##### 



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 March 31, 2006
 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
  o þ o
 o þ




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##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of March 31, 2006
(Unaudited) and December 31, 2005
    
    1Consolidated Statements of Income for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    2Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    3Notes to Consolidated Financial Statements
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    34Item 4.
    
    Controls and Procedures
    
    34Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    35Item 1A.
    
    Risk Factors
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    35Item 5.
    
    Other Information
    
    35Item 6.
    
    Exhibits
    
    35Signature
    
    36




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)March 31
    
    
    December 312006
    
    
    2005(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $530,658 and $518,137)
    
    $
    541,393
    
    
    $
    534,064Equity securities (cost: $9,628 and $7,001)
    
    
    9,987
    
    
    
    8,159Short-term investments
    
    
    5,053
    
    
    
    4,796556,433
    
    
    
    547,019Cash and cash equivalents
    
    
    13,743
    
    
    
    8,934Real estate acquired in claim settlement
    
    
    10,198
    
    
    
    5,721Accrued investment income
    
    
    7,012
    
    
    
    7,237Deferred policy acquisition costs
    
    
    33,904
    
    
    
    33,684Prepaid federal income taxes
    
    
    139,465
    
    
    
    139,465Property and equipment
    
    
    7,613
    
    
    
    7,827Income taxes recoverable
    
    
    
    
    
    
    181Reinsurance recoverable
    
    
    1
    
    
    
    948Other assets
    
    
    17,609
    
    
    
    16,487Total assets
    
    $
    785,978
    
    
    $
    767,503LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    52,614
    
    
    $
    51,074Unearned premiums
    
    
    13,944
    
    
    
    13,494Amounts payable to reinsurers
    
    
    4,279
    
    
    
    4,810Deferred income taxes
    
    
    159,180
    
    
    
    155,189Long-term debt
    
    
    34,503
    
    
    
    34,501Accrued interest on debt
    
    
    584
    
    
    
    1,275Current taxes payable
    
    
    563
    
    
    
    Accrued expenses and other liabilities
    
    
    5,104
    
    
    
    7,969Total liabilities
    
    
    270,771
    
    
    
    268,312Commitments 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 14,831,560 shares
at March 31, 2006 and 14,774,153 shares at December 31, 2005
    
    
    148
    
    
    
    148Additional paid-in capital
    
    
    101,853
    
    
    
    103,657Accumulated other comprehensive income, net of income tax
liability of $3,883 at March 31, 2006 and $5,980 at
December 31, 2005
    
    
    7,211
    
    
    
    11,106Deferred compensation
    
    
    
    
    
    
    (3,161
    )Retained earnings
    
    
    405,995
    
    
    
    387,441Total stockholders equity
    
    
    515,207
    
    
    
    499,191Total liabilities and stockholders equity
    
    $
    785,978
    
    
    $
    767,503
  1




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##### 



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 Three Months EndedMarch 312006
    
    
    2005(In thousands, except share data)Revenue:Premiums written:Direct
    
    $
    59,312
    
    
    $
    48,327Ceded
    
    
    (10,970
    )
    
    
    (9,616
    )Net premiums written
    
    
    48,342
    
    
    
    38,711Change in unearned premiums
    
    
    (452
    )
    
    
    66Earned premiums
    
    
    47,890
    
    
    
    38,777Net investment income
    
    
    6,222
    
    
    
    5,415Net realized investment gains
    
    
    900
    
    
    
    7Other income
    
    
    (2
    )
    
    
    955,010
    
    
    
    44,208Losses and expenses:Net losses and loss adjustment expenses
    
    
    16,351
    
    
    
    10,630Interest expense on debt
    
    
    693
    
    
    
    693Amortization of deferred policy acquisition costs
    
    
    3,862
    
    
    
    3,657Other operating expenses (net of acquisition costs deferred)
    
    
    8,513
    
    
    
    7,21729,419
    
    
    
