##### Table of Contents



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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-22342
 
 Triad Guaranty Inc.
 (Exact name of registrant as specified in its charter)
 DELAWARE(State or other jurisdiction of 
incorporation or organization)
    
    56-1838519(I.R.S. Employer
Identification No.)101 South Stratford Road 
Winston-Salem, North Carolina(Address of principal executive offices)
    
    27104(Zip Code)
 (336) 723-1282  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40Part II. Other InformationItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 6. Exhibits
    
    
    42Signature
    
    
    43Exhibit Index
    
    
    44EX-31.1EX-32.1




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,(dollars in thousands, except per share data)
    
    2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $870,305 and $710,924)
    
    $
    862,486
    
    
    $
    725,631Equity securities (cost: $615 and $2,520)
    
    
    615
    
    
    
    2,162Short-term investments
    
    
    27,619
    
    
    
    56,746Total invested assets
    
    
    890,720
    
    
    
    784,539Cash and cash equivalents
    
    
    47,818
    
    
    
    124,811Real estate acquired in claim settlement
    
    
    3,661
    
    
    
    10,860Accrued investment income
    
    
    10,808
    
    
    
    10,246Deferred policy acquisition costs
    
    
    
    
    
    
    36,243Prepaid federal income taxes
    
    
    15
    
    
    
    116,008Property and equipment
    
    
    9,556
    
    
    
    11,421Reinsurance recoverable, net
    
    
    111,827
    
    
    
    5,815Other assets
    
    
    27,551
    
    
    
    32,910Total assets
    
    $
    1,101,956
    
    
    $
    1,132,853LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    1,042,053
    
    
    $
    359,939Unearned premiums
    
    
    16,870
    
    
    
    17,793Amounts payable to reinsurers
    
    
    1,118
    
    
    
    6,525Deferred income taxes
    
    
    22,889
    
    
    
    123,297Revolving line of credit
    
    
    
    
    
    
    80,000Long-term debt
    
    
    34,527
    
    
    
    34,519Accrued interest on debt
    
    
    584
    
    
    
    1,355Accrued expenses and other liabilities
    
    
    12,314
    
    
    
    10,574Total liabilities
    
    
    1,130,355
    
    
    
    634,002Commitments and contingencies  Note 4Stockholders equity:Preferred stock, par value $0.01 per share  authorized 1,000,000
shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share  authorized 32,000,000
shares; issued and outstanding 15,116,259 shares at September
30, 2008 and 14,920,243 shares at December 31, 2007
    
    
    151
    
    
    
    149Additional paid-in capital
    
    
    112,665
    
    
    
    109,679Accumulated other comprehensive income, net of income tax liability
of $6,475 at December 31, 2007
    
    
    (7,913
    )
    
    
    13,405Retained earnings (accumulated deficit)
    
    
    (133,302
    )
    
    
    375,618Total stockholders equity (deficiency in assets)
    
    
    (28,399
    )
    
    
    498,851Total liabilities and stockholders equity
    
    $
    1,101,956
    
    
    $
    1,132,853
  1




---



##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Premiums written:Direct
    
    $
    79,041
    
    
    $
    86,946
    
    
    $
    252,987
    
    
    $
    248,507Ceded
    
    
    (14,847
    )
    
    
    (14,391
    )
    
    
    (46,322
    )
    
    
    (40,081
    )Net premiums written
    
    
    64,194
    
    
    
    72,555
    
    
    
    206,665
    
    
    
    208,426Change in unearned premiums
    
    
    1,460
    
    
    
    (465
    )
    
    
    918
    
    
    
    (2,656
    )Earned premiums
    
    
    65,654
    
    
    
    72,090
    
    
    
    207,583
    
    
    
    205,770Net investment income
    
    
    10,349
    
    
    
    8,370
    
    
    
    29,071
    
    
    
    23,392Net realized investment (losses) gains
    
    
    (6,519
    )
    
    
    85
    
    
    
    (7,615
    )
    
    
    (3,020
    )Other income
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    669,486
    
    
    
    80,547
    
    
    
    229,045
    
    
    
    226,148Losses and expenses:Net losses and loss adjustment expenses
    
    
    231,194
    
    
    
    106,813
    
    
    
    745,202
    
    
    
    181,287Interest expense on debt
    
    
    691
    
    
    
    1,161
    
    
    
    2,863
    
    
    
    2,548Policy acquisition costs
    
    
    
    
    
    
    4,567
    
    
    
    39,416
    
    
    
    13,860Other
operating expenses (net of acquisition costs deferred)
    
    
    8,726
    
    
    
    11,686
    
    
    
    50,070
    
    
    
    32,733240,611
    
    
    
    124,227
    
    
    
    837,551
    
    
    
    230,428Loss before income tax benefit
    
    
    (171,125
    )
    
    
    (43,680
    )
    
    
    (608,506
    )
    
    
    (4,280
    )Income tax benefit:Current
    
    
    (4,593
    )
    
    
    (2,057
    )
    
    
    (4,595
    )
    
    
    1,468Deferred
    
    
    (6,437
    )
    
    
    (9,774
    )
    
    
    (94,991
    )
    
    
    (3,248
    )(11,030
    )
    
    
    (11,831
    )
    
    
    (99,586
    )
    
    
    (1,780
    )Net loss
    
    $
    (160,095
    )
    
    $
    (31,849
    )
    
    $
    (508,920
    )
    
    $
    (2,500
    )Loss per common and common equivalent share:Basic
    
    $
    (10.69
    )
    
    $
    (2.15
    )
    
    $
    (34.14
    )
    
    $
    (0.17
    )Diluted
    
    $
    (10.69
    )
    
