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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-10816
MGIC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
     
WISCONSIN   39-1486475
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
MGIC PLAZA, 250 EAST KILBOURN AVENUE,    
MILWAUKEE, WISCONSIN   53202
(Address of principal executive offices)   (Zip Code)
(414) 347-6480
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
             
 
  Title of Each Class:       Common Stock, Par Value $1 Per Share
 
          Common Share Purchase Rights
 
           
 
  Name of Each Exchange on Which Registered:       New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
             
 
  Title of Class:       None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes  þ      No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o      No  þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b -2 of the Exchange Act. (Check one):
Large accelerated filer þ                     Accelerated filer o                    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).o   Yes      þ   No
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2005: $6.0 billion *
     
* Solely for purposes of computing such value and without thereby admitting that such persons are affiliates of the Registrant, shares held by directors and executive officers of the Registrant are deemed to be held by affiliates of the Registrant. Shares held are those shares beneficially owned for purposes of Rule 13d-3 under the Securities Exchange Act of 1934 but excluding shares subject to stock options.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of February 15, 2006: 87,490,806
The following documents have been incorporated by reference in this Form 10-K, as indicated:
     
 
  Part and Item Number of Form 10-K Into
Document
  Which Incorporated*
     
Proxy Statement for the 2006 Annual
   
Meeting of Shareholders
  Items 10 through 14 of Part III
     
* In each case, to the extent provided in the Items listed
 
 

 


TABLE OF CONTENTS

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
INDEX TO EXHIBITS
Form of Restricted Stk & Restricted Stk Unit Agreement
Form of Incorporated Terms to Rest Stk & Rest Stk Unit Agreement
Other Compensation Agreements
Statement Re: Computation of Per Share Earnings
Consent of Independent Registered Public Accounting Firm
302 Certificatio of CEO
302 Certification of CFO
906 Certification of CEO and CFO


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Part I
Item 1. Business.
A. General
     MGIC Investment Corporation (the “Company”) is a holding company which, through its wholly owned subsidiary Mortgage Guaranty Insurance Corporation (“MGIC”), is the leading provider of private mortgage insurance in the United States to the home mortgage lending industry. Private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. If the homeowner defaults, private mortgage insurance reduces and, in some instances, eliminates the loss to the insured institution. Private mortgage insurance also facilitates the sale of low down payment and other mortgage loans in the secondary mortgage market, including to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae and Freddie Mac are collectively referred to as the “GSEs”). In addition to mortgage insurance on first liens, the Company, through other subsidiaries, provides lenders with various underwriting and other services and products related to home mortgage lending.
     MGIC is licensed in all 50 states of the United States, the District of Columbia and Puerto Rico. The Company is a Wisconsin corporation. Its principal office is located at MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202 (telephone number (414) 347-6480).
     The Company also has ownership interests in less than majority-owned joint ventures, principally Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and Sherman Financial Group LLC (“Sherman”). C-BASS is principally engaged in the business of investing in the credit risk of credit sensitive single-family residential mortgages. Sherman is principally engaged in the business of purchasing and servicing delinquent consumer assets. As used in this Annual Report on Form 10-K and elsewhere in the Company’s filings with the SEC, the term “Company” means the Company and its consolidated subsidiaries. The Company’s joint ventures are not consolidated with the Company for financial reporting purposes and are not subsidiaries of the Company.
     The Company and its business may be materially affected by the risk factors applicable to the Company that are included in Item 1A of this Annual Report on Form 10-K. C-BASS and Sherman and their respective businesses may be materially affected by the risk factors applicable to them included in Item 1A. These factors may also cause actual results to differ materially from the results contemplated by forward looking statements that the Company may make.
B. The MGIC Book
     Types of Product
     In general, there are two principal types of private mortgage insurance: “primary” and “pool.”
     Primary Insurance. Primary insurance provides mortgage default protection on individual loans and covers unpaid loan principal, delinquent interest and certain expenses associated with the default and subsequent foreclosure (collectively, the “claim amount”). In addition to the loan principal, the claim amount is affected by the mortgage note rate and the time necessary to complete the foreclosure

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process. The insurer generally pays the coverage percentage of the claim amount specified in the primary policy, but has the option to pay 100% of the claim amount and acquire title to the property. Primary insurance generally applies to owner occupied, first mortgage loans on one-to-four family homes, including condominiums. Primary coverage can be used on any type of residential mortgage loan instrument approved by the mortgage insurer.
     References in this document to amounts of insurance written or in force, risk written or in force and other historical data related to MGIC’s insurance refer only to direct (before giving effect to reinsurance) primary insurance, unless otherwise indicated. References in this document to “primary insurance” include insurance written in bulk transactions (see “Bulk Transactions” below) that is supplemental to mortgage insurance written in connection with the origination of the loan or that reduces a lender’s credit risk to less than 51% of the value of the property. Effective with the third quarter of 2001, in reports by private mortgage insurers to the trade association for the private mortgage insurance industry, mortgage insurance that is supplemental to other mortgage insurance or that reduces a lender’s credit risk to less than 51% of the value of the property is classified as pool insurance. The trade association classification is used by members of the private mortgage insurance industry in reports to a mortgage industry publication that computes and publishes primary market share information.
     Primary insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which each loan in a portfolio of loans is individually insured in a single, bulk transaction. New insurance written on a flow basis was $40.1 billion in 2005 compared to $47.1 billion in 2004 and $71.1 billion in 2003. New insurance written for bulk transactions was $21.4 billion during 2005 compared to $15.8 billion for 2004 and $25.7 billion for 2003.
     The following table shows, on a direct basis, primary insurance in force (the unpaid principal balance of insured loans as reflected in MGIC’s records) and primary risk in force (the coverage percentage applied to the unpaid principal balance), for insurance that has been written by MGIC (the “MGIC Book”) as of the dates indicated:
Primary Insurance and Risk In Force
                                         
    December 31,
    2005   2004   2003   2002   2001
                    (In millions)                
Direct Primary Insurance In Force
  $ 170,029     $ 177,091     $ 189,632     $ 196,988     $ 183,904  
 
                                       
Direct Primary Risk In Force
  $ 44,860     $ 45,981     $ 48,658     $ 49,231     $ 45,243  
     The coverage percentage provided by MGIC is determined by the lender. For loans sold by lenders to Fannie Mae or Freddie Mac, the coverage percentage must comply with the requirements established by the particular GSE to which the loan is delivered.
     MGIC charges higher premium rates for higher coverages. MGIC believes depth of coverage requirements have no significant impact on frequency of default. Higher coverage percentages generally result in increased severity (which is the amount paid on a claim), and lower coverage percentages generally result in decreased severity. In accordance with industry accounting practice, reserves for losses are only established for loans in default. Because relatively few defaults occur in the early years of a book of business (see “Past Industry Losses; Defaults; and Claims — Claims” below),

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the higher premium revenue from deeper coverage is recognized before any higher losses resulting from that deeper coverage may be incurred. MGIC’s premium pricing methodology generally targets substantially similar returns on capital regardless of the depth of coverage. However, there can be no assurance that changes in the level of premium rates adequately reflect the risks associated with changes in the depth of coverage.
     In partnership with mortgage insurers, the GSEs are also offering programs under which, on delivery of an insured loan to a GSE, the primary coverage is restructured to an initial shallow tier of coverage followed by a second tier that is subject to an overall loss limit and compensation may be paid to the GSE reflecting services or other benefits realized by the mortgage insurer from the coverage conversion. Lenders receive guaranty fee relief from the GSEs on mortgages delivered with these restructured coverages.
     Mortgage insurance coverage cannot be terminated by the insurer, except for non-payment of premium, and remains renewable at the option of the insured lender, generally at the renewal rate fixed when the loan was initially insured. Lenders may cancel insurance written on a flow basis at any time at their option or because of mortgage repayment, which may be accelerated because of the refinancing of mortgages. In the case of a loan purchased by Freddie Mac or Fannie Mae, a borrower meeting certain conditions may require the mortgage servicer to cancel insurance upon the borrower’s request when the principal balance of the loan is 80% or less of the home’s current value.
     Under the federal Homeowners Protection Act (the “HPA”) a borrower has the right to stop paying premiums for private mortgage insurance on loans closed after July 28, 1999 secured by a property comprised of one dwelling unit that is the borrower’s primary residence when certain loan-to-value ratio (“LTV ratio”) thresholds determined by the value of the home at loan origination and other requirements are met. In general, a borrower may stop making mortgage insurance payments when the LTV ratio is scheduled to reach 80% (based on the loan’s amortization schedule) or actually reaches 80% if the borrower so requests and if certain requirements relating to the borrower’s payment history and the absence of junior liens and a decline in the property’s value since origination are satisfied. In addition, a borrower’s obligation to make payments for private mortgage insurance generally terminates regardless of whether a borrower so requests when the LTV ratio (based on the loan’s amortization schedule) reaches 78% of the unpaid principal balance of the mortgage and the borrower is (or thereafter becomes) current in his mortgage payments. A borrower’s right to stop paying for private mortgage insurance applies only to borrower paid mortgage insurance. The HPA requires that lenders give borrowers certain notices with regard to the cancellation of private mortgage insurance.
     In addition, some states require that mortgage servicers periodically notify borrowers of the circumstances in which they may request a mortgage servicer to cancel private mortgage insurance and some states allow the borrower to require the mortgage servicer to cancel private mortgage insurance under certain circumstances or require the mortgage servicer to cancel such insurance automatically in certain circumstances.
     Coverage tends to continue in areas experiencing economic contraction and housing price depreciation. The persistency of coverage in such areas coupled with cancellation of coverage in areas experiencing economic expansion and housing price appreciation can increase the percentage of the insurer’s portfolio comprised of loans in economically weak areas. This development can also occur during periods of heavy mortgage refinancing because refinanced loans in areas of economic expansion experiencing property value appreciation are less likely to require mortgage insurance at the time of refinancing, while refinanced loans in economically weak areas not experiencing property

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value appreciation are more likely to require mortgage insurance at the time of refinancing or not qualify for refinancing at all and, thus, remain subject to the mortgage insurance coverage.
     The percentage of primary risk written with respect to loans representing refinances was 39.5% in 2005 compared to 37.4% in 2004 and 48.7% in 2003. When a borrower refinances an MGIC-insured mortgage loan by paying it off in full with the proceeds of a new mortgage that is also insured by MGIC, the insurance on that existing mortgage is cancelled, and insurance on the new mortgage is considered to be new primary insurance written. Therefore, continuation of MGIC’s coverage from a refinanced loan to a new loan results in both a cancellation of insurance and new insurance written.
     In addition to varying with the coverage percentage, MGIC’s premium rates vary depending upon the perceived risk of a claim on the insured loan and, thus, take into account the LTV, the loan type (fixed payment versus non-fixed payment) and mortgage term and, for A- and subprime loans and certain other loans, the location of the borrower’s credit score within a range of credit scores. In general, A- loans have FICO scores between 575 and 619 and subprime loans have FICO credit scores of less than 575. A FICO score is a score based on a borrower’s credit history generated by a model developed by Fair Isaac and Company.
     Premium rates cannot be changed after the issuance of coverage. Because the Company believes that over the long term each region of the United States is subject to similar factors affecting risk of loss on insurance written, MGIC generally utilizes a nationally based, rather than a regional or local, premium rate policy.
     The borrower’s mortgage loan instrument may require the borrower to pay the mortgage insurance premium (“borrower paid mortgage insurance”) or there may be no such requirement imposed on the borrower, in which case the premium is paid by the lender, who may recover the premium through an increase in the note rate on the mortgage (“lender paid mortgage insurance”). Almost all of MGIC’s primary insurance in force and new insurance written, other than through bulk transactions, is borrower paid mortgage insurance. New insurance written through bulk transactions is generally paid by the securitization vehicles that hold the mortgages; the mortgage note rate generally does not reflect the premium for the mortgage insurance.
     Under the monthly premium plan, a monthly premium payment is made to MGIC to provide only one month of coverage, rather than one year of coverage provided by the annual premium plan. Under the annual premium plan, the initial premium is paid to MGIC in advance, and earned over the next twelve months of coverage, with annual renewal premiums paid in advance thereafter and earned over the subsequent twelve months of coverage. The annual premiums can be paid with either a higher premium rate for the initial year of coverage and lower premium rates for the renewal years, or with premium rates which are equal (level) for the initial year and subsequent renewal years. Under the single premium plan, a single payment is made to MGIC, covering a specified term exceeding 12 months.
     During each of the last three years, the monthly premium plan represented more than 93% of MGIC’s new insurance written. The annual and single premium plans represented the remaining new insurance written.
     Pool Insurance. Pool insurance is generally used as an additional “credit enhancement” for certain secondary market mortgage transactions. Pool insurance generally covers the loss on a defaulted mortgage loan which exceeds the claim payment under the primary coverage, if primary insurance is

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required on that mortgage loan, as well as the total loss on a defaulted mortgage loan which did not require primary insurance. Pool insurance may have a stated aggregate loss limit and may also have a deductible under which no losses are paid by the insurer until losses exceed the deductible.
     New pool risk written during 2005 was $358 million and was $208 million in 2004. New pool risk written during these years was primarily comprised of risk associated with loans delivered to Freddie Mac and Fannie Mae (“agency pool insurance”), loans delivered to the Federal Home Loan Banks under their mortgage purchase programs and loans made under state housing finance programs. Direct pool risk in force at December 31, 2005 was $2.9 billion compared to $3.0 billion and $2.9 billion at December 31, 2004 and 2003, respectively. The risk amounts referred to above represent pools of loans with contractual aggregate loss limits and those without such limits. For pools of loans without such limits, risk is estimated based on the amount that would credit enhance these loans to a ‘AA” level based on a rating agency model. Under this model, at December 31, 2005, 2004 and 2003 for $5.0 billion, $4.9 billion, and $4.9 billion, respectively, of risk without such limits, risk in force is calculated at $469 million, $418 million, and $353 million, respectively. New risk written, under this model, for the years ended December 31, 2005 and 2004 was $51 million and $65 million, respectively.
     The settlement of a nationwide class action alleging that MGIC violated the Real Estate Settlement Procedures Act (“RESPA”) by providing agency pool insurance and entering into other transactions with lenders that were not properly priced (the “RESPA Litigation”) became final in October 2003. In a February 1, 1999 circular addressed to all mortgage guaranty insurers licensed in New York, the New York Department of Insurance (“NYID”) advised that “significantly underpriced” agency pool insurance would violate the provisions of New York insurance law that prohibit mortgage guaranty insurers from providing lenders with inducements to obtain mortgage guaranty business. In a January 31, 2000 letter addressed to all mortgage guaranty insurers licensed in Illinois, the Illinois Department of Insurance advised that providing pool insurance at a “discounted or below market premium” in return for the referral of primary mortgage insurance would violate Illinois law.
     Risk Sharing Arrangements. MGIC participates in risk sharing arrangements with the GSEs and captive reinsurance arrangements with subsidiaries of certain mortgage lenders that reinsure a portion of the risk on loans originated or purchased by the lender which have MGIC primary insurance. During the nine months ended September 30, 2005 and the year ended December 31, 2004, about 48% and 51%, respectively, of MGIC’s new insurance written on a flow basis was subject to risk sharing arrangements. (New insurance written through the bulk channel is not subject to such arrangements.) The percentage of new insurance written during a quarter covered by such arrangements normally increases after the end of the quarter because, among other reasons, the transfer of a loan in the secondary market can result in a mortgage insured during a quarter becoming part of such an arrangement in a subsequent quarter. Therefore, the percentage of new insurance written for 2005 covered by such arrangements is shown only for the nine months ended September 30, 2005.
     In a February 1, 1999 circular addressed to all mortgage insurers licensed in New York, the NYID said that it was in the process of developing guidelines that would articulate the parameters under which captive mortgage reinsurance is permissible under New York insurance law. Such guidelines, which were to ensure that the reinsurance constituted a legitimate transfer of risk and were fair and equitable to the parties, have not yet been issued. As discussed under “The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings” in Item 1A, the Company provided information regarding captive mortgage reinsurance arrangements to the NYID and the Minnesota Department of Commerce in June 2005 and February 2006, respectively. The complaint in the RESPA Litigation alleged that MGIC pays “inflated” captive reinsurance premiums in

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violation of RESPA. During the three years ended December 31, 2003, 2004 and 2005, MGIC ceded $99.4 million, $101.7 million and $105.2 million of written premium in captive reinsurance arrangements.
     External Reinsurance. At December 31, 2005, disregarding reinsurance under captive structures, less than 2% of MGIC’s insurance in force was externally reinsured. Reinsuring against possible loan losses does not discharge MGIC from liability to a policyholder; however, the reinsurer agrees to indemnify MGIC for the reinsurer’s share of losses incurred. During 2005, the Company entered into two separate reinsurance arrangements with unaffiliated special purpose reinsurance companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Consolidated Operations — Risk Sharing Arrangements” in Item 7.
     Bulk Transactions. In bulk transactions, the individual loans in the insured portfolio are generally insured to specified levels of coverage. The premium in a bulk transaction, which is negotiated with the securitizer or other owner of the loans, is based on the mortgage insurer’s evaluation of the overall risk of the insured loans included in the transaction and is often a composite rate applied to all of the loans in the transaction.
     In general, the loans insured by MGIC in bulk transactions consist of A- loans; subprime loans; cash out refinances that exceed the standard underwriting requirements of the GSEs; jumbo loans; and loans with reduced underwriting documentation. A- loans have FICO scores between 575 and 619 and subprime loans have FICO credit scores of less than 575. A jumbo loan has an unpaid principal balance that exceeds the conforming loan limit. The conforming loan limit is the maximum unpaid principal amount of a mortgage loan that can be purchased by the GSEs. The conforming loan limit is subject to annual adjustment, and for mortgages covering a home with one dwelling unit is $417,000 for 2006 and was $359,650 in 2005 and $333,700 in 2004.
     Approximately 60% of MGIC’s bulk loan risk in force at December 31, 2005 had FICO credit scores of at least 620, compared to 58% at December 31, 2004. Approximately 25% of MGIC’s bulk loan risk in force at December 31, 2005 had A- FICO credit scores compared to 28% at December 31, 2004, and approximately 15% had subprime credit scores at December 31, 2005 compared to 14% at December 31, 2004. Most of the subprime loans insured by MGIC in 2005 were insured in bulk transactions. More than 30% of MGIC’s bulk loan risk in force at December 31, 2005 and 2004 had LTV ratios of 80% and below.
     New insurance written for bulk transactions was $21.4 billion during 2005 compared to $15.8 billion for 2004 and $25.7 billion for 2003. For a discussion of factors that affect new insurance written through the bulk channel, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Consolidated Operations — Bulk Transactions” in Item 7.

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     Customers
     Originators of residential mortgage loans such as mortgage bankers, savings institutions, commercial banks, mortgage brokers, credit unions and other lenders have historically determined the placement of mortgage insurance written on flow basis and as a result are the customers of MGIC. To obtain primary insurance from MGIC written on flow basis, a mortgage lender must first apply for and receive a mortgage guaranty master policy (“Master Policy”) from MGIC. MGIC had approximately 13,800 master policyholders at December 31, 2005 (not including policies issued to branches and affiliates of large lenders). In 2005, MGIC issued coverage on mortgage loans for approximately 3,800 of its master policyholders. MGIC’s top 10 customers generated 30.5% of its new insurance written on a flow basis in 2005, compared to 31.9% in 2004 and 33.1% in 2003.
     Sales and Marketing and Competition
     Sales and Marketing. MGIC sells its insurance products through its own employees, located throughout all regions of the United States and Puerto Rico.
     Competition. For flow business, MGIC and other private mortgage insurers compete directly with federal and state governmental and quasi-governmental agencies, principally the FHA and, to a lesser degree, the Veterans Administration (“VA”). These agencies sponsor government-backed mortgage insurance programs, which during 2005 and 2004 accounted for approximately 24% and 33%, respectively, of the total low down payment residential mortgages which were subject to governmental or private mortgage insurance. Loans insured by the FHA cannot exceed maximum principal amounts which are determined by a percentage of the conforming loan limit. For 2006, the maximum FHA loan amount for homes with one dwelling unit in “high cost” areas is as high as $362,790 and was as high as $312,896 in 2005. Loans insured by the VA do not have mandated maximum principal amounts but have maximum limits on the amount of the guaranty provided by the VA to the lender. For loans closed on or after December 10, 2004 the maximum VA guarantee is $104,250.
     In addition to competition from the FHA and the VA, MGIC and other private mortgage insurers face competition from state-supported mortgage insurance funds in several states, including California and New York. From time to time, other state legislatures and agencies consider expansions of the authority of their state governments to insure residential mortgages.
     Private mortgage insurers may also be subject to competition from Fannie Mae and Freddie Mac to the extent the GSEs are compensated for assuming default risk that would otherwise be insured by the private mortgage insurance industry. Fannie Mae and Freddie Mac each have programs under which an up-front delivery fee can be paid to the GSE and primary mortgage insurance coverage is substantially reduced compared to the coverage requirements that would apply in the absence of the program. In October 1998, Freddie Mac’s charter was amended (and the amendment immediately repealed) to give Freddie Mac flexibility to use protection against default in addition to private mortgage insurance and the two other types of credit enhancement required by the charter for low down payment mortgages purchased by Freddie Mac. In addition, to the extent up-front delivery fees are not retained by the GSEs to compensate for their assumption of default risk, and are used instead to purchase supplemental coverage from mortgage insurers, the resulting concentration of purchasing power in the hands of the GSEs could increase competition among insurers to provide such coverage.
     The capital markets may also develop as competitors to private mortgage insurers in ways the Company cannot predict. During 1998, a newly-organized off-shore company funded by the sale of

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notes to institutional investors provided reinsurance to Freddie Mac against default on a specified pool of mortgages owned by Freddie Mac. A competitor of MGIC has engaged in transactions in which it transferred portions of the risk that it had written in certain bulk transactions to institutional investors in similar reinsurance structures. MGIC has also engaged in similar reinsurance transactions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Consolidated Operations — Risk Sharing Arrangements” in Item 7.
     MGIC and other mortgage insurers also compete with transactions structured to avoid mortgage insurance on low down payment mortgage loans. Such transactions include self-insuring, and “80-10-10” and similar loans (generally referred to as “piggyback loans”), which are loans comprised of both a first and a second mortgage (for example, an 80% LTV first mortgage and a 10% LTV second mortgage), with the LTV ratio of the first mortgage below what investors require for mortgage insurance, compared to a loan in which the first mortgage covers the entire borrowed amount (which in the preceding example would be a 90% LTV mortgage). Captive mortgage reinsurance and similar transactions also result in mortgage originators receiving a portion of the premium and the risk.
     The private mortgage insurance industry currently consists of eight active mortgage insurers and their affiliates; one of the eight is a joint venture in which another mortgage insurer is one of the joint venturers. The names of these mortgage insurers are listed under “Competition or changes in the Company’s relationships with its customers could reduce the Company’s revenues or increase its losses” in Item 1B of this Annual Report on Form 10-K. According to Inside Mortgage Finance, a mortgage industry publication, which obtains its data from reports to it by MGIC and other mortgage insurers that are to be prepared on the same basis as the reports by insurers to the trade association for the private mortgage insurance industry, for 1995 and subsequent years, MGIC has been the largest private mortgage insurer based on new primary insurance written (with a market share of 22.9% in 2005, 23.5% in 2004, 21.9% in 2003 and 24.8% in 2002) and at December 31, 2005, MGIC also had the largest book of direct primary insurance in force. Effective with the third quarter of 2001, these reports do not include as “primary mortgage insurance” insurance on certain loans classified by MGIC as primary insurance, such as loans insured through bulk transactions that already had mortgage insurance placed on the loans at origination.
     The private mortgage insurance industry is highly competitive. The Company believes it competes with other private mortgage insurers for business written through the flow channel principally on the basis of programs involving captive mortgage reinsurance, agency pool insurance, and other similar structures involving lenders; the provision of contract underwriting and related fee-based services to lenders; the provision of other products and services that meet lender needs for risk management, affordable housing, loss mitigation, capital markets and training support; the strength of MGIC’s management team and field organization; and the effective use of technology and innovation in the delivery and servicing of MGIC’s insurance products. The Company believes MGIC’s additional competitive strengths, compared to other private insurers, are its customer relationships, name recognition, reputation and the depth of its database covering loans it has insured. The Company believes it competes for bulk business principally on the basis of the premium rate and the portion of loans submitted for insurance that the Company is willing to insure.
     The complaint in the RESPA Litigation alleged, among other things, that captive mortgage reinsurance, agency pool insurance, and contract underwriting as provided by the Company violated RESPA.

