SEC Filing | MGIC Investment Corp.

View:

Download DOC

Download PDF

Download XLS

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended SEPTEMBER 30, 2006


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

For the transition period from to

Commission file number 1-10816

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)


WISCONSIN		39-1486475
(State or other jurisdiction of		(I.R.S. Employer
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.

YES þ NO o

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).

YES o NO þ

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



CLASS OF STOCK	PAR VALUE	DATE	NUMBER OF SHARES
Common stock	$1.00	10/31/06	83,016,733

MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005		3

	Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2006 and 2005 (Unaudited)		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)		5

	Notes to Consolidated Financial Statements (Unaudited)		6-22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23-44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44

Item 4.	Controls and Procedures		44-45

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors		46-48

Item 2.	Unregistered Sale of Equity Securities & Use of Proceeds		49

Item 6.	Exhibits		50

SIGNATURES			51

INDEX TO EXHIBITS
Statement Re Computation of Net Income Per Share
302 Certification of CEO
302 Certification of CFO
906 Certification of CEO and CFO
Risk Factors

Page 2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2006 (Unaudited) and December 31, 2005


	September 30,			December 30,
	2006			2005
	(In thousands of dollars)
ASSETS
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities (amortized cost, 2006-$5,116,645; 2005-$5,173,091)	$	5,247,390		$	5,292,942
Equity securities (cost, 2006-$2,716; 2005-$2,504)		2,705			2,488


Total investment portfolio		5,250,095			5,295,430

Cash and cash equivalents		257,414			195,256
Accrued investment income		64,252			66,369
Reinsurance recoverable on loss reserves		13,526			14,787
Prepaid reinsurance premiums		10,032			9,608
Premiums receivable		83,801			91,547
Home office and equipment, net		32,195			32,666
Deferred insurance policy acquisition costs		13,872			18,416
Investments in joint ventures		591,907			481,778
Other assets		198,091			151,712


Total assets	$	6,515,185		$	6,357,569


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves	$	1,095,572		$	1,124,454
Unearned premiums		181,490			159,823
Short- and long-term debt (note 2)		782,135			685,163
Income taxes payable		42,148			62,006
Other liabilities		193,746			161,068


Total liabilities		2,295,091			2,192,514


Contingencies (note 3)

Shareholders’ equity:
Common stock, $1 par value, shares authorized 300,000,000; shares issued, 9/30/06 - 122,964,267 12/31/05 - 122,549,285; shares outstanding, 9/30/06 - 82,995,338 12/31/05 - 88,046,430		122,964			122,549
Paid-in capital		300,564			280,052
Treasury stock (shares at cost, 9/30/06 - 39,968,929 12/31/05 - 34,502,855)		(2,186,750	)		(1,834,434	)
Accumulated other comprehensive income, net of tax (note 5)		85,399			77,499
Retained earnings		5,897,917			5,519,389


Total shareholders’ equity		4,220,094			4,165,055


Total liabilities and shareholders’ equity	$	6,515,185		$	6,357,569

See accompanying notes to consolidated financial statements.

Page 3

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Nine Month Periods Ended September 30, 2006 and 2005

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct	$	340,268		$	345,236		$	1,014,751		$	1,029,523
Assumed		597			291			1,441			744
Ceded		(34,995	)		(31,349	)		(104,570	)		(94,630	)


Net premiums written		305,870			314,178			911,622			935,637
Increase in unearned premiums, net		(9,663	)		(8,337	)		(21,245	)		(2,084	)


Net premiums earned		296,207			305,841			890,377			933,553
Investment income, net of expenses		61,486			57,338			178,830			171,519
Realized investment gains (losses), net		185			61			(1,566	)		16,813
Other revenue		11,519			12,503			34,292			33,719


Total revenues		369,397			375,743			1,101,933			1,155,604


Losses and expenses:
Losses incurred, net		164,997			146,197			426,349			381,978
Underwriting and other expenses, net		70,704			69,695			216,461			205,649
Interest expense		9,849			10,084			28,007			31,318


Total losses and expenses		245,550			225,976			670,817			618,945


Income before tax and joint ventures		123,847			149,767			431,116			536,659
Provision for income tax		29,731			39,126			110,376			148,391
Income from joint ventures, net of tax		35,862			31,741			122,530			110,484


Net income	$	129,978		$	142,382		$	443,270		$	498,752


Earnings per share (note 4):
Basic	$	1.56		$	1.56		$	5.21		$	5.36

Diluted	$	1.55		$	1.55		$	5.17		$	5.33


Weighted average common shares outstanding — diluted (shares in thousands, note 4)		83,766			91,796			85,762			93,630


Dividends per share	$	0.2500		$	0.1500		$	0.7500		$	0.3750

See accompanying notes to consolidated financial statements.

Page 4

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2006 and 2005

(Unaudited)


	Nine Months Ended
	September 30,
	2006			2005
	(In thousands of dollars)
Cash flows from operating activities:
Net income	$	443,270		$	498,752
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of capitalized deferred insurance policy acquisition costs		10,523			15,253
Deferred insurance policy acquistion costs		(5,979	)		(8,262	)
Depreciation and amortization		17,219			13,581
Decrease in accrued investment income		2,117			4,934
Decrease in reinsurance recoverable on loss reserves		1,261			2,682
Increase in prepaid reinsurance premiums		(424	)		(944	)
Decrease (increase) in premium receivable		7,746			(456	)
Decrease in loss reserves		(28,882	)		(84,552	)
Increase in unearned premiums		21,667			3,029
Decrease in income taxes payable		(24,181	)		(28,049	)
Equity earnings in joint ventures		(180,393	)		(161,760	)
Distributions from joint ventures		138,874			137,661
Other		6,551			21,020


Net cash provided by operating activities		409,369			412,889


Cash flows from investing activities:
Purchase of equity securities		(212	)		—
Purchase of fixed maturities		(1,476,014	)		(1,029,732	)
Additional investment in joint ventures		(68,552	)		(11,948	)
Sale of investment in joint ventures		—			15,652
Sales of equity securities		—			9,541
Proceeds from sale of fixed maturities		1,291,036			965,558
Proceeds from maturity of fixed maturities		229,113			229,286


Net cash (used in) provided by investing activities		(24,629	)		178,357


Cash flows from financing activities:
Dividends paid to shareholders		(64,741	)		(35,128	)
Proceeds from issuance of long-term debt		199,958			—
Net repayment of short-term debt		(108,841	)		(43,084	)
Reissuance of treasury stock		3,856			(4,386	)
Repurchase of common stock		(373,049	)		(341,734	)
Common stock issued		15,912			8,134
Excess tax benefits from share-based payment arrangements		4,323			—


Net cash used in financing activities		(322,582	)		(416,198	)


Net increase in cash and cash equivalents		62,158			175,048
Cash and cash equivalents at beginning of period		195,256			166,468


Cash and cash equivalents at end of period	$	257,414		$	341,516

See accompanying notes to consolidated financial statements.

Page 5

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(Unaudited)

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 primarily of normal recurring accruals, necessary to summarize fairly the Company’s financial position and results of operations. The results of operations for the nine months ended September 30, 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 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The Interpretation seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. The Interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” When evaluating a tax position for recognition and measurement, an entity shall presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The Interpretation adopts a benefit recognition model with a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a measurement attribute that is the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. This Interpretation is effective for the first annual period beginning after

Page 6

December 15, 2006. The Company is currently evaluating the impact this Interpretation will have on the Company’s results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This statement provides enhanced guidance for using fair value to measure assets and liabilities. This statement also provides expanded disclosure about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. This statement applies whenever other standards require or permit assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the provisions of this statement and the impact, if any, this statement will have on the Company’s results of operations and financial position.