    22,197Income before income taxes
    
    
    25,591
    
    
    
    22,011Income taxes:Current
    
    
    972
    
    
    
    694Deferred
    
    
    6,066
    
    
    
    5,5577,038
    
    
    
    6,251Net income
    
    $
    18,553
    
    
    $
    15,760Earnings per common and common equivalent share:Basic
    
    $
    1.26
    
    
    $
    1.08Diluted
    
    $
    1.25
    
    
    $
    1.07Shares used in computing earnings per common and common
equivalent share:Basic
    
    
    14,758,349
    
    
    
    14,618,183Diluted
    
    
    14,862,471
    
    
    
    14,777,681
 .
 2




---



##### 



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 312006
    
    
    2005(In thousands)Operating activitiesNet income
    
    $
    18,553
    
    
    $
    15,760Adjustments to reconcile net income to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    1,990
    
    
    
    684Accrued expenses and other liabilities
    
    
    (2,865
    )
    
    
    (2,807
    )Current taxes payable
    
    
    563
    
    
    
    Income taxes recoverable
    
    
    181
    
    
    
    310Amounts due to/from reinsurer
    
    
    416
    
    
    
    191Accrued investment income
    
    
    225
    
    
    
    226Policy acquisition costs deferred
    
    
    (4,082
    )
    
    
    (4,226
    )Amortization of deferred policy acquisition costs
    
    
    3,862
    
    
    
    3,657Net realized investment gains
    
    
    (900
    )
    
    
    (7
    )Provision for depreciation
    
    
    615
    
    
    
    826Accretion of discount on investments
    
    
    (35
    )
    
    
    (30
    )Deferred income taxes
    
    
    6,066
    
    
    
    5,557Prepaid federal income taxes
    
    
    
    
    
    
    355Real estate acquired in claim settlement, net of write-downs
    
    
    (4,477
    )
    
    
    78Accrued interest on debt
    
    
    (691
    )
    
    
    (691
    )Other assets
    
    
    (1,122
    )
    
    
    160Other operating activities
    
    
    709
    
    
    
    748Net cash provided by operating activities
    
    
    19,008
    
    
    
    20,791Investing activitiesSecurities available-for-sale:Purchases
 fixed maturities
    
    
    (22,616
    )
    
    
    (27,594
    )Sales  fixed maturities
    
    
    8,000
    
    
    
    503Maturities
 fixed maturities
    
    
    2,160
    
    
    
    3,327Purchases
 equities
    
    
    (4,622
    )
    
    
    Sales  equities
    
    
    2,946
    
    
    
    Net change in short-term investments
    
    
    (257
    )
    
    
    7,346Purchases of property and equipment
    
    
    (401
    )
    
    
    (772
    )Net cash used in investing activities
    
    
    (14,790
    )
    
    
    (17,190
    )Financing activitiesExcess tax benefits from share-based compensation
    
    
    270
    
    
    
    Proceeds from exercise of stock options
    
    
    321
    
    
    
    262Net cash provided by financing activities
    
    
    591
    
    
    
    262Net change in cash and cash equivalents
    
    
    4,809
    
    
    
    3,863Cash and cash equivalents at beginning of period
    
    
    8,934
    
    
    
    10,440Cash and cash equivalents at end of period
    
    $
    13,743
    
    
    $
    14,303Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    
    
    
    $
    Interest
    
    
    1,383
    
    
    
    1,383
  3




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##### 



TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  Share-Based Compensation
 Accounting for Stock Issued to Employees Share-Based Payment 4
         Three Months EndedMarch 31, 2006Income before income taxes
    