    $
    (2.15
    )
    
    $
    (34.14
    )
    
    $
    (0.17
    )Shares used in computing loss per common and
common equivalent share:Basic
    
    
    14,973,386
    
    
    
    14,838,124
    
    
    
    14,907,129
    
    
    
    14,827,534Diluted
    
    
    14,973,386
    
    
    
    14,838,124
    
    
    
    14,907,129
    
    
    
    14,827,534
  2




---



##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 (unaudited)
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    
    2007Operating activitiesNet loss
    
    $
    (508,920
    )
    
    $
    (2,500
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    681,191
    
    
    
    118,890Accrued expenses and other liabilities
    
    
    1,791
    
    
    
    6,665Reinsurance, net
    
    
    (111,419
    )
    
    
    464Accrued investment income
    
    
    (575
    )
    
    
    (1,319
    )Policy acquisition costs deferred
    
    
    (3,173
    )
    
    
    (14,291
    )Policy acquisition costs
    
    
    39,416
    
    
    
    13,860Net realized investment losses
    
    
    7,615
    
    
    
    3,020Provision for depreciation
    
    
    3,195
    
    
    
    1,740Accretion of discount on investments
    
    
    1,667
    
    
    
    526Deferred income taxes
    
    
    (94,991
    )
    
    
    (3,248
    )Prepaid federal income taxes
    
    
    115,993
    
    
    
    (1,909
    )Real estate acquired in claim settlement, net of write-downs
    
    
    7,199
    
    
    
    (2,396
    )Accrued interest on debt
    
    
    (771
    )
    
    
    (224
    )Other assets
    
    
    5,361
    
    
    
    2,904Other operating activities
    
    
    7,059
    
    
    
    (13,022
    )Net cash provided by operating activities
    
    
    150,638
    
    
    
    109,160Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (782,316
    )
    
    
    (237,994
    )Sales  fixed maturities
    
    
    586,248
    
    
    
    104,401Maturities  fixed maturities
    
    
    25,902
    
    
    
    1,500Purchases  equities
    
    
    
    
    
    
    (55
    )Sales  equities
    
    
    268
    
    
    
    7,338Net change in short-term investments
    
    
    26,692
    
    
    
    (73,671
    )Purchases of property and equipment
    
    
    (1,348
    )
    
    
    (4,636
    )Net cash used in investing activities
    
    
    (144,554
    )
    
    
    (203,117
    )Financing activitiesFunding
(repayment) of revolving credit facility
    
    
    (80,000
    )
    
    
    80,000Excess tax benefits from share-based compensation
    
    
    
    
    
    
    175Proceeds from exercise of stock options
    
    
    
    
    
    
    616Net cash (used in) provided by financing activities
    
    
    (80,000
    )
    
    
    80,791Foreign currency translation adjustment on cash and cash equivalents
    
    
    (3,077
    )
    
    
    5,174Net change in cash and cash equivalents
    
    
    (76,993
    )
    
    
    (7,992
    )Cash and cash equivalents at beginning of period
    
    
    124,811
    
    
    
    38,609Cash and cash equivalents at end of period
    
    $
    47,818
    
    
    $
    30,617Supplemental schedule of cash flow informationCash (received) paid during the period for:Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds
    
    $
    (115,993
    )
    
    $
    11,501Interest
    
    $
    3,631
    
    
    $
    2,765
 .
 3




---



##### Table of Contents



TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
  1. The Company
  2. Accounting Policies and Basis of Presentation
 Basis of Presentation
  Recent Accounting Pronouncements
 Fair Value Measurements,
 4




---



##### Table of Contents



Fair Value Measurements at Reporting Date UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(dollars in thousands)
    
    September 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsSecurities available-for-saleFixed maturities
    
    $
    862,486
    
    
    $
    
    
    
    $
    854,866
    
    
    $
    7,620Equity securities
    
    
    615
    
    
    
    615
    
    
    
    
    
    
    
    Real estate acquired in claim
settlement
    
    
    3,661
    
    
    
    
    
    
    
    3,661
    
    
    
    Total
    
    $
    866,762
    
    
    $
    615
    
    
    $
    858,527
    
    
    $
    7,620
  Fair Value Measurement Using SignificantUnobservable Inputs (Level 3)Certain Bonds in Fixed Maturities AFSThree Months Ended
    
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2008
    
    
    September 30, 2008Beginning balance
    
    $
    33,208
    
    
    $
    7,402Total gains and losses (realized and unrealized):Included in operations
    
    
    
    
    
    
    (130
    )Included in other comprehensive income
    
    
    (491
    )
    
    
    (834
    )Purchases, issuances and settlements
    
    
    (24,999
    )
    
    
    383Transfers in and/or out of Level 3
    
    
    (98
    )
    
    
    799Ending balance
    
    $
    7,620
    
    
    $
    7,620The amount of total gains and loss for the period included in
operations attributable to the change in unrealized gains
or
losses relating to assets still held at the reporting date
    
    $
    (507
    )
    
    $
    (854
    )
  Effective Date of
FASB Statement No. 157
 
    
    Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair value in
subsequent periods;
 5




---



##### Table of Contents




    
    Reporting units measured at fair value in the goodwill impairment test under SFAS No.
142, Goodwill and Other Intangible Assets(SFAS 142), and indefinite-lived intangible
assets measured at fair value for impairment assessment under SFAS 142;
    
    Nonfinancial long-lived assets measured at fair value for an impairment assessment
under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets;
    
    Asset retirement obligations initially measured at fair value under SFAS No. 143,
Accounting for Asset Retirement Obligations; and
    
    Nonfinancial liabilities for exit or disposal activities initially measured at fair
value under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities.
 Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active Accounting Changes and Error Corrections
 Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
 6




