Mortgage insurers MGIC Investment Corp. and Radian Group Inc. have agreed to terminate a merger agreement that was complicated by both companies’ potential losses in C-BASS LLC, a subsidiary that’s invested in subprime mortgages.

In agreeing to back out of the merger, the companies said they would drop all lawsuits and that no payments would be made in connection with the termination of the deal.

When announced in February, the merger of MGIC and Radian was expected to create a company with $15 billion in total assets, more than $290 billion of primary mortgage insurance in force and a $104 billion financial guaranty portfolio.

But MGIC said in August that it was not obligated to complete the merger because of potential losses at Credit-Based Asset Servicing and Securitization LLC, or C-BASS, a limited liability company owned by MGIC, Radian and the management of C-BASS.

MGIC and Radian have both said they could lose their entire $1 billion investment in C-BASS, which owns high-risk mortgage-backed securities.

The potential C-BASS losses prompted Fitch Ratings to downgrade the senior debt rating of MGIC Investment Corp. from A+ to A, and put the long-term debt rating of Radian Group and the insurer financial strength ratings of all of its insurance subsidiaries on Ratings Watch Negative.

Headquartered in Philadelphia, Radian is a global credit risk management company that provides credit insurance products for mortgages and other assets. About 12 percent of Radian Group’s net income in the first six months of 2007 was from mortgage insurance.

In a statement issued today, Radian Chief Executive Officer S.A. Ibrahim said the company is confident it can thrive on its own.

“While there are significant credit challenges in today’s mortgage market, we also believe that there are tremendous opportunities for our company in the mortgage insurance and financial guaranty markets, and our management team is moving aggressively to position Radian for future success,” Ibrahim said.

Milwaukee, Wis.-based MGIC’s subsidiary, Mortgage Guaranty Insurance Corp., insured 1.3 million mortgages as of June 30, with $186.1 billion of primary insurance in force.

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