    $
    (280
    )Net income
    
    $
    (182
    )Earnings per share  basic
    
    $
    (0.01
    )Earnings per
share  diluted
    
    $
    (0.01
    )
   Three Months EndedMarch 31, 2005Net income  as reported
    
    $
    15,760Net income  pro forma
    
    $
    15,614Earnings per share  as reported:Basic
    
    $
    1.08Diluted
    
    $
    1.07Earnings per share  pro forma:Basic
    
    $
    1.07Diluted
    
    $
    1.06
 3. Consolidation
  5




---



##### 



4. Commitments And Contingencies
 Reinsurance
  Insurance In Force, Dividend Restrictions, and Statutory Results
  March 31, 2006
    
    
    December 31, 2005Net risk
    
    $
    7,446,926
    
    
    $
    7,312,697Statutory capital and surplus
    
    $
    135,375
    
    
    $
    131,582Statutory contingency reserve
    
    
    469,398
    
    
    
    447,826Total
    
    $
    604,773
    
    
    $
    579,408Risk-to-capital ratio
    
    12.3 to 1
    
    
    
    12.6 to 1
   6




---



##### 



Loss Reserves
  Litigation
  5. Earnings Per Share
  6. Comprehensive Income
  7




---



##### 



7. Income Taxes
  8. Long-Term Stock Incentive Plan
   Weighted-Weighted-
    
    
    Aggregate
    
    
    AverageNumber
    
    
    Average
    
    
    Intrinsic
    
    
    Remainingof Shares
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual Term(in thousands)Outstanding, January 1, 2006
    
    
    588,780
    
    
    $
    37.21Granted
    
    
    9,594
    
    
    
    42.00Exercised
    
    
    23,896
    
    
    
    13.44Cancelled
    
    
    
    
    
    
    Outstanding, March 31, 2006
    
    
    574,478
    
    
    
    38.28
    
    
    $
    5,357
    
    
    5.3 yearsExercisable, March 31, 2006
    
    
    429,672
    
    
    
    36.68
    
    
    $
    4,643
    
    
    3.9 years
 8




---



##### 



2006
    
    2005Expected volatility
    
    
    34.2
    %
    
    
    40.1
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    5.0 years
    
    
    5.0 yearsRisk-free rate
    
    
    4.5
    %
    
    
    3.7
    %
   Weighted-AverageNumber of
    
    
    Grant-DateShares
    
    Fair ValueNonvested, January 1, 2006
    
    
    101,415
    
    
    $
    46.93Granted
    
    
    33,315
    
    
    
    42.00Vested
    
    
    29,631
    
    
    
    46.06Cancelled
    
    
    120
    
    
    
    53.94Nonvested, March 31, 2006
    
    
    104,979
    
    
    
    45.60
    9




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##### 



Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of
Operations
   Update on Critical Accounting Policies and Estimates
   Overview
 10
            Consolidated Results of Operations
  %Change20062006
    
    2005
    
    vs. 2005(In thousands, except percentages and per share information)Earned premiums
    
    $
    47,890
    
    
    $
    38,777
    
    
    
    23.5
    %Net losses and loss adjustment expenses
    
    
    16,351
    
    
    
    10,630
    
    
    
    53.8Net income
    
    
    18,553
    
    
    
    15,760
    
    
    
    17.7Diluted earnings per share
    
    $
    1.25
    
    
    $
    1.07
    
    
    
    16.8
  11




---



##### 



Production and In Force
  % Change2006 vs.2006
    
    
    2005
    
    
    2005(In millions, except percentages)Primary insurance written
    
    $
    1,948
    
    
    $
    2,191
    
    
    
    (11.1
    )%Modified pool insurance written
    
    
    4,606
    
    
    
    2,103
    
    
    
    119.0Total insurance written
    
    $
    6,554
    
    
    $
    4,294
    
    
    
    52.6
    %
  12




---



##### 



2006
    
    2005Flow channel
    
    
    5.3
    %
    
    
    5.5
    %Structured bulk channel
    
    
    16.7
    %
    
    
    16.5
    %Total
    
    
    10.1
    %
    
    
    8.0
    %
  13




---



##### 



2006
    
    2005Prime
    
    
    74.9
    %
    
    
    78.1
    %Alt-A
    
    
    22.8
    
    
    
