in the secondary market, which can result in a mortgage insured during a quarter becoming part of a risk sharing arrangement in a subsequent quarter. New insurance written through the bulk channel is not subject to risk sharing arrangements. Premiums ceded in these arrangements are reported in the period in which they are ceded regardless of when the mortgage was insured.

     On February 14, 2008 Freddie Mac announced that effective on and after June 1, 2008, Freddie Mac-approved private mortgage insurers, including MGIC, may not cede new risk if the gross risk or gross premium ceded to captive reinsurers is greater than 25%. Freddie Mac stated that it made this change to allow mortgage insurers to retain more insurance premiums to pay current claims and rebuild their capital bases. Fannie Mae informed us on February 26, 2008 that it was making similar changes to its requirements. Effective June 1, 2008, we have made the appropriate changes to the terms of our arrangements with those captives that had exceeded the 25% limit.

     During 2008, a number of lenders either terminated their captive arrangements with us (in a termination, the arrangement is cancelled, with no future premium ceded and funds for any incurred but unpaid losses transferred to MGIC) or placed them into run-off (in a run-off, no new loans are reinsured by the captive but loans previously reinsured continue to be covered, with premium and losses continuing to be ceded on those loans). Together, the captives terminated or placed into run-off represented 17.1% of our flow new insurance written that was subject to captive arrangements in 2007. We anticipate that additional lenders may decide to terminate their captive arrangements with us or place them into run-off.

     See discussion under “-Losses” regarding losses assumed by captives.

     In June 2008 we entered into a reinsurance agreement with an affiliate of HCC Insurance Holdings, Inc. The reinsurance agreement is effective on the risk associated with up to $50 billion of qualifying new insurance written each calendar year. The term of the reinsurance agreement begins April 1, 2008 and ends on December 31, 2010, subject to two one-year extensions that may be exercised by HCC. We believe that substantially all of our insurance written subsequent to April 1, 2008 will qualify under the reinsurance agreement.

     The reinsurance agreement is expected to provide claims-paying resources in catastrophic loss environments for insurance written beginning April 1, 2008.

     The agreement is accounted for under deposit accounting rather than reinsurance accounting, because under the guidance of SFAS 113 “Accounting for Reinsurance Contracts’, we concluded that the reinsurance agreement does not result in the reasonable possibility that the reinsurer will suffer a significant loss. The premium ceded to the reinsurer and the brokerage commission paid to an affiliate of the reinsurer, net of a profit commission to us, is recorded as reinsurance fee expense on our statement of operations. In non-catastrophic loss environments, we expect the net expense will be approximately 5% of premiums earned, net of premiums ceded under captive arrangements, on business covered by the agreement. The reinsurance fee for the second quarter of 2008 is separately shown in the statements of operations.

Investment income

     Investment income for the second quarter and first six months of 2008 increased when compared to the same periods in 2007 due to an increase in the average amortized cost of invested assets, offset by a decrease in the average investment yield. The portfolio’s average pre-tax investment yield was 3.87% at June 30, 2008 and 4.59% at June 30, 2007. The portfolio’s average after-tax investment yield was 3.46% at June 30, 2008 and 4.13% at June 30, 2007. Assuming shorter-term yields remain at their current levels, we expect the investment yield will continue to decline because we are investing available funds in shorter maturities so that they will be available for claim payments without the need to obtain the necessary funds through sales of fixed income investments.

Realized losses

     Realized losses for the second quarter and first six months of 2008 included “other than temporary” impairments on our investment portfolio of approximately $8.5 million. There were no “other than temporary” impairments in the second quarter or first six months of 2007.

Other revenue

     Other revenue for the second quarter and first six months of 2008 decreased when compared to the same periods in 2007. The decrease in other revenue was primarily the result of other non-insurance operations.

Losses

     As discussed in “––Critical Accounting Policies” in the 10-K MD&A, and consistent with industry practices, we establish loss reserves for future claims only for loans that are currently delinquent. The terms “delinquent” and “default” are used interchangeably by us and are defined as an insured loan with a mortgage payment that is 45 days or more past due. Loss reserves are established by our estimate of the number of loans in our inventory of delinquent loans that will not cure their delinquency and thus result in a claim, which is referred to as the claim rate (historically, a substantial majority of delinquent loans have eventually cured, see

discussion below regarding the current increase in the rate at which delinquent loans go to claim), and further estimating the amount that we will pay in claims on the loans that do not cure, which is referred to as claim severity. Estimation of losses that we will pay in the future is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy and the current and future strength of local housing markets. Current conditions in the housing and mortgage industries make these assumptions more volatile than they would otherwise be.

