MANAGEMENT’S DISCUSSION AND ANALYSIS of Results of Operations and Financial Condition The following is a “Safe harbor” Statement under the Private Securities Litigation Reform Act of 1995: The statements contained herein that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve certain risks and uncertainties including, but not limited to: the possibility that interest rates may increase rather than remain stable or decrease; the possibility that housing demand may decrease for any number of reasons, some of which may be out of the control of the Company, including changes in interest rates, adverse economic conditions, or other reasons; the Company’s market share may decrease as a result of changes in underwriting criteria by the Company or its competitors, or other reasons; performance of the financial markets generally, changes in the demand for and market acceptance of the Company’s products, increased competition from government programs and  the use of substitutes for mortgage insurance, changes  in government regulation or tax laws that may effect one or more of the Company’s businesses, changes in investor perceptions regarding the strength of financial guaranty providers and the guaranty offer by such providers,  changes in investor concern regarding the credit quality  of municipalities and corporations, including the need or desirability for financial guaranty insurance at all or as an alternative for other credit enhancement; and changes in general financial conditions. Investors are also directed to other risks discussed in documents filed by the Company with the Securities and Exchange Commission. Net income for 2001 was $360.4 million, a 44.8% increase compared to $248.9 million for 2000. The improvement in net income was a result of an increase in earned premiums and investment income and the inclusion of equity in net income  of affiliates, as a result of the Enhance Financial Services Group Inc. (“Financial Guaranty”) acquisition, partially offset by increases in the provision for losses, policy acquisition costs and other operating expenses. As a result of the acquisition  of Financial Guaranty on February 28, 2001, net income for 2001  included the results of operations from March 2001 through  December 2001 for Financial Guaranty, which contributed  $81.3 million to net income and which is included as a component of mortgage services and financial guaranty net income. Consolidated earned premiums of $715.9 million increased $195.0 million or 37.4% from $520.9 million for 2000. Financial Guaranty contributed $106.5 million of this increase. Net investment income increased from $82.9 million in 2000 to $147.5 million in 2001. This increase of $64.5 million or 77.8% included $50.4 million  from Financial Guaranty. Equity in net income of affiliates was $41.3 million for 2001. The provision for losses of $208.1 million increased $53.8 million or 34.9% from the $154.3 million in 2000, with Financial Guaranty contributing $29.0 million of the increase. Policy acquisition and other operating expenses increased by $108.2 million or 99.5% to $216.8 million in 2001 from $108.6 million in 2000. Financial Guaranty contributed $44.9 million of this increase. Interest expense for 2001 was $17.8 million primarily related to the issuance of long-term debt during 2001 as described in note 5 of Notes to Consolidated Financial Statements. The Company’s effective tax rate was 28.7% for 2001 compared to 29.4% for 2000. Net income for 2001 was $280.0 million, a $31.1 million or 12.5% increase from $248.9 in 2000. This increase resulted from improvements in net premiums earned, net investment income and other income, offset by a higher provision for losses and an increase in policy acquisition costs and other operating expenses. Mortgage Insurance is dependent on a small number of lenders for providing a substantial portion of its business. Mortgage Insurance’s top ten lenders were responsible for 46.1% of the direct primary risk in force at December 31, 2001. The top ten lenders were also responsible for 45.0% of primary new insurance written in 2001. Consistent with the rest of the  private mortgage insurance industry, the Company’s highest state concentration of risk is in California. As of December 31, 2001, California accounted for 16.6% of Mortgage Insurance’s total direct primary insurance in force and 11.3% of Mortgage Insurance’s total direct pool insurance in force. In addition, California accounted for 16.0% of Mortgage Insurance’s direct primary new insurance written for the year ended December 31, 2001. The largest single customer of Mortgage Insurance (including branches and affiliates of such customer), measured by new insurance written, accounted for 12.6% of new insurance written during 2001, compared to 11.2% in 2000 and 12.2% in 1999. The concentration of business with lenders may increase or decrease as a result of many factors. These lenders may reduce the amount of business currently given to Mortgage Insurance or cease doing business with it altogether. Mortgage Insurance’s master policies and related lender agreements do not, and by law cannot, require its lenders to do business with it. The loss of business from a major lender could materially adversely affect Mortgage Insurance’s and the Company’s business and financial results. New primary insurance written for 2001 was $44.8 billion, a 79.5% increase from the $24.9 billion written in 2000. This increase in primary new insurance written volume was primarily due to a substantial increase in new insurance written volume in the private mortgage insurance industry compared to 2000. Mortgage Insurance’s market share increased to 15.6% compared to 15.2% in 2000. The Company believes that this market share increase was due, in part, to an increase in its share of new insurance written under structured transactions, MORTGAGE INSURANCE – RESULTS OF OPERATIONS 2001 COMPARED TO 2000 RESULTS OF CONSOLIDATED OPERATIONS >39