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment of FASB Statements No. 87, 88, 106 and 132R. The statement requires, among other things, an employer to recognize in its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year beginning for fiscal years ending after December 15, 2008. Calendar year-end companies with publicly traded equity securities are required to adopt the recognition and disclosure provisions as of December 31, 2006 on a prospective basis. The Company expects the adoption of this statement to have no material impact on the Company’s financial position and no impact on the Company’s results of operations, since any impact will be recorded on the balance sheet through other comprehensive income.

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 September 30, 2006 and 2005, the Company had $84.3 million and $100.0 million in commercial paper outstanding with a weighted average interest rate of 5.36% and 3.80%, respectively.

The Company has a $300 million, five year revolving credit facility, expiring in 2010. 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 September 30, 2006, these requirements were met. The facility will continue to be used as a liquidity back up facility

Page 7

for the outstanding commercial paper. The remaining credit available under the facility after reduction for the amount necessary to support the commercial paper was $215.7 million and $200.0 million at September 30, 2006 and 2005, respectively.

In September 2006 the Company issued, in a public offering, $200 million, 5.625% Senior Notes due in 2011. Interest on the Senior Notes is payable semiannually in arrears on March 15 and September 15, beginning on March 15, 2007. The Senior Notes were rated “A-1” by Moody’s, “A” by S&P and “A+” by Fitch. In addition to the recent offering, 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 September 30, 2006. At September 30, 2005 the Company had $300 million, 7.5% Senior Notes due in October 2005 and $200 million, 6% Senior Notes due in March 2007. At September 30, 2006 and 2005, the market value of the outstanding debt (which also includes commercial paper) was $776.9 million and $603.6 million, respectively.

Interest payments on all long-term and short-term debt were $27.3 million and $30.1 million for the nine months ended September 30, 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 September 30, 2006 the Company has no interest rate swaps outstanding.

(Income) expense on the interest rate swaps for the nine months ended September 30, 2006 and 2005 of approximately ($0.1) million and $0.7 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 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

Page 8

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 litigation regarding when notices to borrowers are required by FCRA.

In June 2005, in response to a letter from the New York Insurance Department (the “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. The Company subsequently provided additional information to the MDC. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban Development (“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 nine months ended September 30, 2006 and 2005.

The Internal Revenue Service (“IRS”) has been conducting an examination of the federal income tax returns of the Company for taxable years 2000 though 2004. The IRS has indicated that they intend to propose adjustments to taxable income relating 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.

Page 9

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				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(Shares in thousands)
Weighted-average shares — Basic		83,238		91,087		85,161		92,982
Common stock equivalents		528		709		601		648


Weighted-average shares — Diluted		83,766		91,796		85,762		93,630

Page 10

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					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
			(In thousands of dollars)
Net income	$	129,978	$	142,382		$	443,270	$	498,752
Other comprehensive income (loss)		72,140		(41,696	)		7,900		(36,183	)


Total comprehensive income	$	202,118	$	100,686		$	451,170	$	462,569


Other comprehensive income (loss) (net of tax):
Change in unrealized net derivative gains and losses	$	—	$	4,952		$	777	$	103
Amortization of deferred losses on derivatives		—		203			—		609
Change in unrealized gains and losses on investments		72,138		(47,369	)		7,085		(37,849	)
Other		2		518			38		954


Other comprehensive income (loss)	$	72,140	$	(41,696	)	$	7,900	$	(36,183	)

At September 30, 2006, accumulated other comprehensive income of $85.4 million included $85.0 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.

Page 11

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
	September 30,
							Other Postretirement
	Pension Benefits						Benefits
	2006			2005			2006			2005
	(In thousands of dollars)
Service cost	$	2,348		$	2,209		$	907		$	854
Interest cost		2,607			2,370			1,020			931
Expected return on plan assets		(3,724	)		(3,354	)		(649	)		(561	)
Recognized net actuarial loss (gain)		35			—			105			75
Amortization of transition obligation		—			—			71			70
Amortization of prior service cost		216			186			—			—


Net periodic benefit cost	$	1,482		$	1,411		$	1,454		$	1,369


	Nine Months Ended
	September 30,
							Other Postretirement
	Pension Benefits						Benefits
	2006			2005			2006			2005
				(In thousands of dollars)
Service cost	$	7,044		$	6,629		$	2,721		$	2,561
Interest cost		7,820			7,112			3,058			2,792
Expected return on plan assets		(11,172	)		(10,064	)		(1,946	)		(1,682	)
Recognized net actuarial loss (gain)		106			—			316			226
Amortization of transition obligation		—			—			213			212
Amortization of prior service cost		648			556			—			—


Net periodic benefit cost	$	4,446		$	4,233		$	4,362		$	4,109

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 September 30, 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

Page 12

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 and nine months ended September 30, 2005.


	Three Months Ended			Nine Months Ended
	September 30,
	2005			2005
	(in thousands of dollars,
	except per share data)
Net income, as reported	$	142,382		$	498,752

Add stock-based employee compensation expense included in reported net income, net of tax		3,186			8,913

Deduct stock-based employee compensation expense determined under fair value method for all awards, net of tax		(4,273	)		(12,190	)


Pro forma net income	$	141,295		$	495,475


Earnings per share:
Basic, as reported	$	1.56		$	5.36


Basic, pro forma	$	1.55		$	5.33


Diluted, as reported	$	1.55		$	5.33


Diluted, pro-forma	$	1.54		$	5.29

The compensation cost that has been charged against income for the share-based plans was $8.8 million and $25.4 million for the three and nine months ended

Page 13

September 30, 2006, compared to $4.9 million and $13.7 million for the three and nine months ended September 30, 2005. The related income tax benefit recognized for the share-based compensation plans was $8.9 million and $4.8 million for the nine months ended September 30, 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. Newly issued shares are used for exercises under the 1991 plan, and treasury shares are used for exercises 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


Granted	$	—		—
Exercised		50.68		(255,745	)
Forfeited or expired		68.50		(2,800	)


Outstanding, June 30, 2006	$	55.79		2,763,819


Granted	$	—		—
Exercised		—		—
Forfeited or expired		63.80		(200	)


Outstanding, September 30, 2006	$	55.79		2,763,619

Page 14

During the nine months ended September 30, 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 $10.0 million. The total amount of cash received from exercise of options was $15.0 million and the related net tax benefit realized from the exercise of those stock options was $3.5 million for the same period. There were no options exercised during the third quarter of 2006.

The following is a summary of stock options outstanding at September 30, 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		1,167,619		4.0	$	44.17		633,629		3.6	$	43.70

$53.70 - 68.63		1,596,000		5.6	$	64.28		1,119,300		5.2	$	63.15


Total		2,763,619		4.9	$	55.79		1,752,929		4.6	$	56.12

The aggregate intrinsic value of options outstanding at September 30, 2006 was $11.6 million. The aggregate intrinsic value of options exercisable was $6.8 million. The aggregate intrinsic value represents the total pre-tax intrinsic value based on the Company’s closing stock price of $59.97 as of September 30, 2006 which would have been received by the option holders had all option holders exercised their options on that date.

Page 15

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


	Fair Market
	Value		Shares
Restricted stock outstanding at December 31, 2005	$	60.50		912,671

Granted		64.66		564,350
Vested		56.87		(262,982	)
Forfeited		61.53		(6,069	)


Restricted stock outstanding at March 31, 2006	$	63.26		1,207,970


Granted		69.96		1,000
Vested		—		—
Forfeited		64.26		(240	)


Restricted stock outstanding at June 30, 2006	$	63.27		1,208,730


Granted		—		—
Vested		—		—
Forfeited		—		—


Restricted stock outstanding at September 30, 2006	$	63.27		1,208,730

At September 30, 2006, 4,523,718 shares were available for future grant under the 2002 stock incentive plan. Of the shares available for future grant, 4,440,398 are available for restricted stock awards.