---



##### Table of Contents



Business Combinationsa replacement of FASB
Statement No. 141
 3. Consolidation
  4. Commitments and Contingencies
 Reinsurance
     7




---



##### Table of Contents



Insurance In Force, Dividend Restrictions, and Statutory Results
  September 30,
    
    
    December 31,
    
    
    September 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Net risk
    
    $
    11,349,180
    
    
    $
    11,967,179
    
    
    $
    11,741,160Statutory capital and surplus
    
    $
    284,228
    
    
    $
    197,713
    
    
    $
    33,883Statutory contingency reserve
    
    
    1,359
    
    
    
    387,365
    
    
    
    626,182Total
    
    $
    285,587
    
    
    $
    585,078
    
    
    $
    660,066Risk-to-capital ratio
    
    39.7 to 1
    
    20.5 to 1
    
    17.8 to 1
    Loss Reserves
  8




---



##### Table of Contents



Premium Deficiency
  Litigation
  5. Earnings (Loss) Per Share (EPS)
 share  are
 6. Comprehensive Income (Loss)
  9




---



##### Table of Contents



7. Income Taxes
  10




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   11




---



##### Table of Contents



Recent Developments
  
    
    On June 19, 2008, we announced that we had ended negotiations with Lightyear Capital LLC
to form a new mortgage insurance company.
    
    We were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac
effective June 19, 2008.
    
    We voluntarily ceased issuing commitments for mortgage insurance effective July 15, 2008
and entered into a voluntary run-off of our remaining insurance business.
    
    Our level of statutory capital was and remains significantly below the thresholds
required by all state insurance departments to write mortgage guaranty insurance business.
   12




---



##### Table of Contents



13




---



##### Table of Contents



Consolidated Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %(dollars in thousands, except per share data)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeEarned premiums
    
    $
    65,654
    
    
    $
    72,090
    
    
    
    (9
    )%
    
    $
    207,583
    
    
    $
    205,770
    
    
    
    1
    %Net losses and loss
adjustment expenses
    
    
    231,194
    
    
    
    106,813
    
    
    
    116
    
    
    
    745,202
    
    
    
    181,287
    
    
    
    311Net loss
    
    
    (160,095
    )
    
    
    (31,849
    )
    
    
    403
    
    
    
    (508,920
    )
    
    
    (2,500
    )
    
    
    20,257Diluted loss per share
    
    $
    (10.69
    )
    
    $
    (2.15
    )
    
    
    398
    
    
    $
    (34.14
    )
    
    $
    (0.17
    )
    
    
    20,148
  14




---



##### Table of Contents



Production
  15




---



##### Table of Contents



Insurance and Risk in Force
  September 30,(dollars in millions)
    
    2008
    
    
    2007
    
    
    % ChangePrimary insurance:Flow primary insurance
    
    $
    40,451
    
    
    $
    40,610
    
    
    
    (0
    )%Structured bulk insurance
    
    
    4,065
    
    
    
    4,700
    
    
    
    (14
    )Total Primary insurance
    
    
    44,516
    
    
    
    45,310
    
    
    
    (2
    )Modified Pool insurance
    
    
    19,823
    
    
    
    22,737
    
    
    
    (13
    )Total insurance
    
    $
    64,339
    
    
    $
    68,047
    
    
    
    (5
    )%
    
    
    The percentage of business defined as non-prime credit quality;
    
    The percentage of Alt-A business;
    
    The percentage of business with a loan-to-value (LTV) greater than 95%;
    
    The percentage of interest only loans and adjustable rate mortgages (ARMs), particularly
ARMs with potential negative amortization;
    
    The percentage of condominium property types;
    
    The percentage of non-primary residence occupancy status;
    
    The percentage of loans in excess of $250,000;
 16




---



##### Table of Contents




    
    The concentration of risk in distressed market states; and
    
    The presence of multiple risk factors on a single insured loan.
 Risk in Force(1)
 Primary
    
    Modified PoolSeptember, 30
    
    September, 30(dollars in millions)
    
    2008
    
    2007
    
    2008
    
    2007Gross Risk in Force
    
    $
    11,583
    
    
    $
    11,871
    
    
    $
    5,776
    
    
    $
    6,643Credit Quality:Prime
    
    
    75.9
    %
    
    
    73.5
    %
    
    
    27.9
    %
    
    
    27.8
    %Alt-A
    
    
    20.6
    
    
    
    22.8
    
    
    
    71.3
    
    
    
    71.4A-Minus
    
    
    3.1
    
    
    
    3.2
    
    
    
    0.7
    
    
    
    0.7Sub Prime
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %LTV:Greater than 95%
    
    
    24.9
    %
    
    
    25.2
    %
    
    
    
    %
    
    
    
    %90.01% to 95.00%
    
    
    32.6
    
    
    
    32.7
    
    
    
    0.2
    
    
    
    0.390.00% and below
    
    
    42.5
    
    
    
    42.1
    
    
    
    99.8
    
    
    
    99.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    66.6
    %
    
    
    63.3
    %
    
    
    26.3
    %
    
    
    26.1
    %Interest Only
    
    
    10.4
    
    
    
    11.0
    
    
    
    23.3
    
    
    
    23.1ARM (amortizing) fixed period 5 years or greater
    
    
    8.6
    
    
    
    10.0
    
    
    
    31.1
    
    
    
    33.6ARM (amortizing) fixed period less than 5 years
    
    
    2.1
    
    
    
    2.5
    
    
    
    5.6
    
    
    
    4.0ARM (potential negative amortization)
    
    
    12.3
    
    
    