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     Certain private mortgage insurers compete for flow business by offering lower premium rates than other companies, including MGIC, either in general or with respect to particular classes of business. MGIC on a case-by-case basis will adjust premium rates, generally depending on the risk characteristics, loss performance or class of business of the loans to be insured, or the costs associated with doing such business.
     In the third quarter of 2001, the Office of Federal Housing Enterprise Oversight (“OFHEO”) adopted a risk-based capital stress test for the GSEs, which was amended in February 2002. One of the elements of the stress test is that future claim payments made by a private mortgage insurer on GSE loans are reduced below the amount provided by the mortgage insurance policy to reflect the risk that the insurer will fail to pay. Claim payments from an insurer whose claims-paying ability rating (which in this document is also referred to as a “financial strength rating”) is ‘AAA’ are subject to a 3.5% reduction over the 10-year period of the stress test, while claim payments from a ‘AA’ rated insurer, such as MGIC, are subject to a 8.75% reduction. The effect of the differentiation among insurers is to require the GSEs to have additional capital for coverage on loans provided by a private mortgage insurer whose claims-paying rating is less than ‘AAA.’ As a result, there is an incentive for the GSEs to use private mortgage insurance provided by a ‘AAA’ rated insurer.
     Contract Underwriting and Related Services
     The Company performs contract underwriting services for lenders in which the Company judges whether the data relating to the borrower and the loan contained in the lender’s mortgage loan application file comply with the lender’s loan underwriting guidelines. The Company also provides an interface to submit such data to the automated underwriting systems of the GSEs, which independently judge the data. These services are provided for loans that require private mortgage insurance as well as for loans that do not require private mortgage insurance. A material portion of the Company’s new insurance written through the flow channel in recent years involved loans for which the Company provided contract underwriting services. The complaint in the RESPA Litigation alleged, among other things, that the pricing of contract underwriting provided by the Company violated RESPA.
     Under its contract underwriting agreements, the Company may be required to provide certain remedies to its customers if certain standards relating to the quality of the Company’s underwriting work are not met. The cost of remedies provided by the Company to customers for failing to meet these standards has not been material to the Company’s financial position or results of operations for the years ended December 31, 2005, 2004 and 2003. There can be no assurance that contract underwriting remedies will not be material in the future.
     Risk Management
     MGIC believes that mortgage credit risk is materially affected by
    the borrower’s credit strength, including the borrower’s credit history, debt-to-income ratios, and cash reserves; and
 
    the loan product, which encompasses the LTV ratio, the type of loan instrument (including whether the instrument provides for fixed or variable payments and the amortization schedule), the type of property and the purpose of the loan.

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     MGIC believes that mortgage credit risk is also affected by the origination practices of the lender and the condition of the housing market in the area in which the property is located.
     MGIC believes that, excluding other factors, claim incidence increases for loans with lower FICO credit scores compared to loans with higher FICO credit scores; for loans with less than full underwriting documentation compared to loans with full underwriting documentation; for loans with higher LTV ratios compared to loans with lower LTV ratios; for ARMs during a prolonged period of rising interest rates compared to fixed rate loans in such a rate environment; for loans that permit the deferral of principal amortization compared to loans that require principal amortization with each monthly payment; for loans in which the original loan amount exceeds the conforming loan limit compared to loans below such limit; and for cash out refinance loans compared to rate and term refinance loans.
     There are also other types of loan characteristics relating to the individual loan or borrower which affect the risk potential for a loan. The presence of a number of higher-risk characteristics in a loan materially increases the likelihood of a claim on such a loan unless there are other characteristics to lower the risk.
     MGIC charges higher premium rates to reflect the increased risk of claim incidence that it perceives is associated with a loan, although not all higher risk characteristics are reflected in the premium rate. There can be no assurance that MGIC’s premium rates adequately reflect the increased risk, particularly in a period of economic recession.
     Delegated Underwriting and GSE Automated Underwriting Approvals. Delegated underwriting is a program under which approved lenders are allowed to commit MGIC to insure loans originated through the flow channel utilizing their own underwriting guidelines and underwriting evaluation. Some major lenders having delegated underwriting authority use their own proprietary automated underwriting services to apply their underwriting guidelines to loans. In addition, since 2000, loans approved by the automated underwriting services of the GSEs have been automatically approved for MGIC mortgage insurance.
     During the last three years, a substantial majority of the loans insured by MGIC through the flow channel were approved as a result of loan approvals by the automated underwriting services of the GSEs or though delegated underwriting programs, including those utilizing proprietary underwriting services. MGIC expects the portion of its flow business that is approved in this manner to continue to increase. The loan approval criteria of automated underwriting services are within the risk management discretion and control of the GSEs or the lender operating the service. As a result of accepting the loan approval decisions of these services, MGIC does not have the ability to control in advance the risk characteristics of such loans. MGIC’s risk management approach to such flow business has been to monitor periodically the credit quality of the loans it has recently insured in this manner. If as a result of such review MGIC perceives certain loans insured in this manner have an unacceptably higher risk of claim, MGIC can continue to insure loans with such characteristics that are thereafter submitted to it at A- rates. In addition, in the case of loans approved other than through the automated underwriting systems of the GSEs, MGIC can decline to continue to insure loans having such characteristics.
     Bulk Transactions Risk Management. The premium for loans insured in a bulk transaction is determined by MGIC’s evaluation of the credit risk of the loans included in the transaction based on information about the loans represented to MGIC by the securitizer. Individual loan files are generally not reviewed in advance of the issuance of an insurance commitment but are reviewed at the time a

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claim is made to confirm that the loan involved in the claim generally conforms to the representations that were previously made. MGIC has the right to rescind coverage for loans that do not conform to such representations.
     Exposure to Catastrophic Loss; Defaults; and Claims
     The private mortgage insurance industry, which is exposed to the risk of catastrophic loss, experienced substantial losses in the mid-to-late 1980s. From the 1970s until 1981, rising home prices in the United States generally led to profitable insurance underwriting results for the industry and caused private mortgage insurers to emphasize market share. To maximize market share, until the mid-1980s, private mortgage insurers employed liberal underwriting practices, and charged premium rates which, in retrospect, generally did not adequately reflect the risk assumed (particularly on pool insurance). These industry practices compounded the losses which resulted from changing economic and market conditions which occurred during the early and mid-1980s, including (i) severe regional recessions and attendant declines in property values in the nation’s energy producing states; (ii) the development by lenders of new mortgage products to defer the impact on home buyers of double digit mortgage interest rates; and (iii) changes in federal income tax incentives which initially encouraged the growth of investment in non-owner occupied properties.
     Defaults. The claim cycle on private mortgage insurance begins with the insurer’s receipt of notification of a default on an insured loan from the lender. MGIC defines a default as an insured loan with a mortgage payment that is 45 days or more past due. Lenders are required to notify MGIC of defaults within 130 days after the initial default, although most lenders do so earlier. The incidence of default is affected by a variety of factors, including the level of borrower income growth, unemployment, divorce and illness, the level of interest rates and general borrower creditworthiness. Defaults that are not cured result in a claim to MGIC. Defaults may be cured by the borrower bringing current the delinquent loan payments or by a sale of the property and the satisfaction of all amounts due under the mortgage.
     The following table shows the number of primary and pool loans insured in the MGIC Book, including loans insured in bulk transactions and A- and subprime loans, the related number of loans in default and the percentage of loans in default (default rate) as of December 31, 2001-2005:

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Default Statistics for the MGIC Book
                                         
    December 31,
    2005   2004   2003   2002   2001
 
PRIMARY INSURANCE
                                       
Insured loans in force
    1,303,084       1,413,678       1,551,331       1,655,887       1,580,283  
Loans in default
    85,788       85,487       86,372       73,648       54,653  
Percentage of loans in default (default rate)
    6.58 %     6.05 %     5.57 %     4.45 %     3.46 %
Flow loans in default
    47,051       44,925       45,259       43,196       36,193  
Percentage of flow loans in default (default rate)
    4.52 %     3.99 %     3.76 %     3.19 %     2.65 %
Bulk loans in force
    263,225       288,587       348,521       301,859       214,917  
Bulk loans in default
    38,737       40,562       41,113       30,452       18,460  
Percentage of bulk loans in default (default rate)
    14.72 %     14.06 %     11.80 %     10.09 %     8.59 %
A-minus and subprime loans in force(1)
    199,345       217,306       244,175       201,195       134,888  
A-minus and subprime loans in default(1)
    36,485       35,824       34,525       25,504       15,649  
Percentage of A-minus and subprime loans in default (default rate)
    18.30 %     16.49 %     14.14 %     12.68 %     11.60 %
POOL INSURANCE
                                       
Insured loans in force
    767,920       790,935       1,035,696       1,208,157       1,351,266  
Loans in default
    23,772       25,500       28,135       26,676       23,623  
Percentage of loans in default (default rate)
    3.10 %     3.22 %     2.72 %     2.21 %     1.75 %
 
(1)   A portion of A-minus and subprime loans is included in the data for flow loans and the remainder is included in the data for bulk loans. Most A-minus and subprime credit loans are written through the bulk channel.
     Regions of the United States may experience different default rates due to varying localized economic conditions from year to year. The following table shows the percentage of the MGIC Book’s primary loans in default by MGIC region at the dates indicated:
Default Rates for Primary Insurance By Region*
                                         
    Dec. 31   Dec. 31   Dec. 31   Dec. 31   Dec. 31
    2005   2004   2003   2002   2001
MGIC REGION:
                                       
New England
    3.98 %     3.43 %     3.43 %     2.91 %     2.27 %
Northeast
    6.48       6.15       5.65       4.74       3.90  
Mid-Atlantic.
    4.89       4.81       4.53       4.05       3.27  
Southeast
    6.79       6.33       6.02       4.87       3.65  
Great Lakes
    8.60       8.19       6.99       5.17       3.74  
North Central
    6.01       5.78       5.38       4.22       3.21  
South Central
    7.94       6.35       5.94       4.65       3.56  
Plains
    4.51       4.51       4.03       3.41       2.76  
Pacific
    3.76       3.92       4.21       3.73       3.38  
National
    6.58 %     6.05 %     5.57 %     4.45 %     3.46 %
 
*   The default rate is affected by both the number of loans in default at any given date as well as the number of insured loans in force at such date.
     Claims. Claims result from defaults which are not cured. Whether a claim results from an uncured default principally depends on the borrower’s equity in the home at the time of default and the borrower’s (or the lender’s) ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage. Claims are affected by various factors, including local housing prices and employment levels, and interest rates.

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     Under the terms of the Master Policy, the lender is required to file a claim for primary insurance with MGIC within 60 days after it has acquired good and marketable title to the underlying property through foreclosure. Depending on the applicable state foreclosure law, generally at least 12 months transpires from the date of default to payment of a claim on an uncured default.
     Within 60 days after the claim has been filed, MGIC has the option of either (i) paying the coverage percentage specified for that loan, with the insured retaining title to the underlying property and receiving all proceeds from the eventual sale of the property or (ii) paying 100% of the claim amount in exchange for the lender’s conveyance of good and marketable title to the property to MGIC. MGIC will then sell the property for its own account.
     Claim activity is not evenly spread throughout the coverage period of a book of primary business. For prime loans, relatively few claims are received during the first two years following issuance of coverage on a loan. This is followed by a period of rising claims which, based on industry experience, has historically reached its highest level in the third through fourth years after the year of loan origination. Thereafter, the number of claims received has historically declined at a gradual rate, although the rate of decline can be affected by conditions in the economy, including lower housing price appreciation. There can be no assurance that this historical pattern of claims will continue in the future and due in part to the subprime component of loans insured in bulk transactions, the peak claim period for bulk loans has generally occurred earlier than for prime loans. Moreover, when a loan is refinanced, because the new loan replaces, and is a continuation of, an earlier loan, the pattern of claims frequency for that new loan may be different from the historical pattern of other loans. As of December 31, 2005, 77.0% of the MGIC Book primary insurance in force had been written during 2003 — 2005, although a portion of such insurance arose from the refinancing of earlier originations.
     In addition to the increasing level of claim activity arising from the maturing of the MGIC Book, another important factor affecting MGIC Book losses is the amount of the average claim paid, which is generally referred to as claim severity. The main determinants of claim severity are the amount of the mortgage loan and the coverage percentage on the loan. The average claim severity on the MGIC Book primary insurance was $26,361 for 2005 as compared to $24,438 in 2004 and $22,925 in 2003.
     Loss Reserves
     A significant period of time may elapse between the occurrence of the borrower’s default on a mortgage payment (the event triggering a potential future claim payment by MGIC), the reporting of such default to MGIC and the eventual payment of the claim related to such uncured default. To recognize the liability for unpaid losses related to outstanding reported defaults (known as the default inventory), the Company, similar to other private mortgage insurers, establishes loss reserves, representing the estimated percentage of defaults which will ultimately result in a claim (known as the claim rate), and the estimated severity of the claims which will arise from the defaults included in the default inventory. In accordance with industry accounting practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default.
     The Company also establishes reserves to provide for the estimated costs of settling claims, including legal and other fees, and general expenses of administering the claims settlement process (“loss adjustment expenses”), and for losses and loss adjustment expenses from defaults which have occurred, but which have not yet been reported to the insurer.

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     The Company’s reserving process is based upon the assumption that past experience, adjusted for the anticipated effect of current economic conditions and projected future economic trends, provides a reasonable basis for estimating future events. However, estimation of loss reserves is inherently judgmental. Economic conditions that have affected the development of the loss reserves in the past may not necessarily affect development patterns in the future, in either a similar manner or degree.
     For further information about loss reserves, see “Management’s Discussion and Analysis—Results of Operations—Losses” in Item 7 and Note 6 to the consolidated financial statements of the Company in Item 8.
     Geographic Dispersion
     The following table reflects the percentage of primary risk in force in the top 10 states and top 10 metropolitan statistical areas (“MSAs”) for the MGIC Book at December 31, 2005:
Dispersion of Primary Risk in Force
                 
Top 10 States            
1.
  Florida         9.0 %
2.
  California         7.9  
3.
  Texas         6.8  
4.
  Michigan         5.1  
5.
  Illinois         5.0  
6.
  Ohio         4.8  
7.
  Pennsylvania         4.0  
8.
  New York         4.0  
9.
  Georgia         3.2  
10.
  Indiana         2.8  
 
               
 
               
Total
            52.6 %
 
               
                 
Top 10 MSAs            
1.
  Chicago         3.7 %
2.
  Atlanta         2.2  
3.
  Detroit         2.1  
4.
  Boston         2.0  
5.
  Los Angeles         2.0  
6.
  Houston         1.8  
7.
  Phoenix         1.8  
8.
  Washington, D.C.         1.8  
9.
  Riverside-San Bernardino         1.7  
10.
  Philadelphia         1.6  
 
               
 
               
Total
            20.7 %
 
               
     The percentages shown above for various MSAs can be affected by changes, from time to time, in the federal government’s definition of an MSA.

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     Insurance in Force by Policy Year
     The following table sets forth for the MGIC Book the dispersion of MGIC’s primary insurance in force as of December 31, 2005, by year(s) of policy origination since MGIC began operations in 1985:
Primary Insurance In Force by Policy Year
                 
    Primary        
    Insurance in     Percent of  
Policy Year   Force     Total  
(In millions of dollars)  
1985-1999
  $ 10,385       6.1 %
2000
    2,216       1.3  
2001
    8,505       5.0  
2002
    17,673       10.4  
2003
    37,058       21.8  
2004
    40,137       23.6  
2005
    54,055       31.8  
 
           
 
               
Total
  $ 170,029       100.0 %
 
           
     Risk In Force and Product Characteristics of Risk in Force
     At December 31, 2005 and 2004, 94% of MGIC’s risk in force was primary insurance and the remaining risk in force was pool insurance. The following table sets forth for the MGIC Book the dispersion of MGIC’s primary risk in force as of December 31, 2005, by year(s) of policy origination since MGIC began operations in 1985:
Primary Risk In Force by Policy Year
                 
    Primary        
    Risk in     Percent of  
Policy Year   Force     Total  
(In millions of dollars)  
1985-1999
  $ 2,478       5.5 %
2000
    558       1.2  
2001
    2,176       4.9  
2002
    4,589       10.2  
2003
    9,527       21.3  
2004
    10,674       23.8  
2005
    14,858       33.1  
 
           
 
               
Total
  $ 44,860       100.0 %
 
           

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The following table reflects at the dates indicated the (i) total dollar amount of primary risk in force for the MGIC Book and (ii) percentage of such primary risk in force (as determined on the basis of information available on the date of mortgage origination) by the categories indicated.
Characteristics of Primary Risk in Force
                 
    December 31,   December 31,
    2005   2004
Direct Risk in Force (In Millions):
  $ 44,860     $ 45,981  
 
LTV: (1)
               
100s
    16.4 %     13.5 %
95s
    30.5       32.4  
90s(2)
    44.5       45.7  
80s
    8.6       8.4  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
Loan Type:
               
Fixed(3)
    74.5 %     77.2 %
Adjustable rate mortgages (“ARMs”)(4).
    25.5       22.8  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
Original Insured Loan Amount(5):
               
Conforming loan limit and below
    92.4 %     93.4 %
Non-conforming
    7.6       6.6  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
Mortgage Term:
               
15-years and under
    3.0 %     4.3 %
Over 15 years
    97.0       95.7  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
 
               
Property Type:
               
Single-family(6)
    91.7 %     93.6 %
Condominium
    7.0       6.2  
Other(7)
    1.3       0.2  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
Occupancy Status:
               
Primary residence
    92.5 %     93.4 %
Second home
    2.9       2.3  
Non-owner occupied
    4.6       4.3  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
Documentation:
               
Alt-A(8)
    13.9 %     11.7 %
Other
    86.1       88.3  
 
               
 
               
Total
    100.0 %     100.0 %
 
               
FICO Score:
               
Prime (FICO 620 and above)
    84.1 %     84.2 %
A Minus (FICO 575 – 619)
    11.0       11.3  
Subprime (FICO below 575)
    4.9       4.5  
 
               
 
               
Total
    100.0 %     100.0 %
 
               

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(1 )  
Loan-to-value represents the ratio (expressed as a percentage) of the dollar amount of the mortgage loan to the value of the property at the time the loan became insured. For purposes of the table, LTV ratios are classified as in excess of 95% (“100s”, a classification that includes 97% to 103% LTV loans); in excess of 90% LTV and up to 95% LTV (“95s”); in excess of 80% LTV and up to 90% LTV (“90s”); and equal to or less than 80% LTV (“80s”).
     
 
(2 )  
MGIC includes in its classification of 90s, loans where the borrower makes a down payment of 10% and finances the associated mortgage insurance premium payment as part of the mortgage loan. At December 31, 2005 and 2004, 1.8% of the primary risk in force consisted of these types of loans.
     
 
(3 )  
Includes fixed rate mortgages with temporary buydowns (where in effect the applicable interest rate is typically reduced by one or two percentage points during the first two years of the loan), ARMs in which the initial interest rate is fixed for at least five years and balloon payment mortgages (a loan with a maturity, typically five to seven years, that is shorter than the loan’s amortization period).
     
 
(4 )  
Includes ARMs where payments adjust fully with interest rate adjustments. Also includes ARMs with negative amortization features, which at December 31, 2005 and 2004, represented 1.4% and 0.8%, respectively, of primary risk in force. Does not include ARMs in which the initial interest rate is fixed for at least five years. As of December 31, 2005 and 2004, ARMs with LTVs in excess of 90% represented 6.6% and 5.9%, respectively, of primary risk in force.
     
 
(5 )  
Loans within the conforming loan limit have an original principal balance that does not exceed the maximum original principal balance of loans that the GSEs are eligible to purchase. The conforming loan limit is subject to annual upward adjustment and was $359,650 for 2005 and $333,700 for 2004. Non-conforming loans are loans with an original principal balance above the conforming loan limit.
     
 
(6 )  
Includes townhouse-style attached housing with fee simple ownership.
     
 
(7 )  
Includes cooperatives and manufactured homes deemed to be real estate.
     
 
(8 )  
Alt-A loans are originated under programs in which there is a reduced level of verification or disclosure compared to traditional mortgage loan underwriting, including programs in which the borrower’s income and/or assets are disclosed in the loan application but there is no verification of those disclosures and programs in which there is no disclosure of income or assets in the loan application. At December 31, 2005 and 2004, Alt-A loans represented 6.9% of risk in force written through the flow channel and 32.5% and 25.8%, respectively of risk in force written through the bulk channel.
C. Other Business and Joint Ventures
     The Company, through subsidiaries, provides various mortgage services for the mortgage finance industry, such as contract underwriting, portfolio retention and secondary marketing of mortgage-related assets. The Company’s eMagic.com LLC subsidiary provides an Internet portal through which mortgage originators can access products and services of wholesalers, investors, and vendors necessary to make a home mortgage loan. In January 2006, the Company acquired Myers Internet, Inc., which is a provider of web-based point of sale solutions for mortgage originators and real estate agents.

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     At December 31, 2005, the Company also owned approximately 46% of C-BASS and approximately 34.6% of Sherman, joint ventures with senior management of the particular joint venture and Radian Group Inc. Effective August 1, 2005, the Company and Radian Group Inc. each sold almost 7 percentage points of their respective interest in Sherman to Sherman’s management for cash. For further information about C-BASS and Sherman (which are the principal joint ventures included in the “Income from joint ventures, net of tax” line in the Company’s Consolidated Statement of Operations), see “Management’s Discussion and Analysis—Results of Operations” in Item 7 and Note 8 to the consolidated financial statements of the Company in Item 8.
     In 1997, the Company, through subsidiaries, began insuring second mortgages, including home equity loans. New insurance written on second mortgages in 2002 and 2001 was approximately $37.8 million and $1.3 billion, respectively. The Company discontinued writing new second mortgage risk for loans closing after December 31, 2001.
D. Investment Portfolio
     Policy and Strategy
     Approximately 76% of the Company’s long-term investment portfolio is managed by either BlackRock, Inc. or Wellington Management Company, LLP, although the Company maintains overall control of investment policy and strategy. The Company maintains direct management of the remainder of its investment portfolio.
     The Company’s current policies emphasize preservation of capital, as well as total return. Therefore, the Company’s investment portfolio consists almost entirely of high-quality, fixed-income investments. Liquidity is sought through diversification and investment in publicly traded securities. The Company attempts to maintain a level of liquidity commensurate with its perceived business outlook and the expected timing, direction and degree of changes in interest rates. The Company’s investment policies in effect at December 31, 2005 limited investments in the securities of a single issuer (other than the U.S. government) and generally limit the purchase of fixed income securities to those that are rated investment grade by at least one rating agency. At that date, the maximum aggregate book value of the holdings of a single obligor or non-government money market mutual fund was:
         
 
  U.S. Government securities   No limit
 
  Pre-refunded municipals escrowed in Treasury securities   No limit*
 
  U.S. Government Agencies (in total)**   15% of portfolio market value
 
  Securities rated “AA” or “AAA”   3% of portfolio market value
 
  Securities rated “Baa” or “A”   2% of portfolio market value
 
*   No limit subject to management liquidity considerations
 
**   As used with respect to the Company’s investment portfolio, Government Agencies include Fannie Mae and Freddie Mac.
     At December 31, 2005, based on amortized cost, approximately 99.3% of the Company’s total fixed income investment portfolio was invested in securities rated ‘A’ or better, with 81.1% rated ‘AAA’ and 15.9% rated ‘AA,’ in each case by at least one nationally recognized securities rating organization.
     The Company’s investment policies and strategies are subject to change depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the Company.

