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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, 2005
 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.  Delaware
    
    56-1838519(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 101 South Stratford Road   (336) 723-1282
(Registrants telephone number, including area code) 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as described in Exchange Act
Rule 12b-2) Yes þ No o Number of shares of Common Stock, $0.01 par value, outstanding as of April 15, 2005:
14,684,941 shares.




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TRIAD GUARANTY INC. INDEX PageNumberPart I. Financial Information:Item 1.Financial Statements:Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004
    
    
    1Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.Controls and Procedures
    
    
    32Part II. Other Information:Item 1.Legal Proceedings
    
    
    32Item 2.Changes in Securities and Use of Proceeds
    
    
    32Item 3.Defaults Upon Senior Securities
    
    
    32Item 4.Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.Other Information
    
    
    32Item 6.Exhibits
    
    
    32Signature
    
    
    33EX-31.iEX-31.iiEX-32




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements TRIAD GUARANTY INC. 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)March 31
    
    
    December 312005
    
    
    2004(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $459,233 and $435,432)
    
    $
    472,990
    
    
    $
    454,121Equity securities (cost: $8,626 and $8,626)
    
    
    10,118
    
    
    
    10,272Short-term investments
    
    
    15,354
    
    
    
    16,095498,462
    
    
    
    480,488Cash
    
    
    4,123
    
    
    
    6,865Real estate
    
    
    132
    
    
    
    211Accrued investment income
    
    
    6,003
    
    
    
    6,229Deferred policy acquisition costs
    
    
    33,023
    
    
    
    32,453Prepaid federal income taxes
    
    
    118,777
    
    
    
    119,132Property and equipment
    
    
    8,890
    
    
    
    8,945Income taxes recoverable
    
    
    667
    
    
    
    977Reinsurance recoverable
    
    
    1,120
    
    
    
    1,164Other assets
    
    
    15,410
    
    
    
    15,571Total assets
    
    $
    686,607
    
    
    $
    672,035LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    34,825
    
    
    $
    34,042Unearned premiums
    
    
    15,843
    
    
    
    15,942Amounts payable to reinsurer
    
    
    4,614
    
    
    
    4,467Deferred income taxes
    
    
    141,702
    
    
    
    137,925Unearned ceding commission
    
    
    148
    
    
    
    200Long-term debt
    
    
    34,495
    
    
    
    34,493Accrued interest on debt
    
    
    584
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    3,591
    
    
    
    6,348Total liabilities
    
    
    235,802
    
    
    
    234,692Commitments 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 14,684,648 shares
at March 31, 2005 and 14,631,678 shares at December 31, 2004
    
    
    147
    
    
    
    146Additional paid-in capital
    
    
    97,101
    
    
    
    94,852Accumulated other comprehensive income, net of income tax
liability of $5,337 at March 31, 2005 and $7,117 at
December 31, 2004
    
    
    9,912
    
    
    
    13,218Deferred compensation
    
    
    (2,743
    )
    
    
    (1,501
    )Retained earnings
    
    
    346,388
    
    
    
    330,628Total stockholders equity
    
    
    450,805
    
    
    
    437,343Total liabilities and stockholders equity
    
    $
    686,607
    
    
    $
    672,035
 See accompanying notes. 1




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TRIAD GUARANTY INC. 
 CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 Three Months EndedMarch 312005
    
    
    2004(In thousands, except share data)Revenue:Premiums written:Direct
    
    $
    48,327
    
    
    $
    40,317Ceded
    
    
    (9,616
    )
    
    
    (7,971
    )Net premiums written
    
    
    38,711
    
    
    
    32,346Change in unearned premiums
    
    
    66
    
    
    
    1,466Earned premiums
    
    
    38,777
    
    
    
    33,812Net investment income
    
    
    5,415
    
    
    
    4,586Net realized investment gains
    
    
    7
    
    
    
    577Other income
    
    
    9
    
    
    
    344,208
    
    
    
    38,978Losses and expenses:Net losses and loss adjustment expenses
    
    
    10,630
    
    
    
    8,883Interest expense on debt
    
    
    693
    
    
    
    693Amortization of deferred policy acquisition costs
    
    
    3,657
    
    
    
    3,185Other operating expenses (net of acquisition costs deferred)
    
    
    7,217
    
    
    
    6,34022,197
    
    
    
    19,101Income before income taxes
    
    
    22,011
    
    
    
    19,877Income taxes:Current
    
    
    694
    
    
    
    558Deferred
    
    
    5,557
    
    
    
    5,2756,251
    
    
    
    5,833Net income
    
    $
    15,760
    
    
    $
    14,044Earnings per common and common equivalent share:Basic
    
    $
    1.08
    
    
    $
    0.97Diluted
    
    $
    1.07
    
    
    $
    0.96Shares used in computing earnings per common and common
equivalent share:Basic
    