As of September 30, 2006, there was $61.6 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 2.6 years. The total fair value of shares vested during the three and nine months ended September 30, 2006 was zero and $17.1 million, respectively.

For purposes of determining the pro forma net income, 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:

Page 16


	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

Page 17

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.

Page 18

Condensed Consolidating Balance Sheets
At September 30, 2006
(in thousands of dollars)


	Parent		MGIC
	Company		Consolidated		Other		Eliminations			Total
ASSETS
Total investments	$	2,420	$	4,946,219	$	301,456	$	—		$	5,250,095
Cash and cash equivalents		179,321		55,130		22,963		—			257,414
Reinsurance recoverable on loss reserves		—		74,534		21		(61,029	)		13,526
Prepaid reinsurance premiums		—		25,273		2		(15,243	)		10,032
Deferred insurance policy acquisition costs		—		13,872		—		—			13,872
Investments in subsidiaries/joint ventures		4,819,322		591,907		—		(4,819,322	)		591,907
Other assets		18,885		383,965		28,431		(52,942	)		378,339


Total assets	$	5,019,948	$	6,090,900	$	352,873	$	(4,948,536	)	$	6,515,185


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves	$	—	$	1,095,572	$	61,029	$	(61,029	)	$	1,095,572
Unearned premiums		—		181,491		15,242		(15,243	)		181,490
Short- and long-term debt		782,096		9,364		—		(9,325	)		782,135
Other liabilities		17,758		208,252		42,279		(32,395	)		235,894


Total liabilities		799,854		1,494,679		118,550		(117,992	)		2,295,091


Total shareholders’ equity		4,220,094		4,596,221		234,323		(4,830,544	)		4,220,094


Total liabilities and shareholders’ equity	$	5,019,948	$	6,090,900	$	352,873	$	(4,948,536	)	$	6,515,185

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 and cash equivalents		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

Page 19

Condensed Consolidating Statements of Operations
Three months ended September 30, 2006
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated			Other			Eliminations			Total
Revenues:
Net premiums written	$	—		$	287,209		$	18,696		$	(35	)	$	305,870


Net premiums earned		—			276,908			19,334			(35	)		296,207

Equity in undistributed net income of subsidiaries		(18,635	)		—			—			18,635			—
Dividends received from subsidiaries		155,000									(155,000	)		—
Investment income, net of expenses		87			57,119			4,280			—			61,486
Realized investment gains, net		—			(100	)		34			251			185
Other revenue		—			2,724			8,795			—			11,519


Total revenues		136,452			336,651			32,443			(136,149	)		369,397


Losses and expenses:
Losses incurred, net		—			154,632			10,365			—			164,997
Underwriting and other expenses		65			50,788			19,897			(46	)		70,704
Interest expense		9,849			—			—			—			9,849


Total losses and expenses		9,914			205,420			30,262			(46	)		245,550


Income before tax and joint ventures		126,538			131,231			2,181			(136,103	)		123,847
Provision (credit) for income tax		(3,440	)		32,957			(123	)		337			29,731
Income from joint ventures, net of tax		—			35,862			—			—			35,862


Net income	$	129,978		$	134,136		$	2,304		$	(136,440	)	$	129,978

Condensed Consolidating Statements of Operations
Nine months ended September 30, 2006
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated			Other		Eliminations			Total
Revenues:
Net premiums written	$	—		$	850,926		$	60,793	$	(97	)	$	911,622


Net premiums earned		—			837,010			53,464		(97	)		890,377

Equity in undistributed net income of subsidiaries		(53,555	)		—			—		53,555			—
Dividends received from subsidiaries		515,000								(515,000	)		—
Investment income, net of expenses		237			168,519			10,074		—			178,830
Realized investment gains, net		—			(1,948	)		131		251			(1,566	)
Other revenue		—			8,081			26,211		—			34,292


Total revenues		461,682			1,011,662			89,880		(461,291	)		1,101,933


Losses and expenses:
Losses incurred, net		—			405,984			20,365		—			426,349
Underwriting and other expenses		192			156,067			60,332		(130	)		216,461
Interest expense		28,007			—			—		—			28,007


Total losses and expenses		28,199			562,051			80,697		(130	)		670,817


Income before tax and joint ventures		433,483			449,611			9,183		(461,161	)		431,116
Provision (credit) for income tax		(9,787	)		118,653			1,118		392			110,376
Income from joint ventures, net of tax		—			122,530			—		—			122,530


Net income	$	443,270		$	453,488		$	8,065	$	(461,553	)	$	443,270

Page 20

Condensed Consolidating Statements of Operations
Three months ended September 30, 2005
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated		Other		Eliminations			Total
Revenues:
Net premiums written	$	—		$	293,294	$	20,947	$	(63	)	$	314,178


Net premiums earned		—			289,439		16,465		(63	)		305,841

Equity in undistributed net income of subsidiaries		103,879			—		—		(103,879	)		—
Dividends received from subsidiaries		44,300							(44,300	)		—
Investment income, net of expenses		1,249			53,528		2,561		—			57,338
Realized investment gains, net		—			42		19		—			61
Other revenue		—			455		12,048		—			12,503


Total revenues		149,428			343,464		31,093		(148,242	)		375,743


Losses and expenses:
Losses incurred, net		—			139,779		6,418		—			146,197
Underwriting and other expenses		84			47,034		22,651		(74	)		69,695
Interest expense		10,083			—		—		1			10,084


Total losses and expenses		10,167			186,813		29,069		(73	)		225,976


Income before tax and joint ventures		139,261			156,651		2,024		(148,169	)		149,767
Provision (credit) for income tax		(3,121	)		42,099		143		5			39,126
Income from joint ventures, net of tax		—			31,741		—		—			31,741


Net income	$	142,382		$	146,293	$	1,881	$	(148,174	)	$	142,382

Condensed Consolidating Statements of Operations
Nine months ended September 30, 2005
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated		Other		Eliminations			Total
Revenues:
Net premiums written	$	—		$	881,596	$	54,250	$	(209	)	$	935,637


Net premiums earned		—			883,688		50,074		(209	)		933,553

Equity in undistributed net income of subsidiaries		10,445			—		—		(10,445	)		—
Dividends received from subsidiaries		507,900							(507,900	)		—
Investment income, net of expenses		1,852			162,684		7,407		(424	)		171,519
Realized investment gains, net		—			16,780		33		—			16,813
Other revenue		—			1,351		32,368		—			33,719


Total revenues		520,197			1,064,503		89,882		(518,978	)		1,155,604


Losses and expenses:
Losses incurred, net		—			364,023		17,955		—			381,978
Underwriting and other expenses		214			141,649		64,028		(242	)		205,649
Interest expense		31,318			424		—		(424	)		31,318


Total losses and expenses		31,532			506,096		81,983		(666	)		618,945


Income before tax and joint ventures		488,665			558,407		7,899		(518,312	)		536,659
Provision (credit) for income tax		(10,087	)		157,759		1,007		(288	)		148,391
Income from joint ventures, net of tax		—			110,484		—		—			110,484


Net income	$	498,752		$	511,132	$	6,892	$	(518,024	)	$	498,752

Page 21

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2006
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated			Other			Eliminations			Total
Net cash from operating activities:	$	524,364	(1)	$	361,916		$	60,911		$	(537,823	)	$	409,368
Net cash (used in) from investing activities:		(18,350	)		31,844			(56,623	)		18,500			(24,629	)
Net cash used in financing activities:		(326,904	)		(515,000	)		—			519,323			(322,581	)

Net increase (decrease) in Cash	$	179,110		$	(121,240	)	$	4,288		$	—		$	62,158


(1)		Includes dividends received from subsidiaries of $515,000.