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     Investment Operations
     At December 31, 2005, the market value of the Company’s investment portfolio was approximately $5.5 billion. At December 31, 2005, municipal securities represented 86.6% of the market value of the total investment portfolio. Securities due within one year, within one to five years, within five to ten years, and after ten years, represented 9.2%, 15.1%, 21.0% and 54.7%, respectively, of the total book value of the Company’s investment in debt securities. The Company’s after-tax yield for 2005 was 3.9%, which was comparable to the after-tax yield of 3.8% in 2004.
     The ten largest holdings of the Company at December 31, 2005 appear in the table below:
                     
                Market Value  
                (in thousands  
                of dollars)  
1.
  Georgia State Series C           $ 47,702  
2.
  Sales Tax Asset Receivable             43,688  
3.
  Indiana State             43,377  
4.
  New York City Water Finance Authority             42,195  
5.
  North Carolina Municipal Power             48,908  
6.
  Chicago IL Metropolitan Water Reclamation             40,156  
7.
  State of Illinois Sales Tax             41,445  
8.
  Jefferson County Alabama Sewer             39,497  
9.
  University of Texas             37,940  
10.
  Atlanta Georgia Water & Wastewater             40,165  
 
                 
 
                   
 
              $ 425,073  
 
                 
 
     Note: This table excludes U.S. Governments, Government Agencies and CMOs.
     The top ten sectors of the Company’s investment portfolio appear in the table below:
                     
                Market Value  
                (in millions  
                of dollars)  
1.
  Tax-Free Municipal           $ 4,402.2  
2.
  U.S. Treasuries             336.4  
3.
  Tax-Preferred Cash Equivalents             260.8  
4.
  Cash Equivalents             198.6  
5.
  Asset Backed             179.4  
6.
  Taxable Municipal             68.5  
7.
  Corporate             23.3  
8.
  Certified Capital Companies             12.0  
9.
  Affordable Hsg State Tax Credits             2.5  
10.
  Foreign             2.1  
 
                 
 
                   
 
              $ 5,485.8  
 
                 
     For further information concerning investment operations, see Note 4 to the consolidated financial statements of the Company, included in Item 8.
E. Regulation
     Direct Regulation
     The Company and its insurance subsidiaries, including MGIC, are subject to regulation by the insurance departments of the various states in which each is licensed to do business. The nature and extent of such regulation varies, but generally depends on statutes which delegate regulatory, supervisory and

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administrative powers to state insurance commissioners.
     In general, such regulation relates, among other things, to licenses to transact business; policy forms; premium rates; insurable loans; annual and other reports on financial condition; the basis upon which assets and liabilities must be stated; requirements regarding contingency reserves equal to 50% of premiums earned; minimum capital levels and adequacy ratios; reinsurance requirements; limitations on the types of investment instruments which may be held in an investment portfolio; the size of risks and limits on coverage of individual risks which may be insured; deposits of securities; limits on dividends payable; and claims handling. Most states also regulate transactions between insurance companies and their parents or affiliates and have restrictions on transactions that have the effect of inducing lenders to place business with the insurer. For a discussion of a February 1, 1999 circular letter from the NYID and a January 31, 2000 letter from the Illinois Department of Insurance, see “The MGIC Book—Types of Product—Pool Insurance, —Risk Sharing Arrangements.” See also “The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings” in Item 1A. For a description of limits on dividends payable, see “Management’s Discussion and Analysis—Liquidity and Capital Resources” in Item 7 and Note 11 to the consolidated financial statements of the Company in Item 8.
     Mortgage insurance premium rates are also subject to state regulation to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. Any increase in premium rates must be justified, generally on the basis of the insurer’s loss experience, expenses and future trend analysis. The general mortgage default experience may also be considered. Premium rates are subject to review and challenge by state regulators. On February 9, 2006, the Company learned the NYID had sent it and other mortgage insurers a letter asking for, among other things, a review of premium rates used in New York and the filing of adjusted premium rates based on recent years’ experience or an explanation why such experience would not alter rates.
     A number of states generally limit the amount of insurance risk which may be written by a private mortgage insurer to 25 times the insurer’s total policyholders’ reserves, commonly known as the “risk-to-capital” requirement.
     MGIC is required to establish a contingency loss reserve in an amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for a period of 10 years, except under certain circumstances.
     Mortgage insurers are generally single-line companies, restricted to writing residential mortgage insurance business only. Although the Company, as an insurance holding company, is prohibited from engaging in certain transactions with MGIC without submission to and, in some instances, prior approval of applicable insurance departments, the Company is not subject to insurance company regulation on its non-insurance businesses.
     Wisconsin’s insurance regulations generally provide that no person may acquire control of the Company unless the transaction in which control is acquired has been approved by the Office of the Commissioner of Insurance of Wisconsin. The regulations provide for a rebuttable presumption of control when a person owns or has the right to vote more than 10% of the voting securities.
     As the most significant purchasers and sellers of conventional mortgage loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie Mae impose requirements on private mortgage insurers in order for such insurers to be eligible to insure loans sold to such agencies. These requirements of Freddie Mac and Fannie Mae are subject to change from time to time. Currently, MGIC is an approved mortgage insurer for both Freddie Mac and Fannie Mae. In addition, to the extent Fannie Mae or Freddie Mac assumes default risk for itself that would otherwise be insured, changes current guarantee fee arrangements (including as a result of primary mortgage insurance coverage being restructured as

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described under “The MGIC Book—Types of Product—Primary Insurance”), allows alternative credit enhancement, alters or liberalizes underwriting guidelines on low down payment mortgages they purchase, or otherwise changes its business practices or processes with respect to such mortgages, private mortgage insurers may be affected.
     Fannie Mae has issued primary mortgage insurance master policy guidelines applicable to MGIC and all other Fannie Mae-approved private mortgage insurers, establishing certain minimum terms of coverage necessary in order for an insurer to be eligible to insure loans purchased by Fannie Mae. The terms of MGIC’s Master Policy comply with these guidelines.
     In December 2003 Standard & Poor’s Rating Services (“S&P”) announced that it lowered MGIC’s financial strength rating to ‘AA’ from ‘AA+’ and the Company’s long-term counterparty credit rating to ‘A’ from ‘A+’ “because of a weakening of MGIC’s operating performance from a very strong to a strong level, as well as rising delinquencies. In addition, the level of risk in MGIC’s book of business is increasing relative to its peers, in part due to the growth in its bulk in-force book, which has grown to about 25% of the total in-force.” S&P said in its announcement that the outlook for MGIC’s and the Company’s ratings was stable. Shortly before S&P’s announcement, Moody’s Investors Service and Fitch Ratings reaffirmed their respective ‘Aa2’ and ‘AA+’ financial strength ratings of MGIC.
     Maintenance of a financial strength rating of at least AA-/Aa3 is critical to a mortgage insurer’s ability to continue to write new business. In assigning financial strength ratings, in addition to considering the adequacy of the mortgage insurer’s capital to withstand extreme loss scenarios under assumptions determined by the rating agency, rating agencies review a mortgage insurer’s historical and projected operating performance, business outlook, competitive position, management, corporate strategy, and other factors. The rating agency issuing the financial strength rating can withdraw or change its rating at any time.
     Indirect Regulation
     The Company and MGIC are also indirectly, but significantly, impacted by regulations affecting purchasers of mortgage loans, such as Freddie Mac and Fannie Mae, and regulations affecting governmental insurers, such as the FHA and VA, and lenders. Private mortgage insurers, including MGIC, are highly dependent upon federal housing legislation and other laws and regulations to the extent they affect the demand for private mortgage insurance and the housing market generally. From time to time, those laws and regulations have been amended to affect competition from government agencies. Proposals are discussed from time to time by Congress and certain federal agencies to reform or modify the FHA and the Government National Mortgage Association, which securitizes mortgages insured by the FHA.
     Subject to certain exceptions, in general, RESPA prohibits any person from giving or receiving any “thing of value” pursuant to an agreement or understanding to refer settlement services. See “The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings” in Item 1B.
     The OTS, the OCC, the Federal Reserve Board, and the Federal Deposit Insurance Corporation have uniform guidelines on real estate lending by insured lending institutions under their supervision. The guidelines specify that a residential mortgage loan originated with an LTV of 90% or greater should have appropriate credit enhancement in the form of mortgage insurance or readily marketable collateral, although no depth of coverage percentage is specified in the guidelines.
     Lenders are subject to various laws, including the Home Mortgage Disclosure Act, the Community Reinvestment Act and the Fair Housing Act, and Fannie Mae and Freddie Mac are subject to various laws, including laws relating to government sponsored enterprises, which may impose obligations or create

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incentives for increased lending to low and moderate income persons, or in targeted areas.
     There can be no assurance that other federal laws and regulations affecting such institutions and entities will not change, or that new legislation or regulations will not be adopted which will adversely affect the private mortgage insurance industry. In this regard, see the penultimate risk factor in Item 1A.
F. Employees
     At December 31, 2005, the Company and its consolidated subsidiaries had approximately 1,200 full- and part-time employees, of whom approximately 35% were assigned to MGIC’s field offices. The number of employees given above does not include “on-call” employees. The number of “on-call” employees can vary substantially, primarily as a result of changes in demand for contract underwriting services.
G. Website Access
     The Company makes available, free of charge, through its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with the SEC. The address of the Company’s website is www.mgic.com, and such reports and amendments are accessible through the “Investor” link at such address.
Item 1A. Risk Factors.
     Forward-Looking Statements and Risk Factors
     The Company’s revenues and losses could be affected by the risk factors discussed below that are applicable to the Company, and the Company’s income from joint ventures could be affected by the risk factors discussed below that are applicable to C-BASS and Sherman. These risk factors are an integral part of Management’s Discussion and Analysis.
     These factors may also cause actual results to differ materially from the results contemplated by forward looking statements that the Company may make. Forward looking statements consist of statements which relate to matters other than historical fact. Among others, statements that include words such as the Company “believes”, “anticipates” or “expects”, or words of similar import, are forward looking statements. The Company is not undertaking any obligation to update any forward looking statements it may make even though these statements may be affected by events or circumstances occurring after the forward looking statements were made.
     The amount of insurance the Company writes could be adversely affected if lenders and investors select alternatives to private mortgage insurance.
These alternatives to private mortgage insurance include:
    lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio,
 
    investors holding mortgages in portfolio and self-insuring,

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    investors using credit enhancements other than private mortgage insurance or using other credit enhancements in conjunction with reduced levels of private mortgage insurance coverage, and
 
    lenders using government mortgage insurance programs, including those of the Federal Housing Administration and the Veterans Administration.
     While no data is publicly available, the Company believes that piggyback loans are a significant percentage of mortgage originations in which borrowers make down payments of less than 20% and that their use is primarily by borrowers with higher credit scores. During the fourth quarter of 2004, the Company introduced on a national basis a program designed to recapture business lost to these mortgage insurance avoidance products. This program accounted for 5.7% of flow new insurance written in the fourth quarter of 2005 and 6.5% of flow new insurance written for all of 2005.
     Deterioration in the domestic economy or changes in the mix of business may result in more homeowners defaulting and the Company’s losses increasing.
     Losses result from events that reduce a borrower’s ability to continue to make mortgage payments, such as unemployment, and whether the home of a borrower who defaults on his mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. Favorable economic conditions generally reduce the likelihood that borrowers will lack sufficient income to pay their mortgages and also favorably affect the value of homes, thereby reducing and in some cases even eliminating a loss from a mortgage default. A deterioration in economic conditions generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect housing values.
     Approximately 8.5% of the Company’s primary risk in force is located in areas within Alabama (0.3%), Florida (4.5%), Louisiana (1.0%), Mississippi (0.6%) and Texas (2.2%) that have been declared eligible for individual and public assistance by the Federal Emergency Management Agency as a result of Hurricanes Katrina, Rita and Wilma. The effect on the Company from these hurricanes, however, will not be limited to these areas to the extent that the borrowers in areas that have not experienced wind or water damage are adversely affected due to deteriorating economic conditions attributable to these hurricanes.
     The mix of business the Company writes also affects the likelihood of losses occurring. In recent years, the percentage of the Company’s volume written on a flow basis that includes segments the Company views as having a higher probability of claim has continued to increase. These segments include loans with loan-to-value (“LTV”) ratios over 95% (including loans with 100% LTV ratios), “FICO” credit scores below 620, limited underwriting, including limited borrower documentation, or total debt-to-income ratios of 38% or higher, as well as loans having combinations of higher risk factors.
     Approximately 9% of the Company’s primary risk in force written through the flow channel, and 72% of the Company’s primary risk in force written through the bulk channel, consists of adjustable rate mortgages (“ARMs”). The Company believes that during a prolonged period of rising interest rates, claims on ARMs would be substantially higher than for fixed rate loans, although the performance of ARMs has not been tested in such an environment. In addition, the Company believes the volume of “interest-only” loans (which may also be ARMs) and other loans with negative amortization features, such as pay option ARMs, increased in 2004 and 2005. Because interest-only loans and pay option ARMs are a relatively recent development, the Company has no data on their historical performance. The Company believes claim rates on certain of these loans will be substantially higher than on comparable loans that do not have negative amortization.

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     Competition or changes in the Company’s relationships with its customers could reduce the Company’s revenues or increase its losses.
     Competition for private mortgage insurance premiums occurs not only among private mortgage insurers but also with mortgage lenders through captive mortgage reinsurance transactions. In these transactions, a lender’s affiliate reinsures a portion of the insurance written by a private mortgage insurer on mortgages originated or serviced by the lender. As discussed under “The mortgage insurance industry is subject to risk from private litigation and regulatory proceedings” below, the Company provided information to the New York Insurance Department and the Minnesota Department of Commerce about captive mortgage reinsurance arrangements. It has been publicly reported that certain other insurance departments may review or investigate such arrangements.
     The level of competition within the private mortgage insurance industry has also increased as many large mortgage lenders have reduced the number of private mortgage insurers with whom they do business. At the same time, consolidation among mortgage lenders has increased the share of the mortgage lending market held by large lenders.
     The Company’s private mortgage insurance competitors include:
  PMI Mortgage Insurance Company,
 
  Genworth Mortgage Insurance Corporation,
 
  United Guaranty Residential Insurance Company,
 
  Radian Guaranty Inc.,
 
  Republic Mortgage Insurance Company,
 
  Triad Guaranty Insurance Corporation, and
 
  CMG Mortgage Insurance Company.
     If interest rates decline, house prices appreciate or mortgage insurance cancellation requirements change, the length of time that the Company’s policies remain in force could decline and result in declines in the Company’s revenue.
     In each year, most of the Company’s premiums are from insurance that has been written in prior years. As a result, the length of time insurance remains in force (which is also generally referred to as persistency) is an important determinant of revenues. The factors affecting the length of time the Company’s insurance remains in force include:
    the level of current mortgage interest rates compared to the mortgage coupon rates on the insurance in force, which affects the vulnerability of the insurance in force to refinancings, and
 
    mortgage insurance cancellation policies of mortgage investors along with the rate of home price appreciation experienced by the homes underlying the mortgages in the insurance in force.
     During the 1990s, the Company’s year-end persistency ranged from a high of 87.4% at December 31,

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1990 to a low of 68.1% at December 31, 1998. At December 31, 2005 persistency was at 61.3%, compared to the record low of 44.9% at September 30, 2003. Over the past several years, refinancing has become easier to accomplish and less costly for many consumers. Hence, even in an interest rate environment favorable to persistency improvement, the Company does not expect persistency will approach its December 31, 1990 level.
     If the volume of low down payment home mortgage originations declines, the amount of insurance that the Company writes could decline which would reduce the Company’s revenues.
The factors that affect the volume of low-down-payment mortgage originations include:
    The level of home mortgage interest rates,
 
    the health of the domestic economy as well as conditions in regional and local economies,
 
    housing affordability,
 
    population trends, including the rate of household formation,
 
    the rate of home price appreciation, which in times of heavy refinancing can affect whether refinance loans have loan-to-value ratios that require private mortgage insurance, and
 
    government housing policy encouraging loans to first-time homebuyers.
     In general, the majority of the underwriting profit (premium revenue minus losses) that a book of mortgage insurance generates occurs in the early years of the book, with the largest portion of the 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 occurs because relatively few of the claims that a book will ultimately experience occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as persistency decreases due to loan prepayments, and higher losses.
     If all other things were equal, a decline in new insurance written in a year that followed a number of years of higher volume could result in a lower contribution to the mortgage insurer’s overall results. This effect may occur because the older books will be experiencing declines in revenue and increases in losses with a lower amount of underwriting profit on the new book available to offset these results.
     Whether such a lower contribution would in fact occur depends in part on the extent of the volume decline. Even with a substantial decline in volume, there may be offsetting factors that could increase the contribution in the current year. These offsetting factors include higher persistency and a mix of business with higher average premiums, which could have the effect of increasing revenues, and improvements in the economy, which could have the effect of reducing losses. In addition, the effect on the insurer’s overall results from such a lower contribution may be offset by decreases in the mortgage insurer’s expenses that are unrelated to claim or default activity, including those related to lower volume.
     Changes in the business practices of Fannie Mae and Freddie Mac could reduce the Company’s revenues or increase its losses.
     The business practices of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government sponsored entity (“GSE”), affect the entire relationship between them and mortgage insurers and include:

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    the level of private mortgage insurance coverage, subject to the limitations of Fannie Mae and Freddie Mac’s charters, when private mortgage insurance is used as the required credit enhancement on low down payment mortgages,
 
    whether Fannie Mae or Freddie Mac influence the mortgage lender’s selection of the mortgage insurer providing coverage and, if so, any transactions that are related to that selection,
 
    whether Fannie Mae or Freddie Mac will give mortgage lenders an incentive, such as a reduced guaranty fee, to select a mortgage insurer that has a “AAA” claims-paying ability,
 
    rating to benefit from the lower capital requirements for Fannie Mae and Freddie Mac when a mortgage is insured by a company with that rating,
 
    the underwriting standards that determine what loans are eligible for purchase by Fannie Mae or Freddie Mac, which thereby affect the quality of the risk insured by the mortgage insurer and the availability of mortgage loans,
 
    the terms on which mortgage insurance coverage can be canceled before reaching the cancellation thresholds established by law, and
 
    the circumstances in which mortgage servicers must perform activities intended to avoid or mitigate loss on insured mortgages that are delinquent.
     The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings.
     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. There can be no assurance that MGIC 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 the Company. In August 2005, the United States Court of Appeals for the Ninth Circuit decided a case under FCRA to which the Company was not a party that may make it more likely that the Company will be subject to future litigation regarding when notices to borrowers are required by FCRA.
     In June 2005, in response to a letter from the New York Insurance Department (“NYID”), the Company provided information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce (the “MDC”), which regulates insurance, the Company provided the MDC with information about captive mortgage reinsurance and certain other matters. In the spring of 2005, spokesmen for insurance commissioners in Colorado and North Carolina were publicly reported as saying that those commissioners are considering investigating or reviewing captive mortgage reinsurance arrangements. Insurance departments or other officials in other states may also conduct such investigations or reviews.
     The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban Development (“HUD”) as well as the insurance commissioner or attorney general of any state may bring an action to enjoin violations of these provisions of RESPA. The insurance law provisions of many states

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prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While the Company believes its 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 the Company or the mortgage insurance industry.
     Net premiums written could be adversely affected if the Department of Housing and Urban Development reproposes and adopts a regulation under the Real Estate Settlement Procedures Act that is equivalent to a proposed regulation that was withdrawn in 2004.
     HUD regulations under RESPA prohibit paying lenders for the referral of settlement services, including mortgage insurance, and prohibit lenders from receiving such payments. In July 2002, HUD proposed a regulation that would exclude from these anti-referral fee provisions settlement services included in a package of settlement services offered to a borrower at a guaranteed price. HUD withdrew this proposed regulation in March 2004. Under the proposed regulation, if mortgage insurance were required on a loan, the package must include any mortgage insurance premium paid at settlement. Although certain state insurance regulations prohibit an insurer’s payment of referral fees, had this regulation been adopted in this form, the Company’s revenues could have been adversely affected to the extent that lenders offered such packages and received value from the Company in excess of what they could have received were the anti-referral fee provisions of RESPA to apply and if such state regulations were not applied to prohibit such payments.
     The Company’s income from joint ventures could be adversely affected by credit losses, insufficient liquidity or competition affecting those businesses.
     C-BASS: Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) is particularly exposed to credit risk and funding risk. In addition, C-BASS’s results are sensitive to its ability to purchase mortgage loans and securities on terms that it projects will meet its return targets. With respect to credit risk, a higher proportion of non-conforming mortgage originations (the types of mortgages C-BASS principally purchases) in 2005 compared to 2004 were products, such as interest only loans to subprime borrowers, that are viewed by C-BASS as having greater credit risk. In addition, credit losses are a function of housing prices, which in certain regions have experienced rates of increase greater than historical norms and greater than growth in median incomes.
     With respect to liquidity, the substantial majority of C-BASS’s on-balance sheet financing for its mortgage and securities portfolio is short-term and dependent on the value of the collateral that secures this debt. While C-BASS’s policies governing the management of capital at risk are intended to provide sufficient liquidity to cover an instantaneous and substantial decline in value, such policies cannot guaranty that all liquidity required will in fact be available.
     Although there has been growth in the volume of non-conforming mortgage originations in recent years, volume is expected to decline in 2006. There is an increasing amount of competition to purchase non-conforming mortgages, including from real estate investment trusts and from firms that in the past acted as mortgage securities intermediaries but which are now establishing their own captive origination capacity. Decreasing credit spreads also heighten competition in the purchase of non-conforming mortgages and other securities.
     Sherman: The results of Sherman Financial Group LLC (“Sherman”) are sensitive to its ability to purchase receivable portfolios on terms that it projects will meet its return targets. While the volume of charged-off consumer receivables and the portion of these receivables that have been sold to third parties such as Sherman has grown in recent years, there is an increasing amount of competition to purchase such portfolios, including from new entrants to the industry, which has resulted in increases in the prices at which portfolios can be purchased.

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Item 1B. Unresolved Staff Comments.
None.

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Item 2. Properties.
     At December 31, 2005, the Company leased office space in various cities throughout the United States under leases expiring between 2006 and 2010 and which required annual rentals of $2.9 million in 2005.
     The Company owns its headquarters facility and an additional office/warehouse facility, both located in Milwaukee, Wisconsin, which contain an aggregate of approximately 310,000 square feet of space.
Item 3. Legal Proceedings.
     The Company is involved in litigation in the ordinary course of business. In the opinion of management, the ultimate resolution of this pending litigation will not have a material adverse effect on the financial position or results of operations of the Company.
     For information about an administrative summons issued by the Internal Revenue Service, see the last paragraph of “Note 10. Income taxes” to the Company’s consolidated financial statements, which paragraph is incorporated by reference.
     For information about the risk of legal proceedings, see the text under “The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings” under “Risk factors” in Item 1A, which is incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
     None.

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Executive Officers
     Certain information with respect to the Company’s executive officers as of March 1, 2006 is set forth below:
     
Name and Age   Title
Curt S. Culver, 53
  Chairman of the Board and Chief Executive Officer of the Company and MGIC; Director of the Company and MGIC
 
   
Patrick Sinks, 49
  President and Chief Operating Officer of the Company and MGIC
 
   
J. Michael Lauer, 61
  Executive Vice President and Chief Financial Officer of the Company and MGIC
 
   
Lawrence J. Pierzchalski, 53
  Executive Vice President– Risk Management of MGIC
 
   
James A. Karpowicz, 58
  Senior Vice President–Chief Investment Officer and Treasurer of the Company and MGIC
 
   
Jeffrey H. Lane, 56
  Senior Vice President, General Counsel and Secretary of the Company and MGIC
 
   
Michael G. Meade, 56
  Senior Vice President–Information Services and Chief Information Officer of MGIC
     Mr. Culver has served as Chief Executive Officer of the Company since January 2000 and as Chairman of the Board since January 2005. He was President of the Company from January 1999 to January 2006 and was President of MGIC from May 1996 to January 2006. Mr. Culver has been a senior officer of MGIC since 1988 having responsibility at various times during his career with MGIC for field operations, marketing and corporate development. From March 1985 to 1988, he held various management positions with MGIC in the areas of marketing and sales.
     Mr. Sinks became President and Chief Operating Officer of the Company and MGIC in January 2006. He was Executive Vice President-Field Operations of MGIC from January 2004 to January 2006 and was Senior Vice President-Field Operations of MGIC from July 2002 to January 2004. From March 1985 to July 2002, he held various positions within MGIC’s finance and accounting organization, the last of which was Senior Vice President, Controller and Chief Accounting Officer.
     Mr. Lauer has served as Executive Vice President and Chief Financial Officer of the Company and MGIC since March 1989.
     Mr. Pierzchalski has served as Executive Vice President-Risk Management of MGIC since May 1996 and prior thereto as Senior Vice President-Risk Management or Vice President-Risk Management of MGIC from April 1990. From March 1985 to April 1990, he held various management positions with MGIC in the areas of market research, corporate planning and risk management.
     Mr. Karpowicz has served as Senior Vice President–Chief Investment Officer and Treasurer of the Company and MGIC since January, 2005 and has been Treasurer since 1998. From 1986 to January, 2005, he held various positions within MGIC’s investment operations organization, the last of which was Vice President.
     Mr. Lane has served as Senior Vice President, General Counsel and Secretary of the Company and

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MGIC since August 1996. For more than five years prior to his joining the Company, Mr. Lane was a partner of Foley & Lardner, a law firm headquartered in Milwaukee, Wisconsin.
     Mr. Meade has served as Senior Vice President–Information Services and Chief Information Officer since February 1992. From 1985 to 1992 he held various positions within MGIC’s information services organization, the last of which was Vice President–Information Services.

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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
     (a) The Company’s Common Stock is listed on the New York Stock Exchange under the symbol “MTG.” The following table sets forth for 2004 and 2005 by calendar quarter the high and low sales prices of the Common Stock on the New York Stock Exchange.
                                 
    2004   2005
Quarter   High   Low   High   Low
First
  $ 70.80     $ 56.20     $ 70.00     $ 59.98  
Second
    76.99       63.90       66.48       56.93  
Third
    78.95       62.42       70.02       60.56  
Fourth
    69.94       60.00       67.75       56.70  
     In 2004 and 2005 the Company declared and paid the following cash dividends:
                 
Quarter   2004   2005
First
  $ .0375     $ .0750  
Second
    .0375       .1500  
Third
    .0750       .1500  
Fourth
    .0750       .1500  
 
  $ .2250     $ .5250  
     The Company is a holding company and the payment of dividends from its insurance subsidiaries is restricted by insurance regulation. For a discussion of these restrictions, see the sixth paragraph under “Management’s Discussion and Analysis — Liquidity and Capital Resources” in Item 7 on Form 10-K and Note 11 of the Notes to the Consolidated Financial Statements in Item 8, which are incorporated by reference.
     As of February 10, 2006, the number of shareholders of record was 174. In addition, the Company estimates there are more than 200,000 beneficial owners of shares held by brokers and fiduciaries.
     Information regarding equity compensation plans is contained in Item 12.
     (b) Not applicable.
     (c) Information about shares of Common Stock repurchased during the fourth quarter of 2005 appears in the table below.

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                    (c)   (d)
                    Total Number of   Maximum Number of
                    Shares Purchased as   Shares that May Yet
    (a)   (b)   Part of Publicly   Be Purchased Under
    Total Number of   Average Price Paid   Announced Plans or   the Plans or
Period   Shares Purchased   per Share   Programs   Programs (A)
October 1, 2005 through October 31, 2005
    1,934,409     $ 59.14       1,934,409       2,063,934  
 
                               
November 1, 2005 through November 30, 2005
    1,248,693     $ 62.24       1,248,693       815,241  
 
                               
December 1, 2005 through December 31, 2005
        $             815,241  
 
                               
Total
    3,183,102     $ 60.35       3,183,102       815,241  
 
(A)   On May 8, 2003 the Company announced that its Board of Directors authorized the repurchase of up to five million shares of the Company’s Common Stock in the open market or in private transactions. On January 26, 2006, the Company announced that its Board authorized the repurchase of an additional ten million shares in the open market or in private transactions.