    13.2
    
    
    
    13.7
    
    
    
    13.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    10.7
    %
    
    
    10.4
    %
    
    
    9.6
    %
    
    
    9.3
    %Other (principally single-family detached)
    
    
    89.3
    
    
    
    89.6
    
    
    
    90.4
    
    
    
    90.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    87.8
    %
    
    
    87.6
    %
    
    
    73.4
    %
    
    
    73.6
    %Secondary home
    
    
    7.9
    
    
    
    7.9
    
    
    
    6.1
    
    
    
    6.2Non-owner occupied
    
    
    4.3
    
    
    
    4.5
    
    
    
    20.5
    
    
    
    20.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$0 - $50,000
    
    
    0.8
    %
    
    
    1.1
    %
    
    
    0.5
    %
    
    
    0.3
    %$51,000 - $100,000
    
    
    9.3
    
    
    
    11.2
    
    
    
    5.3
    
    
    
    3.5$100,001 - $250,000
    
    
    51.8
    
    
    
    54.9
    
    
    
    45.4
    
    
    
    39.6$250,001 - $500,000
    
    
    32.3
    
    
    
    28.4
    
    
    
    42.1
    
    
    
    42.7Over $500,000
    
    
    5.8
    
    
    
    4.4
    
    
    
    6.7
    
    
    
    13.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Market Status:Distressed market states (AZ, CA, FL, NV)
    
    
    27.2
    %
    
    
    26.9
    %
    
    
    48.9
    %
    
    
    47.6
    %Non-distressed market states
    
    
    72.8
    
    
    
    73.1
    
    
    
    51.1
    
    
    
    52.4Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Gross risk in force is on a per policy basis and does not account for risk ceded to captive
reinsurers or
applicable stop-loss amounts and deductibles on Modified Pool
structured bulk transactions. Percentages represent distribution of gross risk in force. 17




---



##### Table of Contents



Primary
    
    
    Modified Pool *September 30, 2008
    
    
    September 30, 2008Direct Risk
    
    
    
    
    
    
    Direct Risk(dollars in millions)
    
    in Force
    
    
    Percent
    
    
    in Force
    
    
    Percent2002 and before
    
    $
    567.6
    
    
    
    4.9
    %
    
    $
    4.5
    
    
    
    0.6
    %2003
    
    
    996.1
    
    
    
    8.6
    
    
    
    29.6
    
    
    
    3.92004
    
    
    973.0
    
    
    
    8.4
    
    
    
    74.3
    
    
    
    9.82005
    
    
    1,447.9
    
    
    
    12.5
    
    
    
    255.4
    
    
    
    33.72006
    
    
    2,455.6
    
    
    
    21.2
    
    
    
    285.8
    
    
    
    37.72007
    
    
    4,494.2
    
    
    
    38.8
    
    
    
    108.4
    
    
    
    14.32008
    
    
    648.6
    
    
    
    5.6
    
    
    
    
    
    
    
    Total
    
    $
    11,583.0
    
    
    
    100.0
    %
    
    $
    758.0
    
    
    
    100.0
    %
 
 *
    
    For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss
limits and
deductibles within each specific structure.  18




---



##### Table of Contents



Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeDirect premium written
    
    $
    79,041
    
    
    $
    86,946
    
    
    
    (9
    )%
    
    $
    252,987
    
    
    $
    248,507
    
    
    
    2
    %Ceded premium written
    
    
    (14,847
    )
    
    
    (14,391
    )
    
    
    3
    
    
    
    (46,322
    )
    
    
    (40,081
    )
    
    
    16Net premium written
    
    
    64,194
    
    
    
    72,555
    
    
    
    (12
    )
    
    
    206,665
    
    
    
    208,426
    
    
    
    (1
    )Change in unearned premiums
    
    
    1,460
    
    
    
    (465
    )
    
    
    (414
    )
    
    
    918
    
    
    
    (2,656
    )
    
    
    (135
    )Earned premiums
    
    $
    65,654
    
    
    $
    72,090
    
    
    
    (9
    )%
    
    $
    207,583
    
    
    $
    205,770
    
    
    
    1
    %Net investment income
    
    $
    10,349
    
    
    $
    8,370
    
    
    
    24
    %
    
    $
    29,071
    
    
    $
    23,392
    
    
    
    24
    %Net realized investment (losses) gains
    
    $
    (6,519
    )
    
    $
    85
    
    
    
    (7,769
    )%
    
    $
    (7,615
    )
    
    $
    (3,020
    )
    
    
    152
    %Total revenues
    
    $
    69,486
    
    
    $
    80,547
    
    
    
    (14
    )%
    
    $
    229,045
    
    
    $
    226,148
    
    
    
    1
    %
    19




---



##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeNet losses and loss adjustment expenses:Net paid claims
    
    $
    59,357
    
    
    $
    28,470
    
    
    
    108
    %
    
    $
    167,708
    
    
    $
    64,272
    
    
    
    161
    %Change in reserves
    
    
    165,958
    
    
    
    76,612
    
    
    
    117
    %
    
    
    559,469
    
    
    
    113,888
    
    
    
    391
    %Loss adjustment expenses
    
    
    5,879
    
    
    
    1,731
    
    
    
    240
    %
    
    
    18,025
    
    
    
    3,127
    
    
    
    476
    %Total
    
    $
    231,194
    
    
    $
    106,813
    
    
    
    116
    %
    
    $
    745,202
    
    
    $
    181,287
    
    
    
    311
    %Policy acquisition costs
    
    
    
    
    
    
    4,567
    
    
    
    (100
    )
    
    
    39,416
    
    
    
    13,860
    
    
    
    184Other operating expenses (net of
acquisition
costs deferred)
    