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2005
(in thousands of dollars)


	Parent			MGIC
	Company			Consolidated			Other			Eliminations			Total
Net cash from operating activities:	$	519,716	(1)	$	391,328		$	12,845		$	(511,000	)	$	412,889
Net cash (used in) from investing activities:		(2,948	)		198,415			(20,210	)		3,100			178,357
Net cash used in financing activities:		(416,198	)		(507,900	)		—			507,900			(416,198	)

Net increase (decrease) in Cash	$	100,570		$	81,843		$	(7,365	)	$	—		$	175,048


(1)		Includes dividends received from subsidiaries of $507,900.

Page 22


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

Overview

Business and General Environment

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

As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. The discussion below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2005. We refer to this Discussion as the “10-K MD&A.”

Our 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

Page 23

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 and realized gains and losses

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 is mainly a function of cash generated from operations, including investment earnings, less cash used for non-investment purposes, such as share repurchases. Realized gains and losses are a function of the difference between the amount received on sale of a security and the security’s amortized cost. The amount received on sale is affected by the coupon rate of the security compared to the yield of comparable securities.

•

Losses incurred

Losses incurred are the expense that results from a payment delinquency on an insured loan. As explained under “Critical Accounting Policies” in the 10-K MD&A, 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 our ability to mitigate our 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

Page 24

Our operating expenses 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

Our results of operations are also affected by income from joint ventures. Joint venture income principally consists of the aggregate results of our investment in two less than majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and Sherman Financial Group LLC (“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.

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

Page 25

		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

Page 26

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 Third Quarter Results

Our results of operations in the third quarter of 2006 were principally affected by:

•

Losses incurred

Losses incurred for the third quarter of 2006 increased compared to the same period in 2005 primarily due to a smaller decrease in the estimates regarding how many delinquencies will result in a claim, when compared to the same period in 2005. The decrease in estimates regarding how many delinquencies will result in a claim (claim rate) is the result of recent historical improvements in the claim rate in certain geographical regions, with the exception of the Midwest where recent historical claim rates have not improved. The states of Michigan, Ohio and Indiana accounted for approximately 35% of our losses paid for the third quarter. Additionally, news from the auto industry suggests continued cuts in Midwest employment for the next couple of years.

Page 27

•

Premiums written and earned

During the third quarter of 2006, our written and earned premiums were lower than in the third quarter of 2005 due to lower average premium rates, offset by a slight increase in the average insurance in force.

•

Underwriting expenses

Underwriting expenses increased in the third quarter of 2006 compared to the third quarter of 2005 primarily due to additional expenses related to Myers Internet (acquired in January 2006), equity based compensation and expansion into international operations.

•

Investment income

Investment income in the third quarter of 2006 was higher than in the third quarter of 2005 due to an increase in the pre-tax yield.

•

Income from joint ventures

Income from joint ventures increased in the third quarter of 2006 compared to the same period in 2005 due to higher income from C-BASS and Sherman. See “Results of Consolidate Operations – Joint Ventures.”

Page 28

RESULTS OF CONSOLIDATED OPERATIONS

As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. We are not undertaking any obligation to update any forward looking statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements were made.

NIW

The amount of MGIC’s NIW (this term is defined in the “Overview-Business and General Environment” section) during the three and nine months ended September 30, 2006 and 2005 was as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
	($ billions)
	2006			2005			2006			2005
Flow	$	10.9		$	11.4		$	28.9		$	30.7
Bulk		5.8			6.8			13.9			15.5


Total NIW	$	16.7		$	18.2		$	42.8		$	46.2


Refinance volume as a % of primary flow NIW		20	%		27	%		23	%		28	%

NIW on a flow basis for the third quarter and first nine months of 2006 was less than the volume during the comparable periods in 2005. This decrease 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.

Page 29

Cancellations and insurance in force

NIW and cancellations of primary insurance in force during the three and nine months ended September 30, 2006 and 2005 were as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
	($ billions)
NIW	$	16.7		$	18.2		$	42.8		$	46.2
Cancellations		(13.1	)		(19.8	)		(39.4	)		(53.1	)


Change in primary insurance in force	$	3.6		$	(1.6	)	$	3.4		$	(6.9	)

Direct primary insurance in force was $173.4 billion at September 30, 2006 compared to $170.0 billion at December 31, 2005 and $170.2 billion at September 30, 2005. In the third quarter of 2006 insurance in force increased $3.6 billion. The $2.9 billion increase in insurance in force in the second quarter of 2006 was the first quarter of growth in the in force book since the fourth quarter of 2002.

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 67.8% at September 30, 2006, an increase from 61.3% at December 31, 2005 and 60.2% at September 30, 2005. We expect 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 October 2006.

Bulk transactions

NIW from bulk transactions during the third quarter and first nine months of 2006 was less than the volume during the comparable periods in 2005.

Our writings of bulk insurance are in part sensitive to the volume of securitization transactions involving non-conforming loans. Our 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

Page 30

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 our view of the risk of the business, which is affected by the historical performance of previously insured pools and our 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, we also insure pools of mortgage loans. New pool risk written during the three months ended September 30, 2006 and 2005 was $43 million and $97 million, respectively. Our direct pool risk in force was $3.1 billion, $2.9 billion and $2.9 billion at September 30, 2006, December 31, 2005 and September 30, 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 September 30, 2006 and 2005, for $4.5 billion and $5.1 billion, respectively, of risk without such limits, risk in force was calculated at $472 million and $468 million, respectively. For the three months ended September 30, 2006 and 2005 for $15 million and $98 million, respectively, of risk without contractual aggregate loss limits, new risk written under this model was $1 million and $5 million, respectively.

New pool risk written during the nine months ended September 30, 2006 and 2005 was $200 million and $203 million, respectively. Under the model described above, for the nine months ended September 30, 2006 and 2005 for $45 million and $900 million, respectively, of risk without contractual aggregate loss limits, new risk written during those periods was calculated at $3 million and $49 million, respectively.

Net premiums written and earned

Net premiums written and earned during the third quarter of 2006 decreased due to lower average premium rates, offset by a slight increase in the average insurance in force, when compared to the same period in 2005. Net premiums written and earned during the first nine months of 2006 decreased due to lower average premium rates, as well as a decline in the average insurance in force, when compared to the same period in 2005. Average premium rates declined during these periods due to insurance with deductibles written through the bulk channel. We anticipate that net premiums written and earned in the fourth quarter of 2006 will be lower than the comparable period in 2005, due to lower average premium rates, offset by slight growth in the average insurance in force.

Risk sharing arrangements

For the quarter ended June 30, 2006, approximately 47.4% of our 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 47.8% for the quarter ended September 30, 2005. The percentage of new insurance

Page 31

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.

Continuing a program begun in 2005 to reduce exposure to certain geographical areas and categories of risk, during the first nine months of 2006, we entered into an excess of loss reinsurance agreement under which we ceded approximately $45 million of risk in force to a special purpose reinsurance company. The structure of this reinsurance transaction was similar to two reinsurance transactions entered into in 2005. See the 10-K MD&A under “Results of Consolidated Operations – Risk-sharing arrangements.” The total original risk in force ceded under these three transactions was $130 million. Premiums ceded under these three reinsurance agreements have not been material and are included in “ceded premiums.” We may enter into similar transactions in the future.