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Item 6. Selected Financial Data.
                                         
    Year Ended December 31,  
    2005     2004     2003     2002     2001  
    (In thousands of dollars, except per share data)  
Summary of Operations
                                       
Revenues:
                                       
Net premiums written
  $ 1,252,310     $ 1,305,417     $ 1,364,631     $ 1,177,955     $ 1,036,353  
 
                             
 
                                       
Net premiums earned
  $ 1,238,692     $ 1,329,428     $ 1,366,011     $ 1,182,098     $ 1,042,267  
Investment income, net
    228,854       215,053       202,881       207,516       204,393  
Realized investment gains, net
    14,857       17,242       36,862       29,113       37,352  
Other revenue
    44,127       50,970       79,657       65,836       30,448  
 
                             
 
                                       
Total revenues
    1,526,530       1,612,693       1,685,411       1,484,563       1,314,460  
 
                             
 
                                       
Losses and expenses:
                                       
Losses incurred, net
    553,530       700,999       766,028       365,752       160,814  
Underwriting and other expenses
    275,416       278,786       302,473       265,633       234,494  
Interest expense
    41,091       41,131       41,113       36,776       30,623  
 
                             
 
                                       
Total losses and expenses
    870,037       1,020,916       1,109,614       668,161       425,931  
 
                             
 
                                       
Income before tax and joint ventures
    656,493       591,777       575,797       816,402       888,529  
Provision for income tax
    176,932       159,348       146,027       240,971       277,590  
Income from joint ventures, net of tax
    147,312       120,757       64,109       53,760       28,198  
 
                             
 
                                       
Net income
  $ 626,873     $ 553,186     $ 493,879     $ 629,191     $ 639,137  
 
                             
 
                                       
Weighted average common shares outstanding (in thousands)
    92,443       98,245       99,022       104,214       107,795  
 
                             
 
                                       
Diluted earnings per share
  $ 6.78     $ 5.63     $ 4.99     $ 6.04     $ 5.93  
 
                             
 
                                       
Dividends per share
  $ .525     $ .2250     $ .1125     $ .10     $ .10  
 
                             
 
                                       
Balance sheet data
                                       
Total investments
  $ 5,486,070     $ 5,582,627     $ 5,205,161     $ 4,726,472     $ 4,069,447  
Total assets
    6,357,569       6,380,691       5,917,387       5,300,303       4,567,012  
Loss reserves
    1,124,454       1,185,594       1,061,788       733,181       613,664  
Short- and long-term debt
    685,163       639,303       599,680       677,246       472,102  
Shareholders’ equity
    4,165,055       4,143,639       3,796,902       3,395,192       3,020,187  
Book value per share
    47.31       43.05       38.58       33.87       28.47  

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    Year Ended December 31,  
    2005     2004     2003     2002     2001  
New primary insurance written ($ millions)
  $ 61,503     $ 62,902     $ 96,803     $ 92,532     $ 86,122  
New primary risk written ($ millions)
    16,836       16,792       25,209       23,403       21,038  
New pool risk written ($ millions) (1)
    358       208       862       674       412  
 
                                       
Insurance in force (at year-end) ($ millions)
                                       
Direct primary insurance
    170,029       177,091       189,632       196,988       183,904  
Direct primary risk
    44,860       45,981       48,658       49,231       45,243  
Direct pool risk (1)
    2,909       3,022       2,895       2,568       1,950  
 
                                       
Primary loans in default ratios
                                       
Policies in force
    1,303,084       1,413,678       1,551,331       1,655,887       1,580,283  
Loans in default
    85,788       85,487       86,372       73,648       54,653  
Percentage of loans in default
    6.58 %     6.05 %     5.57 %     4.45 %     3.46 %
Percentage of loans in default — bulk
    14.72 %     14.06 %     11.80 %     10.09 %     8.59 %
 
                                       
Insurance operating ratios (GAAP)
                                       
Loss ratio
    44.7 %     52.7 %     56.1 %     30.9 %     15.4 %
Expense ratio (2)
    15.9 %     14.6 %     14.1 %     14.8 %     16.5 %
 
                             
 
                                       
Combined ratio
    60.6 %     67.3 %     70.2 %     45.7 %     31.9 %
 
                             
 
                                       
Risk-to-capital ratio (statutory)
                                       
MGIC
    6.3:1       6.8:1       8.1:1       8.7:1       9.1:1  
 
(1)   Represents contractual aggregate loss limits and, for the years ended December 31, 2005, 2004, 2003 and 2002, for $5.0 billion, $4.9 billion, $4.9 billion and $3.0 billion, respectively, of risk without such limits, risk is calculated at $51 million, $65 million, $192 million and $147 million, respectively, for new risk written and $469 million, $418 million, $353 million and $161 million, respectively, for risk in force, the estimated amount that would credit enhance these loans to a ‘AA’ level based on a rating agency model.
 
(2)   The loss ratio (expressed as a percentage) is the ratio of the sum of incurred losses and loss adjustment expenses to net premiums earned. The expense ratio (expressed as a percentage) is the ratio of the combined insurance operations underwriting expenses to net premiums written.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Business and General Environment
     The Company, through its subsidiary Mortgage Guaranty Insurance Corporation (“MGIC”), is the leading provider of private mortgage insurance in the United States to the home mortgage lending industry. The Company’s 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.
The Company’s results of operations are affected by:
  Premiums written and earned
     Premiums written and earned in a year are influenced by:
  o   New insurance written, which increases the size of the in force book of insurance. New insurance written is the aggregate principal amount of the mortgages that are insured during a period and is referred to as “NIW”. NIW is affected by many factors, 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, such as piggyback loans.
 
  o   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 home price appreciation.
 
  o   Premium rates, which are affected by the risk characteristics of the loans insured and the percentage of coverage on the loans.
 
  o   Premiums ceded to reinsurance subsidiaries of certain mortgage lenders and risk sharing arrangements with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (government sponsored entities or “GSEs”).
 
      Premiums are generated by the insurance that is in force during all or a portion of the period. Hence, lower average insurance in force in one period compared to another is a factor that will reduce premiums written and earned, although this effect may be mitigated (or enhanced) by differences in the average premium rate between the two periods as well as by premium that is ceded. Also, NIW 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
     The investment portfolio is comprised almost entirely of highly rated, fixed income securities. The

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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, which is principally held by MGIC, is mainly a function of cash generated from operations, including investment earnings, less cash used for non-investment purposes, such as dividends paid to the Company.
  Losses incurred
     Losses incurred are the expense that results from a payment delinquency on an insured loan. As explained under “Critical Accounting Policies” below, this expense is recognized only when a loan is delinquent. Losses incurred are generally affected by:
  o   The state of the economy, 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.
 
  o   The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
 
  o   The average claim payment, which is affected by the size of loans insured (higher average loan amounts tend to increase losses incurred), the percentage coverage on insured loans (deeper average coverage tends to increase incurred losses), and housing values, which affect the Company’s ability to mitigate its losses through sales of properties with delinquent mortgages.
 
  o   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 and the condition of the economy can affect this pattern.
  Underwriting and other expenses
     The operating expenses of the Company generally vary primarily due to contract underwriting volume, which in turn generally varies with the level of mortgage origination activity. Contract underwriting generates fee income included in “Other revenue.”
  Income from joint ventures
     The Company’s results of operations are also affected by income from joint ventures. Joint venture income principally consists of the aggregate results of the Company’s investment in two less than majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and Sherman Financial Group LLC (“Sherman”).
     C-BASS: C-BASS is primarily an investor in the credit risk of credit-sensitive single-family residential mortgages. It finances these activities through borrowings included on its balance sheet and by securitization activities generally conducted through off-balance sheet entities. C-BASS generally retains the first-loss and other subordinate securities created in the securitization. The loans owned by C-BASS and underlying C-BASS’s mortgage securities investments are serviced by Litton Loan Servicing LP, a subsidiary of C-BASS (“Litton”). Litton’s servicing operations primarily support C-BASS’s investment in credit risk, and investments made by funds managed or co-managed by C-BASS, rather than generating

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fees for servicing loans owned by third-parties.
     C-BASS’s consolidated results of operations are affected by:
    Portfolio revenue, which in turn is primarily affected by net interest income, gain on sale and liquidation and hedging gains and losses related to portfolio assets, net of mark-to-market and whole loan reserve changes.
  o   Net interest income
 
      Net interest income is principally a function of the size of C-BASS’s portfolio of whole loans and mortgages and other securities, and the spread between the interest income generated by these assets and the interest expense of funding them. Interest income from a particular security is recognized based on the expected yield for the security.
 
  o   Gain on sale and liquidation
 
      Gain on sale and liquidation results from sales of mortgage and other securities, and liquidation of mortgage loans. Securities may be sold in the normal course of business or because of the exercise of call rights by third parties. Mortgage loan liquidations result from loan payoffs, from foreclosure or from sales of real estate acquired through foreclosure.
    Servicing revenue
 
      Servicing revenue is a function of the unpaid principal balance of mortgage loans serviced and servicing fees and charges. The unpaid principal balance of mortgage loans serviced by Litton is affected by mortgages acquired by C-BASS because servicing on subprime and other mortgages acquired is generally transferred to Litton. Litton also services or provides special servicing on loans in mortgage securities owned by funds managed or co-managed by C-BASS. Litton also may obtain servicing on loans in third party mortgage securities acquired by C-BASS or when the loans become delinquent by a specified number of payments (known as “special servicing”).
 
    Revenues from money management activities
 
      These revenues include management fees from C-BASS issued collateralized bond obligations (“CBOs”), equity in earnings from C-BASS investments in investment funds managed or co-managed by C-BASS and management fees and incentive income from investment funds managed or co-managed by C-BASS.
 
    Transaction revenue, which in turn is affected by gain on securitization and hedging gains and losses related to securitization
  o   Gain on securitization
 
      Gain on securitization is a function of the face amount of the collateral in the securitization and the margin realized in the securitization. This margin depends on the difference between the proceeds realized in the securitization and the purchase price paid by C-BASS for the collateral. The proceeds realized in a securitization include the value of securities created in the securitization that are retained by C-BASS.

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    Hedging gains and losses, net of mark-to-market and whole loan reserve changes
 
      Hedging gains and losses primarily consist of changes in the value of derivative instruments (including interest rate swaps, interest rate caps and futures) and short positions, as well as realized gains and losses from the closing of hedging positions. C-BASS uses derivative instruments and short sales in a strategy to reduce the impact of changes in interest rates on the value of its mortgage loans and securities. Changes in value of derivative instruments are subject to current recognition because C-BASS does not account for the derivatives as “hedges” under SFAS No. 133.
 
      Mortgage and other securities are classified by C-BASS as trading securities and are carried at fair value, as estimated by C-BASS. Changes in fair value between period ends (a “mark-to-market”) are reflected in C-BASS’s statement of operations as unrealized gains or losses. Changes in fair value of mortgage and other securities may relate to changes in credit spreads or to changes in the level of interest rates or the slope of the yield curve. Mortgage loans are not marked-to-market and are carried at the lower of cost or fair value on a portfolio basis, as estimated by C-BASS.
 
      During a period in which short-term interest rates decline, in general, C-BASS’s hedging positions will decline in value and the change in value, to the extent that the hedges related to whole loans, will be reflected in C-BASS’s earnings for the period as an unrealized loss. The related increase, if any, in the value of mortgage loans will not be reflected in earnings but, absent any countervailing factors, when mortgage loans owned during the period are securitized, the proceeds realized in the securitization should increase to reflect the increased value of the collateral.
     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.
     Sherman’s consolidated results of operations are affected by:
    Revenues from delinquent receivable portfolios
 
      These revenues are the cash collections on such 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 (the difference between revenues from a receivable portfolio and that portfolio’s amortization) is recognized.
 
    Costs of collection, which include servicing fees paid to third parties to collect receivables.
2005 Results
     The Company’s results of operations in 2005 were principally affected by:

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  Losses incurred
     Losses incurred decreased in 2005 compared to 2004, primarily due to a decrease in the estimates regarding how many delinquencies will eventually result in a claim, when compared to 2004.
  Premiums written and earned
     The Company’s written and earned premiums in 2005 were lower than in 2004 due to a decline in the average insurance in force.
  Investment income
     Investment income was higher in 2005 than in 2004 due to an increase in the average investment portfolio as measured by amortized cost, as well as a slight increase in the pre-tax yield.
  Underwriting and other expenses
     Underwriting and other expenses decreased in 2005, compared to 2004, primarily as a result of decreases in expenses related to contract underwriting activity.
  Income from joint ventures
     Income from joint ventures increased in 2005, compared to 2004, due to higher income from each of C-BASS and Sherman.

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RESULTS OF CONSOLIDATED OPERATIONS
     As discussed under “Forward Looking Statements and Risk Factors” in Item 1A, actual results may differ materially from the results contemplated by forward looking statements. The Company is not undertaking any obligation to update any forward looking statements it 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 were made.
NIW
     The amount of MGIC’s NIW (this term is defined under “Premiums written and earned” in the “Overview–Business and General Environment” section) during the years ended December 31, 2005, 2004 and 2003 was as follows:
                         
    Year Ended  
    December 31,  
    2005     2004     2003  
            ($ billions)          
NIW-Flow Channel
  $ 40.1     $ 47.1     $ 71.1  
NIW-Bulk Channel
    21.4       15.8       25.7  
 
                 
 
                       
Total NIW
  $ 61.5     $ 62.9     $ 96.8  
 
                 
Refinance volume as a % of primary flow NIW
    28 %     30 %     47 %
     The decrease in NIW on a flow basis in 2005 was primarily the result of continued market growth for piggyback loans that offer alternatives to mortgage insurance. For a discussion of NIW written through the bulk channel, see “Bulk transactions” below. The Company expects NIW in 2006 to be slightly below the level in 2005.
     The decrease in NIW on a flow basis in 2004, compared to 2003, was primarily related to a decrease in the overall mortgage origination market.

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Cancellations and insurance in force
     NIW and cancellations of primary insurance in force during the years ended December 31, 2005, 2004 and 2003 were as follows:
                         
    Year Ended  
    December 31,  
    2005     2004     2003  
            ($ billions)          
NIW
  $ 61.5     $ 62.9     $ 96.8  
Cancellations
    (68.6 )     (75.4 )     (104.2 )
 
                 
 
                       
Change in primary insurance in force
  $ (7.1 )   $ (12.5 )   $ (7.4 )
 
                 
 
                       
As of December 31, Direct primary insurance in force
  $ 170.0     $ 177.1     $ 189.6  
 
                 
     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. MGIC’s persistency rate (percentage of insurance remaining in force from one year prior) was 61.3% at December 31, 2005, 60.2% at December 31, 2004 and 47.1% at December 31, 2003. The Company expects modest improvement in the persistency rate in 2006, although this expectation assumes the absence of significant declines in the level of mortgage interest rates from their level in late February 2006.

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Bulk transactions
     The Company’s writings of bulk insurance are in part sensitive to the volume of securitization transactions involving non-conforming loans. The Company’s writings of bulk insurance are also sensitive to competition from other methods of providing credit enhancement in a securitization, including an execution in which the subordinate tranches in the securitization rather than mortgage insurance bear the first loss from mortgage defaults. Competition from such an execution in turn depends on, among other factors, the yield at which investors are willing to purchase tranches of the securitization that involve a higher degree of credit risk compared to the yield for tranches involving the lowest credit risk (the difference in such yields is referred to as the spread) and the amount of credit for losses that a rating agency will give to mortgage insurance. As the spread narrows, competition from an execution in which the subordinate tranches bear the first loss increases. The competitiveness of the mortgage insurance execution in the bulk channel may also be impacted by changes in the Company’s view of the risk of the business, which is affected by the historical performance of previously insured pools and the Company’s expectations for regional and local real estate values. As a result of the sensitivities discussed above, bulk volume can vary materially from period to period.
     NIW for bulk transactions increased from $15.8 billion in 2004 to $21.4 billion in 2005 due primarily to transactions with customers for which no insurance had been written in 2004, as well as slightly wider spreads in the last few months of 2005. In 2004, NIW for bulk transactions decreased from $25.7 billion in 2003, due primarily to narrower spreads and competition from other mortgage insurers. As it has in past years, the Company priced the bulk business written in 2005 to generate acceptable returns; there can be no assurance, however, that the assumptions underlying the premium rates will achieve this objective.
Pool insurance
     In addition to providing primary insurance coverage, the Company also insures pools of mortgage loans. New pool risk written during the years ended December 31, 2005, 2004 and 2003 was $358 million, $208 million and $862 million, respectively. The Company’s direct pool risk in force was $2.9 billion, $3.0 billion and $2.9 billion at December 31, 2005, 2004 and 2003, respectively. These risk amounts represent pools of loans with contractual aggregate loss limits and those without such limits. For pools of loans without such 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 December 31, 2005, 2004 and 2003, for $5.0 billion, $4.9 billion and $4.9 billion, respectively, of risk without such limits, risk in force is calculated at $469 million, $418 million and $353 million, respectively. New risk written, under this model, for the years ended December 31, 2005 and 2004 was $51 million and $65 million, respectively.
Net premiums written and earned
     Net premiums written and earned during 2005 decreased, compared to 2004, due to a decline in the average insurance in force, which has continued to decline since the beginning of 2003. The Company expects the average insurance in force during 2006 to be lower than in 2005. As a result, the Company anticipates that net premiums written and earned in 2006 will decline compared to 2005.
     Net premium written and earned decreased in 2004, compared to 2003, due to a decline in the average insurance in force, as well as a decrease in new insurance written through the flow and bulk channels.

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Risk sharing arrangements
     For the nine months ended September 30, 2005, approximately 47.8% of the Company’s new insurance written on a flow basis was subject to arrangements with reinsurance subsidiaries of certain mortgage lenders or risk sharing arrangements with the GSEs compared to 50.6% for the year ended December 31, 2004 and 52.3% for the year ended December 31, 2003. The percentage of new insurance written during a period covered by such arrangements normally increases after the end of the period because, among other reasons, the transfer of a loan in the secondary market can result in a mortgage insured during a period becoming part of such an arrangement in a subsequent period. Therefore, the percentage of new insurance written covered by such arrangements is not shown for the current quarter. Premiums ceded in such arrangements are reported in the period in which they are ceded regardless of when the mortgage was insured.
     In 2005, to reduce exposure to certain geographical areas and categories of risk, including Alt A loans (loans with reduced levels of borrower disclosure or verification of borrower disclosure), the Company entered into two separate excess of loss reinsurance agreements under which it ceded approximately $85.5 million of risk in force in the aggregate to two special purpose reinsurance companies (the “SPRs”). The SPRs are not affiliated with the Company and were formed solely to enter into the reinsurance arrangements. The SPRs obtained their capital from institutional investors by issuance of various classes of notes the return on which is linked to the performance of the reinsured portfolio. The SPRs invested the proceeds of the notes in high quality short-term investments. Income earned on those investments and reinsurance premiums paid by the Company are applied to pay interest on the notes as well as expenses of the SPRs. The investments will be liquidated to pay reinsured loss amounts to the Company. Proceeds not required to pay reinsured losses will be applied to pay principal on the notes. Premiums ceded under these agreements have not been material and are included in “ceded premiums.”
Investment income
     Investment income for 2005 increased due to an increase in the amortized cost of average invested assets to $5.4 billion for 2005 from $5.2 billion for 2004, as well as slight increase in the average investment yield. The portfolio’s average pre-tax investment yield was 4.28% at December 31, 2005 and 4.25% at December 31, 2004. The portfolio’s average after-tax investment yield was 3.86% at December 31, 2005 and 3.76% at December 31, 2004. The Company’s net realized gains in 2005 and 2004 resulted primarily from the sale of fixed maturities. Under guidance from the staff of the FASB that was finalized in the fourth quarter of 2005, it could be more likely that a decrease in the market value of certain investments in the Company’s fixed income portfolio will be required to be recognized as a realized loss in the statement of operations than under the existing accounting standard.
     Investment income for 2004 increased compared to 2003 due to an increase in the amortized cost of average invested assets to $5.2 billion for 2004 from $4.7 billion for 2003. The Company’s net realized gains for 2003 resulted primarily from the sale of fixed maturities.
Other revenue
     The decrease in other revenue in 2005, compared to 2004 is primarily the result of decreased revenue from non-insurance operations, other than contract underwriting.

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     The decrease in other revenue in 2004, compared to 2003, is primarily the result of decreased revenue from contract underwriting due to a lower level of mortgage origination activity during 2004 compared to 2003.
Losses
     As discussed in “Critical Accounting Policies,” consistent with industry practices, loss reserves for future claims are established only for loans that are currently delinquent. (The terms “delinquent” and “default” are used interchangeably by the Company and are defined as an insured loan with a mortgage payment that is 45 days or more past due.) Loss reserves are established by management’s estimating the number of loans in the Company’s inventory of delinquent loans that will not cure their delinquency (historically, a substantial majority of delinquent loans have cured), which is referred to as the claim rate, and further estimating the amount that the Company will pay in claims on the loans that do not cure, which is referred to as claim severity. Estimation of losses that the Company 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.
     In 2005, net losses incurred were $554 million, of which $680 million pertained to current year loss development and ($126) million pertained to favorable prior years’ loss development. In 2004, net losses incurred were $701 million, of which $714 million pertained to current year loss development and ($13) million pertained to favorable prior years’ loss development. See “Note 6. Loss reserves” to the Company’s consolidated financial statements.
     The amount of losses incurred pertaining to current year loss development represents the estimated amount to be ultimately paid on default notices received in the current year. Losses incurred pertaining to the current year decreased in 2005, compared to 2004, primarily due to decreases in the estimates regarding how many primary default notices will eventually result in a claim. These decreases in estimates relate to an improvement in claim rates in all regions except for the Midwest which had a modest increase, as well as a number of recent delinquencies included in the year end default inventory that are reserved for at a reduced claim rate and are as a result of Hurricanes Katrina, Rita and Wilma.
     The amount of losses incurred pertaining to prior year loss development represents actual claim payments that were higher or lower than what was estimated by the Company at the end of the prior year as well as a re-estimation of amounts to be ultimately paid on defaults remaining in inventory from the end of the prior year. This re-estimation is the result of management’s review of current trends in default inventory, such as defaults that have resulted in a claim, the amount of the claim, the change in relative level of defaults by geography and the change in average loan exposure. In 2005, the $126 million reduction in losses incurred pertaining to prior years was due primarily to more favorable loss trends experienced during the year. In 2004, the $13 million reduction in losses incurred pertaining to prior years was due primarily to more stable loss trends experienced in that year.
     The Company anticipates that losses incurred in 2006 will exceed their 2005 level.
     In 2004, compared to 2003, losses incurred decreased primarily due to a decrease in the delinquency inventory compared to the prior period increase. This decrease in delinquency inventory was in part offset by increases in the estimates regarding how many delinquencies will eventually result in a claim and how much will be paid on claims.
     Information about the composition of the primary insurance default inventory at December 31, 2005, 2004 and 2003 appears in the table below.

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    2005   2004   2003
Total loans delinquent
    85,788       85,487       86,372  
Percentage of loans delinquent (default rate)
    6.58 %     6.05 %     5.57 %
 
                       
Flow loans delinquent
    47,051       44,925       45,259  
Percentage of flow loans delinquent (default rate)
    4.52 %     3.99 %     3.76 %
 
                       
Bulk loans delinquent
    38,737       40,562       41,113  
Percentage of bulk loans delinquent (default rate)
    14.72 %     14.06 %     11.80 %
 
                       
A-minus and subprime credit loans delinquent*
    36,485       35,824       34,525  
Percentage of A-minus and subprime credit loans delinquent (default rate)
    18.30 %     16.49 %     14.14 %
 
*   A portion of A-minus and subprime credit loans is included in flow loans delinquent and the remainder is included in bulk loans delinquent. Most A-minus and subprime credit loans are written through the bulk channel. A-minus loans have FICO credit scores of 575-619, as reported to MGIC at the time a commitment to insure is issued, and subprime loans have FICO credit scores of less than 575.
     The average primary claim paid for 2005 was $26,361 compared to $24,438 in 2004 and $22,925 in 2003.
     The pool notice inventory decreased from 25,500 at December 31, 2004 to 23,772 at December 31, 2005; the pool notice inventory was 28,135 at December 31, 2003.
     The Company estimates that the default inventory at December 31, 2005 includes 5,300 defaults related to Hurricanes Katrina, Rita and Wilma. For additional information on the potential effect of these hurricanes, see “Deterioration in the domestic economy or changes in the mix of business may result in more homeowners defaulting and the Company’s losses increasing” under “Risk Factors” in Item 1A.

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     Information about net losses paid in 2005, 2004 and 2003 appears in the table below.
                         