Losses incurred

     Losses incurred for the second quarter of 2008 significantly increased compared to the same period in 2007 primarily due to a significant increase in the default inventory as well as an increase in the estimates regarding how much will be paid on claims, or severity, when compared to the same period in 2007. The default inventory increased by approximately 14,600 delinquencies in the second quarter of 2008, compared to an increase of approximately 4,500 in the second quarter of 2007.

     Losses incurred for the first six months of 2008 significantly increased compared to the same period in 2007 primarily due to increases in the default inventory and estimates regarding how many delinquencies will result in a claim, or claim rate, and severity, when each of these items is compared to the same period in 2007. The default inventory increased by approximately 21,100 delinquencies in the first six months of 2008, compared to an increase of approximately 2,000 in the first six months of 2007.

     Our loss estimates are established based upon historical experience. The increase in estimated severity in the second quarter and first six months of 2008 was primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as our inability to mitigate losses through the sale of properties in some geographical areas due to slowing home price appreciation or declines in home values. We continue to experience increases in delinquencies in certain markets with higher than average loan balances, such as Florida and California. In California we have experienced an increase in delinquencies, from 6,900 as of December 31, 2007 to 8,500 as of March 31, 2008 and 10,200 as of June 30, 2008. Our Florida delinquencies increased from 12,500 as of December 31, 2007 to 15,600 as of March 31, 2008 and 19,400 as of June 30, 2008. The average claim paid on California loans was more than twice as high as the average claim paid for the remainder of the country. The increase in the estimated claim rate is due to increases in the claim rates across the country. Certain markets such as California, Florida, Nevada and Arizona have experienced more significant increases in claim rates.

     We believe that the foregoing trends could continue throughout 2008, resulting in a higher level of incurred losses in 2008, compared to 2007. These trends may also continue beyond 2008.

     As discussed under “––Risk Sharing Arrangements” a portion of our flow new insurance written is subject to reinsurance arrangements with captives. The majority of these reinsurance arrangements are aggregate excess of loss reinsurance agreements, and the remainder are quota share agreements. Under the aggregate excess of loss agreements, we are responsible for the first aggregate layer of loss, which is typically between 4% and 5%, the captives are responsible for the second aggregate layer of loss, which is typically 5% or 10%, and we are responsible for any remaining loss. The layers are typically expressed as a

percentage of the original risk on an annual book of business reinsured by the captive. The premium cessions on these agreements typically ranged from 25% to 40% of the direct premium. Under a quota share arrangement premiums and losses are shared on a pro-rata basis between us and the captives, with the captives’ portion of both premiums and losses typically ranging from 25% to 50%. As noted under “––Risk Sharing Arrangements” based on changes to the GSE requirements, beginning June 1, 2008 our captive arrangements, both aggregate excess of loss and quota share, are limited to a 25% cede rate.

     Under these agreements the captives are required to maintain a separate trust account, of which we are the sole beneficiary. Premiums ceded to a captive are deposited in the applicable trust account to support the captive’s layer of insured risk. These amounts are held in the trust account and are available to pay reinsured losses. The captive’s ultimate liability is limited to the assets in the trust account. When specific time periods are met and the individual trust account balance has reached a required level, then the individual captive may make authorized withdrawals from its applicable trust account. In most cases, the captives are also allowed to withdraw funds from the trust account to pay verifiable federal income taxes and operational expenses. Conversely, if the account balance falls below certain thresholds, the individual captive may be required to contribute funds to the trust account. However, in most cases, our sole remedy if a captive does not contribute such funds is to put the captive into run-off, in which case no new business would be ceded to the captive. The total fair value of the trust fund assets under these agreements at June 30, 2008 exceeded $730 million.

     In the second quarter and first six months of 2008 the captive arrangements reduced our losses incurred by approximately $90 million and $148 million, respectively. We anticipate that the reduction in losses incurred will continue at this level or higher in the second half of 2008.

     Information about the composition of the primary insurance default inventory at June 30, 2008, December 31, 2007 and June 30, 2007 appears in the table below.