    
    8,726
    
    
    
    11,686
    
    
    
    (25
    )
    
    
    50,070
    
    
    
    32,733
    
    
    
    53Loss ratio
    
    
    352.1
    %
    
    
    148.2
    %
    
    
    138
    
    
    
    359.0
    %
    
    
    88.1
    %
    
    
    307Expense ratio
    
    
    13.6
    %
    
    
    22.4
    %
    
    
    (39
    )
    
    
    26.4
    %
    
    
    22.4
    %
    
    
    18Combined ratio
    
    
    365.7
    %
    
    
    170.6
    %
    
    
    114
    
    
    
    385.4
    %
    
    
    110.5
    %
    
    
    249
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangePaid claims:Primary insurance
    
    $
    48,766
    
    
    $
    23,058
    
    
    
    111.5
    %
    
    $
    126,189
    
    
    $
    56,192
    
    
    
    125
    %Modified Pool
insurance
    
    
    10,755
    
    
    
    5,413
    
    
    
    98.7
    
    
    
    41,799
    
    
    
    8,080
    
    
    
    417Total
    
    $
    59,521
    
    
    $
    28,471
    
    
    
    109.1
    %
    
    $
    167,988
    
    
    $
    64,272
    
    
    
    161
    %Number of claims paid:Primary insurance
    
    
    950
    
    
    
    625
    
    
    
    52.0
    %
    
    
    2,555
    
    
    
    1,691
    
    
    
    51
    %Modified Pool
insurance
    
    
    150
    
    
    
    131
    
    
    
    14.5
    
    
    
    680
    
    
    
    237
    
    
    
    187Total
    
    
    1,100
    
    
    
    756
    
    
    
    45.5
    %
    
    
    3,235
    
    
    
    1,928
    
    
    
    68
    %
  20




---



##### Table of Contents



Primary
    
    Modified PoolAverage
    
    Average
    
    Average
    
    AverageVintage Year
    
    Loan Size
    
    Insured Risk
    
    Loan Size
    
    Insured Risk2002 and Prior
    
    $
    105,000
    
    
    $
    26,812
    
    
    $
    78,646
    
    
    $
    25,4852003
    
    
    116,321
    
    
    
    28,090
    
    
    
    142,804
    
    
    
    42,2692004
    
    
    130,940
    
    
    
    34,893
    
    
    
    147,811
    
    
    
    43,8552005
    
    
    156,352
    
    
    
    40,991
    
    
    
    177,428
    
    
    
    57,7662006
    
    
    208,012
    
    
    
    53,746
    
    
    
    262,528
    
    
    
    69,4372007
    
    
    207,695
    
    
    
    56,024
    
    
    
    272,463
    
    
    
    79,3282008
    
    
    203,440
    
    
    
    46,645
    
    
    
    
    
    
    
    Overall Average
    
    $
    171,510
    
    
    $
    44,628
    
    
    $
    208,465
    
    
    $
    60,744
   21




---



##### Table of Contents



Cumulative Paid Loss Ratiosas of September 30,Book Year
    
    2008
    
    20071996
    
    
    14.6
    %
    
    
    14.5
    %1997
    
    
    10.4
    
    
    
    10.21998
    
    
    6.9
    
    
    
    6.71999
    
    
    9.9
    
    
    
    9.92000
    
    
    35.7
    
    
    
    35.32001
    
    
    32.2
    
    
    
    30.62002
    
    
    33.0
    
    
    
    31.62003
    
    
    19.2
    
    
    
    15.72004
    
    
    23.1
    
    
    
    15.92005
    
    
    40.0
    
    
    
    15.32006
    
    
    37.3
    
    
    
    6.02007
    
    
    9.1
    
    
    
    2008
    
    
    
    
    
    
    
   September 30,
    
    
    December 31,
    
    
    September 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Primary insurance:Reserves for reported defaults
    
    $
    656,096
    
    
    $
    251,316
    
    
    $
    144,189Reserves for defaults incurred but not reported
    
    
    86,961
    
    
    
    40,691
    
    
    
    19,765Total Primary insurance
    
    
    743,057
    
    
    
    292,007
    
    
    
    163,954Modified Pool insurance:Reserves for reported defaults
    
    
    258,347
    
    
    
    54,876
    
    
    
    31,164Reserves for defaults incurred but not reported
    
    
    23,735
    
    
    
    8,340
    
    
    
    2,619Total Modified Pool insurance
    
    
    282,082
    
    
    
    63,216
    
    
    
    33,783Reserve for loss adjustment expenses
    
    
    16,914
    
    
    
    4,716
    
    
    
    2,718Total reserves for losses and loss adjustment
expenses
    
    $
    1,042,053
    
    
    $
    359,939
    
    
    $
    200,455
 22




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(dollars in thousands)
    
    2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % ChangeIncrease in reserve for losses and
loss adjustment expenses
    
    $
    165,958
    
    
    $
    76,612
    
    
    
    117
    %
    
    $
    559,469
    
    
    $
    113,888
    
    
    
    391
    %
   23




---



##### Table of Contents



September 30,
    
    December 31,
    
    September 30,(dollars in thousands)
    