    Year Ended  
    December 31,  
Net paid claims ($ millions)   2005     2004     2003  
Flow
  $ 281     $ 273     $ 194  
Bulk
    249       227       160  
Other
    82       77       80  
 
                 
 
  $ 612     $ 577     $ 434  
 
                 
     As of December 31, 2005, 77% of the Company’s primary insurance in force was written subsequent to December 31, 2002. On the Company’s 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 (which can have the effect of accelerating the period in the life of a book during which the highest claim frequency occurs) and deteriorating economic conditions (which can result in increasing claims following a period of declining claims). On the Company’s bulk business, the period of highest claims frequency has generally occurred earlier than in the historical pattern on the Company’s flow business.
Underwriting and other expenses
     The decrease in underwriting and other expenses in 2005, compared to 2004, as well as the decrease in 2004, compared to 2003, is primarily attributable to decreases in expenses related to contract underwriting activity. The Company anticipates that expenses in 2006 will increase compared to 2005, due to an increase in expenses related to Myers Internet, Inc. acquired in January 2006 (see “Note 16. Subsequent Events” to the Company’s consolidated financial statements), international operations, and expensing of unvested stock options granted in 2002. (Beginning in 2003, the Company has expensed the fair value of stock options granted on or after January 1, 2003.)
Consolidated ratios
     The table below presents the Company’s consolidated loss, expense and combined ratios for the periods indicated.
                         
    Year Ended
    December 31,
Consolidated Insurance Operations:   2005   2004   2003
Loss ratio
    44.7 %     52.7 %     56.1 %
Expense ratio
    15.9 %     14.6 %     14.1 %
 
                       
Combined ratio
    60.6 %     67.3 %     70.2 %
 
                       

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     The loss ratio (expressed as a percentage) is the ratio of the sum of incurred losses and loss adjustment expenses to net premiums earned. The expense ratio (expressed as a percentage) is the ratio of underwriting expenses to net premiums written. The combined ratio is the sum of the loss ratio and the expense ratio.
Income taxes
     The effective tax rate was 27.0% in 2005, compared to 26.9% in 2004 and 25.4% in 2003. During those periods, the effective tax rate was below the statutory rate of 35%, reflecting the benefits recognized from tax-preferenced investments. Tax-preferenced investments of the Company include tax-exempt municipal bonds, interests in mortgage related securities with flow through characteristics and investments in real estate ventures which generate low income housing credits. Changes in the effective tax rate principally result from a higher or lower percentage of total income before tax being generated from tax-preferenced investments.
     The higher effective tax rate in 2004, compared to 2003, was principally due to less benefits being recognized from these investments.
Joint ventures
     The Company’s equity in the earnings from the C-BASS and Sherman joint ventures with Radian Group Inc. (“Radian”) and certain other joint ventures and investments, accounted for in accordance with the equity method of accounting, is shown separately, net of tax, on the Company’s consolidated statement of operations. The increase in income from joint ventures in 2005, compared to 2004, as well as the increase in 2004, compared to 2003, is primarily the result of increased equity earnings from each of Sherman and C-BASS.

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C-BASS
     Summary C-BASS balance sheets and income statements at the dates and for the periods indicated appear below.
C-BASS Summary Balance Sheet:
                 
    December 31,  
    2005     2004  
    ($ millions)  
Assets:
               
Whole loans
  $ 4,638     $ 1,753  
Securities
    2,054       1,450  
Servicing
    468       444  
Other
    534       362  
 
           
Total Assets
  $ 7,694     $ 4,009  
 
           
 
               
Total Liabilities
    6,931       3,409  
 
               
Debt*
    6,434       2,648  
 
               
Owners’ Equity
    763       600  
 
*   Most of which is scheduled to mature within one year or less.
     Included in total assets and total liabilities at December 31, 2004 were approximately $457 million of assets and the same amount of liabilities from securitizations that did not qualify for off-balance sheet treatment. The liabilities from these securitizations are not included in Debt in the table above. There were no such assets and liabilities at December 31, 2005.
     The increase in whole loans and securities from 2004 to 2005 and related debt used to finance these assets principally resulted from acquisitions in the fourth quarter of 2005 and reflected more favorable market pricing for the acquisition of these assets. Principally as a result of securitizations during the first two months of 2006, C-BASS’s whole loan inventory at February 28, 2006 was approximately $2.6 billion lower than at year-end 2005 and its securities inventory was approximately $500 million lower. Debt used to finance these assets was also reduced.

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C-BASS Summary Income Statement:
                         
    Year Ended December 31,  
    2005     2004     2003  
    ($ millions)  
Portfolio
  $ 292.2     $ 230.5     $ 154.6  
Servicing
    257.5       164.7       128.4  
Money management
    35.8       19.9       24.5  
Transaction
    39.4       64.0       49.3  
 
                 
Total revenue
    624.9       479.1       356.8  
 
                       
Total expense
    384.3       271.0       212.9  
 
                 
 
                       
Income before tax
  $ 240.6     $ 208.1     $ 143.9  
 
                 
 
                       
Company’s share of pretax income
  $ 110.9     $ 97.9     $ 66.1  
 
                 
     See “Overview—Business and General Environment—Income from Joint Ventures—C-BASS” for a description of the components of the revenue lines.
     The increased contribution from C-BASS for 2005, compared to 2004, was primarily due to increased servicing revenue, net interest income and portfolio mark-to-market and hedging gains. The increased servicing revenue was due primarily to Litton’s higher average servicing portfolio. Higher net interest income was the result of a higher average investment portfolio and higher earnings on trust deposits for securities serviced by Litton. The portfolio mark-to-market resulted from securities called by C-BASS and securities obtained by C-BASS through risk sharing arrangements where C-BASS owned the securities at a discount. The realized gains from hedging reflected hedging on whole loans securitized.
     The increased contribution from C-BASS in 2004 compared to 2003 was primarily due to an increase in gains on sales and liquidation to third parties of securities and mortgage loans, higher net interest income, higher mark-to-market from calls by C-BASS of CBO securitizations and lower hedging losses. Gains on sale and liquidation to third parties increased principally due to calls of securities at par which had a book value below par. Higher net interest income was principally the result of a higher average portfolio of mortgage loans. Higher mark-to-market and lower hedging losses were reflective of changes in interest rates.
     The Company’s investment in C-BASS on an equity basis at December 31, 2005 was $362.6 million. The Company received $33.5 million in distributions from C-BASS during 2005.

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Sherman
     Summary Sherman balance sheets and income statements at the dates and for the periods indicated appear below.
Sherman Summary Balance Sheet:
                 
    December 31,  
    2005     2004  
    ($ millions)  
Total Assets
  $ 979     $ 484  
 
               
Total Liabilities
    743       245  
 
               
Debt
    597       143  
 
               
Members’ Equity
    236       239  
     In March 2005, Sherman acquired the holding company for Credit One Bank (“Credit One”), formerly known as First National Bank of Marin, for a payment of cash and subordinated notes. Credit One originates and services subprime credit cards. During 2005, the increases in total assets, total liabilities and debt were primarily related to the acquisition of Credit One.
     Sherman Summary Income Statement:
                         
    Year Ended December 31,  
    2005     2004     2003  
    ($ millions)  
Revenues from receivable portfolios
  $ 855.5     $ 801.8     $ 603.3  
Portfolio amortization
    292.8       343.4       343.9  
 
                 
Revenues, net of amortization
    562.7       458.4       259.4  
 
                       
Credit card interest income and fees
    196.7              
Other revenue
    71.1       59.5       34.2  
 
                 
Total revenues
    830.5       517.9       293.6  
 
                       
Total expenses
    542.9       317.3       222.7  
 
                 
 
Income before tax
  $ 287.6     $ 200.6     $ 70.9  
 
                 
 
                       
Company’s share of pre-tax income
  $ 110.3     $ 83.3     $ 29.4  
 
                 
     The increased contribution from Sherman in 2005, compared to 2004, and in 2004 compared to 2003, was primarily due to increased revenue, net of amortization, from delinquent receivable portfolios owned

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during the comparison periods attributable to continuing collections and lower amortization and from higher collections due to growth in the amount of delinquent receivable portfolios owned by Sherman in sequential periods. The increase in revenue for 2005 was also due to credit card income and fees generated by Credit One; the increase in expenses in 2005 was also related to Credit One.
     The Company anticipates that Sherman’s income before tax in 2006 will be less than its income before tax in 2005.
     The Company’s investment in Sherman on an equity basis at December 31, 2005 was $79.3 million. The Company received $110.7 million of distributions from Sherman in 2005.
     In June 2005, MGIC, Radian (MGIC and Radian are collectively referred to as the “Corporate Partners”) and entities (the “Management Entities”) owned by the senior management (“Senior Management”) of Sherman entered into a Securities Purchase Agreement and a Call Option Agreement. Under the Securities Purchase Agreement, each of MGIC and Radian agreed to sell to one of the Management Entities 6.92% of the 41.5% interest in Sherman owned by each (a total of 13.84% for both MGIC and Radian) for approximately $15.7 million, which is $1.0 million in excess of the approximate book value of the interest at April 30, 2005. Upon completion of the sale in August 2005, Senior Management of Sherman owned an interest in Sherman of 30.84% and each of MGIC and Radian owned interests of 34.58%.
     Under the Call Option Agreement, one of the Management Entities granted separate options (each an “Option”) to each Corporate Partner to purchase a 6.92% interest in Sherman (a total of 13.84% under both Options). Each Option is exercisable beginning in July 2006 at the option price provided in the Call Option Agreement. If one Corporate Partner does not exercise its Option, the other Corporate Partner may exercise that Option.
     In connection with these transactions, the payout under Sherman’s annual incentive plan (which is based on a percentage of Sherman’s pre-bonus results) was reduced effective May 1, 2005.
Other Matters
     Under the Office of Federal Housing Enterprise Oversight’s (“OFHEO”) risk-based capital stress test for the GSEs, claim payments made by a private mortgage insurer on GSE loans are reduced below the amount provided by the mortgage insurance policy to reflect the risk that the insurer will fail to pay. Claim payments from an insurer whose claims-paying ability rating is ‘AAA’ are subject to a 3.5% reduction over the 10-year period of the stress test, while claim payments from a ‘AA’ rated insurer, such as MGIC, are subject to an 8.75% reduction. The effect of the differentiation among insurers is to require the GSEs to have additional capital for coverage on loans provided by a private mortgage insurer whose claims-paying rating is less than ‘AAA.’ As a result, there is an incentive for the GSEs to use private mortgage insurance provided by a ‘AAA’ rated insurer.

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Financial Condition
     The Company had $300 million, 5.375% Senior Notes due in November 2015 and $200 million, 6% Senior Notes due in March 2007 outstanding at December 31, 2005. At December 31, 2004 the Company had $300 million, 7.5% Senior Notes due in October 2005 and $200 Million, 6% Senior Notes due in March 2007. In October 2005 the Company issued, in a public offering, $300 million, 5.375% Senior Notes due in 2015. Interest on the Notes is payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2006. The Senior Notes were rated “A-1” by Moody’s, “A” by S&P and “A+” by Fitch. The Company utilized the proceeds from the sale of these Senior Notes, together with available cash, to repay the $300 million, 7.5% Senior Notes that matured October 17, 2005. At December 31, 2005 and 2004, the market value of the outstanding debt was $687.9 million and $661.3 million, respectively.
     See “Results of Operations–Joint ventures” above for information about the financial condition of C-BASS and Sherman.
     As of December 31, 2005, 80% of the investment portfolio was invested in tax-preferenced securities. In addition, at December 31, 2005, based on book value, more than 99% of the Company’s fixed income securities were invested in ‘A’ rated and above, readily marketable securities, concentrated in maturities of less than 15 years.
     At December 31, 2005, the Company’s derivative financial instruments in its investment portfolio were immaterial. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. At December 31, 2005, the effective duration of the Company’s fixed income investment portfolio was 4.9 years. This means that for an instantaneous parallel shift in the yield curve of 100 basis points there would be an approximate 4.9% change in the market value of the Company’s fixed income portfolio.
Liquidity and Capital Resources
     The Company’s consolidated sources of funds consist primarily of premiums written and investment income. Positive cash flows are invested pending future payments of claims and other expenses. Management believes that future cash inflows from premiums will be sufficient to meet future claim payments. Cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities subject to insurance regulatory requirements regarding the payment of dividends to the extent funds were required by other than the seller. Substantially all of the investment portfolio securities are held by the Company’s insurance subsidiaries.
     The Company has a $300 million commercial paper program, which is rated “A-1” by S&P and “P-1” by Moody’s. At December 31, 2005 and 2004, the Company had $187.8 and $139.5 million in commercial paper outstanding with a weighted average interest rate of 4.39% and 2.36%, respectively.
     In March of 2005, the Company obtained a $300 million, five year revolving credit facility, expiring in 2010. The facility replaced the previous $285 million facility that was set to expire in 2006. Under the terms of the credit facility, the Company must maintain shareholders’ equity of at least $2.25 billion and MGIC must maintain a 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 regulation. At December 31, 2005, these requirements were met. The facility will

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continue to be used as a liquidity back up facility for the outstanding commercial paper. The remaining credit available under the facility after reduction for the amount necessary to support the commercial paper was $112.2 million and $145.5 million at December 31, 2005 and 2004, respectively.
     In March 2005, an outstanding swap was amended to coincide with the new credit facility. Under the terms of the swap contract, the Company pays a fixed rate of 5.07% and receives a variable interest rate based on LIBOR. The swap has an expiration date coinciding with the maturity of the credit facility and is designated as a cash flow hedge. The cash flow swap outstanding at December 31, 2005 and 2004 are evaluated quarterly with any ineffectiveness being recorded as an expense. To date this evaluation has not resulted in any hedge ineffectiveness. Swaps are subject to credit risk to the extent the counterparty would be unable to discharge its obligations under the swap agreements.
     Expense on the interest rate swaps in 2005, 2004 and 2003 of approximately $0.8 million, $3.3 million and $3.4 million, respectively, was included in interest expense. Gains or losses arising from the amendment or termination of interest rate swaps are deferred and amortized to interest expense over the life of the hedged items.
     The commercial paper, back-up credit facility and the Senior Notes are obligations of the Company and not of its subsidiaries. The Company is a holding company and the payment of dividends from its insurance subsidiaries is restricted by insurance regulation. MGIC is the principal source of dividend-paying capacity. At the end of February 2006, MGIC paid a quarterly dividend of $55 million, as well asan extraordinary dividend of $150 million. As a result of this extraordinary dividend, MGIC cannot currently pay any dividends without regulatory approval until the end of February 2007. For additional information about the financial condition, results of operations and cash flows of the Company, on a parent company basis, and MGIC, on a consolidated basis, see “Note 15. Condensed consolidating financial statements” to the Company’s consolidated financial statements.
     During 2005, the Company repurchased 8.7 million shares of Common Stock under publicly announced programs at a cost of $533.8 million, a portion of which is subject to adjustment based on the price of the Company’s stock in the first part of 2006. At December 31, 2005, the Company had authority covering the purchase of an additional 0.8 million shares under these programs. In January 2006, the Company’s Board of Directors authorized the repurchase of an additional 10 million shares. From mid-1997 through December 31, 2005, the Company has repurchased 35.5 million shares under publicly announced programs at a cost of $2.0 billion. Funds for the shares repurchased by the Company since mid-1997 have been provided through a combination of debt, including the Senior Notes and the commercial paper, and internally generated funds.
     The Company’s principal exposure to loss is its obligation to pay claims under MGIC’s mortgage guaranty insurance policies. At December 31, 2005, MGIC’s direct (before any reinsurance) primary and pool risk in force (which is the unpaid principal balance of insured loans as reflected in the Company’s records multiplied by the coverage percentage, and taking account of any loss limit) was approximately $52.3 billion. In addition, as part of its contract underwriting activities, the Company is responsible for the quality of its underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. Through December 31, 2005, the cost of remedies provided by the Company to customers for failing to meet the standards of the contracts has not been material. However, the decreasing trend of home mortgage interest rates over the last several years may have mitigated the effect of some of these costs since the general effect of lower interest rates can be to increase the value of certain loans on which remedies are provided. There can be no assurance that contract underwriting remedies will not be material in the future.

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     The Company’s consolidated risk-to-capital ratio was 7.4:1 at December 31, 2005 compared to 7.9:1 at December 31, 2004. The decrease was due to an increase in capital and a decrease in risk in force during 2005.
     The risk-to-capital ratios set forth above have been computed on a statutory basis. However, the methodology used by the rating agencies to assign claims-paying ability ratings permits less leverage than under statutory requirements. As a result, the amount of capital required under statutory regulations may be lower than the capital required for rating agency purposes. In addition to capital adequacy, the rating agencies consider other factors in determining a mortgage insurer’s claims-paying rating, including its historical and projected operating performance, business outlook, competitive position, management and corporate strategy.
     For certain material risks of the Company’s business, see Item 1A. The discussion in Item 1A is an integral part of Management’s Discussion and Analysis.
Contractual Obligations
     At December 31, 2005, the approximate future payments under the contractual obligations of the Company of the type described in the table below are as follows:
                                         
    Payments due by period  
            Less than                     More than  
Contractual Obligations ($ millions):   Total     1 year     1-3 years     3-5 years     5 years  
Long-term debt obligations
  $ 680     $ 29     $ 238     $ 32     $ 381  
Operating lease obligations
    13       5       7       1        
Purchase obligations
    17       16       1              
Other long-term liabilities
    1,124       597       460       67        
 
                             
 
                                       
Total
  $ 1,834     $ 647     $ 706     $ 100     $ 381  
 
                             
     The Company’s long-term debt obligations consist of $300 million, 5.375% Senior Notes due in 2015 and $200 million, 6% Senior Notes due in 2007, as discussed in “Note 5. Short and long-term debt” to the Company’s consolidated financial statements and under “Liquidity and Capital Resources” above. The Company’s operating lease obligations include operating leases on certain office space, data processing equipment and autos, as discussed in “Note 12. Leases” to the Company’s consolidated financial statements. The Company’s purchase obligations included obligations to purchase computer software, home office furniture and equipment, and Myers Internet, Inc., as discussed in “Note 16. Subsequent Events” to the Company’s consolidated financial statements.
     The Company’s Other long-term liabilities represent the loss reserves established to recognize the liability for losses and loss adjustment expenses related to defaults on insured mortgage loans. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. The future loss payment periods are estimated based on historical experience.

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Critical Accounting Policies
     The Company believes that the accounting policies described below involved significant judgments and estimates used in the preparation of its consolidated financial statements.
Loss reserves
     Reserves are established for reported insurance losses and loss adjustment expenses based on when notices of default on insured mortgage loans are received. A default is defined as an insured loan with a mortgage payment that is 45 days or more past due. Reserves are also established for estimated losses incurred on notices of default not yet reported. Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default.
     Reserves are established by management using estimated claims rates and claims amounts in estimating the ultimate loss. The estimated claims rates and claims amounts represent what management believes best reflect the estimate of what will actually be paid on the loans in default. These estimates are based on management’s review of trends in the default inventory, such as defaults that have resulted in a claim, the amount of the claim, the change in the level of defaults by geography and the change in average loan exposure. Amounts for salvage recoverable are considered in the determination of the reserve estimates. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. Adjustments to reserve estimates are reflected in the financial statements in the years in which the adjustments are made. The liability for reinsurance assumed is based on information provided by the ceding companies.
     The incurred but not reported (“IBNR”) reserves referred to above result from defaults occurring prior to the close of an accounting period, but which have not been reported to the Company. Consistent with reserves for reported defaults, IBNR reserves are established using estimated claims rates and claims amounts for the estimated number of defaults not reported. As of December 31, 2005 and 2004, the Company has established IBNR reserves in the amount of $112 million and $113 million, respectively.
     Reserves also provide for the estimated costs of settling claims, including legal and other expenses and general expenses of administering the claims settlement process.

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Revenue recognition
     When the policy term ends, the primary mortgage insurance written by the Company is renewable at the insured’s option through continued payment of the premium in accordance with the schedule established at the inception of the policy term. The Company has no ability to reunderwrite or reprice these policies after issuance. Premiums written under policies having single and annual premium payments are initially deferred as unearned premium reserve and earned over the policy term. Premiums written on policies covering more than one year are amortized over the policy life in accordance with the expiration of risk which is the anticipated claim payment pattern based on historical experience. Premiums written on annual policies are earned on a monthly pro rata basis. Premiums written on monthly policies are earned as the monthly coverage is provided. When a policy is cancelled, all premium that is non-refundable is immediately earned. Any refundable premium is returned to the lender and will have no effect on earned premium. Policy cancellations also lower the persistency rate which is a variable used in calculating the rate of amortization of deferred policy acquisition costs discussed below.
     Fee income of the non-insurance subsidiaries is earned and recognized as the services are provided and the customer is obligated to pay.
Deferred insurance policy acquisition costs
     Costs associated with the acquisition of mortgage insurance policies, consisting of employee compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred insurance policy acquisition costs (“DAC”). DAC arising from each book of business is charged against revenue in the same proportion that the underwriting profit for the period of the charge bears to the total underwriting profit over the life of the policies. The underwriting profit and the life of the policies are estimated and are reviewed quarterly and updated when necessary to reflect actual experience and any changes to key variables such as persistency or loss development. Interest is accrued on the unamortized balance of DAC.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
     At December 31, 2005, the Company’s derivative financial instruments in its investment portfolio were immaterial. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. At December 31, 2005, the effective duration of the Company’s fixed income investment portfolio was 4.9 years. This means that for an instantaneous parallel shift in the yield curve of 100 basis points there would be an approximate 4.9% change in the market value of the Company’s fixed income portfolio.
     The Company’s borrowings under its commercial paper program are subject to interest rates that are variable. A discussion of the Company’s interest rate swaps appears in the fourth and fifth paragraphs of Item 7 of this Annual Report on Form 10-K under “Liquidity and Capital Resources” and such discussion is incorporated by reference.
Item 8. Financial Statements and Supplementary Data.
     The following consolidated financial statements of the Company are filed pursuant to this Item 8:
         
    Page No.  
Consolidated statements of operations for each of the three years in the period ended December 31, 2005
    59  
Consolidated balance sheets at December 31, 2005 and 2004
    60  
Consolidated statements of shareholders’ equity for each of the three years in the period ended December 31, 2005
    61  
Consolidated statements of cash flows for each of the three years in the period ended December 31, 2005
    62  
Notes to consolidated financial statements
    63-102  
Report of independent registered public accounting firm
    103-104  

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
                         
    2005     2004     2003  
    (In thousands of dollars, except per share data)  
Revenues:
                       
Premiums written:
                       
Direct
  $ 1,380,998     $ 1,420,643     $ 1,482,349  
Assumed
    1,075       307       97  
Ceded (note 7)
    (129,763 )     (115,533 )     (117,815 )
 
                 
 
                       
Net premiums written
    1,252,310       1,305,417       1,364,631  
(Increase) decrease in unearned premiums
    (13,618 )     24,011       1,380  
 
                 
 
                       
Net premiums earned (note 7)
    1,238,692       1,329,428       1,366,011  
 
                       
Investment income, net of expenses (note 4)
    228,854       215,053       202,881  
Realized investment gains, net (note 4)
    14,857       17,242       36,862  
Other revenue
    44,127       50,970       79,657  
 
                 
 
                       
Total revenues
    1,526,530       1,612,693       1,685,411  
 
                 
 
                       
Losses and expenses:
                       
Losses incurred, net (notes 6 and 7)
    553,530       700,999       766,028  
Underwriting and other expenses
    275,416       278,786       302,473  
Interest expense
    41,091       41,131       41,113  
 
                 
 
                       
Total losses and expenses
    870,037       1,020,916       1,109,614  
 
                 
 
                       
Income before tax and joint ventures
    656,493       591,777       575,797  
Provision for income tax (note 10)
    176,932       159,348       146,027  
Income from joint ventures, net of tax
    147,312       120,757       64,109  
 
                 
 
                       
Net income
  $ 626,873     $ 553,186     $ 493,879  
 
                 
 
                       
Earnings per share (note 11):
                       
 
                       
Basic
  $ 6.83     $ 5.67     $ 5.00  
 
                 
Diluted
  $ 6.78     $ 5.63     $ 4.99  
 
                 
See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
                 
    2005     2004  
    (In thousands of dollars)  
ASSETS
               
Investment portfolio (note 4):
               
Securities, available-for-sale, at fair value:
               
Fixed maturities
  $ 5,292,942     $ 5,413,662  
Equity securities
    2,488       5,326  
Short-term investments
    190,640       163,639  
 
           
 
Total investment portfolio (amortized cost, 2005-$5,366,235; 2004-$5,388,763)
    5,486,070       5,582,627  
 
               
Cash
    4,616       2,829  
Accrued investment income
    66,369       67,255  
Reinsurance recoverable on loss reserves (note 7)
    14,787       17,302  
Prepaid reinsurance premiums (note 7)
    9,608       6,836  
Premiums receivable
    91,547       95,396  
Home office and equipment, net
    32,666       36,382  
Deferred insurance policy acquisition costs
    18,416       27,714  
Investments in joint ventures (note 8)
    481,778       414,309  
Other assets
    151,712       130,041  
 
           
 
Total assets
  $ 6,357,569     $ 6,380,691  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities:
               
Loss reserves (notes 6 and 7)
  $ 1,124,454     $ 1,185,594  
Unearned premiums (note 7)
    159,823       143,433  
Short- and long-term debt (note 5)
    685,163       639,303  
Income taxes payable
    62,006       109,741  
Other liabilities
    161,068       158,981  
 
           
 
Total liabilities
    2,192,514       2,237,052  
 
           
 
               
Contingencies (note 13)
               
 
               
