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

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

For the transition period from                      to                     

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN		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 *

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

 

 

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

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),

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

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

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

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.

     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

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.

     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.

     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

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:

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	%

     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	%

     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.

     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.

     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.

     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	%

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	%

(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.

     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

     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.

     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

     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

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

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

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,

	•		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.

     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,

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:

	•		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

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.

Item 1B. Unresolved Staff Comments.

None.

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.

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

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.

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.

										(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

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

		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

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

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

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.

	•		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:

•

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.

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.

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.

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.

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.

     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.

		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	%

     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.

     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	%

     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.

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

     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.

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