FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For the quarterly period ended MARCH 31, 2006

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
incorporation or organization)		Identification No.)
250 E. KILBOURN AVENUE		53202
MILWAUKEE, WISCONSIN		(Zip Code)
(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 Exchange Act).

YESo		NO þ

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

CLASS OF STOCK		PAR VALUE		DATE		NUMBER OF SHARES
Common stock		$1.00		04/30/06		87,433,075

 

 

MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005			3
Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2006 and 2005 (Unaudited)			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			37-38
PART II. OTHER INFORMATION
Item 1A. Risk Factors			39-40
Item 2. Unregistered Sale of Equity Securities & Use of Proceeds			40-41
Item 6. Exhibits			41
SIGNATURES			42
INDEX TO EXHIBITS
Statement of Computation of Net Income
CERTIFICATION-SECTION 302 - CEO
CERTIFICATION-SECTION 302 - CFO
CERTIFICATION-SECTION 906 - CEO/CFO
RISK FACTORS-ANNUAL REPORT ON FORM 10-K

PART I. FINANCIAL INFORMATION

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2006 (Unaudited) and December 31, 2005

		March 31,				December 31,
		2006				2005
		(In thousands of dollars)
ASSETS
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities		$	5,234,591			$	5,292,942
Equity securities			2,489				2,488
Total investment portfolio			5,237,080				5,295,430
Cash and cash equivalents			206,595				195,256
Accrued investment income			66,265				66,369
Reinsurance recoverable on loss reserves			14,039				14,787
Prepaid reinsurance premiums			9,110				9,608
Premiums receivable			92,784				91,547
Home office and equipment, net			32,579				32,666
Deferred insurance policy acquisition costs			16,934				18,416
Investments in joint ventures			472,207				481,778
Other assets			176,625				151,712
Total assets		$	6,324,218			$	6,357,569
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves		$	1,103,557			$	1,124,454
Unearned premiums			160,130				159,823
Short- and long-term debt (note 2)			597,674				685,163
Income taxes payable			114,878				62,006
Other liabilities			152,453				161,068
Total liabilities			2,128,692				2,192,514
Contingencies (note 3)
Shareholders’ equity:
Common stock, $1 par value, shares authorized 300,000,000; shares issued, 3/31/06 - 122,766,397 12/31/05 - 122,549,285; shares outstanding, 3/31/06 - 87,266,998 12/31/05 - 88,046,430			122,766				122,549
Paid-in capital			273,840				280,052
Treasury stock (shares at cost, 3/31/06 - 35,499,399 12/31/05 - 34,502,855)			(1,907,942	)			(1,834,434	)
Accumulated other comprehensive income, net of tax (note 5)			45,975				77,499
Retained earnings			5,660,887				5,519,389
Total shareholders’ equity			4,195,526				4,165,055
Total liabilities and shareholders’ equity		$	6,324,218			$	6,357,569

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2006 and 2005

(Unaudited)

		Three Months Ended
		March 31,
		2006				2005
		(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct		$	333,576			$	342,287
Assumed			397				202
Ceded			(33,501	)			(30,250	)
Net premiums written			300,472				312,239
(Increase) decrease in unearned premiums, net			(805	)			3,840
Net premiums earned			299,667				316,079
Investment income, net of expenses			57,964				57,003
Realized investment gains, net			87				1,565
Other revenue			11,314				10,261
Total revenues			369,032				384,908
Losses and expenses:
Losses incurred, net			114,885				98,866
Underwriting and other expenses, net			74,265				67,895
Interest expense			9,315				10,722
Total losses and expenses			198,465				177,483
Income before tax and joint ventures			170,567				207,425
Provision for income tax			46,166				59,660
Income from joint ventures, net of tax			39,052				34,248
Net income		$	163,453			$	182,013
Earnings per share (note 4):
Basic		$	1.89			$	1.91
Diluted		$	1.87			$	1.90
Weighted average common shares outstanding — diluted (shares in thousands, note 4)			87,227				95,784
Dividends per share		$	0.2500			$	0.0750

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2006 and 2005

(Unaudited)