    14.2A Minus
    
    
    2.0
    
    
    
    6.1Sub Prime
    
    
    0.3
    
    
    
    1.6Total
    
    
    100.0
    %
    
    
    100.0
    %
  2006
    
    2005ARMs
    
    
    32.4
    %
    
    
    38.1
    %LTV greater than 95%
    
    
    10.1
    %
    
    
    13.1
    %
   14




---



##### 



% Change2006 vs.2006
    
    
    2005
    
    
    2005(In millions, except percentages)Primary insurance
    
    $
    29,891
    
    
    $
    29,001
    
    
    
    3.1
    %Modified Pool insurance
    
    
    18,309
    
    
    
    9,217
    
    
    
    98.6Total insurance
    
    $
    48,200
    
    
    $
    38,218
    
    
    
    26.1
    %
    2006
    
    2005Primary insurance in force
    
    
    10.4
    %
    
    
    7.6
    %Modified Pool insurance in force
    
    
    68.4
    %
    
    
    61.3
    %Total insurance in force
    
    
    32.0
    %
    
    
    20.5
    %
 15




---



##### 



2006
    
    2005Credit quality:Prime
    
    
    83.9
    %
    
    
    86.1
    %Alt-A
    
    
    11.2
    
    
    
    8.5A Minus
    
    
    4.1
    
    
    
    4.5Sub Prime
    
    
    0.8
    
    
    
    0.9Total
    
    
    100.0
    %
    
    
    100.0
    %Loan type:Fixed
    
    
    73.8
    %
    
    
    75.6
    %ARM
    
    
    26.2
    
    
    
    24.4Total
    
    
    100.0
    %
    
    
    100.0
    %
  2006
    
    2005Primary flow insurance in force
    
    
    59.9
    %
    
    
    56.7
    %Total insurance in force
    
    
    36.7
    %
    
    
    42.0
    %
   16




---



##### 



Revenues
  %Change2006 vs.2006
    
    
    2005
    
    
    2005(In thousands, except percentages)Direct premium written
    
    $
    59,312
    
    
    $
    48,327
    
    
    
    22.7
    %Ceded premium written
    
    
    (10,970
    )
    
    
    (9,616
    )
    
    
    14.1Net premium written
    
    
    48,342
    
    
    
    38,711
    
    
    
    24.9Change in unearned premiums
    
    
    (452
    )
    
    
    66
    
    
    
    (784.8
    )Earned premiums
    
    $
    47,890
    
    
    $
    38,777
    
    
    
    23.5Net investment income
    
    $
    6,222
    
    
    $
    5,415
    
    
    
    14.9Total revenues
    
    $
    55,010
    
    
    $
    44,208
    
    
    
    24.4
    %
   2006
    
    2005Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    18.5
    %
    
    
    19.9
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    17.3
    %
    
    
    18.3
    %Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements)
    
    
    37.2
    %
    
    
    36.6
    %
 17




---



##### 



2006
    
    2005Primary insurance written
    
    
    55.1
    %
    
    
    46.8
    %Total insurance written
    
    
    16.4
    %
    
    
    23.9
    %
     18




---



##### 



Losses and Expenses
  % Change2006 vs.2006
    
    2005
    
    2005(In thousands, except percentages)Net losses and loss adjustment expenses
    
    $
    16,351
    
    
    $
    10,630
    
    
    
    53.8
    %Amortization of deferred policy acquisition costs
    
    
    3,862
    
    
    
    3,657
    
    
    
    5.6Other operating expenses (net of acquisition
costs deferred)
    
    
    8,513
    
    
    
    7,217
    
    
    
    18.0Loss ratio
    
    
    34.1
    %
    
    
    27.4
    %Expense ratio
    
    
    25.6
    %
    
    
    28.1
    %Combined ratio
    
    
    59.7
    %
    
    
    55.5
    %
  19




---



##### 



% Change2006 vs.2006
    
    
    2005
    
    
    2005(In thousands, except percentages)Paid claims:Primary insurance
    
    $
    13,284
    
    
    $
    8,681
    
    
    