    
    14,618,183
    
    
    
    14,458,667Diluted
    
    
    14,777,681
    
    
    
    14,671,346
 See accompanying notes. 2




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TRIAD GUARANTY INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months EndedMarch 312005
    
    
    2004(In thousands)Operating activitiesNet income
    
    $
    15,760
    
    
    $
    14,044Adjustments to reconcile net income to net cash provided by
operating activities:Loss, loss adjustment expenses and unearned premium reserves
    
    
    684
    
    
    
    1,288Accrued expenses and other liabilities
    
    
    (2,756
    )
    
    
    (3,302
    )Current taxes payable
    
    
    
    
    
    
    572Income taxes recoverable
    
    
    310
    
    
    
    Amounts due to/from reinsurer
    
    
    191
    
    
    
    (439
    )Accrued investment income
    
    
    226
    
    
    
    (273
    )Policy acquisition costs deferred
    
    
    (4,226
    )
    
    
    (4,685
    )Amortization of deferred policy acquisition costs
    
    
    3,657
    
    
    
    3,185Net realized investment gains
    
    
    (7
    )
    
    
    (577
    )Provision for depreciation
    
    
    826
    
    
    
    790Accretion of discount on investments
    
    
    (30
    )
    
    
    (303
    )Deferred income taxes
    
    
    5,557
    
    
    
    5,274Prepaid federal income taxes
    
    
    355
    
    
    
    Unearned ceding commission
    
    
    (51
    )
    
    
    (120
    )Real estate acquired in claim settlement
    
    
    78
    
    
    
    1Accrued interest on debt
    
    
    (691
    )
    
    
    (691
    )Other assets
    
    
    160
    
    
    
    2,113Other operating activities
    
    
    748
    
    
    
    252Net cash provided by operating activities
    
    
    20,791
    
    
    
    17,129Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (27,594
    )
    
    
    (44,661
    )Sales  fixed maturities
    
    
    3,830
    
    
    
    19,241Purchases  equities
    
    
    
    
    
    
    (114
    )Sales  equities
    
    
    
    
    
    
    390Net change in short-term investments
    
    
    741
    
    
    
    12,796Purchases of property and equipment
    
    
    (772
    )
    
    
    (1,304
    )Net cash used in investing activities
    
    
    (23,795
    )
    
    
    (13,652
    )Financing activitiesProceeds from exercise of stock options
    
    
    262
    
    
    
    286Net cash provided by financing activities
    
    
    262
    
    
    
    286Net change in cash
    
    
    (2,742
    )
    
    
    3,763Cash at beginning of period
    
    
    6,865
    
    
    
    973Cash at end of period
    
    $
    4,123
    
    
    $
    4,736Supplemental 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
 See accompanying notes. 3




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TRIAD GUARANTY INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2005
   1.
    The Company Triad Guaranty Inc. is a holding company which, through its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (Triad), provides private mortgage insurance coverage in the
United States to mortgage lenders or investors to protect the lender or investor against loss from
defaults on low down payment residential mortgage loans and to facilitate the sale of mortgage
loans in the secondary market. Triad Guaranty Inc. and its subsidiaries are collectively referred
to as the Company.  2.
    Accounting Policies And Basis Of Presentation Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months ended March 31, 2005
and 2004 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Triad Guaranty Inc. annual report on Form 10-K for the year ended
December 31, 2004. 4




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Stock Options Currently, the Company grants stock options to certain employees for a fixed number of shares
with an exercise price equal to or greater than the fair value of the shares at the date of grant.
The Company accounts for stock option grants using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly recognized no compensation cost for these grants. Had compensation expense been
recognized using the fair value method on the grant date, net income and earnings per share on a
pro forma basis would be as shown in the table below. For purposes of pro forma disclosures, the
estimated fair value of the options is expensed over the options vesting periods (in thousands,
except for earnings per share information): Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income  as reported
    
    $
    15,760
    
    
    $
    14,044Net income  pro forma
    
    $
    15,614
    
    
    $
    13,907Earnings per share  as reported:Basic
    
    $
    1.08
    
    
    $
    0.97Diluted
    
    $
    1.07
    
    
    $
    0.96Earnings per share  pro forma:Basic
    
    $
    1.07
    
    
    $
    0.96Diluted
    
    $
    1.06
    
    
    $
    0.95
 In December 2004, the Financial Accounting Standards Board issued Statement of Financial Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires the
compensation cost relating to stock-based payment transactions to be recognized in financial
statements beginning in July 1, 2005. On April 14, 2005, the Securities and Exchange Commission
amended Regulation S-X so that filers who are not small business issuers will not be required to
file financial statements in compliance with SFAS 123R until the first fiscal year beginning after
June 15, 2005. As a result, the Company plans on adopting SFAS 123R effective January 1, 2006.
The impact of adoption is anticipated to be similar to that described in our 2004 Form 10-K. Reclassifications Certain amounts in prior years have been reclassified to conform with the current year
presentation. These reclassifications had no effect on previously reported net income or
stockholders equity. 3. Consolidation The consolidated financial statements include the accounts of Triad Guaranty Inc. and all of
its subsidiaries. All significant intercompany accounts and transactions have been eliminated. 5