		Three Months Ended
		March 31,
		2006				2005
		(In thousands of dollars)
Cash flows from operating activities:
Net income		$	163,453			$	182,013
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred insurance policy acquisition costs			3,521				5,632
Increase in deferred insurance policy acquisition costs			(2,039	)			(4,581	)
Depreciation and amortization			6,854				4,519
Decrease in accrued investment income			104				3,295
Decrease in reinsurance recoverable on loss reserves			748				1,069
Decrease in prepaid reinsurance premiums			498				492
(Increase) decrease in premium receivable			(1,237	)			7,911
Decrease in loss reserves			(20,897	)			(51,494	)
Increase (decrease) in unearned premiums			307				(4,332	)
Increase in income taxes payable			50,006				44,834
Equity earnings in joint ventures			(57,251	)			(49,872	)
Distributions from joint ventures			67,862				60,375
Other			(10,796	)			36,503
Net cash provided by operating activities			201,133				236,364
Cash flows from investing activities:
Purchase of fixed maturities			(386,062	)			(289,505	)
Additional investment in joint ventures			(984	)			(1,760	)
Sale of equity securities							616
Proceeds from sale of fixed maturities			350,525				85,089
Proceeds from maturity of fixed maturities			40,125				49,372
Net cash provided by (used in) investing activities			3,604				(156,188	)
Cash flows from financing activities:
Dividends paid to shareholders			(21,954	)			(7,201	)
Net (repayment of) proceeds from short-term debt			(89,583	)			14,947
Reissuance of treasury stock			1,275				570
Repurchase of common stock			(91,534	)			(68,567	)
Common stock issued			5,532				703
Excess tax benefits from share-based payment arrangements			2,866				—
Net cash used in financing activities			(193,398	)			(59,548	)
Net increase in cash and cash equivalents			11,339				20,628
Cash and cash equivalents at beginning of period			195,256				166,468
Cash and cash equivalents at end of period		$	206,595			$	187,096

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

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

     The accompanying unaudited consolidated financial statements of MGIC Investment Corporation (the “Company”) and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005 included in the Company’s Annual Report on Form 10-K for that year.

     The accompanying consolidated financial statements have not been audited by independent auditors in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring accruals, necessary to summarize fairly the Company’s financial position and results of operations. The results of operations for the three months ended March 31, 2006 may not be indicative of the results that may be expected for the year ending December 31, 2006.

New Accounting Standards

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the provisions of SFAS 155 and believes that adoption will not have a material effect on its financial position or results of operations.

     In July 2005, the FASB published an Exposure Draft of a proposed Interpretation, “Accounting for Uncertain Tax Positions.” The Exposure Draft seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. The FASB has reopened deliberations to consider comments that were received regarding the Exposure Draft. At this time, the FASB has decided that the final interpretation would apply to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The Exposure Draft requires that a tax position meet a “probable recognition threshold” for the benefit of the uncertain tax position to be recognized in the financial statements. When evaluating a tax position for recognition and measurement, an entity should presume that a taxing authority will examine a tax position. The interpretation will most probably adopt a

benefit recognition model with a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a best estimate measurement attribute. It is expected to be finalized during the second quarter of 2006, with an effective date as of the start of the first annual period beginning after December 31, 2006. The Company will continue to evaluate the impact, if any, this proposed Interpretation would have on the Company’s results of operations and financial position.

Reclassifications

     Certain reclassifications have been made in the accompanying financial statements to 2005 amounts to conform to 2006 presentation.

Note 2 — Short- and long-term debt

     The Company has a $300 million commercial paper program, which is rated “A-1” by Standard and Poors (“S&P”) and “P-1” by Moody’s. At March 31, 2006 and 2005, the Company had $100.0 and $155.5 million in commercial paper outstanding with a weighted average interest rate of 4.74% and 2.85%, respectively.

     In March of 2005, the Company obtained a $300 million, five year revolving credit facility, expiring in 2010. The facility replaced the previous $285 million facility that was due to expire in 2006. Under the terms of the credit facility, the Company must maintain shareholders’ equity of at least $2.25 billion and Mortgage Guaranty Insurance Corporation (“MGIC”) must maintain a risk-to-capital ratio of not more than 22:1 and maintain policyholders’ position (which includes MGIC’s statutory surplus and its contingency reserve) of not less than the amount required by Wisconsin insurance regulation. At March 31, 2006, these requirements were met. The facility will continue to be used as a liquidity back up facility for the outstanding commercial paper. The remaining credit available under the facility after reduction for the amount necessary to support the commercial paper was $200.0 million and $144.5 million at March 31, 2006 and 2005, respectively.