		June 30,				December 31,				June 30,
		2008				2007				2007
Total loans delinquent (1)			128,231				107,120				80,588
Percentage of loans delinquent (default rate)			8.60	%			7.45	%			6.11	%
Prime loans delinquent (2)			60,505				49,333				36,712
Percentage of prime loans delinquent (default rate)			5.01	%			4.33	%			3.58	%
A-minus loans delinquent (2)			24,859				22,863				17,943
Percentage of A-minus loans delinquent (default rate)			21.80	%			19.20	%			16.18	%
Subprime credit loans delinquent (2)			12,425				12,915				11,679
Percentage of subprime credit loans delinquent (default rate)			36.59	%			34.08	%			28.03	%
Reduced documentation loans delinquent (3)			30,442				22,009				14,254
Percentage of reduced doc loans delinquent (default rate)			22.51	%			15.48	%			10.17	%

     In the second quarter of 2008 a large servicer changed their methodology for reporting delinquencies to us and the industry for loans greater than 12 months old. Under the new methodology this servicer is now reporting delinquencies to us sooner than they had historically and is now reporting consistent with substantially all other servicers. As a result of this change the servicer reported approximately 4,400 more delinquencies to us in the second quarter; which represented 30% of our total increase in delinquencies for the quarter. Because our reserves for estimated losses include loans that are delinquent but not yet reported to us by servicers within our incurred but not reported, or IBNR reserves, this change by the servicer did not have any effect on our overall loss reserves.

     The pool notice inventory increased from 25,224 at December 31, 2007 to 25,577 at June 30, 2008; the pool notice inventory was 20,781 at June 30, 2007.

     The average primary claim paid for the second quarter of 2008 was $53,282 compared to $33,229 for the same period in 2007. The average primary claim paid for the first six months of 2008 was $52,234 compared to $32,068 for the same period in 2007. We expect the average primary claim paid to continue to increase in 2008 and beyond. We expect these increases will be driven by our higher average insured loan sizes as well as decreases in our ability to mitigate losses through the sale of properties in some geographical regions, as certain housing markets, like California and Florida, become less favorable.

     The average claim paid for the top 5 states (based on 2008 losses paid) for the three and six months ended June 30, 2008 and 2007 appears in the table below.

		Three months ended								Six months ended
		June 30,								une 30,
Average claim paid for the top 5 states		2008				2007				2008				2007
California		$	117,843			$	71,344			$	116,920			$	67,914
Florida			70,463				39,698				70,433				36,820
Michigan			37,335				35,972				37,244				34,638
Ohio			33,468				31,726				34,009				31,262
Arizona			74,437				44,196				73,497				36,530
Other states			43,140				31,277				42,687				30,586
All states		$	53,282			$	33,229			$	52,234			$	32,068

     The average loan size of our insurance in force at June 30, 2008, December 31, 2007 and June 30, 2007 appears in the table below.

		June 30,				December 31,				June 30,
Average loan size		2008				2007				2007
Total insurance in force		$	151,770			$	147,308			$	141,160
Prime (FICO 620 & >)			147,880				141,690				133,790
A-Minus (FICO 575-619)			133,410				133,460				130,780
Subprime (FICO < 575)			122,750				124,530				127,210
Reduced doc (All FICOs)			209,380				209,990				207,530

     The average loan size of our insurance in force at June 30, 2008, December 31, 2007 and June 30, 2007 for the top 5 states (based on 2008 losses paid) appears in the table below.

		June 30,				December 31,				June 30,
Average loan size		2008				2007				2007
California		$	294,085			$	291,578			$	282,845
Florida			180,218				178,063				171,549
Michigan			120,466				119,428				118,100
Ohio			114,952				113,276				111,374
Arizona			189,896				185,518				174,626
All other states			146,024				141,297				135,118

     Information about net paid claims during the three and six months ended June 30, 2008 and 2007 appears in the table below.

		Three months ended										Six months ended
		June 30,										June 30,
Net paid claims ($ millions)		2008					2007					2008					2007
Prime (FICO 620 & >)			$	144				$	75				$	281				$	142
A-Minus (FICO 575-619)				73					36					141					70
Subprime (FICO < 575)				37					23					76					42
Reduced doc (All FICOs)				116					32					223					58
Other				24					24					49					48
Direct losses paid				394					190					770					360
Reinsurance				(9	)				(2	)				(14	)				(6	)
Net losses paid			$	385				$	188				$	756				$	354

     Primary claims paid for the top 15 states (based on 2008 losses paid) and all other states for the three and six months ended June 30, 2008 and 2007 appear in the table below.