Investment income

Investment income for the third quarter of 2006 increased due to an increase in the average investment yield. Investment income for the first nine months of 2006 increased due to an increase in the average investment yield, offset by a slight decrease in the average amortized cost of invested assets. The portfolio’s average pre-tax investment yield was 4.54% at September 30, 2006 and 4.21% at September 30, 2005. The portfolio’s average after-tax investment yield was 4.01% at September 30, 2006 and 3.79% at September 30, 2005. Our net realized gains in the third quarter and net realized losses in the first nine months of 2006 were immaterial. Our net realized gains in the third quarter and first nine months of 2005 resulted primarily from the sale of fixed maturities.

Other revenue

The decrease in other revenue in the third quarter of 2006 compared to the third quarter of 2005 is primarily the result of decreased revenue from contract underwriting, offset by additional revenue from the operation of Myers Internet. The increase in other revenue for the first nine months of 2006 compared to the same period in 2005 is primarily the result of additional revenue from the operation of Myers Internet, offset by a decrease in revenue from contract underwriting.

Losses

As discussed in “Critical Accounting Policies” in the 10-K MD&A, 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 our inventory of delinquent loans that will not cure their delinquency and thus result in a claim (historically, a substantial majority of delinquent loans have

Page 32

cured), which is referred to as the claim rate, and further estimating the amount that we will pay in claims on the loans that do not cure, which is referred to as claim severity.

The estimated claims rates and claims amounts represent what management believes best reflect the estimate of what will actually be paid on the loans in default as of the reserve date. The estimate of claims rates and claims amounts are based on management’s review of recent trends in default inventory. Management reviews recent trends in the rate at which defaults resulted in a claim (i.e. claims rate), the amount of the claim (i.e. severity), the change in the level of defaults by geography and the change in average loan exposure. The process does not encompass management projecting any correlation between claims rate and claims amounts to projected economic conditions such as changes in unemployment rate, interest rate or housing value. As a result, management’s process to determine reserves does not include quantitative ranges of outcomes that are reasonably likely to occur.

In considering the potential sensitivity of the factors underlying management’s best estimate of loss reserves, it is possible that even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have a significant impact on reserves and, correspondingly, on results of operations. For example, as of the reserve date, a $1,000 change in the average severity reserve factor combined with a 1% change in the average claim rate reserve factor could change the reserve amount by approximately $55 million. Historically, it has not been uncommon for us to experience variability in the development of the reserves at this level or higher, as shown by the historical development of our loss reserves in the table below:


	Losses incurred			Reserve at
	related to			end of
	prior years (1)			prior year
2005	$	126,167		$	1,185,594
2004		13,451			1,061,788
2003		(113,797	)		733,181
2002		74,252			613,664
2001		212,126			609,546


(1)		A positive number for a prior year indicates a redundancy of loss reserves, and a negative number for a prior year indicates a deficiency of loss reserves.

The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of the claim payments may vary significantly from the loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values that could expose the Company to greater loss, including through resale of properties obtained through foreclosure proceedings. Changes to our estimates could result in material changes to our operations, even in a stable economic environment. Adjustments to reserve estimates are reflected in the financial statements in the periods in which the adjustments are made.

Page 33

Net losses incurred increased in the third quarter of 2006 compared to the same period in 2005 due to a smaller decrease in the estimates regarding how many delinquencies will eventually result in a claim, when compared to the same period in 2005. The decrease in estimates regarding how many delinquencies will result in a claim is the result of recent historical improvements in the claim rate in certain geographical regions, with the exception of the Midwest where recent historical claim rates have not improved. The states of Michigan, Ohio and Indiana accounted for approximately 35% of our losses paid for the third quarter. Additionally, news from the auto industry suggests continued cuts in Midwest employment for the next couple of years.

The average primary claim paid for the three months ended September 30, 2006 was $29,606 compared to $26,735 for the same period in 2005.

Net losses incurred increased in the first nine months of 2006 compared to the same period in 2005 due to a larger increase in the estimates regarding how much will be paid on claims, as well as a smaller decrease in the estimates regarding how many delinquencies will eventually result in a claim, when both are compared to the same period in 2005. The increase in estimates regarding how much will be paid on claims is primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as a decrease in our ability to mitigate losses through the sale of properties in some geographical areas. The decrease in estimates regarding how many delinquencies will result in a claim is the result of recent historical improvements in the claim rate in certain geographical regions, with the exception of the Midwest where recent historical claim rates have not improved. The states of Michigan, Ohio and Indiana accounted for approximately 35% of our losses paid for the first nine months of 2006. Additionally, news from the auto industry suggests continued cuts in Midwest employment for the next couple of years.

The average primary claim paid for the nine months ended September 30, 2006 was $27,874 compared to $26,173 for the same period in 2005.

Information about the composition of the primary insurance default inventory at September 30, 2006, December 31, 2005 and September 30, 2005 appears in the table below.

Page 34


	September 30,			December 31,			September 30,
	2006			2005			2005
Total loans delinquent		76,301			85,788			78,754
Percentage of loans delinquent (default rate)		5.98	%		6.58	%		5.95	%

Flow loans delinquent		41,130			47,051			41,742
Percentage of flow loans delinquent (default rate)		3.99	%		4.52	%		3.95	%

Bulk loans delinquent		35,171			38,737			37,012
Percentage of bulk loans delinquent (default rate)		14.33	%		14.72	%		13.92	%

A-minus and subprime credit loans delinquent*		33,727			36,485			34,265
Percentage of A-minus and subprime credit loans delinquent (default rate)		18.70	%		18.30	%		16.66	%


*		A portion of A-minus and subprime credit loans is included in flow loans delinquent and the remainder is included in bulk loans delinquent. Most A-minus and subprime credit loans are written through the bulk channel. A-minus loans have FICO credit scores of 575-619, as reported to MGIC at the time a commitment to insure is issued, and subprime loans have FICO credit scores of less than 575.

The pool notice inventory decreased from 23,772 at December 31, 2005 to 20,244 at September 30, 2006; the pool notice inventory was 23,033 at September 30, 2005.

Information about net losses paid in 2006 and 2005 appears in the table below.


	Three months ended				Nine months ended
	September 30,				September 30,
	2006		2005		2006		2005
Net paid claims ($ millions)

Flow	$	67	$	72	$	201	$	217
Bulk		69		65		187		187
Other		21		20		66		60

	$	157	$	157	$	454	$	464

Net paid claims in 2006 were $135 million in the first quarter, $162 million in the second quarter and $157 million in the third quarter. The sequential increase in paid claims compared to the first quarter was primarily the result of an acceleration in bankruptcy filings in October 2005 prior to the change in the bankruptcy laws. The effect of this acceleration was that we paid claims in the second and third quarters of 2006 that we would otherwise have paid after these quarters. To a lesser extent, the increase was also the result of the GSE’s lifting of the moratorium on pursuing delinquencies in certain areas of the hurricane impacted states and the beginning of the clearance of a foreclosure backlog in Ohio. The effect of these factors was that claims that would otherwise have been paid before the second and third quarter were paid in those quarters.

Page 35

As of September 30, 2006, 67% of our primary insurance in force was written subsequent to December 31, 2003. On our flow business, the highest claim frequency years have typically been the third and fourth year after the year of loan origination. However, the pattern of claims frequency can be affected by many factors, including low persistency (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 our bulk business, the period of highest claims frequency has generally occurred earlier than in the historical pattern on our flow business.