    53.0
    %Modified Pool insurance
    
    
    1,100
    
    
    
    970
    
    
    
    13.4Total
    
    $
    14,384
    
    
    $
    9,651
    
    
    
    49.0
    %Number of claims paid:Primary insurance
    
    
    506
    
    
    
    352
    
    
    
    43.8
    %Modified Pool insurance
    
    
    67
    
    
    
    55
    
    
    
    21.8Total
    
    
    573
    
    
    
    407
    
    
    
    40.8
    %Average severity:Primary insurance
    
    $
    26.3
    
    
    $
    24.7Modified Pool insurance
    
    
    16.4
    
    
    
    17.6Total
    
    
    25.1
    
    
    
    23.7
  Policy Year
    
    2006
    
    20052001 and prior
    
    
    6.4
    %
    
    
    9.7
    %2002
    
    
    8.0
    
    
    
    12.62003
    
    
    24.6
    
    
    
    37.32004
    
    
    24.4
    
    
    
    34.22005
    
    
    31.3
    
    
    
    6.22006
    
    
    5.3
    
    
    
    Total
    
    
    100.0
    %
    
    
    100.0
    %
  20




---



##### 



% Change2006 vs.2006
    
    
    2005
    
    
    2005(In thousands, except percentages)Primary insurance:Reserves for reported defaults
    
    $
    44,399
    
    
    $
    29,793
    
    
    
    49.0
    %Reserves for defaults incurred but not reported
    
    
    3,686
    
    
    
    2,592
    
    
    
    42.2Total Primary insurance
    
    
    48,085
    
    
    
    32,385
    
    
    
    48.5Modified Pool insurance:Reserves for reported defaults
    
    
    3,960
    
    
    
    1,885
    
    
    
    110.1Reserves for defaults incurred but not reported
    
    
    465
    
    
    
    456
    
    
    
    2.0Total Modified Pool insurance
    
    
    4,425
    
    
    
    2,341
    
    
    
    89.0Reserve for loss adjustment expenses
    
    
    104
    
    
    
    99
    
    
    
    5.1Total reserves for losses and loss adjustment
expenses
    
    $
    52,614
    
    
    $
    34,825
    
    
    
    51.1
    %
  21




---



##### 



2006
    
    2005Total business:Number of insured loans in force
    
    
    317,670
    
    
    
    272,839Number of loans in default
    
    
    6,892
    
    
    
    5,463With deductibles
    
    
    1,127
    
    
    
    538Without deductibles
    
    
    5,765
    
    
    
    4,925Percentage of loans in default (default rate)
    
    
    2.17
    %
    
    
    2.00
    %Percentage of loans in default excluding
deductibles
    
    
    1.81
    %
    
    
    1.81
    %Primary insurance:Number of insured loans in force
    
    
    215,736
    
    
    
    217,657Number of loans in default
    
    
    5,116
    
    
    
    4,134Percentage of loans in default
    
    
    2.37
    %
    
    
    1.90
    %Modified Pool insurance:Number of insured loans in force
    
    
    101,934
    
    
    
    55,182Number of loans in default
    
    
    1,776
    
    
    
    1,329With deductibles
    
    
    1,127
    
    
    
    538Without deductibles
    
    
    649
    
    
    
    791Percentage of loans in default
    
    
    1.74
    %
    
    
    2.41
    %Percentage of loans in default excluding
deductibles
    
    
    0.64
    %
    
    
    1.43
    %Primary Alt-A business:Number of insured loans in force
    
    
    16,838
    
    
    
    13,134Number of loans in default
    
    
    634
    
    
    