Shareholders’ equity (note 11):
               
Common stock, $1 par value, shares authorized 300,000,000; shares issued 2005 - 122,549,285; 2004 - 122,324,295 outstanding 2005 - 88,046,430; 2004 - 96,260,864
    122,549       122,324  
Paid-in capital
    280,052       270,450  
Treasury stock (shares at cost 2005 - 34,502,855 2004 - 26,063,431)
    (1,834,434 )     (1,313,473 )
Accumulated other comprehensive income, net of tax (note 2)
    77,499       123,383  
Retained earnings (note 11)
    5,519,389       4,940,955  
 
           
 
Total shareholders’ equity
    4,165,055       4,143,639  
 
           
 
Total liabilities and shareholders’ equity
  $ 6,357,569     $ 6,380,691  
 
           
See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2005, 2004 and 2003
                                                 
                            Accumulated              
                            other              
    Common     Paid-in     Treasury     comprehensive     Retained     Comprehensive  
    stock     capital     stock     income (note 2)     earnings     income  
    (In thousands of dollars)  
Balance, December 31, 2002
  $ 121,419     $ 233,330     $ (1,035,858 )   $ 147,908     $ 3,928,393          
 
Net income
                            493,879     $ 493,879  
 
Change in unrealized investment gains and losses, net
                      (20,948 )           (20,948 )
Unrealized gain (loss) on derivatives, net
                      2,494             2,494  
Minimum pension liability adjustment, net
                      13,018             13,018  
Change in members’ equity
          609                            
Dividends declared
                            (11,124 )        
Common stock shares issued
    168       7,479                            
Repurchase of outstanding common shares
                (94,133 )                    
Reissuance of treasury stock
          (1,933 )     14,022                      
Other
                      (1,821 )           (1,821 )
 
                                             
Comprehensive income
                                $ 486,622  
 
                                   
 
Balance, December 31, 2003
  $ 121,587     $ 239,485     $ (1,115,969 )   $ 140,651     $ 4,411,148          
 
Net income
                            553,186     $ 553,186  
Change in unrealized investment gains and losses, net
                      (22,228 )           (22,228 )
Unrealized gain (loss) on derivatives, net
                      3,849             3,849  
Dividends declared
                            (22,032 )        
Common stock shares issued
    737       35,618                            
Repurchase of outstanding common shares
                (205,014 )                    
Reissuance of treasury stock
          9,483       7,510                      
Equity compensation
          (14,136 )                          
Other
                      1,111       (1,347 )     1,111  
 
                                             
Comprehensive income
                                $ 535,918  
 
                                   
 
Balance, December 31, 2004
  $ 122,324     $ 270,450     $ (1,313,473 )   $ 123,383     $ 4,940,955          
 
Net income
                            626,873     $ 626,873  
Change in unrealized investment gains and losses, net (note 4)
                      (48,119 )           (48,119 )
Unrealized gain (loss) on derivatives, net (note 5)
                      1,140             1,140  
Dividends declared
                            (48,439 )        
Common stock shares issued
    225       11,288                            
Repurchase of outstanding common shares
                (533,844 )                    
Reissuance of treasury stock
          (19,038 )     12,883                      
Equity compensation (note 11)
          17,352                            
Other
                      1,095             1,095  
 
                                             
Comprehensive income
                                $ 580,989  
 
                                   
 
Balance, December 31, 2005
  $ 122,549     $ 280,052     $ (1,834,434 )   $ 77,499     $ 5,519,389          
 
                                     
See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
                         
    2005     2004     2003  
    (In thousands of dollars)  
Cash flows from operating activities:
                       
Net income
  $ 626,873     $ 553,186     $ 493,879  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Amortization of deferred insurance policy acquisition costs
    20,344       26,020       29,455  
Captialized deferred insurance policy acquisition costs
    (11,046 )     (21,121 )     (30,197 )
Depreciation and other amortization
    18,977       21,631       21,224  
Decrease (increase) in accrued investment income
    886       (7,667 )     (1,156 )
Decrease in reinsurance recoverable on loss reserves
    2,515       772       2,971  
(Increase) decrease in prepaid reinsurance premiums
    (2,772 )     692       652  
Decrease (increase) in premium receivable
    3,849       26,894       (24,539 )
(Decrease) increase in loss reserves
    (61,140 )     123,806       328,607  
Increase (decrease) in unearned premiums
    16,390       (24,704 )     (2,030 )
Equity earnings in joint ventures
    (215,965 )     (176,499 )     (91,997 )
Distributions from joint ventures
    144,161       82,300       27,450  
Other
    (34,718 )     (46,150 )     (67,683 )
 
                 
 
Net cash provided by operating activities
    508,354       559,160       686,636  
 
                 
 
                       
Cash flows from investing activities:
                       
Purchase of fixed maturities
    (1,592,615 )     (1,782,395 )     (3,822,762 )
Purchase of equity securities
    (2,802 )            
Investments in joint ventures
    (12,928 )     (12,137 )     (7,769 )
Sale of investment in joint ventures
    15,652              
Proceeds from sale of equity securities
    10,167       8,244       1,798  
Proceeds from sale of fixed maturities
    1,355,912       1,102,533       3,017,411  
Proceeds from maturity of fixed maturities
    283,256       286,946       351,731  
 
                 
 
Net cash provided by (used in) investing activities
    56,642       (396,809 )     (459,591 )
 
                 
 
                       
Cash flows from financing activities:
                       
Dividends paid to shareholders
    (48,439 )     (22,032 )     (11,124 )
Proceeds from issuance of long-term debt
    297,732              
Repayment of long-term debt
    (300,000 )            
Net proceeds from (repayment of) short-term debt
    42,833       37,804       (78,873 )
Proceeds from reissuance of treasury stock
    1,234       2,633       305  
Payments for repurchase of common stock
    (533,844 )     (205,014 )     (94,134 )
Common stock shares issued
    4,276       29,380       4,856  
 
                 
 
Net cash used in financing activities
    (536,208 )     (157,229 )     (178,970 )
 
                 
 
Net increase in cash and cash equivalents
    28,788       5,122       48,075  
Cash and cash equivalents at beginning of year
    166,468       161,346       113,271  
 
                 
 
Cash and cash equivalents at end of year
  $ 195,256     $ 166,468     $ 161,346  
 
                 
See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
1.   Nature of business
 
    MGIC Investment Corporation (“Company”) is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”) and several other subsidiaries, is principally engaged in the mortgage insurance business. The Company provides mortgage insurance to lenders throughout the United States and to government sponsored entities (“GSEs”) to protect against loss from defaults on low down payment residential mortgage loans. Through certain other non-insurance subsidiaries, the Company also provides various services for the mortgage finance industry, such as contract underwriting and portfolio analysis and retention.
 
    At December 31, 2005, the Company’s direct primary insurance in force (representing the principal balance in the Company’s records of all mortgage loans that it insures) and direct primary risk in force (representing the insurance in force multiplied by the insurance coverage percentage) was approximately $170.0 billion and $44.9 billion, respectively. In addition to providing direct primary insurance coverage, the Company also insures pools of mortgage loans. The Company’s direct pool risk in force at December 31, 2005 was approximately $2.9 billion.
 
2.   Basis of presentation and summary of significant accounting policies
 
    The accompanying financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). In accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
 
    Principles of consolidation
 
    The consolidated financial statements include the accounts of MGIC Investment Corporation and its majority-owned subsidiaries. All intercompany transactions have been eliminated. The Company’s 46.1% investment in Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and 34.6% investment in Sherman Financial Group LLC (“Sherman”), which are joint ventures with Radian Group Inc., are accounted for using the equity method of accounting and recorded on the balance sheet as investments in joint ventures. The Company reviews its investments in joint ventures for evidence of “other than temporary” impairments, such as an inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. There were no “other than temporary” impairment charges for the years ending December 31, 2005, 2004 and 2003. The Company has certain other joint ventures and investments, accounted for in accordance with the equity method of accounting, of an immaterial amount. The Company’s equity in the earnings of these joint ventures is shown separately, net of tax, on the statement of operations. (See note 8.)

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Investments
The Company categorizes its investment portfolio according to its ability and intent to hold the investments to maturity. Investments which the Company does not have the ability and intent to hold to maturity are considered to be available-for- sale and are reported at fair value and the related unrealized gains or losses are, after considering the related tax expense or benefit, recognized as a component of accumulated other comprehensive income in shareholders’ equity. The Company’s entire investment portfolio is classified as available-for-sale. Realized investment gains and losses are reported in income based upon specific identification of securities sold. (See note 4.)
The Company completes a quarterly review of invested assets for evidence of “other than temporary” impairments. A cost basis adjustment and realized loss will be taken on invested assets whose value decline is deemed to be “other than temporary”. Additionally, for investments written down, income accruals will be stopped absent evidence that payment is likely and an assessment of the collectability of previously accrued income made. Factors used in determining investments whose value decline may be considered “other than temporary” include the following:
    Investments with a market value less than 80% of amortized costs
 
    For fixed income and preferred stocks, declines in credit ratings to below investment grade from appropriate rating agencies
 
    Other securities which are under pressure due to market constraints or event risk
 
    Intention of management to hold fixed income securities to maturity
There were no “other than temporary” asset impairment charges for the years ending December 31, 2005 and 2003. In 2004, a charge of $1.3 million was recognized as an “other than temporary” asset impairment.
Home office and equipment
Home office and equipment is carried at cost net of depreciation. For financial statement reporting purposes, depreciation is determined on a straight-line basis for the home office, equipment and data processing hardware over estimated lives of 45, 5 and 3 years, respectively. For income tax purposes, the Company uses accelerated depreciation methods.
Home office and equipment is shown net of accumulated depreciation of $42.8 million, $43.5 million and $42.6 million at December 31, 2005, 2004 and 2003, respectively. Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $4.6 million, $5.0 million and $4.9 million, respectively.
Deferred insurance policy acquisition costs
Costs associated with the acquisition of mortgage insurance business, consisting of employee compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred insurance policy acquisition costs (“DAC”). Because Statement of Financial Accounting Standards (“SFAS”) No. 60, Accounting and Reporting by Insurance Enterprises, specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of DAC, amortization of these costs for each underwriting year book of business is charged against revenue in proportion to estimated gross profits over the estimated life of the policies using the guidance of SFAS No. 97, Accounting and Reporting by Insurance Enterprises For Certain Long

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Duration Contracts and Realized Gains and Losses From the Sale of Investments. This includes accruing interest on the unamortized balance of DAC. The estimates for each underwriting year are reviewed quarterly and updated when necessary to reflect actual experience and any changes to key variables such as persistency or loss development.
During 2005, 2004 and 2003, the Company amortized $20.3 million, $26.0 million and $29.5 million, respectively, of deferred insurance policy acquisition costs.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment expenses based on when notices of default on insured mortgage loans are received. Reserves are also established for estimated losses incurred on notices of default not yet reported by the lender. Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. Reserves are established by management using estimated claims rates and claims amounts in estimating the ultimate loss. Amounts for salvage recoverable are considered in the determination of the reserve estimates. Adjustments to reserve estimates are reflected in the financial statements in the years in which the adjustments are made. The liability for reinsurance assumed is based on information provided by the ceding companies.
The incurred but not reported (“IBNR”) reserves result from defaults occurring prior to the close of an accounting period, but which have not been reported to the Company. Consistent with reserves for reported defaults, IBNR reserves are established using estimated claims rates and claims amounts for the estimated number of defaults not reported.
Reserves also provide for the estimated costs of settling claims, including legal and other expenses and general expenses of administering the claims settlement process. (See note 6.)
Revenue recognition
The insurance subsidiaries write policies which are guaranteed renewable contracts at the insured’s option on a single, annual or monthly premium basis. The insurance subsidiaries have no ability to reunderwrite or reprice these contracts. Premiums written on a single premium basis and an annual premium basis are initially deferred as unearned premium reserve and earned over the policy term. Premiums written on policies covering more than one year are amortized over the policy life in accordance with the expiration of risk which is the anticipated claim payment pattern based on historical experience. Premiums written on annual policies are earned on a monthly pro rata basis. Premiums written on monthly policies are earned as coverage is provided. When a policy is cancelled, all premium that is non-refundable is immediately earned. Any refundable premium is returned to the lender and will have no effect on earned premium. Policy cancellations also lower the persistency rate which is a variable used in calculating the rate of amortization of deferred policy acquisition costs.
Fee income of the non-insurance subsidiaries is earned and recognized as the services are provided and the customer is obligated to pay. Fee income consists primarily of contract underwriting and related fee-based services provided to lenders and is included in “Other revenue” on the statement of operations.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return. A formal tax sharing

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agreement exists between the Company and its subsidiaries. Each subsidiary determines income taxes based upon the utilization of all tax deferral elections available. This assumes tax and loss bonds are purchased and held to the extent they would have been purchased and held on a separate company basis since the tax sharing agreement provides that the redemption or non-purchase of such bonds shall not increase such member’s separate taxable income and tax liability on a separate company basis.
Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income, subject to certain limitations, the amounts added to contingency loss reserves. Generally, the amounts so deducted must be included in taxable income in the tenth subsequent year. The deduction is allowed only to the extent that U.S. government non-interest bearing tax and loss bonds are purchased and held in an amount equal to the tax benefit attributable to such deduction. The Company accounts for these purchases as a payment of current federal income taxes.
Deferred income taxes are provided under the liability method, which recognizes the future tax effects of temporary differences between amounts reported in the financial statements and the tax bases of these items. The expected tax effects are computed at the current federal tax rate. (See note 10.)
Benefit plans
The Company has a non-contributory defined benefit pension plan covering substantially all employees. Retirement benefits are based on compensation and years of service. The Company recognizes these retirement benefit costs over the period during which employees render the service that qualifies them for benefits. The Company’s policy is to fund pension cost as required under the Employee Retirement Income Security Act of 1974. (See note 9.)
The Company accrues the estimated costs of retiree medical and life benefits over the period during which employees render the service that qualifies them for benefits. The Company offers both medical and dental benefits for retired employees and their spouses. Benefits are generally funded on a pay-as-you-go basis. The cost to the Company was not significant in 2005, 2004 and 2003. (See note 9.)
Stock-based compensation
The Company has certain stock-based compensation plans. (See note 11). Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted or modified on or after January 1, 2003. The adoption of SFAS No. 123 did not have a material effect on the Company’s results of operations or its financial position. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under the Company’s plans generally vest over periods ranging from one to five years. The cost related to stock-based employee compensation included in the determination of net income for 2005, 2004 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period.

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    Years Ended December 31,  
    2005     2004     2003  
    (In thousands of dollars, except per share data)  
Net income, as reported
  $ 626,873     $ 553,186     $ 493,879  
Add stock-based employee compensation expense included in reported net income, net of tax
    13,017       7,656       4,146  
Deduct stock-based employee compensation expense, determined under the fair value method for all awards, net of tax
    (17,381 )     (11,683 )     (10,503 )
 
                 
 
                       
Pro forma net income
  $ 622,509     $ 549,159     $ 487,522  
 
                 
 
                       
Earnings per share:
                       
Basic, as reported
  $ 6.83     $ 5.67     $ 5.00  
 
                 
Basic, pro forma
  $ 6.78     $ 5.63     $ 4.94  
 
                 
 
                       
Diluted, as reported
  $ 6.78     $ 5.63     $ 4.99  
 
                 
Diluted, pro forma
  $ 6.73     $ 5.59     $ 4.92  
 
                 
Reinsurance
Loss reserves and unearned premiums are reported before taking credit for amounts ceded under reinsurance treaties. Ceded loss reserves are reflected as “Reinsurance recoverable on loss reserves”. Ceded unearned premiums are reflected as “Prepaid reinsurance premiums”. The Company remains contingently liable for all reinsurance ceded. (See note 7.)
Earnings per share
The Company’s basic and diluted earnings per share (“EPS”) have been calculated in accordance with SFAS No. 128, Earnings Per Share. The Company’s net income is the same for both basic and diluted EPS. Basic EPS is based on the weighted-average number of common shares outstanding. Diluted EPS is based on the weighted-average number of common shares outstanding plus common stock equivalents which would include stock awards and stock options. The following is a reconciliation of the weighted-average number of shares used for basic EPS and diluted EPS. (See note 11.)
                         
    Years Ended December 31,  
    2005     2004     2003  
    (shares in thousands)  
Weighted-average shares — Basic
    91,787       97,549       98,776  
Common stock equivalents
    656       696       246  
 
                 
 
Weighted-average shares — Diluted
    92,443       98,245       99,022  
 
                 

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For the years ended December 31, 2005, 2004 and 2003, 1.3 million, 0.6 million and 1.4 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive. For the years ended December 31, 2005 and 2004, 0.4 million and 0.3 million shares, respectively, of performance stock awards have been excluded from the calculation of diluted earnings per share because the number of shares ultimately issued is contingent on performance measures established for a specific performance period.
Statement of cash flows
The Company’s short-term investments consist entirely of money market funds and commercial paper with maturities of less than 90 days. For purposes of the consolidated statement of cash flows, the Company considers short-term investments to be cash equivalents. A reconciliation follows:
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands of dollars)  
Cash and cash equivalents per statement of cash flows
  $ 195,256     $ 166,468     $ 161,346  
Less:
                       
Money market funds
    (190,640 )     (120,646 )     (137,734 )
Commercial paper
          (42,993 )      
 
                 
Cash per balance sheet
  $ 4,616     $ 2,829     $ 23,612  
 
                 
Comprehensive income
The Company’s total comprehensive income, as calculated per SFAS No. 130, Reporting Comprehensive Income, was as follows:
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands of dollars)  
Net income
  $ 626,873     $ 553,186     $ 493,879  
Other comprehensive loss
    (45,884 )     (17,268 )     (7,257 )
 
                 
 
Total comprehensive income
  $ 580,989     $ 535,918     $ 486,622  
 
                 
 
                       
Other comprehensive income (loss) (net of tax):
                       
Change in unrealized net derivative gains and losses
  $ 464     $ 2,812     $ 1,412  
Amortization of deferred losses on derivatives
    676       1,037       1,082  
Change in unrealized gains and losses on investments
    (48,119 )     (22,228 )     (20,948 )
Minimum pension liability adjustment
                13,018  
Other
    1,095       1,111       (1,821 )
 
                 
 
                       
Other comprehensive loss
  $ (45,884 )   $ (17,268 )   $ (7,257 )
 
                 

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At December 31, 2005, accumulated other comprehensive income of $77.5 million included $77.9 million of net unrealized gains on investments, ($0.8) million relating to derivative financial instruments and $0.4 million relating to the accumulated other comprehensive income of the Company’s joint venture investment. At December 31, 2004, accumulated other comprehensive income of $123.4 million included $126.0 million of net unrealized gains on investments, ($1.9) million relating to derivative financial instruments and ($0.7) million relating to the accumulated other comprehensive loss of the Company’s joint venture investment. (See notes 4 and 5.)
Recent accounting pronouncements
In December 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”. This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. The fair value recognition provisions of SFAS No. 123 were voluntarily adopted by the Company in 2003 prospectively to all employee awards granted or modified on or after January 1, 2003 under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. The adoption did not have a material effect on the Company’s results of operations or its financial position. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be measured based on the fair value of the equity or liability instrument issued and be recognized in the financial statements of the company. In April 2005 the effective date of this statement was delayed. SFAS No. 123R is now effective for annual reporting periods that begin after June 15, 2005. The statement will be adopted by the Company beginning January 1, 2006 under the modified prospective method. The adoption will not have a material effect on the Company’s results of operations or its financial position.
In July 2005, the FASB published an Exposure Draft of a proposed interpretation, “Accounting for Uncertain Tax Positions.” The Exposure Draft seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. The FASB has reopened deliberations to consider comments that were received regarding the Exposure Draft. At this time, the FASB has decided that the final interpretation would apply to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” When evaluating a tax position for recognition and measurement, an entity should presume that a taxing authority will examine a tax position. The interpretation will most probably adopt a benefit recognition model with a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a best estimate measurement attribute. It is expected to be finalized in the first or second quarter of 2006 with an effective date as of the start of the first annual period beginning after December 15, 2006. The Company will continue to evaluate the impact, if any, this interpretation would have on the Company’s results of operations and financial position.
The proposed FASB Staff Position (“FSP”) EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1” was issued as final in the fourth quarter of 2005. The FSP was retitled FAS 115-1 “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” and superseded EITF 03-1 “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. Under the guidance, it could be more likely that a decrease in the market value of certain investments in the Company’s fixed income portfolio will be required to be recognized as a realized loss in the statement of operations than under previously existing accounting standards.
Reclassifications
Certain reclassifications have been made in the accompanying financial statements to 2004 and 2003

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    amounts to allow for consistent financial reporting.
 
3.   Related party transactions
 
    The Company provided certain services to C-BASS and Sherman in 2005, 2004 and 2003 in exchange for fees. In addition, C-BASS provided certain services to the Company during 2005, 2004 and 2003 in exchange for fees. The net impact of these transactions was not material to the Company.

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4.   Investments
 
    The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at December 31, 2005 and 2004 are shown below. Debt securities consist of fixed maturities and short-term investments.
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
December 31, 2005:   Cost     Gains     Losses     Value  
            (In thousands of dollars)          
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 336,658     $ 2,116     $ (2,414 )   $ 336,360  
Obligations of U.S. states and political subdivisions
    4,630,856       133,391       (12,456 )     4,751,791  
Corporate debt securities
    248,327       1,749       (517 )     249,559  
Mortgage-backed securities
    145,790       235       (2,253 )     143,772  
Debt securities issued by foreign sovereign governments
    2,100                   2,100  
 
                       
Total debt securities
    5,363,731       137,491       (17,640 )     5,483,582  
Equity securities
    2,504             (16 )     2,488  
 
                       
 
                               
Total investment portfolio
  $ 5,366,235     $ 137,491     $ (17,656 )   $ 5,486,070  
 
                       
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
December 31, 2004:   Cost     Gains     Losses     Value  
            (In thousands of dollars)          
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 611,465     $ 9,131     $ (3,474 )   $ 617,122  
Obligations of U.S. states and political subdivisions
    4,351,789       190,210       (6,309 )     4,535,690  
Corporate debt securities
    237,667       3,813       (454 )     241,026  
Mortgage-backed securities
    166,437       808       (215 )     167,030  
Debt securities issued by foreign sovereign governments
    16,079       354             16,433  
 
                       
Total debt securities
    5,383,437       204,316       (10,452 )     5,577,301  
Equity securities
    5,326                   5,326  
 
                       
 
                               
Total investment portfolio
  $ 5,388,763     $ 204,316     $ (10,452 )   $ 5,582,627  
 
                       

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The amortized cost and fair values of debt securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most mortgage-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
                 
    Amortized     Fair  
    Cost     Value  
    (In thousands of dollars)  
Due in one year or less
  $ 503,092     $ 503,243  
Due after one year through five years
    818,494       825,624  
Due after five years through ten years
    1,120,475       1,152,664  
Due after ten years
    2,775,880       2,858,279  
 
           
 
    5,217,941       5,339,810  
 
               
Mortgage-backed securities
    145,790       143,772  
 
           
 
               
Total at December 31, 2005
  $ 5,363,731     $ 5,483,582  
 
           

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At December 31, 2005 and 2004, fixed maturity investments had gross unrealized losses of $17.7 million and $10.5 million, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:
                                                 
    Less Than 12 Months     12 Months or Greater     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
December 31, 2005   Value     Losses     Value     Losses     Value     Losses  
            (In thousands of dollars)                  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 234,175     $ 869     $ 56,991     $ 1,545     $ 291,166     $ 2,414  
Obligations of U.S. states and political subdivisions
    977,560       8,360       167,319       4,096       1,144,879       12,456  
Corporate debt securities
    2,506       31       16,612       486       19,118       517  
Mortgage-backed securities
    125,228       1,774       12,788       479       138,016       2,253  
Equity securities
    2,167       16                   2,167       16  
 
                                   
Total investment portfolio
  $ 1,341,636     $ 11,050     $ 253,710     $ 6,606     $ 1,595,346     $ 17,656  
 
                                   
                                                 
    Less Than 12 Months     12 Months or Greater     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
December 31, 2004   Value     Losses     Value     Losses     Value     Losses  
                    (In thousands of dollars)                  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 312,707     $ 2,941     $ 14,020     $ 533     $ 326,727     $ 3,474  
Obligations of U.S. states and political subdivisions
    517,216       5,825       33,623       484       550,839       6,309  
Corporate debt securities
    26,610       454                   26,610       454  
Mortgage-backed securities
    22,081       83       18,693       132       40,774       215  
 
                                   
Total investment portfolio
  $ 878,614     $ 9,303     $ 66,336     $ 1,149     $ 944,950     $ 10,452  
 
                                   
The unrealized losses in all categories of the Company’s investments were caused by interest rate increases. Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2005.