     The Company had $300 million, 5.375% Senior Notes due in November 2015 and $200 million, 6% Senior Notes due in March 2007 outstanding at March 31, 2006. At March 31, 2005 the Company had $300 million, 7.5% Senior Notes due in October 2005 and $200 million, 6% senior Notes due in March 2007. In October 2005 the Company issued, in a public offering, $300 million, 5.375% Senior Notes due in 2015. Interest on the Notes is payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2006. The Senior Notes were rated “A-1” by Moody’s, “A” by S&P and “A+” by Fitch. The Company utilized the proceeds from the sale of these Senior Notes, together with available cash, to repay the $300 million, 7.5% Senior Notes that came due October 17, 2005. At March 31, 2006 and 2005, the market value of the outstanding debt was $588.4million and $667.3 million, respectively.

     Interest payments on all long-term and short-term debt were $8.3 million and $8.6 million for the three months ended March 31, 2006 and 2005, respectively.

     During the first quarter of 2006, an outstanding interest rate swap contract was terminated. This swap was placed into service to coincide with the committed credit

facility, used as a backup for the commercial paper program. Under the terms of the swap contract, the Company paid a fixed rate of 5.07% and received a variable interest rate based on the London Inter Bank Offering Rate (“LIBOR”). The swap had an expiration date coinciding with the maturity of the credit facility and was designated as a cash flow hedge. At March 31, 2006 the Company has no interest rate swaps outstanding.

     Expense (income) on the interest rate swaps for the three months ended March 31, 2006 and 2005 of approximately ($0.1) million and $0.5 million, respectively, was included in interest expense. Gains or losses arising from the amendment or termination of interest rate swaps are deferred and amortized to interest expense over the life of the hedged items.

Note 3 — Litigation and contingencies

     The Company is involved in litigation in the ordinary course of business. In the opinion of management, the ultimate resolution of this pending litigation will not have a material adverse effect on the financial position or results of operations of the Company.

     Consumers are bringing a growing number of lawsuits against home mortgage lenders and settlement service providers. In recent years, seven mortgage insurers, including MGIC, have been involved in litigation alleging violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. MGIC’s settlement of class action litigation against it under RESPA became final in October 2003. MGIC settled the named plaintiffs’ claims in litigation against it under FCRA in late December 2004 following denial of class certification in June 2004. There can be no assurance that MGIC will not be subject to 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, the NYID requested MGIC to review its premium rates in New York and to file adjusted rates based on recent years’ experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the NYID that it believes its premium rates are reasonable and that, given the nature of mortgage insurance risk, premium rates should not be determined only by the experience of recent years. In February 2006, in response to an administrative subpoena from the Minnesota Department of Commerce (the “MDC”), which regulates insurance, the Company provided the MDC with information about captive mortgage reinsurance and certain other matters. Insurance departments or other officials in other states may also seek information about or investigate captive mortgage reinsurance.

     The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban Development (“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.

     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 three months ended March 31, 2006 and 2005.

     The Internal Revenue Service (“IRS”) has been conducting an examination of the federal income tax returns of the Company for 2000 and 2001. During 2005, the IRS expanded the examination to include the 2002, 2003 and 2004 taxable years. In this examination, they have summonsed documents which include communications with outside legal counsel engaged by the Company. Management believes that these documents are protected by the attorney-client privilege and has declined to waive that privilege, so it has not provided them to the IRS. The documents relate to a portfolio of investments in the residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). This portfolio has been managed and maintained during years prior to, during and subsequent to the examination period. The tax returns have included the flow through of income and losses from these investments in the computation of taxable income. The IRS has indicated that they do not believe that the Company has established sufficient tax basis in the REMIC residual interests to deduct some portion of the flow through losses from income. To date, they have not provided a detailed explanation of their position or the calculation of the dollar amount of any potential adjustment. The Company will contest any such proposal to increase taxable income and believes that income taxes related to these years have been properly provided for in the financial statements.

Note 4 — Earnings per share

     The Company’s basic and diluted earnings per share (“EPS”) have been calculated in accordance with SFAS No. 128, Earnings Per Share. The Company’s net income is the same for both basic and diluted EPS. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding plus common stock equivalents which include stock awards and stock options. The following is a reconciliation of the weighted average number of shares used for basic EPS and diluted EPS.