Underwriting and other expenses

Underwriting and other expenses in the third quarter and first nine months of 2006 were more than the comparable periods in 2005. The increase was primarily due to additional expenses from Myers Internet, equity based compensation and expansion into international operations. (In the first nine months of 2006, $4.0 million of equity based compensation expenses were related to the adoption of FAS 123R.) The effect of these expense increases was partially offset by lower non-insurance expenses.

Consolidated ratios

The table below presents our consolidated loss, expense and combined ratios for the periods indicated.


	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
Consolidated Insurance Operations:

Loss ratio		55.7	%		47.8	%		47.9	%		40.9	%
Expense ratio		16.4	%		15.7	%		16.9	%		15.6	%

Combined ratio		72.1	%		63.5	%		64.8	%		56.5	%

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 increase in the loss ratio in 2006, compared to 2005, is due to an increase in losses incurred and a decrease in premiums earned compared to the prior year. The expense ratio (expressed as a percentage) is the ratio of underwriting expenses to net premiums written. The increase in the expense ratio in 2006, compared to 2005, is due to an increase in underwriting expenses and a decrease in premiums written compared to the prior year. The combined ratio is the sum of the loss ratio and the expense ratio.

Income taxes

The effective tax rate was 24.0% in the third quarter of 2006, compared to 26.1% in the third quarter of 2005. During those periods, the effective tax rate was below the statutory rate of 35%, reflecting the benefits recognized from tax preferenced investments. Our tax preferenced investments 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. The

Page 36

lower effective tax rate in 2006 resulted from a higher percentage of total income before tax being generated from tax preferenced investments, which resulted from lower levels of underwriting income.

The effective tax rate was 25.6% in the first nine months of 2006, compared to 27.7% in the first nine months of 2005. The lower effective tax rate in 2006 resulted from a higher percentage of total income before tax being generated from tax preferenced investments, which resulted from lower levels of underwriting income.

Joint ventures

Our 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 our consolidated statement of operations. The increase in income from joint ventures for the third quarter and first nine months of 2006 compared to the third quarter and first nine months of 2005 is primarily the result of increased equity earnings from each of C-BASS and Sherman.

C-BASS

Summary C-BASS balance sheets and income statements at the dates and for the periods indicated appear below.

Summary Balance Sheet:
(September 30, 2006 — unaudited
December 31, 2005 — audited)


	September 30,		December 31,
	2006		2005
	($ millions)
Assets
Whole loans	$	4,655	$	4,638
Securities		1,923		2,054
Servicing		569		468
Other		1,285		534

Total Assets	$	8,432	$	7,694


Total Liabilities	$	7,522	$	6,931

Debt*		5,809		6,434

Owners’ Equity		910		763


*		Most of which is scheduled to mature within one year or less.

Included in whole loans and total liabilities at September 30, 2006 were approximately $941 million of assets and the same amount of liabilities from 3^rd party

Page 37

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.

Summary Income Statement
(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2006		2005		2006		2005
	($ millions)
Portfolio	$	71.6	$	53.6	$	256.5	$	220.7
Servicing		94.2		73.8		275.8		213.9
Money management		8.0		7.2		24.1		21.4
Other		—		—		0.1		0.1

Total revenue		173.8		134.6		556.5		456.1

Total expense		114.1		89.0		333.9		274.8


Income before tax	$	59.7	$	45.6	$	222.6	$	181.3


Company’s share of pretax income	$	27.5	$	21.0	$	102.7	$	83.6

See “Overview—Business and General Environment—Income from Joint Ventures—C-BASS” for a description of the components of the revenue lines.

The increased contribution for the third quarter of 2006, compared to the same period in 2005, was primarily due to increased net interest income and servicing revenue. Higher net interest income was the result of a higher average investment portfolio and higher earnings on trust deposits for securities serviced by Litton as well as the overall interest rate movement. The increased servicing revenue was due primarily to Litton’s higher average servicing portfolio.

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 and financial position.

Our investment in C-BASS on an equity basis at September 30, 2006 was $430.1 million. We received $35.2 million in distributions from C-BASS during the first nine months of 2006.

Page 38

Sherman

Summary Sherman balance sheets and income statements at the dates and for the periods indicated appear below.

Summary Balance Sheet:
(September 30, 2006 — unaudited
December 31, 2005 — audited)


	September 30,		December 31,
	2006		2005
	($ millions)
Total Assets	$	1,078	$	979

Total Liabilities		900		743

Debt		727		597

Members’ Equity		178		236

During 2006, the changes in debt and members’ equity were primarily related to a capital distribution paid during the year. We received $103.7 million in distributions in the first nine months of 2006. Our investment in Sherman on an equity basis at September 30, 2006 was $124.9 million. See discussion below on the exercise of the restructured call option, as well as our Current Report on Form 8-K filed on September 15, 2006.

Page 39

Summary Income Statement
(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2006		2005		2006		2005
	($ millions)
Revenues from receivable portfolios	$	248.7	$	224.8	$	809.9	$	672.0
Portfolio amortization		84.6		71.8		289.5		221.2

Revenues, net of amortization		164.1		153.0		520.4		450.8


Credit card interest income and fees		93.8		59.4		254.7		121.7
Other revenue		2.4		7.1		15.3		30.6

Total revenues		260.3		219.5		790.4		603.1

Expenses		179.0		147.3		548.6		397.1


Income before tax	$	81.3	$	72.2	$	241.8	$	206.0


Company’s share of pretax income	$	26.7	$	26.4	$	82.2	$	82.0

Sherman experienced increased net revenues in 2006 from portfolios owned and from the operations of the Credit One Bank, acquired in March 2005. The increase in expenses in 2006 relates to the Credit One acquisition.

In connection with the restructuring of the Sherman option, effective July 1, 2006, 94% of the existing interests in Sherman were recapitalized into Class A Common Units and the remaining 6% were recapitalized into a combination of Preferred Units and Class B Common Units. After exercise of the option we now own 40.96% of the Class A units and 50% of the Preferred Units. Also upon exercise of the option, the option price paid in excess of the book value, $61.5 million was allocated to Sherman’s assets on our financial records, up to the fair market value of those assets. The written up assets will be amortized over their assumed lives, resulting in additional amortization expense for us above Sherman’s actual amortization expense. The “Company’s share of pretax income” line item in the table above includes $6.6 million of this additional amortization expense for both the three and nine months ended September 30, 2006. The difference between the option price paid over book value and the fair value of the assets is recorded in our financial records as goodwill and will be periodically tested for impairment.

Other Matters

Under the Office of Federal Housing Enterprise Oversight’s (“OFHEO”) risk-based capital stress test for the GSEs, claim payments made by a private mortgage insurer on GSE loans are reduced below the amount provided by the mortgage insurance policy to reflect the risk that the insurer will fail to pay. Claim payments from an insurer whose

Page 40

claims-paying ability rating is ‘AAA’ are subject to a 3.5% reduction over the 10-year period of the stress test, while claim payments from a ‘AA’ rated insurer, such as MGIC, are subject to an 8.75% reduction. The effect of the differentiation among insurers is to require the GSEs to have additional capital for coverage on loans provided by a private mortgage insurer whose claims-paying rating is less than ‘AAA.’ As a result, there is an incentive for the GSEs to use private mortgage insurance provided by a ‘AAA’ rated insurer.

Financial Condition

In September 2006 the Company issued, in a public offering, $200 million, 5.625% Senior Notes due in 2011. Interest on the Senior Notes is payable semiannually in arrears on March 15 and September 15, beginning on March 15, 2007. The Senior Notes were rated “A-1” by Moody’s, “A” by S&P and “A+” by Fitch. In addition to the recent offering, 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 September 30, 2006. At September 30, 2006 and 2005, the market value of the outstanding debt (which also includes commercial paper) was $776.9 million and $603.6 million, respectively.