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Net investment income is comprised of the following:
                         
    2005     2004     2003  
    (In thousands of dollars)  
Fixed maturities
  $ 218,313     $ 210,555     $ 198,968  
Equity securities
    2,292       2,748       2,764  
Short-term investments
    9,564       2,844       1,996  
Other
    1,515       1,283       1,293  
 
                 
 
                       
Investment income
    231,684       217,430       205,021  
Investment expenses
    (2,830 )     (2,377 )     (2,140 )
 
                 
 
                       
Net investment income
  $ 228,854     $ 215,053     $ 202,881  
 
                 
The net realized investment gains (losses) and change in net unrealized appreciation (depreciation) of investments are as follows:
                         
    2005     2004     2003  
    (In thousands of dollars)  
Net realized investment gains (losses) on sale of investments:
                       
Fixed maturities
  $ 13,694     $ 11,827     $ 38,946  
Equity securities
    4,544       5,290       (701 )
Joint ventures
    (3,379 )     125       (1,385 )
Other
    (2 )           2  
 
                 
 
                       
 
  $ 14,857     $ 17,242     $ 36,862  
 
                 
 
                       
Change in net unrealized appreciation (depreciation):
                       
Fixed maturities
  $ (74,013 )   $ (34,197 )   $ (32,227 )
Equity securities
    (16 )            
 
                 
 
 
  $ (74,029 )   $ (34,197 )   $ (32,227 )
 
                 

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The reclassification adjustment relating to the change in investment gains and losses is as follows:
                         
    2005     2004     2003  
    (In thousands of dollars)  
Unrealized holding (losses) gains arising during the period, net of tax
  $ (38,381 )   $ (15,112 )   $ 7,178  
Less: reclassification adjustment for net gains included in net income, net of tax
    (9,738 )     (7,116 )     (28,126 )
 
                 
Change in unrealized investment gains and losses, net of tax
  $ (48,119 )   $ (22,228 )   $ (20,948 )
 
                 
    The gross realized gains and the gross realized losses on sales of securities were $28.4 million and $13.5 million, respectively, in 2005, $22.1 million and $4.9 million, respectively, in 2004 and $54.6 million and $17.7 million, respectively, in 2003.
 
    The tax benefit related to the changes in net unrealized (depreciation) appreciation was $25.9 million, $12.0 million and $11.3 million for 2005, 2004 and 2003, respectively.
 
    The Company had $22.8 million and $23.1 million of investments on deposit with various states at December 31, 2005 and 2004, respectively, due to regulatory requirements of those state insurance departments.
 
5.   Short- and long-term debt
 
    The Company has a $300 million commercial paper program, which is rated “A-1” by Standard and Poors (“S&P”) and “P-1” by Moody’s. At December 31, 2005 and 2004, the Company had $187.8 million and $139.5 million in commercial paper outstanding with a weighted average interest rate of 4.39% and 2.36%, respectively.
 
    In March of 2005, the Company obtained a $300 million, five year revolving credit facility, expiring in 2010. The facility replaced the previous $285 million facility that was due to expire in 2006. Under the terms of the credit facility, the Company must maintain shareholders’ equity of at least $2.25 billion and Mortgage Guaranty Insurance Corporation (“MGIC”) must maintain a 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 regulation. At December 31, 2005, these requirements were met. The facility will continue to be used as a liquidity back up facility for the outstanding commercial paper. The remaining credit available under the facility after reduction for the amount necessary to support the commercial paper was $112.2 million and $145.5 million at December 31, 2005 and 2004, respectively.
 
    The Company had $300 million, 5.375% Senior Notes due in November 2015 and $200 million, 6% Senior Notes due in March 2007 outstanding at December 31, 2005. At December 31, 2004 the Company had $300 million, 7.5% Senior Notes due in October 2005 and $200 million, 6% Senior Notes due in March 2007. In October 2005 the Company issued, in a public offering, $300 million, 5.375% Senior Notes due in 2015. Interest on the notes is payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2006. The Senior Notes were rated “A-1” by Moody’s, “A” by S&P and “A+” by Fitch. The Company has utilized the proceeds from the sale of the notes, together with available cash, to repay the $300 million, 7.5%

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    Senior Notes that came due October 17, 2005. At December 31, 2005 and 2004, the market value of the outstanding debt was $687.9 million and $661.3 million, respectively.
    Interest payments on all long-term and short-term debt were $43.5 million, $42.1 million and $41.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.
 
    In March 2005, an outstanding swap was amended to coincide with the new credit facility. Under the terms of the swap contract, the Company pays a fixed rate of 5.07% and receives a variable interest rate based on LIBOR. The swap has an expiration date coinciding with the maturity of the credit facility and is designated as a cash flow hedge. The cash flow swap outstanding at December 31, 2005 and 2004 are evaluated quarterly with any ineffectiveness being recorded as an expense. To date these evaluations have not resulted in any hedge ineffectiveness. Swaps are subject to credit risk to the extent the counterparty would be unable to discharge its obligations under the swap agreements.
 
    Expense on the interest rate swaps for the years ended December 31, 2005, 2004 and 2003 of approximately $0.8 million, $3.3 million and $3.4 million, respectively, was included in interest expense. Gains or losses arising from the amendment or termination of interest rate swaps are deferred and amortized to interest expense over the life of the hedged items.
 
6.   Loss reserves
 
    As described in Note 2, the Company establishes reserves to recognize the estimated liability for losses and loss adjustment expenses related to defaults on insured mortgage loans. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of beginning and ending loss reserves for each of the past three years:

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    2005     2004     2003  
    (In thousands of dollars)  
Reserve at beginning of year
  $ 1,185,594     $ 1,061,788     $ 733,181  
Less reinsurance recoverable
    17,302       18,074       21,045  
 
                 
Net reserve at beginning of year
    1,168,292       1,043,714       712,136  
 
                       
Losses incurred:
                       
Losses and LAE incurred in respect of default notices received in:
                       
Current year
    679,697       714,450       652,231  
Prior years (1)
    (126,167 )     (13,451 )     113,797  
 
                 
Subtotal
    553,530       700,999       766,028  
 
                 
 
                       
Losses paid:
                       
Losses and LAE paid in respect of default notices received in:
                       
Current year
    29,804       35,668       34,505  
Prior years
    582,351       540,753       399,945  
 
                 
Subtotal
    612,155       576,421       434,450  
 
                 
Net reserve at end of year
    1,109,667       1,168,292       1,043,714  
Plus reinsurance recoverables
    14,787       17,302       18,074  
 
                 
 
                       
Reserve at end of year
  $ 1,124,454     $ 1,185,594     $ 1,061,788  
 
                 
 
(1)   A negative number for a prior year indicates a redundancy of loss reserves, and a positive number for a prior year indicates a deficiency of loss reserves.
 
    The top portion of the table above shows losses incurred on default notices received in the current year and in prior years, respectively. The amount of losses incurred relating to default notices received in the current year represents the estimated amount to be ultimately paid on such default notices. The amount of losses incurred relating to default notices received in prior years represents actual claim payments that were higher or lower than what was estimated by the Company at the end of the prior year, as well as a re-estimation of amounts to be ultimately paid on defaults remaining in inventory from the end of the prior year. This re-estimation is the result of management’s review of current trends in default inventory, such as defaults that have resulted in a claim, the amount of the claim, the change in the relative level of defaults by geography and the change in average loan exposure.
 
    Current year losses incurred decreased in 2005 compared to 2004 primarily due to decreases in the estimates regarding how many primary default notices will eventually result in a claim, when compared to the prior period. The primary insurance notice inventory increased from 85,487 at December 31, 2004 to 85,788 at December 31, 2005 and pool insurance notice inventory decreased from 25,500 at December 31, 2004 to 23,772 at December 31, 2005. The average primary claim paid for 2005 was $26,361 compared to $24,438 in 2004.
 
    The development of the reserves in 2005, 2004 and 2003 is reflected in the prior year line. In 2005, the $126.2 million reduction in losses incurred related to prior years was due primarily to more

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favorable loss trends experienced during the year. In 2004, the $13.5 million reduction in losses incurred related to prior years was due primarily to more stable loss trends experienced during that year.
The lower portion of the table above shows the breakdown between claims paid on default notices received in the current year and default notices received in prior years. Since it takes, on average, about twelve months for a default which is not cured to develop into a paid claim, most losses paid relate to default notices received in prior years.

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Information about the composition of the primary insurance default inventory at December 31, 2005 and 2004 appears in the table below.
                 
    December 31,     December 31,  
    2005     2004  
Total loans delinquent
    85,788       85,487  
Percentage of loans delinquent (default rate)
    6.58 %     6.05 %
 
               
Flow loans delinquent
    47,051       44,925  
Percentage of flow loans delinquent (default rate)
    4.52 %     3.99 %
 
               
Bulk loans delinquent
    38,737       40,562  
Percent of bulk loans delinquent (default rate)
    14.72 %     14.06 %
 
               
A-minus and subprime credit loans delinquent*
    36,485       35,824  
Percentage of A-minus and subprime credit loans delinquent (default rate)
    18.30 %     16.49 %
 
*       A portion of A-minus and subprime credit loans is included in flow loans delinquent and the remainder is included in bulk loans delinquent. Most A-minus and subprime credit loans are written through the bulk channel. A-minus loans have FICO scores of 575-619, as reported to MGIC at the time a commitment to insure is issued, and subprime loans have FICO scores of less than 575.
7.   Reinsurance
 
    The Company cedes a portion of its business to reinsurers and records assets for reinsurance recoverable on loss reserves and prepaid reinsurance premiums. Business written between 1985 and 1993 is ceded under various reinsurance agreements with several reinsurers. The Company also cedes primary business to reinsurance subsidiaries of certain mortgage lenders, primarily under aggregate excess of loss agreements for each reinsurance period. The majority of ceded premiums relates to these agreements. In 2005, the Company entered into two separate excess of loss reinsurance agreements under which it ceded approximately $85.5 million of risk in force in the aggregate to two special purpose reinsurance companies. Additionally, certain pool polices written by the Company have been reinsured with one domestic reinsurer. The Company receives a ceding commission under certain reinsurance agreements.
 
    The Company monitors the claims paying ability of its reinsurers and does not currently anticipate any collection problems. Generally, reinsurance recoverables on primary loss reserves and prepaid reinsurance premiums are backed by trust funds or letters of credit. No reinsurer represents more than $10 million of the aggregate amount recoverable.
 
    The effect of these agreements on premiums earned and losses incurred is as follows:

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    2005     2004     2003  
    (In thousands of dollars)  
Premiums earned:
                       
Direct
  $ 1,364,598     $ 1,445,321     $ 1,484,249  
Assumed
    1,064       333       227  
Ceded
    (126,970 )     (116,226 )     (118,465 )
 
                 
 
Net premiums earned
  $ 1,238,692     $ 1,329,428     $ 1,366,011  
 
                 
 
                       
Losses incurred:
                       
Direct
  $ 558,077     $ 706,782     $ 769,531  
Assumed
    (100 )     (358 )     (163 )
Ceded
    (4,447 )     (5,425 )     (3,340 )
 
                 
 
Net losses incurred
  $ 553,530     $ 700,999     $ 766,028  
 
                 
8.   Investments in joint ventures
 
    C-BASS
 
    C-BASS is a mortgage investment and servicing firm specializing in credit-sensitive single-family residential mortgage assets and residential mortgage-backed securities. C-BASS principally invests in whole loans (including subprime loans) and mezzanine and subordinated residential mortgage-backed securities backed by non-conforming residential mortgage loans. C-BASS’s principal sources of revenues during the last three years were net interest income (including accretion on mortgage securities), servicing fees, money management fees from C-BASS CBOs and investment funds sponsored by C-BASS, and gains on securitization and liquidation of mortgage-related assets, offset by hedging losses. C-BASS’s results of operations are affected by the timing of its securitization transactions. Virtually all of C-BASS’s assets do not have readily ascertainable market values and, as a result, their value for financial statement purposes is estimated by the management of C-BASS based on, among other things, valuations provided by financing counterparties. The ultimate value of these assets is the net present value of their future cash flows, which depends on, among other things, the level of losses on the underlying mortgages and prepayment activity by the mortgage borrowers. Market value adjustments could impact C-BASS’s results of operations and the Company’s share of those results. The Company’s investment in C-BASS on an equity basis at December 31, 2005 was $362.6 million.

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C-BASS Summary Balance Sheet:
                 
    December 31,  
    2005     2004  
    ($ millions)  
Assets
               
Whole loans
  $ 4,638     $ 1,753  
Servicing
    468       444  
Securities
    2,054       1,450  
Other
    534       362  
 
           
Total assets
  $ 7,694     $ 4,009  
 
           
 
               
Total liabilities
    6,931       3,409  
 
               
Debts
    6,434       2,648  
 
               
Owners’ equity
    763       600  
Included in total assets and total liabilities at December 31, 2004 were approximately $457 million of assets and the same amount of liabilities from securitizations that did not qualify for off-balance sheet treatment. The liabilities from these securitizations are not included in Debt in the table above. There were no such assets and liabilities at December 31, 2005.
C-BASS Summary Income Statement:
                         
    Year Ended December 31,  
    2005     2004     2003  
    ($ millions)  
Portfolio
  $ 292.2     $ 230.5     $ 154.6  
Servicing
    257.5       164.7       128.4  
Money Management
    35.8       19.9       24.5  
Transaction
    39.4       64.0       49.3  
 
                 
Total revenue
    624.9       479.1       356.8  
 
                       
Total expense
    384.3       271.0       212.9  
 
                 
 
                       
Income before tax
  $ 240.6     $ 208.1     $ 143.9  
 
                 
 
                       
Company’s share of pre-tax income
  $ 110.9     $ 97.9     $ 66.1  
 
                 
Sherman
Sherman is principally engaged in the business of purchasing and collecting for its own account delinquent consumer assets which are primarily unsecured. The borrowings used to finance these activities are included in Sherman’s balance sheet. A substantial portion of Sherman’s consolidated assets are investments in consumer receivable portfolios that do not have readily

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ascertainable market values. Sherman’s results of operations are sensitive to estimates by Sherman’s management of ultimate collections on these portfolios.
In March 2005, Sherman acquired the holding company for Credit One Bank (“Credit One”), formerly known as First National Bank of Marin, for a payment of cash and subordinated notes. This acquisition materially increased Sherman’s consolidated assets as well as its debt and financial leverage. Credit One’s operations during 2005 consisted of activities related to originating subprime credit cards. During 2005, Sherman’s increases in total assets, total liabilities and debt were primarily related to the acquisition of Credit One.
In June 2005, MGIC, Radian (MGIC and Radian are collectively referred to as the “Corporate Partners”) and entities (the “Management Entities”) owned by the senior management (“Senior Management”) of Sherman entered into a Securities Purchase Agreement and a Call Option Agreement. Under the Securities Purchase Agreement, each of MGIC and Radian agreed to sell to one of the Management Entities 6.92% of the 41.5% interest in Sherman owned by each (a total of 13.84% for both MGIC and Radian) for approximately $15.7 million, which is $1.0 million in excess of the approximate book value of the interest at April 30, 2005. Upon completion of the sale, Senior Management of Sherman owns an interest in Sherman of 30.84% and each of MGIC and Radian own interests of 34.58%. The sale closed in early August 2005. Under the Call Option Agreement, one of the Management Entities granted separate options (each an “Option”) to each Corporate Partner to purchase a 6.92% interest in Sherman (a total of 13.84% under both Options). Each Option is exercisable beginning in July 2006 at the option price provided in the Call Option Agreement. If one Corporate Partner does not exercise its Option, the other Corporate Partner may exercise that Option. The Securities Purchase Agreement and Call Option Agreement were filed as exhibits to the Company’s Current Report on Form 8-K filed on June 30, 2005; the description above is qualified by the terms of the actual agreements. In connection with these transactions, the payout under Sherman’s annual incentive plan (which is based on a percentage of Sherman’s pre-bonus results) was reduced effective May 1, 2005.
The Company’s investment in Sherman on an equity basis at December 31, 2005 was $79.3 million.
Sherman Summary Balance Sheet:
                 
    December 31,  
    2005     2004  
    ($ millions)  
Total assets
  $ 979     $ 484  
 
               
Total liabilities
    743       245  
 
               
Debt
    597       143  
 
               
Members’ equity
    236       239  

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Sherman Summary Income Statement:
                         
    Year Ended December 31,  
    2005     2004     2003  
    ($ millions)  
Revenues from receivable portfolios
  $ 855.5     $ 801.8     $ 603.3  
Portfolio amortization
    292.8       343.4       343.9  
 
                 
Revenues, net of amortization
    562.7       458.4       259.4  
 
                       
Credit card interest income and fees
    196.7              
Other revenue
    71.1       59.5       34.2  
 
                 
Total revenues
    830.5       517.9       293.6  
 
                       
Total expenses
    542.9       317.3       222.7  
 
                 
 
                       
Income before tax
  $ 287.6     $ 200.6     $ 70.9  
 
                 
 
                       
Company’s share of pre-tax income
  $ 110.3     $ 83.3     $ 29.4  
 
                 
    Because C-BASS and Sherman are accounted for using the equity method, they are not consolidated with the Company and their assets and liabilities do not appear in the Company’s balance sheet. The “investments in joint ventures” item in the Company’s balance sheet reflects the amount of capital contributed by the Company to joint ventures plus the Company’s share of their comprehensive income (or minus its share of their comprehensive loss) and minus capital distributed to the Company by the joint ventures. (See note 2.)
 
9.   Benefit plans
 
    The following tables provide reconciliations of the changes in the benefit obligation, fair value of plan assets and funded status of the pension and other postretirement benefit plans:

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                    Other Postretirement  
    Pension Benefits     Benefits  
    2005     2004     2005     2004  
            (In thousands of dollars)          
Reconciliation of projected benefit obligation:
                               
Benefit obligation at beginning of year
  $ 156,707     $ 141,202     $ 63,586     $ 61,685  
Service cost
    8,838       9,137       3,414       3,459  
Interest cost
    9,483       8,741       3,722       3,525  
Plan participants’ contributions
                272       220  
Plan amendment (1)
    404       927             (1,972 )
Actuarial loss (gain)
    3,398       (1,312 )     (859 )     (2,376 )
Benefits paid
    (2,241 )     (1,988 )     (1,267 )     (955 )
 
                       
 
                               
Benefit obligation at end of year
  $ 176,589     $ 156,707     $ 68,868     $ 63,586  
 
                       
 
                               
Reconciliation of fair value of plan assets:
                               
Fair value of plan assets at beginning of year
  $ 180,104     $ 139,074     $ 29,692     $ 22,940  
Adjustment
    6       160       199        
Actual return on plan assets
    13,282       19,358       1,880       2,751  
Employer contributions
    8,127       23,500       3,812       4,736  
Plan participants’ contributions
                272       220  
Benefits paid
    (2,241 )     (1,988 )     (1,267 )     (955 )
 
                       
 
                               
Fair value of plan assets at end of year
  $ 199,278     $ 180,104     $ 34,588     $ 29,692  
 
                       
 
                               
Balance Sheet at end of year
                               
Accumulated benefit obligation
  $ (152,100 )   $ (132,002 )     N/A       N/A  
Effect of salary projection
    (24,489 )     (24,705 )     N/A       N/A  
 
                           
Projected benefit obligation
    (176,589 )     (156,707 )   $ (68,868 )   $ (63,586 )
Fair value of plan assets
    199,278       180,104       34,588       29,692  
 
                       
Funded status
    22,689       23,397       (34,280 )     (33,894 )
Unrecognized net actuarial loss (gain)
    25,287       21,759       13,211       14,209  
Unrecognized net transition obligation
                1,984       2,268  
Unrecognized prior service cost
    5,087       5,423              
 
                       
 
                               
Net amount recognized
  $ 53,063     $ 50,579     $ (19,085 )   $ (17,417 )
 
                       
 
(1)   The pension plan has been amended to provide additional benefits for certain participants as listed in the plan documents and for the increased benefit and salary limits on the projected benefit obligation. The postretirement medical plan has been amended for changes in coverage levels, deductibles and out-of-pocket limits.

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                    Other Postretirement  
    Pension Benefits     Benefits  
    2005     2004     2005     2004  
    (In thousands of dollars)  
Net amount recognized in consolidated balance sheet
                               
Prepaid benefit cost
  $ 53,063     $ 50,579       N/A       N/A  
Accrued benefit liability
                N/A       N/A  
Intangible asset
                N/A       N/A  
Accumulated other comprehensive income
                N/A       N/A  
 
                           
Net amount recognized
  $ 53,063     $ 50,579       N/A       N/A  
 
                           
 
                               
Reconciliation of Prepaid/(Accrued) benefit cost
                               
Prepaid/(Accrued) benefit cost at beginning of year
  $ 50,579     $ 36,534     $ (17,417 )   $ (15,860 )
Net periodic benefit cost
    (5,644 )     (9,455 )     (5,479 )     (6,293 )
Contributions
    8,128       23,500       2,816       4,000  
Benefits paid (net of participants contributions)
                995       736  
 
                       
Prepaid benefit cost at end of year
  $ 53,063     $ 50,579     $ (19,085 )   $ (17,417 )
 
                       
The following table provides the components of net periodic benefit cost for the pension and other postretirement benefit plans:
                                                 
                            Other Postretirement  
    Pension Benefits     Benefits  
    2005     2004     2003     2005     2004     2003  
                    (In thousands of dollars)                  
Service cost
  $ 8,838     $ 9,137     $ 7,963     $ 3,414     $ 3,459     $ 3,135  
Interest cost
    9,483       8,741       7,671       3,722       3,525       3,300  
Expected return on plan assets
    (13,418 )     (10,370 )     (6,796 )     (2,242 )     (1,720 )     (989 )
Recognized net actuarial loss (gain)
          1,246       1,950       301       499       659  
Amortization of transition obligation
                      284       530       530  
Amortization of prior service cost
    741       701       612                    
 
                                   
 
Net periodic benefit cost
  $ 5,644     $ 9,455     $ 11,400     $ 5,479     $ 6,293     $ 6,635  
 
                                   

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     The following benefit payments, which reflect future service, are expected to be paid in the following fiscal years:
                                 
            Other Postretirement  
            Benefits  
    Pension     Gross     Medicare Part     Net  
    Benefits     Benefits     D Subsidy     Benefits  
    (in thousands of dollars)  
Fiscal Year
                               
2006
    2,954       1,316       89       1,227  
2007
    3,533       1,562       107       1,455  
2008
    4,194       1,807       130       1,677  
2009
    5,061       2,130       155       1,975  
2010
    6,168       2,483       188       2,295  
Years 2011 — 2015
    49,502       18,477       1,595       16,882  
Employer pension and postretirement contributions for the fiscal year ending December 31, 2006 are expected to approximate $10.3 million and $4.6 million, respectively. The ERISA minimum required pension contribution is zero.
Allocation of Plan Assets
                                 
                    Other Postretirement  
    Pension Benefits     Benefits  
    2005     2004     2005     2004  
Actual
                               
Equity securities
    82 %     82 %     100 %     100 %
Debt securities
    15 %     15 %            
Real estate
    3 %     3 %            
 
                       
Total
    100 %     100 %     100 %     100 %
 
                               
Target
                               
Equity securities
    82 %     82 %     100 %     100 %
Debt securities
    15 %     15 %            
Real estate
    3 %     3 %            
 
                       
Total
    100 %     100 %     100 %     100 %

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The Company’s pension plan portfolio returns are expected to achieve the following objectives over each market cycle and for at least 5 years:
  Total return should exceed growth in CPI
 
  Achieve competitive investment results
 
  Provide consistent investment returns
 
  Exceed the actuarial return assumption of the retirement plan
The primary focus in developing asset allocation ranges for the account is the assessment of the account’s investment objectives and the level of risk that is acceptable to obtain those objectives. To achieve these goals the minimum and maximum allocation ranges for fixed securities and equity securities are:
                 
    Minimum     Maximum  
Fixed
    0 %     30 %
Equity
    70 %     100 %
Cash equivalents
    0 %     10 %
Investment in international oriented funds is limited to a maximum of 15% of the equity range.
The Company’s postretirement plan portfolio returns are expected to achieve the following objectives over each market cycle and for at least 5 years:
  Total return should exceed growth in CPI
 
  Provide consistent investment returns
The primary focus in developing asset allocation ranges for the account is the assessment of the account’s investment objectives and the level of risk that is acceptable to obtain those objectives. To achieve these goals the minimum and maximum allocation ranges for fixed income securities and equity securities are:
                 
    Minimum     Maximum  
Fixed
    0 %     40 %
Equity
    60 %     100 %
Cash equivalents
    0 %     40 %
Given the long term nature of this portfolio and the lack of any immediate need for cash flow, it is anticipated that the equity investments will consist of growth stocks and will typically be at the higher end of the allocation ranges above. Investment in international oriented funds is limited to a maximum of 15% of the equity range.