		Three Months Ended
		March 31,
		2006				2005
Weighted-average shares — Basic			86,577				95,265
Common stock equivalents			650				519
Weighted-average shares — Diluted			87,227				95,784

Note 5 — Comprehensive income

     The Company’s total comprehensive income, as calculated per SFAS No. 130, Reporting Comprehensive Income, was as follows:

		Three Months Ended
		March 31,
		2006				2005
		(In thousands of dollars)
Net income		$	163,453			$	182,013
Other comprehensive income (loss)			(31,523	)			(56,692	)
Total comprehensive income		$	131,930			$	125,321
Other comprehensive income (loss) (net of tax):
Change in unrealized net derivative gains and losses		$	777			$	711
Amortization of deferred losses on derivatives			—				203
Change in unrealized gains and losses on investments			(32,336	)			(58,356	)
Other			36				750
Other comprehensive income (loss)		$	(31,523	)		$	(56,692	)
Other			36				750
Other comprehensive income (loss)		$	(31,523	)		$	(56,692	)

     At March 31, 2006, accumulated other comprehensive income of $46.0 million included $45.6 million of net unrealized gains on investments and $0.4 million relating to the accumulated other comprehensive gain of the Company’s joint venture investment, all net of tax. At December 31, 2005, accumulated other comprehensive income of $77.5 million included $77.9 million of net unrealized gains on investments, ($0.8) million relating to derivative financial instruments and $0.4 million relating to the accumulated other comprehensive loss of the Company’s joint venture investment.

Note 6 — Benefit Plans

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

		Three Months Ended
		March 31,
										Other Postretirement
		Pension Benefits								Benefits
		2006				2005				2006				2005
		(In thousands of dollars)
Service cost		$	2,364			$	2,210			$	898			$	919
Interest cost			2,627				2,371				1,024				984
Expected return on plan assets			(3,709	)			(3,355	)			(649	)			(560	)
Recognized net actuarial loss (gain)			98				—				111				127
Amortization of transition obligation			—				—				71				71
Amortization of prior service cost			216				185				—				—
Net periodic benefit cost		$	1,596			$	1,411			$	1,455			$	1,541

     The Company previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute approximately $10.3 million and $4.6 million, respectively, to its pension and postretirement plans in 2006. As of March 31, 2006, no contributions have been made.

Note 7 — Share-based compensation plans

     The Company has certain share-based compensation plans. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” under the modified prospective method, accordingly prior period amounts have not been restated. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be measured based on the fair value of the equity or liability instrument issued and be recognized in the financial statements of the company. This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. The fair value recognition provisions of SFAS No. 123 were voluntarily adopted by the Company in 2003 prospectively to all employee awards granted or modified on or after January 1, 2003. The adoption of SFAS No. 123R and SFAS No. 123 did not have a material effect on the Company’s results of operations or its financial position. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under the Company’s plans generally vest over periods ranging from one to five years.

     The cost related to stock-based employee compensation included in the determination of net income for 2005 was less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards for the three months ended March 31, 2005.

		Three Months Ended
		March 31,
		2005
		(in thousands of dollars,
		except per share data)
Net income, as reported		$	182,013
Add stock-based employee compensation expense included in reported net income, net of tax			2,522
Deduct stock-based employee compensation expense determined under fair value method for all awards, net of tax			(3,622	)
Pro forma net income		$	180,913
Earnings per share:
Basic, as reported		$	1.91
Basic, pro forma		$	1.90
Diluted, as reported		$	1.90
Diluted, pro-forma		$	1.89

     The compensation cost that has been charged against income for the share-based plans was $7.9 million and $3.9 million for the three months ended March 31, 2006 and 2005, respectively. The related income tax benefit recognized for the share-based compensation plans was $2.8 million and $1.4 million for the three months ended March 31, 2006 and 2005, respectively.