    445Percentage of loans in default
    
    
    3.77
    %
    
    
    3.39
    %
   22




---



##### 



Number of defaults in FEMA-designated areas at December 31, 2005
    
    
    891Number of defaults in FEMA-designated areas cured during the first
quarter of 2006 with no loss incurred
    
    
    (292
    )Number of new defaults in FEMA-designated areas reported during the
first quarter of 2006
    
    
    192Number of defaults in FEMA-designated areas at March 31, 2006
    
    
    791Number of defaults in FEMA-designated areas at March 31, 2006
without deductibles
    
    
    608
     23




---



##### 



Significant Customers
  Financial Position
 24
        Deferred Policy Acquisition Costs
    2006
    
    
    2005(In thousands, except percentages)Balance  beginning of year
    
    $
    33,684
    
    
    $
    32,453Costs capitalized
    
    
    4,082
    
    
    
    4,227Amortization  normal
    
    
    (3,849
    )
    
    
    (3,315
    )Amortization
 dynamic adjustment
    
    
    (13
    )
    
    
    (342
    )Total amortization
    
    
    (3,862
    )
    
    
    (3,657
    )Balance  end of year
    
    $
    33,904
    
    
    $
    33,023Annual Persistency
    
    
    70.2
    %
    
    
    67.8
    %
 25




---



##### 



Prepaid Federal Income Taxes and Deferred Income Taxes
   Investment Portfolio
 Portfolio Description
  26




---



##### 



March 31, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed maturity securities:U. S. government obligations
    
    $
    11,936
    
    
    
    2.2
    %
    
    $
    12,124
    
    
    
    2.2
    %State and municipal bonds
    
    
    507,614
    
    
    
    91.2
    
    
    
    500,027
    
    
    
    91.4Corporate bonds
    
    
    21,787
    
    
    
    3.9
    
    
    
    21,855
    
    
    
    4.0Mortgage-backed bonds
    
    
    56
    
    
    
    0.0
    
    
    
    58
    
    
    
    0.0Total fixed maturities
    
    
    541,393
    
    
    
    97.3
    
    
    
    534,064
    
    
    
    97.6Equity securities
    
    
    9,987
    
    
    
    1.8
    
    
    
    8,159
    
    
    
    1.5Total available-for-sale
securities
    
    
    551,380
    
    
    
    99.1
    
    
    
    542,223
    
    
    
    99.1Short-term investments
    
    
    5,053
    
    
    
    0.9
    
    
    
    4,796
    
    
    
    0.9$
    556,433
    
    
    
    100.0
    %
    
    $
    547,019
    
    
    
    100.0
    %
   Carrying
    
    % of TotalName of Creditor
    
    Value
    
    Invested Assets(In thousands, except percentages)Atlanta, Georgia Airport
    
    $
    6,750
    
    
    
    1.21
    %State of Pennsylvania
    
    
    6,035
    
    
    
    1.08
    %Federal National Mortgage Association
    
    
    5,330
    
    
    
    0.96
    %State of Hawaii
    
    
    5,304
    
    
    
    0.95
    %AAM/ZAZOVE Institutional Income Fund
    
    
    5,250
    
    
    
    0.94
    %Port of Seattle, Washington
    
    
    4,563
    
    
    
    0.82
    %Cook County, Illinois
    
    
    4,202
    
    
    
    0.76
    %Denver, Colorado City and County Airport
    
    
    4,193
    
    
    
    0.75
    %Charlotte, North Carolina Airport
    
    
    4,125
    
    
    
    0.74
    %State of Nevada Water Pollution Control
    
    
    4,042
    
    
    
    0.73
    %
  27




---



##### 



2006
    
    2005(In thousands, except percentages)Average investments at cost
or amortized cost
    
    $
    537,631
    
    
    $
    464,805Pre-tax net investment income
    
    $
    6,222
    
    
    $
    5,415Pre-tax yield
    
    
    4.6
    %
    
    
    4.7
    %Tax-equivalent yield-to-maturity
    
    
    6.7
    %
    
    
    6.8
    %Pre-tax realized investment gains
    
    $
    900
    
    
    $
    7
  Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturity securities:U. S. government obligations
    