    2008
    
    2007
    
    2007% of Gross Risk In Force:California
    
    
    14.7
    %
    
    
    15.1
    %
    
    
    15.2
    %Florida
    
    
    11.5
    %
    
    
    12.1
    %
    
    
    12.2
    %Arizona
    
    
    5.2
    %
    
    
    5.5
    %
    
    
    5.6
    %Nevada
    
    
    3.0
    %
    
    
    3.1
    %
    
    
    3.1
    %Total Distressed
Market States
    
    
    34.4
    %
    
    
    35.9
    %
    
    
    36.1
    %% of Gross Risk in Default:California
    
    
    25.5
    %
    
    
    19.1
    %
    
    
    15.8
    %Florida
    
    
    23.7
    %
    
    
    20.0
    %
    
    
    16.5
    %Arizona
    
    
    6.7
    %
    
    
    5.6
    %
    
    
    4.9
    %Nevada
    
    
    4.7
    %
    
    
    3.9
    %
    
    
    4.1
    %Total Distressed
Market States
    
    
    60.6
    %
    
    
    48.7
    %
    
    
    41.3
    %% of Gross Reserves:California
    
    
    24.4
    %
    
    
    18.3
    %
    
    
    15.0
    %Florida
    
    
    24.2
    %
    
    
    20.0
    %
    
    
    16.3
    %Arizona
    
    
    6.7
    %
    
    
    5.4
    %
    
    
    4.7
    %Nevada
    
    
    4.5
    %
    
    
    3.9
    %
    
    
    3.8
    %Total Distressed
Market States
    
    
    59.9
    %
    
    
    47.6
    %
    
    
    39.8
    %
  September 30,
    
    December 31,
    
    September 30,(dollars in thousands)
    
    2008
    
    2007
    
    2007Risk on loans in default
    
    $
    2,191,743
    
    
    $
    1,000,384
    
    
    $
    669,839Gross Case Reserves
as a percentage of
risk in default (1)
    
    
    45.4
    %
    
    
    36.6
    %
    
    
    32.1
    %
 
 (1)
    
    Reflects gross case reserves, which excludes IBNR and ceded reserves, as a percent of risk in
default for total primary delinquent loans and total modified pool delinquent loans.  24




---



##### Table of Contents



September 30,
    
    December 31,
    
    September 30,(dollars in thousands)
    
    2008
    
    2007
    
    2007Total business:Number of insured loans in force
    
    
    354,645
    
    
    
    378,907
    
    
    
    378,814With deductibles
    
    
    53,780
    
    
    
    59,592
    
    
    
    61,634Without deductibles
    
    
    300,865
    
    
    
    319,315
    
    
    
    317,180Number of loans in default
    
    
    32,105
    
    
    
    16,821
    
    
    
    12,367With deductibles
    
    
    7,278
    
    
    
    4,072
    
    
    
    3,104Without deductibles
    
    
    24,827
    
    
    
    12,749
    
    
    
    9,263Percentage of loans in default
(default rate)
    
    
    9.05
    %
    
    
    4.44
    %
    
    
    3.26
    %Percentage of loans in default
excluding deductibles
    
    
    8.25
    %
    
    
    3.99
    %
    
    
    2.92
    %Primary insurance:Number of insured loans in force
    
    
    259,556
    
    
    
    273,798
    
    
    
    269,681Number of loans in default
    
    
    19,441
    
    
    
    10,419
    
    
    
    7,541Percentage of loans in default
    
    
    7.49
    %
    
    
    3.81
    %
    
    
    2.80
    %Modified Pool insurance:Number of insured loans in force
    
    
    95,089
    
    
    
    105,109
    
    
    
    109,133With deductibles
    
    
    53,758
    
    
    
    59,569
    
    
    
    61,611Without deductibles
    
    
    41,331
    
    
    
    45,540
    
    
    
    47,522Number of loans in default
    
    
    12,664
    
    
    
    6,402
    
    
    
    4,826With deductibles
    
    
    7,278
    
    
    
    4,072
    
    
    
    3,104Without deductibles
    
    
    5,386
    
    
    
    2,330
    
    
    
    1,722Percentage of loans in default
    
    
    13.32
    %
    
    
    6.09
    %
    
    
    4.42
    %Percentage of loans in default
excluding deductibles
    
    
    13.03
    %
    
    
    5.12
    %
    
    
    3.62
    %
     25




---



##### Table of Contents



Expenses and Taxes
    26




---



##### Table of Contents



Financial Position
   Deferred Policy Acquisition Costs
  Prepaid Federal Income Taxes and Deferred Income Taxes
  27




---



##### Table of Contents



Premium Deficiency Reserve
    28




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
    September 30, 2008
    
    
    December 31, 2007(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    20,424
    
    
    
    2.3
    %
    
    $
    11,762
    
    
    
    1.5
    %State and municipal bonds
    
    
    215,537
    
    
    
    24.2
    %
    
    
    673,264
    
    
    
    85.8
    %Corporate bonds
    
    
    508,437
    
    
    
    57.1
    %
    
    
    40,605
    
    
    
    5.2
    %Mortgage-backed bonds
    
    
    118,088
    
    
    
    13.3
    %
    
    
    
    
    
    
    0.0
    %Total fixed maturities
    
    
    862,486
    
    
    
    96.9
    %
    
    
    725,631
    
    
    
    92.5
    %Equity securities
    
    
    615
    
    
    
    0.1
    %
    
    
    2,162
    
    
    
    0.3
    %Total available-for-sale
securities
    
    
    863,101
    
    
    
    97.0
    %
    
    
    727,793
    
    
    
    92.8
    %Short-term investments
    
    
    27,619
    
    
    
    3.0
    %
    
    
    56,746
    
    
    
    7.2
    %$
    890,720
    
    
    
    100.0
    %
    
    $
    784,539
    
    
    
    100.0
    %
 29




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(dollars in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Average investments at cost or amortized cost
    