     The Company has stock incentive plans that were adopted in 1991 and 2002. When the 2002 plan was adopted, no further awards could be made under the 1991 plan. The maximum number of shares covered by awards under the 2002 plan is the total of 7.1 million shares plus the number of shares that must be purchased at a purchase price of not less than the fair market value of the shares as a condition to the award of restricted stock under the 2002 plan. The maximum number of shares of restricted stock that can be awarded under the 2002 plan is 5.9 million shares. Both plans provide for the award of stock options with maximum terms of 10 years and for the grant of restricted stock or restricted stock units, and the 2002 plan also provides for the grant of stock appreciation rights. The exercise price of options is the closing price of the common stock on the New York Stock Exchange on the date of grant. The vesting provisions of options and restricted stock are determined at the time of grant. New shares are issued when stock option grants under the 1991 plan are exercised. Treasury shares are used for awards under the 2002 plan. Directors may receive awards under the 2002 plan and were eligible for awards of restricted stock under the 1991 plan.

     A summary of option activity in the stock incentive plans during 2006 is as follows:

		Weighted
		Average				Shares
		Exercise				Subject
		Price				to Option
Outstanding, December 31, 2005		$	54.19				3,274,731
Granted			—				—
Exercised			39.20				(238,437	)
Forfeited or expired			54.80				(13,930	)
Outstanding, March 31, 2006		$	55.37				3,022,364

     During the three months ended March 31, 2006, the total intrinsic value of options exercised (i.e., the difference in the market price at exercise and the price paid by the employee to exercise the option) was $6.4 million, the total amount of cash received from exercise of options was $6.7 million and the related net tax benefit realized from the exercise of those stock options was $2.2 million.

     The following is a summary of stock options outstanding at March 31, 2006:

		Options Outstanding												Options Exercisable
										Weighted												Weighted
Exercise						Remaining				Average								Remaining				Average
Price						Average				Exercise								Average				Exercise
Range		Shares				Life (years)				Price				Shares				Life (years)				Price
$33.81 - 47.31			1,319,214				4.5			$	44.18				785,224				4.2			$	43.80
$53.70 - 68.63			1,703,150				6.0			$	64.03				1,225,250				5.6			$	62.90
Total			3,022,364				5.4			$	55.37				2,010,474				5.0			$	55.44

     The aggregate intrinsic value of options outstanding at March 31, 2006 was $34 million. The aggregate intrinsic value of options exercisable was $22.5 million. The aggregate intrinsic value represents the total pretax intrinsic value based on the Company’s closing stock price of $66.63 as of March 31, 2006 which would have been received by the option holders had all option holders exercised their options on that date.

     A summary of restricted stock or restricted stock units during 2006 is as follows:

		Weighted
		Average
		Grant Date
		Fair Market
		Value				Shares
Restricted stock outstanding at December 31, 2005		$	60.50				898,671
Granted			64.66				564,350
Vested			56.87				(262,982	)
Forfeited			61.53				(6,069	)
Restricted stock outstanding at March 31, 2006		$	63.26				1,193,970

     At March 31, 2006, 4,522,068 shares were available for future grant under the 2002 stock incentive plan. Of the shares available for future grant, 4,441,158 are available for restricted stock awards.

     As of March 31, 2006, there was $81.5 million of total unrecognized compensation cost related to nonvested share-based compensation agreements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of shares vested during the three months ended March 31, 2006 was $17.1 million.

     For purposes of determining the pro forma net income disclosure in Note 1, the fair value of options granted was estimated at grant date using the binomial option pricing model for the 2004 options and the Black-Scholes model for the 2003 and prior options with the following weighted average assumptions for each year:

		Grants Issued in Year Ended December 31,
		2004				2003
Risk free interest rate			3.27	%			2.91	%
Expected life		5.50		years	4.87		years
Expected volatility			30.20	%			29.40	%
Expected dividend yield			0.25	%			0.25	%
Fair value of each option		$	21.68			$	13.12

Note 8 — Condensed consolidating financial statements

     The following condensed financial information sets forth, on a consolidating basis, the balance sheet, statement of operations, and statement of cash flows for MGIC Investment Corporation (“Parent Company”), which represents the Company’s investments in all of its subsidiaries under the equity method, Mortgage Guaranty Insurance Corporation and Subsidiaries (“MGIC Consolidated”), and all other subsidiaries

of the Company (“Other”) on a combined basis. The eliminations column represents entries eliminating investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