    $
    12,353
    
    
    $
    7
    
    
    $
    (424
    )
    
    $
    11,936State and municipal bonds
    
    
    498,525
    
    
    
    11,395
    
    
    
    (2,306
    )
    
    
    507,614Corporate bonds
    
    
    19,727
    
    
    
    2,067
    
    
    
    (7
    )
    
    
    21,787Mortgage-backed bonds
    
    
    53
    
    
    
    3
    
    
    
    
    
    
    
    56Subtotal, fixed maturities
    
    
    530,658
    
    
    
    13,472
    
    
    
    (2,737
    )
    
    
    541,393Equity securities
    
    
    9,628
    
    
    
    476
    
    
    
    (117
    )
    
    
    9,987Total securities
    
    $
    540,286
    
    
    $
    13,948
    
    
    $
    (2,854
    )
    
    $
    551,380
  28




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##### 



Credit Risk
  March 31, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed Maturities:U.S. treasury and agency bonds
    
    $
    11,936
    
    
    
    2.2
    %
    
    $
    12,124
    
    
    
    2.3
    %AAA
    
    
    425,539
    
    
    
    78.6
    
    
    
    420,489
    
    
    
    78.7AA
    
    
    55,142
    
    
    
    10.2
    
    
    
    52,812
    
    
    
    9.9A
    
    
    30,447
    
    
    
    5.6
    
    
    
    30,176
    
    
    
    5.7BBB
    
    
    9,534
    
    
    
    1.8
    
    
    
    9,780
    
    
    
    1.8BB
    
    
    811
    
    
    
    0.1
    
    
    
    781
    
    
    
    0.1Not rated
    
    
    7,984
    
    
    
    1.5
    
    
    
    7,902
    
    
    
    1.5Total fixed maturities
    
    $
    541,393
    
    
    
    100.0
    %
    
    $
    534,064
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,695
    
    
    
    17.0
    %
    
    $
    1,709
    
    
    
    20.9
    %A
    
    
    1,553
    
    
    
    15.5
    
    
    
    1,559
    
    
    
    19.1BBB
    
    
    1,139
    
    
    
    11.4
    
    
    
    1,125
    
    
    
    13.8Not rated
    
    
    498
    
    
    
    5.0
    
    
    
    490
    
    
    
    6.04,885
    
    
    
    48.9
    
    
    
    4,883
    
    
    
    59.8Common stocks
    
    
    5,102
    
    
    
    51.1
    
    
    
    3,276
    
    
    
    40.2Total equities
    
    $
    9,987
    
    
    
    100.0
    %
    
    $
    8,159
    
    
    
    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§
    
    Downgrades by a rating agency§
    
    Past due interest or principal payments or other violation of covenants§
    
    Deterioration of the overall financial condition of the specific issuer
 29
           Realized Losses and Impairments
  
    
    Approximately $65,000 was a write-down on preferred stock of a U.S.
governmental agency that was continuously in an unrealized loss position for
over twelve months. The market value of the security was at 97% of its book
value at the time of the write-down, but given the length of time the security
had been continuously in an unrealized loss position, we determined the
impairment was other-than-temporary. The circumstances surrounding this
impairment did not impact any other securities in our portfolio.
    