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The assumptions used in the measurement of the Company’s pension and other postretirement benefit obligations are shown in the following table:
                                                 
    Pension Benefits             Other Postretirement Benefits  
    2005     2004     2003     2005     2004     2003  
Weighted average assumptions
                                               
Used to determine year-end benefit obligation:
                                               
Discount rate
    6.00 %     6.25 %     6.25 %     6.00 %     6.25 %     6.25 %
Rate of compensation increase
    4.50 %     4.50 %     4.50 %     N/A       N/A       N/A  
 
                                               
Used to determine net periodic benefit cost:
                                               
Discount rate
    6.25 %     6.25 %     6.75 %     6.25 %     6.25 %     6.75 %
Expected return on plan assets
    7.50 %     7.50 %     7.50 %     7.50 %     7.50 %     7.50 %
Rate of compensation increase
    4.50 %     4.50 %     4.50 %     N/A       N/A       N/A  
In selecting a discount rate, the Company performed a hypothetical cash flow bond matching exercise, matching the Company’s expected pension plan and postretirement medical plan cash flows, respectively, against a selected portfolio of high quality corporate bonds. The modeling was performed using a bond portfolio of noncallable bonds with at least $25 million outstanding. The average yield of these hypothetical bond portfolios was used as the benchmark for determining the discount rate. In selecting the expected long-term rate of return on assets, the Company considered the average rate of earnings expected on the classes of funds invested or to be invested to provide for the benefits of these plans. This included considering the trusts’ targeted asset allocation for the year and the expected returns likely to be earned over the next 20 years.
Plan assets consist of fixed maturities, equity securities and real estate. The Company is amortizing the unrecognized transition obligation for other postretirement benefits over 20 years.
For measurement purposes a 10.0% health care trend rate was used for 2005. In 2006, the rate is assumed to be 9.5%, decreasing to 5.0% by 2015 and remaining at this level beyond.
A 1% change in the health care trend rate assumption would have the following effects on other postretirement benefits:
                 
    1-Percentage     1-Percentage  
    Point Increase     Point Decrease  
    (In thousands of dollars)  
Effect on total service and interest cost components
  $ 1,672     $ (1,290 )
Effect on postretirement benefit obligation
    14,323       (11,266 )
The Company has a profit sharing and 401(k) savings plan for employees. At the discretion of the Board of Directors, the Company may make a profit sharing contribution of up to 5% of each participant’s eligible compensation. The Company provides a matching 401(k) savings contribution on employees’ before-tax contributions at a rate of 80% of the first $1,000 contributed and 40% of the

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next $2,000 contributed. The Company recognized profit sharing expense and 401(k) savings plan expense of $5.6 million, $5.7 million and $7.7 million in 2005, 2004 and 2003, respectively.

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10.   Income taxes
Net deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows:
                 
    2005     2004  
    (In thousands of dollars)  
Deferred tax assets
  $ 157,571     $ 150,876  
Deferred tax liabilities
    (75,224 )     (108,692 )
 
           
 
               
Net deferred tax asset
  $ 82,347     $ 42,184  
 
           
Management believes that all gross deferred tax assets at December 31, 2005 are fully realizable and no valuation reserve was established.
The components of the net deferred tax asset as of December 31, 2005 and 2004 are as follows:
                 
    2005     2004  
    (In thousands of dollars)  
Unearned premium reserves
  $ 14,847     $ 13,220  
Deferred policy acquisition costs
    (6,446 )     (9,700 )
Loss reserves
    29,254       32,485  
Unrealized appreciation in investments
    (41,731 )     (66,438 )
Statutory contingency loss reserves
    (16,116 )     (20,851 )
Mortgage investments
    32,899       54,605  
Benefit plans
    (6,347 )     (6,844 )
Deferred compensation
    16,251       9,301  
Investments in joint ventures
    58,723       35,748  
Other, net
    1,013       658  
 
           
 
               
Net deferred tax asset
  $ 82,347     $ 42,184  
 
           

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The following summarizes the components of the provision for income tax:
                         
    2005     2004     2003  
    (In thousands of dollars)  
Federal:
                       
Current
  $ 171,420     $ 158,104     $ 170,353  
Deferred
    3,021       (762 )     (28,277 )
State
    2,491       2,006       3,951  
 
                 
 
                       
Provision for income tax
  $ 176,932     $ 159,348     $ 146,027  
 
                 
The Company paid $264.5 million, $203.2 million and $182.1 million in federal income tax in 2005, 2004 and 2003, respectively. At December 31, 2005, 2004 and 2003, the Company owned $1,625.3 million, $1,468.5 million and $1,316.9 million, respectively, of tax and loss bonds.
The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
                         
    2005     2004     2003  
Federal statutory income tax rate
    35.0 %     35.0 %     35.0 %
Tax exempt municipal bond interest
    (8.4 )     (8.4 )     (8.2 )
Mortgage investments
                (1.9 )
Other, net
    0.4       0.3       0.5  
 
                 
 
                       
Effective income tax rate
    27.0 %     26.9 %     25.4 %
 
                 
The Internal Revenue Service (“IRS”) has been conducting an examination of the federal income tax returns of the Company for 2000 and 2001. During 2005, the IRS expanded the examination to include the 2002, 2003 and 2004 taxable years. In this examination, they have summonsed documents which include communications with outside legal counsel engaged by the Company. Management believes that these documents are protected by the attorney-client privilege and has declined to waive that privilege, so it has not provided them to the IRS. The documents relate to a portfolio of investments in the residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). This portfolio has been managed and maintained during years prior to, during and subsequent to the examination period. The tax returns have included the flow through of income and losses from these investments in the computation of taxable income. The IRS has indicated that they do not believe that the Company has established sufficient tax basis in the REMIC residual interests to deduct some portion of the flow through losses from income. To date, they have not provided a detailed explanation of their position or the calculation of the dollar amount of any potential adjustment. The Company will contest any such proposal to increase taxable income and believes that income taxes related to these years have been properly provided for in the financial statements.
11.   Shareholders’ equity and dividend restrictions
Dividends
The Company’s insurance subsidiaries are subject to statutory regulations as to maintenance of policyholders’ surplus and payment of dividends. The maximum amount of dividends that the

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insurance subsidiaries may pay in any twelve-month period without regulatory approval by the Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”) is the lesser of adjusted statutory net income or 10% of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. As a result of extraordinary dividends paid, MGIC cannot currently pay any dividends without regulatory approval. The other insurance subsidiaries of the Company can pay $1.8 million of dividends to the Company without such regulatory approval.
Certain of the Company’s non-insurance subsidiaries also have requirements as to maintenance of net worth. These restrictions could also affect the Company’s ability to pay dividends.
In 2005, 2004 and 2003, the Company paid dividends of $48.4 million, $22.0 million and $11.1 million, respectively, or $0.525 per share in 2005, $0.225 per share in 2004 and $0.1125 per share in 2003.
Accounting Principles
The accounting principles used in determining statutory financial amounts differ from GAAP, primarily for the following reasons:
Under statutory accounting practices, mortgage guaranty insurance companies are required to maintain contingency loss reserves equal to 50% of premiums earned. Such amounts cannot be withdrawn for a period of ten years except as permitted by insurance regulations. Changes in contingency loss reserves impact the statutory statement of operations. Contingency loss reserves are not reflected as liabilities under GAAP and changes in contingency loss reserves do not impact GAAP operations.
Under statutory accounting practices, insurance policy acquisition costs are charged against operations in the year incurred. Under GAAP, these costs are deferred and amortized as the related premiums are earned commensurate with the expiration of risk.
Under statutory accounting practices, purchases of tax and loss bonds are accounted for as investments. Under GAAP, purchases of tax and loss bonds are recorded as payments of current income taxes.
Under statutory accounting practices, fixed maturity investments are generally valued at amortized cost. Under GAAP, those investments which the Company does not have the ability and intent to hold to maturity are considered to be available-for-sale and are recorded at fair value, with the unrealized gain or loss recognized, net of tax, as an increase or decrease to shareholders’ equity.
Under statutory accounting practices, certain assets, designated as non-admitted assets, are charged directly against statutory surplus. Such assets are reflected on the GAAP financial statements.
Under statutory accounting practices, the Company’s share of the net income or loss of its investments in joint ventures is credited directly to statutory surplus.

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Under GAAP, income from joint ventures is shown separately, net of tax, on the statement of operations.
The statutory net income, policyholder’s surplus, and the contingency reserve liability of the insurance subsidiaries (excluding the non-insurance companies), as well as the dividends paid by MGIC to the Company, are as follows:
                                 
Year Ended   Net   Policyholder’s   Contingency   Dividends paid by MGIC
December 31,   Income   Surplus   Reserve   to the Company
(In thousands of dollars)
2005
  $ 316,908     $ 1,678,566     $ 4,662,652     $ 552,200  
2004
    179,623       1,840,084       4,234,157       162,900  
2003
    286,473       1,699,295       3,800,265       232,023  
Stock incentive plans
The Company has 1991 and 2002 stock incentive plans. When the 2002 plan was adopted in 2002, no further awards could be made under the 1991 plan. The maximum number of shares covered by awards under the 2002 plan is the total of 7.1 million shares plus the number of shares that must be purchased at a purchase price of not less than the fair market value of the shares as a condition to the award of restricted stock under the 2002 plan. The maximum number of shares of restricted stock that can be awarded under the 2002 plan is 5.9 million shares. Both plans provide for the award of stock options with maximum terms of 10 years and for the grant of restricted stock or restricted stock units, and the 2002 plan also provides for the grant of stock appreciation rights. The exercise price of options is the closing price of the common stock on the New York Stock Exchange on the date of grant. The vesting provisions of options and restricted stock are determined at the time of grant. Directors may receive awards under the 2002 plan and were eligible for awards of restricted stock under the 1991 plan.
A summary of option activity in the stock incentive plans during 2003, 2004 and 2005 is as follows:

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    Weighted        
    Average     Shares  
    Exercise     Subject  
    Price     to Option  
Outstanding, December 31, 2002
  $ 49.42       3,587,559  
 
             
 
               
Granted
    43.70       606,000  
Exercised
    30.15       (168,780 )
Forfeited or expired
    55.08       (121,880 )
 
             
 
               
Outstanding, December 31, 2003
    49.19       3,902,899  
 
             
 
               
Granted
    68.20       612,000  
Exercised
    43.69       (787,678 )
Forfeited or expired
    54.94       (191,800 )
 
             
 
               
Outstanding, December 31, 2004
    53.39       3,535,421  
 
             
 
               
Granted
           
Exercised
    42.92       (254,490 )
Forfeited or expired
    62.56       (6,200 )
 
           
 
               
Outstanding, December 31, 2005
  $ 54.19       3,274,731  
 
           
The exercise price of the options granted in 2003 and 2004 was equal to the market value of the stock on the date of grant. The options are exercisable between one and ten years after the date of grant.
Information about restricted stock or restricted stock units granted during 2003, 2004 and 2005 is as follows:
                         
    Year Ended December 31,
    2005   2004   2003
Shares or units granted
    495,919       274,869       298,674  
 
                       
Weighted average grant date fair market value
  $ 64.21     $ 68.08     $ 43.44  
For the year ended December 31, 2005, approximately 144 thousand shares of restricted stock became vested and approximately 1 thousand shares of restricted stock were forfeited. At December 31, 2005, 4,988,341 shares were available for future grant under the 2002 stock incentive plan. Of the shares available for future grant, 4,915,510 are available for restricted stock awards.
For purposes of determining the pro forma net income disclosure in Note 2, the fair value of these options was estimated at grant date using the binomial option pricing model for the 2004 options and the Black-Scholes model for the 2003 and prior options with the following weighted average assumptions for each year:

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    Grants Issued in Year Ended December 31,
    2004       2003
Risk free interest rate
    3.27 %         2.91 %    
Expected life
    5.50  years         4.87  years    
Expected volatility
    30.20 %         29.40 %    
Expected dividend yield
    0.25 %         0.25 %    
Fair value of each option
  $ 21.68         $ 13.12      
The following is a summary of stock options outstanding at December 31, 2005:
                                         
    Options Outstanding     Options Exercisable  
                    Weighted             Weighted  
            Remaining     Average             Average  
Exercise           Average     Exercise             Exercise  
Price Range   Shares     Life (years)     Price     Shares     Price  
$33.81 - $47.31
    1,559,031       4.4     $ 43.36       911,061     $ 42.50  
 
                                       
$53.70 - $68.63
    1,715,700       6.3     $ 64.03       893,250     $ 62.55  
 
                                   
 
                                       
Total
    3,274,731       5.4     $ 54.19       1,804,311     $ 52.42  
 
                                   
At December 31, 2004 and 2003, option shares of 1,465,301 and 1,754,929 were exercisable at an average exercise price of $49.47 and $45.88, respectively. The Company also granted an immaterial amount of equity instruments other than options and restricted stock during 2003, 2004 and 2005.
Under terms of the Company’s Shareholder Rights Agreement each outstanding share of the Company’s Common Stock is accompanied by one Right. The “Distribution Date” occurs ten days after an announcement that a person has become the beneficial owner (as defined in the Agreement) of the Designated Percentage of the Company’s Common Stock (the date on which such an acquisition occurs is the “Shares Acquisition Date” and a person who makes such an acquisition is an “Acquiring Person”), or ten business days after a person announces or begins a tender offer in which consummation of such offer would result in ownership by a person of 15 percent or more of the Common Stock. The Designated Percentage is 15% or more, except that for certain investment advisers and investment companies advised by such advisers, the Designated Percentage is 20% or more if certain conditions are met. The Rights are not exercisable until the Distribution Date. Each Right will initially entitle shareholders to buy one-half of one share of the Company’s Common Stock at a Purchase Price of $225 per full share (equivalent to $112.50 for each one-half share), subject to adjustment. If there is an Acquiring Person, then each Right (subject to certain limitations) will entitle its holder to purchase, at the Rights’ then-current Purchase Price, a number of shares of Common Stock of the Company (or if after the Shares Acquisition Date, the Company is acquired in a business combination, common shares of the acquiror) having a market value at the time equal to twice the Purchase Price. The Rights will expire on July 22, 2009, subject to extension. The Rights are redeemable at a price of $0.001 per Right at any time prior to the time a person becomes an Acquiring Person. Other than certain amendments, the Board of Directors may amend the Rights in any respect without the consent of the holders of the Rights.

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12.   Leases
The Company leases certain office space as well as data processing equipment and autos under operating leases that expire during the next six years. Generally, all rental payments are fixed.
Total rental expense under operating leases was $7.6 million, $8.0 million and $8.2 million in 2005, 2004 and 2003, respectively.
At December 31, 2005, minimum future operating lease payments are as follows (in thousands of dollars):
         
2006
  $ 5,169  
2007
    4,470  
2008
    2,428  
2009
    921  
2010 and thereafter
    129  
 
     
 
       
Total
  $ 13,117  
 
     
13.   Litigation and contingencies
The Company is involved in litigation in the ordinary course of business. In the opinion of management, the ultimate resolution of this pending litigation will not have a material adverse effect on the financial position or results of operations of the Company.
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. There can be no assurance that MGIC 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 the Company. In August 2005, the United States Court of Appeals for the Ninth Circuit decided a case under FCRA to which the Company was not a party that may make it more likely that the Company will be subject to future litigation regarding when notices to borrowers are required by FCRA.
In June 2005, in response to a letter from the New York Insurance Department (“NYID”), the Company provided information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce (the “MDC”), which regulates insurance, the Company provided the MDC with information about captive mortgage reinsurance and certain other matters. In the spring of 2005, spokesmen for insurance commissioners in Colorado and North Carolina were publicly reported as saying that those commissioners are considering investigating or reviewing captive mortgage reinsurance arrangements. Insurance departments or other officials in other states may also conduct such investigations or reviews. The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban Development (“HUD”) as well as the insurance commissioner or attorney general of any state may

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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 the Company believes its 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 the Company or the mortgage insurance industry.
Under its contract underwriting agreements, the Company may be required to provide certain remedies to its customers if certain standards relating to the quality of the Company’s underwriting work are not met. The cost of remedies provided by the Company to customers for failing to meet these standards has not been material to the Company’s financial position or results of operations for the years ended December 31, 2005, 2004 and 2003.
See note 10 for a description of federal income tax contingencies.

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14.   Unaudited quarterly financial data
                                         
    Quarter    
                                    2005
2005   First   Second   Third   Fourth   Year
    (In thousands of dollars, except per share data)
Net premiums written
  $ 312,239     $ 309,220     $ 314,178     $ 316,673     $ 1,252,310  
Net premiums earned
    316,079       311,633       305,841       305,139       1,238,692  
Investment income, net of expenses
    57,003       57,178       57,338       57,335       228,854  
Losses incurred, net
    98,866       136,915       146,197       171,552       553,530  
Underwriting and other expenses
    67,895       68,059       69,695       69,767       275,416  
Net income
    182,013       174,357       142,382       128,121       626,873  
Earnings per share (a):
                                       
Basic
    1.91       1.88       1.56       1.45       6.83  
Diluted
    1.90       1.87       1.55       1.44       6.78  
                                         
    Quarter    
                                    2004
2004   First   Second   Third   Fourth   Year
    (In thousands of dollars, except per share data)
Net premiums written
  $ 329,062     $ 319,126     $ 320,803     $ 336,426     $ 1,305,417  
Net premiums earned
    341,516       331,128       324,224       332,560       1,329,428  
Investment income, net of expenses
    53,141       52,314       54,187       55,411       215,053  
Losses incurred, net
    190,677       154,073       169,802       186,447       700,999  
Underwriting and other expenses
    67,314       72,723       68,782       69,967       278,786  
Net income
    130,073       154,524       134,069       134,520       553,186  
Earnings per share (a):
                                       
Basic
    1.32       1.57       1.37       1.40       5.67  
Diluted
    1.31       1.56       1.36       1.39       5.63  
 
(a)   Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of the quarterly per share data may not equal the per share data for the year.
15.   Condensed consolidating financial statements
The following condensed financial information sets forth, on a consolidating basis, the balance sheet, statement of operations, and statement of cash flows information for MGIC Investment Corporation (“Parent Company”), which represents the Company’s investments in all of its subsidiaries under the equity method, Mortgage Guaranty Insurance Corporation and Subsidiaries (“MGIC Consolidated”), and all other subsidiaries of the Company (“Other”) on a combined basis. The eliminations column represents entries eliminating investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

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Condensed Consolidating Balance Sheet
At December 31, 2005
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
ASSETS
                                       
Total investments
  $ 2,779     $ 5,219,521     $ 263,770     $     $ 5,486,070  
Cash
    2       4,324       290             4,616  
Reinsurance recoverable on loss reserves
          78,097       36       (63,346 )     14,787  
Prepaid reinsurance premiums
          17,521       3       (7,916 )     9,608  
Deferred insurance policy acquisition costs
          18,416                   18,416  
Investments in subsidiaries/joint ventures
    4,842,932       481,778             (4,842,932 )     481,778  
Other assets
    13,542       356,624       28,274       (56,146 )     342,294  
 
                                       
 
                             
Total assets
  $ 4,859,255     $ 6,176,281     $ 292,373     $ (4,970,340 )   $ 6,357,569  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Liabilities:
                                       
Loss reserves
  $     $ 1,124,454     $ 63,346     $ (63,346 )   $ 1,124,454  
Unearned premiums
          159,823       7,916       (7,916 )     159,823  
Short- and long-term debt
    685,124       9,364             (9,325 )     685,163  
Other liabilities
    9,076       232,109       13,435       (31,546 )     223,074  
 
                             
 
                                       
Total liabilities
    694,200       1,525,750       84,697       (112,133 )     2,192,514  
 
                             
 
                                       
Total shareholders’ equity
    4,165,055       4,650,531       207,676       (4,858,207 )     4,165,055  
 
                             
 
                                       
Total liabilities and shareholders’ equity
  $ 4,859,255     $ 6,176,281     $ 292,373     $ (4,970,340 )   $ 6,357,569  
 
                             
Condensed Consolidating Balance Sheet
At December 31, 2004
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
ASSETS
                                       
Total investments
  $ 18,355     $ 5,315,382     $ 248,890     $     $ 5,582,627  
Cash
          2,505       324             2,829  
Reinsurance recoverable on loss reserves
          84,916       67       (67,681 )     17,302  
Prepaid reinsurance premiums
          8,312       4       (1,480 )     6,836  
Deferred insurance policy acquisition costs
          27,714                   27,714  
Investments in subsidiaries/joint ventures
    4,767,631       414,309             (4,767,631 )     414,309  
Other assets
    11,381       353,202       22,488       (57,997 )     329,074  
 
                                       
 
                             
Total assets
  $ 4,797,367     $ 6,206,340     $ 271,773     $ (4,894,789 )   $ 6,380,691  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Liabilities:
                                       
Loss reserves
  $     $ 1,185,594     $ 67,681     $ (67,681 )   $ 1,185,594  
Unearned premiums
          143,433       1,480       (1,480 )     143,433  
Short- and long-term debt
    639,263       8,847             (8,807 )     639,303  
Other liabilities
    14,465       266,682       15,189       (27,614 )     268,722  
 
                             
 
                                       
Total liabilities
    653,728       1,604,556       84,350       (105,582 )     2,237,052  
 
                             
 
                                       
Total shareholders’ equity
    4,143,639       4,601,784       187,423       (4,789,207 )     4,143,639  
 
                             
 
                                       
Total liabilities and shareholders’ equity
  $ 4,797,367     $ 6,206,340     $ 271,773     $ (4,894,789 )   $ 6,380,691  
 
                             

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Condensed Consolidating Statement of Operations
Year ended December 31, 2005
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
Revenues:
                                       
Net premiums written
  $     $ 1,177,862     $ 74,702     $ (254 )   $ 1,252,310  
 
                             
 
                                       
Net premiums earned
          1,170,681       68,265       (254 )     1,238,692  
 
                                       
Equity in undistributed net income of subsidiaries
    100,261                   (100,261 )      
Dividends received from subsidiaries
    552,200                   (552,200 )      
Investment income, net of expenses
    2,465       216,780       10,033       (424 )     228,854  
Realized investment gains (losses), net
          15,017       (160 )           14,857  
Other revenue
          1,794       42,333             44,127  
 
                             
 
                                       
Total revenues
    654,926       1,404,272       120,471       (653,139 )     1,526,530  
 
                             
 
                                       
Losses and expenses:
                                       
Losses incurred, net
          523,535       29,995             553,530  
Underwriting and other expenses
    278       191,061       84,376       (299 )     275,416  
Interest expense
    41,091       424             (424 )     41,091  
 
                             
 
                                       
Total losses and expenses
    41,369       715,020       114,371       (723 )     870,037  
 
                             
 
                                       
Income before tax and joint ventures
    613,557       689,252       6,100       (652,416 )     656,493  
Provision (credit) for income tax
    (13,316 )     190,718       (185 )     (285 )     176,932  
Income from joint ventures, net of tax
          147,312                   147,312  
 
                             
 
                                       
Net income
  $ 626,873     $ 645,846     $ 6,285     $ (652,131 )   $ 626,873  
 
                             
Condensed Consolidating Statement of Operations
Year ended December 31, 2004
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
Revenues:
                                       
Net premiums written
  $     $ 1,232,791     $ 72,978     $ (352 )   $ 1,305,417  
 
                             
 
                                       
Net premiums earned
          1,256,141       73,639       (352 )     1,329,428  
 
                                       
Equity in undistributed net income of subsidiaries
    416,385                   (416,385 )      
Dividends received from subsidiaries
    162,900                   (162,900 )      
Investment income, net of expenses
    1,240       205,650       8,667       (504 )     215,053  
Realized investment gains, net
    4       16,853       322       63       17,242  
Other revenue
          4,984       45,986             50,970  
 
                             
 
                                       
Total revenues
    580,529       1,483,628       128,614       (580,078 )     1,612,693  
 
                             
 
                                       
Losses and expenses:
                                       
Losses incurred, net
          664,228       36,771             700,999  
Underwriting and other expenses
    272       191,214       87,697       (397 )     278,786  
Interest expense
    41,124       509             (502 )     41,131  
 
                             
 
                                       
Total losses and expenses
    41,396       855,951       124,468       (899 )     1,020,916  
 
                             
 
                                       
Income before tax and joint ventures
    539,133       627,677       4,146       (579,179 )     591,777  
Provision (credit) for income tax
    (14,053 )     173,799       (1,065 )     667       159,348  
Income from joint ventures, net of tax
          120,757                   120,757  
 
                             
 
                                       
Net income
  $ 553,186     $ 574,635     $ 5,211     $ (579,846 )   $ 553,186  
 
                             

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Condensed Consolidating Statement of Operations
Year ended December 31, 2003
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
Revenues:
                                       
Net premiums written
  $     $ 1,283,006     $ 82,121     $ (496 )   $ 1,364,631  
 
                             
 
                                       
Net premiums earned
          1,284,081       82,426       (496 )     1,366,011  
 
                                       
Equity in undistributed net income of subsidiaries
    288,305                   (288,305 )      
Dividends received from subsidiaries
    232,023                   (232,023 )      
Investment income, net of expenses
    645       194,591       8,022       (377 )     202,881  
Realized investment gains, net
          34,939       1,811       112       36,862  
Other revenue
          8,505       71,152             79,657  
 
                             
 
                                       
Total revenues
    520,973       1,522,116       163,411       (521,089 )     1,685,411  
 
                             
 
                                       
Losses and expenses:
                                       
Losses incurred, net
          706,337       59,691             766,028  
Underwriting and other expenses
    228       196,898       105,888       (541 )     302,473  
Interest expense
    41,107       383             (377 )     41,113  
 
                             
 
                                       
Total losses and expenses
    41,335       903,618       165,579       (918 )     1,109,614  
 
                             
 
                                       
Income before tax and joint ventures
    479,638       618,498       (2,168 )     (520,171 )     575,797  
Provision (credit) for income tax
    (14,241 )     162,731       (2,551 )     88       146,027  
Income from joint ventures, net of tax
          64,109                   64,109  
 
                             
 
                                       
Net income
  $ 493,879     $ 519,876     $ 383     $ (520,259 )   $ 493,879  
 
                             

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Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005
(in thousands of dollars)
                                         
    Parent     MGIC                    
    Company     Consolidated     Other     Eliminations     Total  
Net cash from operating activities:
  $ 536,734 (1)   $ 520,348     $ 19,582</