Condensed Consolidating Balance Sheets
At March 31, 2006
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
ASSETS
Total investments		$	2,526			$	4,970,161			$	264,393			$	—			$	5,237,080
Cash and cash equivalents			3,434				196,187				6,974				—				206,595
Reinsurance recoverable on loss reserves			—				75,188				32				(61,181	)			14,039
Prepaid reinsurance premiums			—				18,377				4				(9,271	)			9,110
Deferred insurance policy acquisition costs			—				16,934				—				—				16,934
Investments in subsidiaries/joint ventures			4,776,624				472,207				—				(4,776,624	)			472,207
Other assets			18,871				381,768				26,104				(58,490	)			368,253
Total assets		$	4,801,455			$	6,130,822			$	297,507			$	(4,905,566	)		$	6,324,218
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves		$	—			$	1,103,557			$	61,181			$	(61,181	)		$	1,103,557
Unearned premiums			—				160,130				9,271				(9,271	)			160,130
Short- and long-term debt			597,635				9,364				—				(9,325	)			597,674
Other liabilities			8,294				276,285				18,147				(35,395	)			267,331
Total liabilities			605,929				1,549,336				88,599				(115,172	)			2,128,692
Total shareholders’ equity			4,195,526				4,581,486				208,908				(4,790,394	)			4,195,526
Total liabilities and shareholders’ equity		$	4,801,455			$	6,130,822			$	297,507			$	(4,905,566	)		$	6,324,218

Condensed Consolidating Balance Sheets
At December 31, 2005
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
ASSETS
Total investments		$	2,570			$	5,047,475			$	245,385			$	—			$	5,295,430
Cash			211				176,370				18,675				—				195,256
Reinsurance recoverable on loss reserves			—				78,097				36				(63,346	)			14,787
Prepaid reinsurance premiums			—				17,521				3				(7,916	)			9,608
Deferred insurance policy acquisition costs			—				18,416				—				—				18,416
Investments in subsidiaries/joint ventures			4,842,932				481,778				—				(4,842,932	)			481,778
Other assets			13,542				356,624				28,274				(56,146	)			342,294
Total assets		$	4,859,255			$	6,176,281			$	292,373			$	(4,970,340	)		$	6,357,569
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves		$	—			$	1,124,454			$	63,346			$	(63,346	)		$	1,124,454
Unearned premiums			—				159,823				7,916				(7,916	)			159,823
Short- and long-term debt			685,124				9,364				—				(9,325	)			685,163
Other liabilities			9,076				232,109				13,435				(31,546	)			223,074
Total liabilities			694,200				1,525,750				84,697				(112,133	)			2,192,514
Total shareholders’ equity			4,165,055				4,650,531				207,676				(4,858,207	)			4,165,055
Total liabilities and shareholders’ equity		$	4,859,255			$	6,176,281			$	292,373			$	(4,970,340	)		$	6,357,569

Condensed Consolidating Statements of Operations
Three months ended March 31, 2006
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
Revenues:
Net premiums written		$	—			$	282,653			$	17,841			$	(22	)		$	300,472
Net premiums earned			—				283,202				16,487				(22	)			299,667
Equity in undistributed net income of subsidiaries			(35,515	)			—				—				35,515				—
Dividends received from subsidiaries			205,000												(205,000	)			—
Investment income, net of expenses			99				55,072				2,793				—				57,964
Realized investment gains, net			—				57				30				—				87
Other revenue			—				2,665				8,649				—				11,314
Total revenues			169,584				340,996				27,959				(169,507	)			369,032
Losses and expenses:
Losses incurred, net			—				110,599				4,286				—				114,885
Underwriting and other expenses			64				54,108				20,126				(33	)			74,265
Interest expense			9,315				—				—				—				9,315
Total losses and expenses			9,379				164,707				24,412				(33	)			198,465
Income before tax and joint ventures			160,205				176,289				3,547				(169,474	)			170,567
Provision (credit) for income tax			(3,248	)			48,738				659				17				46,166
Income from joint ventures, net of tax			—				39,052				—				—				39,052
Net income		$	163,453			$	166,603			$	2,888			$	(169,491	)		$	163,453