    $
    882,444
    
    
    $
    729,519
    
    
    $
    834,583
    
    
    $
    688,776Pre-tax net investment income
    
    $
    10,349
    
    
    $
    8,370
    
    
    $
    29,071
    
    
    $
    23,392Pre-tax yield
    
    
    4.7
    %
    
    
    4.6
    %
    
    
    4.6
    %
    
    
    4.5
    %Pre-tax realized investment (losses) gains
    
    $
    (6,519
    )
    
    $
    85
    
    
    $
    (7,615
    )
    
    $
    (3,020
    )
  Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    20,303
    
    
    $
    226
    
    
    $
    (105
    )
    
    $
    20,424State and municipal bonds
    
    
    213,949
    
    
    
    1,593
    
    
    
    (5
    )
    
    
    215,537Corporate bonds
    
    
    518,113
    
    
    
    703
    
    
    
    (10,379
    )
    
    
    508,437Mortgage-backed bonds
    
    
    117,940
    
    
    
    562
    
    
    
    (414
    )
    
    
    118,088Subtotal, fixed maturities
    
    
    870,305
    
    
    
    3,084
    
    
    
    (10,903
    )
    
    
    862,486Equity securities
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    615Short term investments
    
    
    28,056
    
    
    
    
    
    
    
    (437
    )
    
    
    27,619Total securities
    
    $
    898,976
    
    
    $
    3,084
    
    
    $
    (11,340
    )
    
    $
    890,720
   30




---



##### Table of Contents



Credit Risk
  September 30, 2008
    
    
    December 31, 2007(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    20,424
    
    
    
    2.4
    %
    
    $
    11,762
    
    
    
    1.6
    %AAA
    
    
    251,551
    
    
    
    29.2
    
    
    
    518,769
    
    
    
    71.5AA
    
    
    224,052
    
    
    
    26.0
    
    
    
    150,820
    
    
    
    20.8A
    
    
    344,813
    
    
    
    40.0
    
    
    
    25,774
    
    
    
    3.6BBB
    
    
    12,256
    
    
    
    1.4
    
    
    
    8,738
    
    
    
    1.2BB
    
    
    1,463
    
    
    
    0.2
    
    
    
    1,072
    
    
    
    0.1B
    
    
    242
    
    
    
    0.0
    
    
    
    
    
    
    
    CCC
    
    
    2,301
    
    
    
    0.3
    
    
    
    5,591
    
    
    
    0.8CC and lower
    
    
    62
    
    
    
    0.0
    
    
    
    2
    
    
    
    0.0Not rated
    
    
    5,322
    
    
    
    0.6
    
    
    
    3,103
    
    
    
    0.4Total fixed maturities
    
    $
    862,486
    
    
    
    100.0
    %
    
    $
    725,631
    
    
    
    100.0
    %Equity Securities:Preferred stocks:AA
    
    $
    419
    
    
    
    68.2
    %
    
    $
    745
    
    
    
    34.5
    %A
    
    
    131
    
    
    
    21.3
    
    
    
    883
    
    
    
    40.8BBB
    
    
    65
    
    
    
    10.6
    
    
    
    534
    
    
    
    24.7615
    
    
    
    100.0
    
    
    
    2,162
    
    
    
    100.0Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    $
    615
    
    
    
    100.0
    %
    
    $
    2,162
    
    
    
    100.0
    %
   31




---



##### Table of Contents



Credit Quality With Benefit of
    
    
    Credit Quality Without BenefitCredit Enhancements
    
    
    of Credit Enhancements(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentU.S. treasury and agency bonds
    
    $
    8,279
    
    
    
    1.0
    %
    
    $
    8,282
    
    
    
    1.0
    %AAA
    
    
    242,037
    
    
    
    28.1
    
    
    
    205,563
    
    
    
    23.8AA
    
    
    189,310
    
    
    
    21.9
    
    
    
    156,946
    
    
    
    18.2A
    
    
    401,213
    
    
    
    46.5
    
    
    
    436,944
    
    
    
    50.7BBB
    
    
    12,256
    
    
    
    1.4
    
    
    
    17,853
    
    
    
    2.1BB
    
    
    1,463
    
    
    
    0.2
    
    
    
    2,389
    
    
    
    0.3B
    
    
    242
    
    
    
    0.0
    
    
    
    1,988
    
    
    
    0.2CCC
    
    
    2,301
    
    
    
    0.3
    
    
    
    
    
    
    
    CC and below
    
    
    63
    
    
    
    0.0
    
    
    
    63
    
    
    
    0.0Not rated
    
    
    5,322
    
    
    
    0.6
    
    
    
    32,458
    
    
    
    3.8Total Fixed Maturities
    
    $
    862,486
    
    
    
    100.0
    %
    
    $
    862,486
    
    
    
    100.0
    %
   Financial Guarantors
 Credit Enhanced State andMunicipal Portfolio(dollars in thousands)
    
    Amount
    
    
    PercentMBIA
    
    $
    48,140
    
    
    
    27.9
    %FSA
    
    
    25,474
    
    
    
    14.8FGIC
    
    
    37,894
    
    
    
    22.0AMBAC
    
    
    37,756
    
    
    
    21.9Others (four companies)
    
    
    23,154
    
    
    
    13.4Total
    
    $
    172,418
    
    
    
    100.0
    %
   
    
    Length of time the fair value was below amortized cost;
    
    Industry factors or conditions related to a geographic area negatively affecting
the security;
 32




---



##### Table of Contents




    
    Downgrades by a rating agency;
    
    Past due interest or principal payments or other violation of covenants; and
    
    Deterioration of the overall financial condition of the specific issuer.
     Realized Gains (Losses) and Impairments
  33




---



##### Table of Contents



Liquidity and Capital Resources
 
      34




---



##### Table of Contents



35




---



##### Table of Contents



September 30,
    
    
    December 31,
    
    
    September 30,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2007Statutory policyholders surplus
    