See “Results of Operations–Joint ventures” above for information about the financial condition of C-BASS and Sherman.

As of September 30, 2006, 82% of the investment portfolio was invested in tax-preferenced securities. In addition, at September 30, 2006, based on book value, approximately 98% of our fixed income securities were invested in ‘A’ rated and above, readily marketable securities, concentrated in maturities of less than 15 years.

At September 30, 2006, our derivative financial instruments in our investment portfolio were immaterial. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. At September 30, 2006, the effective duration of our fixed income investment portfolio was 4.8 years. This means that for an instantaneous parallel shift in the yield curve of 100 basis points there would be an approximate 4.8% change in the market value of our fixed income portfolio.

Liquidity and Capital Resources

Our consolidated sources of funds consist primarily of premiums written and investment income. Positive cash flows are invested pending future payments of claims and other expenses. Management believes that future cash inflows from premiums will be sufficient to meet future claim payments. Cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities subject to insurance regulatory requirements regarding the payment of dividends to the extent funds were required by other than the seller. Substantially all of the investment portfolio securities are held by our insurance subsidiaries.

Page 41

We have a $300 million commercial paper program, which is rated “A-1” by S&P and “P-1” by Moody’s. At September 30, 2006 and 2005, we had $84.3 and $100.0 million in commercial paper outstanding with a weighted average interest rate of 5.36% and 3.80%, respectively. We have a $300 million, five year revolving credit facility expiring in 2010 which 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 $215.7 million and $200.0 million at September 30, 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, we paid a fixed rate of 5.07% and received a variable interest rate based on LIBOR. The swap had an expiration date coinciding with the maturity of the credit facility and was designated as a cash flow hedge. At September 30, 2006 we have no interest rate swaps outstanding.

The commercial paper, back-up credit facility and the Senior Notes are obligations of the Company and not of its subsidiaries. We are a holding company and the payment of dividends from our insurance subsidiaries is restricted by insurance regulation. MGIC is the principal source of dividend-paying capacity. In the first nine months of 2006, MGIC paid three quarterly dividends of $55 million each, as well as extraordinary dividends totaling $350 million. As a result of the extraordinary dividends, MGIC cannot currently pay any dividends without regulatory approval. In early November 2006 MGIC received regulatory approval to pay a quarterly dividend of $55 million in the fourth quarter of 2006.

During the first nine months of 2006, we repurchased 5.9 million shares of Common Stock under publicly announced programs at a cost of $373.0 million. At September 30, 2006, we had authority covering the purchase of an additional 4.9 million shares under these programs. For additional information regarding stock repurchases, see Item 2(c) of Part II of this Quarterly Report on Form 10-Q. From mid-1997 through September 30, 2006, we repurchased 41.4 million shares under publicly announced programs at a cost of $2.3 billion. Funds for the shares repurchased by us since mid-1997 have been provided through a combination of debt, including the Senior Notes and the commercial paper, and internally generated funds.

Our principal exposure to loss is our obligation to pay claims under MGIC’s mortgage guaranty insurance policies. At September 30, 2006, MGIC’s direct (before any reinsurance) primary and pool risk in force (which is the unpaid principal balance of insured loans as reflected in our records multiplied by the coverage percentage, and taking account of any loss limit) was approximately $53.3 billion. In addition, as part of our contract underwriting activities, we are responsible for the quality of our underwriting decisions in accordance with the terms of the contract underwriting agreements with

Page 42

customers. Through September 30, 2006, the cost of remedies provided by us to customers for failing to meet the standards of the contracts has not been material. However, the decreasing trend of home mortgage interest rates over the last several years may have mitigated the effect of some of these costs since the general effect of lower interest rates can be to increase the value of certain loans on which remedies are provided. There can be no assurance that contract underwriting remedies will not be material in the future.

Our consolidated risk-to-capital ratio was 7.4:1 at both September 30, 2006 and December 31, 2005.

The risk-to-capital ratios set forth above have been computed on a statutory basis. However, the methodology used by the rating agencies to assign claims-paying ability ratings permits less leverage than under statutory requirements. As a result, the amount of capital required under statutory regulations may be lower than the capital required for rating agency purposes. In addition to capital adequacy, the rating agencies consider other factors in determining a mortgage insurer’s claims-paying rating, including its historical and projected operating performance, business outlook, competitive position, management and corporate strategy.

Page 43

Forward-Looking Statements and Risk Factors

General: Our revenues and losses could be affected by the risk factors referred to under “Location of Risk Factors” below that are applicable to the Company, and our income from joint ventures could be affected by the risk factors referred to under “Location of Risk Factors” 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 we may make. Forward looking statements consist of statements which relate to matters other than historical fact. Among others, statements that include words such as we “believe”, “anticipate” or “expect”, or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements were made.

Location of Risk Factors: The risk factors are in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented by Part II, Item 1 A of our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2006 and in Part II, Item 1 A of this Quarterly Report on Form 10-Q. The risk factors in the 10-K, as supplemented by those 10-Qs and through updating of various statistical information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2006, derivative financial instruments in our investment portfolio were immaterial. We primarily place our investments in instruments that meet investment grade credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. At September 30, 2006, the effective duration of our fixed income investment portfolio was 4.8 years. This means that for each instantaneous parallel shift in the yield curve of 100 basis points there would be an approximate 4.8% change in the market value of our fixed income investment portfolio.

Our borrowings under our commercial paper program are subject to interest rates that are variable. See the fourth and fifth paragraphs under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” for a discussion of our interest rate swaps.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the

Page 44

period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer concluded that such controls and procedures were effective as of the end of such period. There was no change in our internal control over financial reporting that occurred during the third quarter of 2006 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Page 45

PART II. OTHER INFORMATION

Item 1 A. Risk Factors

With the possible exception of the changes set forth below, there have been no material changes in our risk factors from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The principal changes to the risk factors that are set forth below were also included in Exhibit 99 to our Current Report on Form 8-K dated October 12, 2006. Exhibit 99 set forth our risk factors as part of our press release announcing earnings for the third quarter of 2006. Some of the information in the risk factors in the 10-K has been updated by information in the same risk factor included in that Exhibit 99.

Deterioration in the domestic economy or in home prices in the segment of the market the Company serves 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.

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 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. Moreover, even if interest rates remain unchanged, claims on ARMs with a “teaser rate” (an initial interest rate that does not fully reflect the index which determines subsequent rates) may also be substantially higher because of the increase in the mortgage payment that will occur when the fully indexed rate becomes effective. In addition, the Company believes the volume of “interest-only” loans (which may also be ARMs) and loans with negative amortization features, such as pay option ARMs, increased in 2005 and 2006. 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 loans without scheduled payment increases that are made to borrowers of comparable credit quality.

Page 46

The mortgage insurance industry is subject to the risk of private litigation and regulatory proceedings.

The Company’s income from joint ventures could be adversely affected by credit losses, insufficient liquidity or competition affecting those businesses.

Page 47

from its own securitizations and those of other issuers. 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. C-BASS’s mortgage purchases in 2005 and 2006 have primarily been of subprime mortgages, which bear a higher risk of default. Further, a higher proportion of subprime mortgage originations in 2005 and in 2006, as compared to 2004, were interest-only loans, which C-BASS views as having greater credit risk. C-BASS has not purchased any pay option ARMs, which are another type of higher risk mortgage. Credit losses are affected by housing prices. A higher house price at default than at loan origination generally mitigates credit losses while a lower house price at default generally increases losses. Over the last several years, in certain regions home prices have experienced rates of increase greater than historical norms and greater than growth in median incomes. During the period 2003 to 2005, according to the Office of Federal Housing Oversight, home prices nationally increased 27%. Recent forecasts predict that home prices will have minimal if any increase over the remainder of 2006, and may decline in certain regions.