Condensed Consolidating Statements of Operations
Three months ended March 31, 2005
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
Revenues:
Net premiums written		$	—			$	295,405			$	16,902			$	(68	)		$	312,239
Net premiums earned			—				299,057				17,090				(68	)			316,079
Equity in undistributed net income of subsidiaries			144,562				—				—				(144,562	)			—
Dividends received from subsidiaries			44,300												(44,300	)			—
Investment income, net of expenses			250				54,605				2,354				(206	)			57,003
Realized investment gains, net			—				1,549				16				—				1,565
Other revenue			—				511				9,750				—				10,261
Total revenues			189,112				355,722				29,210				(189,136	)			384,908
Losses and expenses:
Losses incurred, net			—				94,529				4,337				—				98,866
Underwriting and other expenses			68				49,301				18,605				(79	)			67,895
Interest expense			10,719				210				—				(207	)			10,722
Total losses and expenses			10,787				144,040				22,942				(286	)			177,483
Income before tax and joint ventures			178,325				211,682				6,268				(188,850	)			207,425
Provision (credit) for income tax			(3,688	)			61,827				1,518				3				59,660
Income from joint ventures, net of tax			—				34,248				—				—				34,248
Net income		$	182,013			$	184,103			$	4,750			$	(188,853	)		$	182,013

Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2006
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
Net cash from operating activities:		$	199,443	(1)		$	196,541			$	10,149			$	(205,000	)		$	201,133
Net cash from (used in) investing activities:			44				25,410				(21,850	)			—				3,604
Net cash used in financing activities:			(196,264	)			(202,134	)			—				205,000				(193,398	)
Net increase (decrease) in Cash		$	3,223			$	19,817			$	(11,701	)		$	—			$	11,339

Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2005
(in thousands of dollars)

		Parent				MGIC
		Company				Consolidated				Other				Eliminations				Total
Net cash from operating activities:		$	44,074	(1)		$	228,281			$	8,309			$	(44,300	)		$	236,364
Net cash from (used in) investing activities:			61				(147,756	)			(8,493	)			—				(156,188	)
Net cash used in financing activities:			(59,548	)			(44,300	)			—				44,300				(59,548	)
Net (decrease) increase in Cash		$	(15,413	)		$	36,225			$	(184	)		$	—			$	20,628

ITEM 2. 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” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, 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 mortgage loans owned by C-BASS and underlying C-BASS’s mortgage securities investments are generally 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.

     In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), an amendment to SFAS No.140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS 156 provides standards for the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. It is effective for fiscal years beginning after September 15, 2006. C-BASS is currently evaluating the effect, if any, the new standard will have on its results of operations or financial position.

     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.
•		Credit card interest and fees, along with the coincident provision for losses for uncollectible amounts.
•		Costs of collection, which include servicing fees paid to third parties to collect receivables.

2006 First quarter Results

     The Company’s results of operations in the first quarter of 2006 were principally affected by:

•

Losses incurred

     Losses incurred for the first quarter of 2006 increased compared to the same period in 2005 primarily due to an increase in the estimates regarding how many delinquencies will eventually result in a claim and how much will be paid on claims when compared to the same period in 2005.

•

Premiums written and earned

     During the first quarter of 2006, the Company’s written and earned premiums were lower than in the first quarter of 2005 due to a decline in the average insurance in force.

•

Underwriting expenses

Underwriting expenses increased in the first quarter of 2006 compared to the first quarter of 2005 primarily due to additional amounts related to Myers Internet (acquired in January 2006) and equity based compensation.

•

Investment income

     Investment income in the first quarter of 2006 was higher than in the first quarter of 2005 due to a slight increase in the pre-tax yield.

•

Income from joint ventures

     Income from joint ventures increased in the first quarter of 2006 compared to the same period in 2005 due to higher income from each of C-BASS and Sherman.

     The discussion below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

RESULTS OF CONSOLIDATED OPERATIONS

     As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. 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 in the “Overview-Business and General Environment” section) during the three months ended March 31, 2006 and 2005 was as follows:

		Three months ended
		March 31,
		2006				2005
		($ billions)
Flow		$	7.9			$	8.9
Bulk			2.1				2.5
Total NIW		$	10.0			$	11.4
Refinance volume as a % of primary flow NIW			28	%			33	%

     NIW on a flow basis for the first quarter of 2006 was less than the volume during the first quarter of 2005. The decrease in NIW on a flow basis for the first three months of 2006 was primarily the result of a decrease in refinance volume. Refinance volume in turn is driven by changes in interest rates as discussed with respect to cancellations below. For a discussion of NIW written through the bulk channel, see “Bulk transactions” below.