    $
    284.2
    
    
    $
    197.7
    
    
    $
    33.9Statutory contingency reserve
    
    
    1.4
    
    
    
    387.4
    
    
    
    626.2Total
    
    $
    285.6
    
    
    $
    585.1
    
    
    $
    660.1
     36




---



##### Table of Contents



Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Update on Critical Accounting Policies and Estimates
   Premium Deficiency
   37




---



##### Table of Contents



Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  
    
    if we are unable to satisfy the enhanced regulatory obligations imposed on us in
run-off, the Illinois Division of Insurance could impose penalties on us, place us in
rehabilitation and impose further restrictions on our business or appoint a receiver
to liquidate our insurance subsidiary;
    
    if the significant assumptions utilized in the corrective plan related to the
timing and amount of claims, the persistency of renewal premiums, and the expenses
related to servicing the remaining
portfolio prove to be materially and adversely inaccurate, the Illinois Division of
Insurance may be forced to place Triad in rehabilitation or appoint a receiver to
liquidate our business;
    
    our ability to lower operating expenses to the most efficient level while still
providing the ability to mitigate losses effectively as we transition to run-off
status will have an impact on our financial performance in run-off;
    
    whether we ultimately prevail in arbitration with the Excess-of-Loss reinsurance
treaty will have an impact on our financial performance in run-off;
    
    if housing prices continue to fall, additional borrowers may default and claims
could be higher than anticipated;
    
    if unemployment rates continue to rise, especially in those areas that have
already experienced significant declines in home prices, defaults and claims could be
higher than anticipated;
 38




---



##### Table of Contents




    
    a significant decline in interest rates coupled with an increase in available
credit could increase refinancings and decrease the persistency of renewal premiums
and the quality of our insurance in force;
    
    ongoing credit tightening in the mortgage marketplace may continue and cause an
increased number of defaults and, ultimately, paid claims due to the unavailability
of refinancing options;
    
    the appointment of FHFA as the conservator of both Fannie Mae and Freddie Mac may
result in changes in the business practices of the GSEs that could adversely impact
our financial performance in run-off;
    
    our financial condition and performance in run-off could be affected by new
legislation, such as EESA, or regulations impacting the mortgage industry or the GSEs
specifically and the financial services industry in general;
    
    if GSEs or our lender customers choose to cancel the insurance on policies that we
insure, our financial performance in run-off could be adversely affected;
    
    if we have failed to properly underwrite mortgage loans under contract
underwriting service agreements, we may be required to assume the costs of
repurchasing those loans or face other remedies;
    
    if we are unable to satisfy its continued listing requirements, we may be delisted
from The NASDAQ Stock Market;
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions; and
    
    further economic downturns in regions where we have larger concentrations of risk
and in markets already distressed could have a particularly adverse effect on our
financial condition and loss development.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   39




---



##### Table of Contents



Interest Rate Risk on Investments
   Market Risk
  
 Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including the Principal Executive Officer (PEO) and Principal Financial Officer
(PFO), of the effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934 (Act). Based on that evaluation, our
management, including our PEO and PFO, concluded, as of the end of the period covered by
this report, that our disclosure controls and procedures were effective to enable us to
record, process, summarize and report in a timely manner the information that we are
required to disclose in our reports under the Act. Disclosure controls and procedures
include controls and procedures designed to ensure that management, including our PEO and
PFO, is alerted to material information required to be disclosed in our filings under the
Act so as to allow timely decisions regarding our disclosures. In designing and evaluating
disclosure controls and procedures, we recognized that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to
do.
 40




---



##### Table of Contents



b)
    
    There were no changes to our internal control over financial reporting during the third
quarter of 2008 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 A deep or prolonged recession in the United States and continued tightened credit in mortgage
markets may increase mortgage defaults and limit opportunities for borrowers to cure defaults or
for our company to mitigate its losses, which would adversely impact the future value of our
company.
  41




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Shares Voted
    
    SharesElection of Directors
    
    in Favor
    
    WithheldRobert T. David
    
    
    11,817,402
    
    
    
    296,012H. Lee Durham, Jr.
    
    
    11,434,864
    
    
    
    678,550William T. Ratliff, III
    
    
    11,925,731
    
    
    
    187,683Richard S. Swanson
    
    
    11,319,047
    
    
    
    794,367David W. Whitehurst
    
    
    11,930,219
    
    
    
    183,195
  Shares Voted
    
    Shares Voted
    
    SharesOther Proposals
    
    in Favor
    

Against
    
    WithheldRatification of the selection of Ernst
& Young LLP
as the independent registered public
accounting
firm for Triad Guaranty Inc. for 2008.
    
    
    12,017,230
    
    
    
    54,443
    
    
    
    41,741
 
 Item 6. Exhibits
  42




---



##### Table of Contents



SIGNATURE
  TRIAD GUARANTY INC.Date: November 10, 2008/s/ Kenneth S. DwyerKenneth S. DwyerVice President and Chief Accounting Officer

(Duly Authorized Officer and Principal Accounting Officer)
 43




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.54
    
    
    Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and Mark K. Tonnesen, previously filed as
Exhibit 10.54 to the Companys Current Report on Form 8-K
filed on July 17, 2008, and incorporated herein by
reference.*10.55
    
    
    Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and William T. Ratliff, III, previously filed
as Exhibit 10.55 to the Companys Current Report on Form
8-K filed on July 17, 2008, and incorporated herein by
reference.*31.1
    
    

Certification
of Principal Executive Officer and Principal
Financial Officer pursuant to Exchange Act Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    

Certification
of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 
 *
    
    Management contract or compensatory arrangement. 44