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4. Commitments And Contingencies Reinsurance Certain premiums and losses are assumed from and ceded to other insurance companies under
various reinsurance agreements, the majority of which are captive reinsurance agreements with
certain customers. Reinsurance contracts do not relieve Triad from its obligations to
policyholders. Failure of the reinsurer to honor its obligation could result in losses to Triad;
consequently, allowances are established for amounts deemed uncollectible. Triad evaluates the
financial condition of its reinsurers and monitors credit risk arising from similar geographic
regions, activities, or economic characteristics of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvency. Insurance In Force, Dividend Restrictions, and Statutory Results Insurance regulations generally limit the writing of mortgage guaranty insurance to an
aggregate amount of insured risk no greater than 25 times the total of statutory capital and
surplus and the statutory contingency reserve. The amount of net risk for insurance in force at
March 31, 2005 and December 31, 2004, as presented below, was computed by applying the various
percentage settlement options to the insurance in force amounts, adjusted by risk ceded under
reinsurance agreements and by applicable stop-loss limits, based on the original insured amount of
the loan. Triads ratio is as follows (dollars in thousands): March 31, 2005
    
    
    December 31, 2004Net risk
    
    $
    7,098,866
    
    
    $
    7,049,102Statutory capital and surplus
    
    $
    132,161
    
    
    $
    135,662Statutory contingency reserve
    
    
    387,540
    
    
    
    369,484Total
    
    $
    519,701
    
    
    $
    505,146Risk-to-capital ratio
    
    13.7 to 1
    
    
    14.0 to 1
 Triad and its wholly-owned subsidiaries are each required under their respective domiciliary
states insurance code to maintain a minimum level of statutory capital and surplus. Triad, an
Illinois domiciled insurer, is required under the Illinois Insurance Code (the Code) to maintain
minimum statutory capital and surplus of $5 million. The Code permits dividends to be paid only
out of earned surplus and also requires prior approval of extraordinary dividends. An
extraordinary dividend is any dividend or distribution of cash or other property, the fair value of
which, together with that of other dividends or distributions made within a period of twelve
consecutive months, exceeds the greater of (a) ten percent of statutory surplus as regards
policyholders, or (b) statutory net income for the calendar year preceding the date of the
dividend. Net income as determined in accordance with statutory accounting practices was $22.0
million and $18.6 million for the three months ended March 31, 2005 and 2004, respectively, and
$78.2 million for the year ended December 31, 2004. 6




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At March 31, 2005 and December 31, 2004, the amount of Triads equity that could be paid out
in dividends to stockholders was $48.4 million and $51.9 million, respectively, which was the
earned surplus of Triad on a statutory basis on those dates. Loss Reserves The Company establishes loss reserves to provide for the estimated costs of settling claims on
loans reported in default and loans in default that are in the process of being reported to the
Company. The Companys reserving process incorporates various components in a formula that gives
effect to current economic conditions and profiles delinquencies by such factors as policy year,
geography, chronic late payment characteristics, the number of months the policy has been in
default, as well as whether the defaults were underwritten as flow business or as part of a
structured bulk transaction. The process is based upon the assumption that long-term historical
experience, taking into consideration the above factors and adjusted for current economic events
that the Company believes will significantly impact the long-term loss development, provides a
reasonable basis for estimating projected claim rates (frequency) and claim amounts (severity).
The Company considers severity and frequency to be the most significant assumptions in the
establishment of its loss reserves. Estimation of loss reserves is a difficult and inexact process
and there are inherent risks and uncertainties involved in making these assumptions. Economic
conditions that have affected the development of loss reserves in the past may not necessarily
affect development patterns in the future in either a similar manner or degree. Due to the
inherent uncertainty in estimating reserves for losses and loss adjustment expenses, there can be
no assurance that reserves will be adequate to cover ultimate loss developments on loans in
default, currently or in the future. The Companys profitability and financial condition could be
adversely affected to the extent that its estimated reserves are insufficient to cover losses on
loans in default.  Litigation A lawsuit has been filed against the Company in the ordinary course of the Companys business
alleging violations of the Fair Credit Reporting Act. In the opinion of management, the ultimate
resolution of this pending litigation will not have a material adverse effect on the financial
position or results of operations of the Company.  5.
    Earnings Per Share Basic and diluted earnings per share are based on the weighted-average daily number of shares
outstanding. For diluted earnings per share, the denominator includes the dilutive effects of
stock options and unvested restricted stock on the weighted-average shares outstanding. There are
no other reconciling items between the denominators used in basic earnings per share and diluted
earnings per share. The numerator used in basic earnings per share and diluted earnings per share
is the same for all periods presented. 7