Cancellations and insurance in force

     NIW and cancellations of primary insurance in force during the three months ended March 31, 2006 and 2005 were as follows:

		Three months ended
		March 31,
		2006				2005
		($ billions)
NIW		$	10.0			$	11.4
Cancellations			(13.1	)			(16.4	)
Change in primary insurance in force		$	(3.1	)		$	(5.0	)

     Direct primary insurance in force was $166.9 billion at March 31, 2006 compared to $170.0 billion at December 31, 2005 and $172.1 billion at March 31, 2005.

     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 62.0% at March 31, 2006, an increase from 61.3% at December 31, 2005 and 59.7% at March 31, 2005. The Company expects modest improvement in the persistency rate for the remainder of 2006, although this expectation assumes the absence of significant declines in the level of mortgage interest rates from their level in late April 2006.

Bulk transactions

     NIW for bulk transactions decreased from $2.5 billion during the first quarter of 2005 to $2.1 billion in the first quarter of 2006.

     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.

Pool insurance

     In addition to providing primary insurance coverage, the Company also insures pools of mortgage loans. New pool risk written during the three months ended March 31, 2006 and 2005 was $68 million and $48 million, respectively. The Company’s direct pool risk in force was $3.0 billion, $2.9 billion and $3.1 billion at March 31, 2006, December 31, 2005 and March 31, 2005, 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 March 31, 2006 and 2005, for $4.8 billion and $5.1 billion, respectively, of risk without such limits risk in force was calculated at $470 million and $438 million, respectively. New risk written under this model, for the three months ended March 31, 2006 and 2005, was $1 million and $20 million, respectively.

Net premiums written and earned

     Net premiums written and earned during the first quarter of 2006 decreased due to a decline in the average insurance in force, when compared to the same period in 2005. The Company expects the average insurance in force during the remainder of 2006 will be slightly lower than during the comparable period in 2005. As a result, the Company anticipates that net premiums written and earned for 2006 will be lower than in 2005.

Risk sharing arrangements

     For the quarter ended December 31, 2005, approximately 49.0% 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 47.0% for the quarter ended March 31, 2005. 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 this agreement have not been

material and are included in “ceded premiums.” The Company may enter into similar transactions in the future.

Investment income

     Investment income for the first quarter of 2006 increased due to a slight increase in the average investment yield. The portfolio’s average pre-tax investment yield was 4.35% at March 31, 2006 and 4.27% at March 31, 2005. The portfolio’s average after-tax investment yield was 3.87% at March 31, 2006 and 3.79% at March 31, 2005. The Company’s net realized gains in the first quarter of 2006 were immaterial. The Company’s net realized gains in the first quarter of 2005 resulted primarily from the sale of fixed maturities.

Other revenue

     The increase in other revenue is primarily the result of additional revenue from the operation of Myers Internet offset by somewhat lower revenues from other non-insurance operations.

Losses

     As discussed in “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, 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.

     Net losses incurred increased in the first quarter of 2006 compared to the same period in 2005 due to an increase in the estimates regarding how many delinquencies will eventually result in a claim during the first quarter of 2006 when compared to the same period in 2005 along with a higher estimate of the amount of the ultimate future payment per claim. The average primary claim paid for the three months ended March 31, 2006 was $26,857 compared to $26,094 for the same period in 2005.

     The Company anticipates that losses incurred in the second quarter of 2006 will be above the level in the first quarter of 2006.

     Information about the composition of the primary insurance default inventory at March 31, 2006, December 31, 2005 and March 31, 2005 appears in the table below.

		March 31,				December 31,				March 31,
		2006				2005				2005
Total loans delinquent			76,362				85,788				78,234
Percentage of loans delinquent (default rate)			6.00	%			6.58	%			5.71	%
Flow loans delinquent			41,022				47,051				41,469
Percentage of flow loans delinquent (default rate)			4.00	%			4.52	%			3.77	%
Bulk loans delinquent			35,340				38,737				36,765
Percentage of bulk loans delinquent (default rate)			14.31	%			14.72	%			13.59	%
A-minus and subprime credit loans delinquent*			33,085				36,485				32,545
Percentage of A-minus and subprime credit loans delinquent (default rate)			17.32	%			18.30	%			15.66	%