    Approximately $50,000 was a write-down on bonds of a financing company
related to a U.S. car manufacturer. The car manufacturer had posted weak
operating results throughout 2005, lowered earnings projections and had been
downgraded by rating agencies. Although the financing company was very
 30




---



##### 



liquid and had never missed a payment, we determined the impairment was
other-than-temporary due to the circumstances surrounding the related car
manufacturer. We later sold this security at a value approximately equal to its
book value after the write-down. No other securities were impacted by the
circumstances surrounding this impairment.
  Liquidity and Capital Resources
       31




---



##### 



March 31, 2006
    
    
    December 31, 2005Statutory policyholders surplus
    
    $
    135.4
    
    
    $
    131.6Statutory contingency reserve
    
    
    469.4
    
    
    
    447.8Total
    
    $
    604.8
    
    
    $
    579.4
     32




---



##### 



Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  §
    
    interest rates may increase or decrease from their current levels;§
    
    housing prices may increase or decrease from their current levels;§
    
    housing transactions requiring mortgage insurance may decrease for many reasons
including changes in interest rates or economic conditions or alternative credit
enhancement products;§
    
    our market share may change as a result of changes in underwriting criteria or
competitive products or rates;§
    
    the amount of insurance written could be adversely affected by changes in federal
housing legislation, including changes in the Federal Housing Administration loan
limits and coverage requirements of Freddie Mac and Fannie Mae (Government Sponsored
Enterprises);§
    
    our financial condition and competitive position could be affected by legislation
or regulation impacting the mortgage guaranty industry or the Government Sponsored
Entities, specifically, and the financial services industry in general;§
    
    rating agencies may revise methodologies for determining our financial strength
ratings and may revise or withdraw the assigned ratings at any time;
 33




---



##### 



§
    
    decreases in persistency, which are affected by loan refinancings in periods of
low interest rates, may have an adverse effect on earnings;§
    
    the amount of insurance written and the growth in insurance in force or risk in
force as well as our performance may be adversely impacted by the competitive
environment in the private mortgage insurance industry, including the type,
structure, mix and pricing of our products and services and our competitors;§
    
    if we fail to properly underwrite mortgage loans under contract underwriting
service agreements, we may be required to assume the costs of repurchasing those
loans;§
    
    with consolidation occurring among mortgage lenders and our concentration of
insurance in force generated through relationships with significant lender
customers, our margins may be compressed and the loss of a significant customer or a
change in their business practices affecting mortgage insurance may have an adverse
effect on our earnings;§
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions;§
    
    economic downturns in regions where our risk is more concentrated could have a
particularly adverse effect on our financial condition and loss development;§
    
    revisions in risk-based capital rules by the Office of Federal Housing Enterprise
Oversight for Fannie Mae and Freddie Mac could severely limit our ability to compete
against various types of credit protection counterparties, including AAA rated
private mortgage insurers;§
    
    changes in the eligibility guidelines of Fannie Mae or Freddie Mac could have an
adverse effect on the Company;§
    
    proposed regulation by the Department of Housing and Urban Development to exclude
packages of real estate settlement services, which may include any required mortgage
insurance premium paid at closing, from the anti-referral provisions of the Real
Estate Settlement Procedures Act could adversely affect our earnings;§
    
    our financial and competitive position could be affected by regulatory activity
requiring changes to mortgage industry business practices, such as captive
reinsurance.
  
 Item 3. Quantitative and Qualitative Disclosures about 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 Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to
 34




---



##### 



Securities Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our management,
including our CEO and CFO, concluded, as of the end of the period covered by this report,
that our disclosure controls and procedures were effective. Disclosure controls and
procedures include controls and procedures designed to ensure that management, including our
CEO and CFO, 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.
 b)
    
    There have been no changes in internal controls over financial reporting during the
first quarter of 2006 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1.
Legal Proceedings
 
 Item 1A. Risk Factors
  
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3.
Defaults Upon Senior Securities 
 
 Item 4.
Submission of Matters to a Vote of Security Holders 
 
 Item 5.
Other Information 
 
 Item 6.
Exhibits 
 35




---



##### 



SIGNATURE
  TRIAD GUARANTY INC.Date: May 10, 2006/s/ Kenneth S. DwyerKenneth S. DwyerVice President and Chief Accounting Officer
 36




---



##### 



EXHIBIT INDEX
 Exhibit Number
    
    Description31
    (i)
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31(ii)
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 37