With respect to liquidity, the substantial majority of C-BASS’s on-balance sheet financing for its mortgage and securities portfolio is dependent on the value of the collateral that secures this debt. C-BASS maintains substantial liquidity to cover margin calls in the event of substantial declines in the value of its mortgages and securities. 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. Further, approximately 43% of C-BASS’s financing has a term of less than one year, and is subject to renewal risk.

The interest expense on C-BASS’s borrowings is primarily tied to short-term rates such as LIBOR. In a period of rising interest rates, the interest expense could increase in different amounts and at different rates and times than the interest that C-BASS earns on the related assets, which could negatively impact C-BASS’s earnings.

Although there has been growth in the volume of subprime mortgage originations in recent years, volume is expected to decline in 2006, which may result in C-BASS purchasing fewer mortgages for securitization. Since 2005, there has been an increasing amount of competition to purchase subprime mortgages, from mortgage originators that formed real estate investment trusts and from firms, such as investment banks and commercial banks, that in the past acted as mortgage securities intermediaries but which are now establishing their own captive origination capacity. Many of these competitors are larger and have a lower cost of capital.

Sherman: The results of Sherman Financial Group LLC (“Sherman”), which is principally engaged in the business of purchasing and servicing delinquent consumer assets, 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.

Page 48

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES & USE OF PROCEEDS

Information about shares of Common Stock repurchased during the third quarter of 2006 appears in the table below.


							(d)
					(c)		Maximum
					Total Number of		Number of
					Shares		Shares that May
					Purchased as		Yet Be
	(a)				Part of Publicly		Purchased
	Total Number of		(b)		Announced		Under the Plans
	Shares		Average Price		Plans or		or Programs
Period	Purchased		Paid per Share		Programs		(A)
July 1, 2006 through July 31, 2006		1,616,140	$	58.63		1,616,140		6,001,382

August 1, 2006 through August 31,2006		165,000	$	55.27		165,000		5,836,382

September 1, 2006 through September 30, 2006		915,900	$	59.96		915,900		4,920,482

Total		2,697,040	$	58.88		2,697,040		4,920,482


(A)		On January 26, 2006 the Company announced that its Board of Directors authorized the repurchase of up to ten million shares of our Common Stock in the open market or in private transactions.

Page 49

ITEM 6. EXHIBITS

The accompanying Index to Exhibits is incorporated by reference in answer to this portion of this Item, and except as otherwise indicated in the next sentence, the Exhibits listed in such Index are filed as part of this Form 10-Q. Exhibit 32 is not filed as part of this Form 10-Q but accompanies this Form 10-Q.

Page 50

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on November 9, 2006.


		MGIC INVESTMENT CORPORATION

		\s\ J. Michael Lauer

		J. Michael Lauer
		Executive Vice President and
		Chief Financial Officer

		\s\ Joseph J. Komanecki

		Joseph J. Komanecki
		Senior Vice President, Controller and
		Chief Accounting Officer

Page 51

INDEX TO EXHIBITS
(Part II, Item 6)


Exhibit
Number		Description of Exhibit
2		Amended and Restated Call Option Agreement, dated as of September 13, 2006, by and among the Company, Radian Guaranty, Inc., and Sherman Capital, L.L.C. (Incorporated by reference to Exhibit 1.2 in the Company’s Current Report on Form 8-K filed on September 15, 2006)

11		Statement Re Computation of Net Income Per Share

31.1		Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002

31.2		Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002

32		Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”)

99		Risk Factors included in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented by Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and September 30, 2006

exv11

EXHIBIT 11

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three and Nine Month Periods Ended September 30, 2006 and 2005


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(In thousands of dollars, except per share data)
BASIC EARNINGS PER SHARE

Average common shares outstanding		83,238		91,087		85,161		92,982


Net income	$	129,978	$	142,382	$	443,270	$	498,752


Basic earnings per share	$	1.56	$	1.56	$	5.21	$	5.36


DILUTED EARNINGS PER SHARE

Adjusted weighted average shares outstanding:
Average common shares outstanding		83,238		91,087		85,161		92,982
Common stock equivalents		528		709		601		648


Adjusted weighted average diluted shares outstanding		83,766		91,796		85,762		93,630


Net income	$	129,978	$	142,382	$	443,270	$	498,752


Diluted earnings per share	$	1.55	$	1.55	$	5.17	$	5.33

exv31w1

Exhibit 31.1

I, Curt S. Culver, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of MGIC Investment Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s

auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006


\s\ Curt S. Culver
Curt S. Culver
Chief Executive Officer

exv31w2

Exhibit 31.2

CERTIFICATIONS

I, J. Michael Lauer, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of MGIC Investment Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	(a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 9, 2006

\s\ J. Michael Lauer
J. Michael Lauer
Chief Financial Officer

exv32

Exhibit 32

SECTION 1350 CERTIFICATIONS

The undersigned, Curt S. Culver, Chief Executive Officer of MGIC Investment Corporation (the “Company”), and J. Michael Lauer, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S. C. Section 1350, that to our knowledge:

(1)

the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 9, 2006

\s\ Curt S. Culver
Curt S. Culver
Chief Executive Officer

\s\ J. Michael Lauer
J. Michael Lauer
Chief Financial Officer

exv99

Exhibit 99

Risk Factors included in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented by Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and September 30, 2006 and through updating of various statistical information

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 (“LTV”) ratio and a second mortgage with a 10%, 15% or 20% LTV 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% LTV ratio that has private mortgage insurance,

	•		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 10.1% of flow new insurance written in the second quarter of 2006 and 6.5% of flow new insurance written for all of 2005.

has continued to increase. These segments include loans with 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.

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. Other insurance departments or other officials, including attorneys general, may also seek information about or investigate captive mortgage reinsurance.

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,

•

GE 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 September 30, 2006 persistency was at 67.8%, 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 LTV 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.

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 could be adversely affected if personal information on consumers that it maintains is improperly disclosed.

As part of its business, the Company maintains large amounts of personal information on consumers. While the Company believes it has appropriate information security policies and systems to prevent unauthorized disclosure, there can be no assurance that unauthorized disclosure, either through the actions of third parties or employees, will not occur. Unauthorized disclosure could adversely affect the Company’s reputation and expose it to material claims for damages.

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 principally engaged in the business of investing in the credit risk of credit sensitive single-family residential mortgages. C-BASS is particularly exposed to funding risk and to credit risk through ownership of the higher risk classes of mortgage backed securities from its own securitizations and those of other issuers. 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. C-BASS’s mortgage purchases in 2005 and 2006 have primarily been of subprime mortgages, which bear a higher risk of default. Further, a higher proportion of subprime mortgage originations in 2005 and in 2006, as compared to 2004, were interest-only loans, which C-BASS views as having greater credit risk. C-BASS has not purchased any pay option ARMs, which are another type of higher risk mortgage. Credit losses are affected by housing prices. A higher house price at default than at loan origination generally mitigates credit losses while a lower house price at default generally increases losses. Over the last several years, in certain regions home prices have experienced rates of increase greater than historical norms and greater than growth in median incomes. During the period 2003 to 2005, according to the Office of Federal Housing Oversight, home prices nationally increased 27%.

Recent forecasts predict that home prices will have minimal if any increase over the remainder of 2006, and may decline in certain regions.