		Three months ended								Six months ended
		June 30,								June 30,
Paid claims by state ($ millions)		2008				2007				2008				2007
California		$	92.2			$	8.6			$	174.1			$	12.5
Florida			36.0				4.9				66.0				6.9
Michigan			27.6				25.0				56.5				46.0
Ohio			17.0				17.9				35.4				36.4
Arizona			16.8				1.2				29.4				1.3
Georgia			15.1				9.1				29.4				17.4
Illinois			14.8				8.0				27.4				14.5
Texas			12.4				11.6				25.8				25.7
Minnesota			11.3				6.3				25.8				13.5
Nevada			12.4				1.5				22.8				2.5
Colorado			9.0				8.1				19.5				15.2
Massachusetts			8.3				4.9				17.1				7.5
Virginia			10.4				2.2				17.0				3.5
Indiana			6.6				8.3				14.3				16.3
Maryland			6.9				0.1				12.8				1.0
Other states			73.2				48.3				147.7				91.8
			370.0				166.0				721.0				312.0
Other (Pool, LAE, Reinsurance)			15.0				22.0				35.0				42.0
		$	385.0			$	188.0			$	756.0			$	354.0

     The default inventory in those same states at June 30, 2008, December 31, 2007 and June 30, 2007 appears in the table below.

		June 30,				December 31,				June 30,
Default inventory by state		2008				2007				2007
California			10,225				6,925				4,163
Florida			19,397				12,548				6,288
Michigan			7,628				7,304				6,373
Ohio			6,894				6,901				6,110
Arizona			3,650				2,170				1,106
Georgia			5,293				4,623				3,455
Illinois			6,343				5,433				4,136
Texas			7,261				7,103				5,916
Minnesota			2,848				2,478				1,948
Nevada			2,282				1,338				689
Colorado			1,758				1,534				1,313
Massachusetts			1,951				1,596				1,241
Virginia			2,345				1,760				1,174
Indiana			4,084				3,763				3,254
Maryland			2,179				1,595				979
Other states			44,093				40,049				32,443
			128,231				107,120				80,588

     The rate at which claims are received and paid has slowed due to various state and lender foreclosure moratoriums, servicing delays, fraud investigations by us, pursuit of mitigation opportunities and a lack of capacity in the court systems. Net paid claims for the full year 2008 may still approximate $1.8 billion to $2.0 billion; however the claims paid in 2008 will likely be at the lower end of this range due to the slower rate at which claims are currently being received and paid.

     As of June 30, 2008, 76% of our primary insurance in force was written subsequent to December 31, 2004. On our flow business, the highest claim frequency years have typically been the third and fourth year after the year of loan origination. However, the pattern of claims frequency can be affected by many factors, including low persistency and deteriorating economic conditions. Low persistency can have the effect of accelerating the period in the life of a book during which the highest claim frequency occurs. Deteriorating economic conditions can result in increasing claims following a period of declining claims. On our bulk business, the period of highest claims frequency has generally occurred earlier than in the historical pattern on our flow business.

Premium deficiency

     During the second quarter of 2008 the premium deficiency reserve on Wall Street bulk transactions declined by $159 million from $947 million, as of March 31, 2008, to $788 million as of June 30, 2008. During the first six months of 2008 the premium deficiency reserve on Wall Street bulk transaction declined by $423 million from $1,211 million as of December 31, 2007. The $788 million premium deficiency reserve as of June 30, 2008 reflects the present

value of expected future losses and expenses that exceeded the present value of expected future premium and already established loss reserves. As of June 30, 2008 there was no premium deficiency related to the remainder of our in force business.

     The components of the premium deficiency reserve at December 31, 2007, March 31, 2008 and June 30, 2008 appears in the table below.

		December 31,				March 31,				June 30,
($ millions)		2007				2008				2008
Present value of expected future premium		$	901			$	874			$	829
Present value of expected future paid losses and expenses			(3,561	)			(3,397	)			(3,263	)
Net present value of future cash flows			(2,660	)			(2,523	)			(2,434	)
Established loss reserves			1,449				1,576				1,646
Net deficiency		$	(1,211	)		$	(947	)		$	(788	)