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6.
    Comprehensive Income Comprehensive income consists of net income and other comprehensive income. For the Company,
other comprehensive income is composed of unrealized gains or losses on available-for-sale
securities, net of income tax. For the three months ended March 31, 2005 and 2004, the Companys
comprehensive income was $12.5 million and $15.7 million, respectively.  7.
    Income Taxes Income tax expense differs from the amounts computed by applying the Federal statutory income
tax rate to income before income taxes primarily due to tax-exempt interest that the Company earns
from its investments in municipal bonds. 8




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Item 2.
    Managements Discussion and Analysis of Financial Condition and Results of Operations Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes
the consolidated financial condition, changes in financial position, and results of operations for
the three months ended March 31, 2005 and 2004, of Triad Guaranty Inc. and its consolidated
subsidiaries (collectively, the Company). The discussion supplements Managements Discussion and
Analysis in Form 10-K for the year ended December 31, 2004, and should be read in conjunction with
the interim financial statements and notes contained herein. Certain of the statements contained herein, other than statements of historical fact, are
forward-looking statements. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related
to economic, competitive, and legislative developments. These forward-looking statements are
subject to change and uncertainty, which are, in many instances, beyond our control and have been
made based upon our expectations and beliefs concerning future developments and their potential
effect on us. Actual developments and their results could differ materially from those expected by
us, depending on the outcome of certain factors, including the possibility of general economic and
business conditions that are different than anticipated, legislative developments, changes in
interest rates or the stock markets, stronger than anticipated competitive activity, and the
factors described in the forward-looking statements. Update on Critical Accounting Estimates Our Annual Report on Form 10-K describes the accounting policies that are critical to the
understanding of our results of operations and our financial position. These critical accounting
policies relate to the assumptions and judgments utilized in establishing the reserve for losses
and loss adjustment expenses, determining if declines in fair values of investments are other than
temporary, and establishing appropriate initial amortization schedules for deferred policy
acquisition costs (DAC) and subsequent adjustments to that amortization. We believe that these continue to be the critical accounting policies applicable to the
Company and that these policies were applied in a consistent manner during the first quarter of
2005. Overview Through our subsidiaries, we provide mortgage guaranty insurance coverage to residential
mortgage lenders and investors in the United States as a credit-enhancement vehicle, typically when
individual borrowers have less than 20% equity in the property. Business originated by lenders and
submitted to us on a loan-by-loan basis is referred to as flow business. Mortgage guaranty
insurance facilitates the sale of individual low 9




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down payment loans in the secondary market and provides protection to lenders who choose to
keep the loans in their own portfolios. Additionally, we provide mortgage insurance to lenders and
investors who seek additional default protection, capital relief, and credit-enhancement on groups
of loans that are sold in the secondary market. This business is referred to as structured bulk
transactions or structured bulk business. Our revenues principally consist of a) initial and renewal earned premiums from flow business
(net of reinsurance premiums ceded as part of our risk management strategies), b) initial and
renewal earned premiums from structured bulk transactions, and c) investment income on invested
assets. We also realize investment gains, net of investment losses, periodically as a source of
revenue when the opportunity presents itself within the context of our overall investment strategy. Our expenses principally consist of a) amounts ultimately paid on claims submitted, b)
increases in reserves for estimated future claim payments, c) general and administrative costs of
acquiring new business and servicing existing policies, d) other general business expenses, and e)
income taxes. Our profitability depends largely on a) the adequacy of our product pricing and underwriting
discipline relative to the risks insured, b) persistency levels, c) operating efficiencies, and d)
the level of investment yield, including realized gains and losses, on our investment portfolio.
We define persistency as the percentage of insurance in force remaining from twelve months prior.
Cancellations of policies originated during the past twelve months are not considered in our
calculation of persistency. This method of calculating persistency may vary from that of other
mortgage insurers. We believe that our calculation presents an accurate measure of the percentage
of insurance in force remaining from twelve months prior. Cancellations result primarily from the
borrower refinancing or selling mortgaged residential properties and, to a lesser degree, from the
borrower achieving prescribed equity levels at which the lender no longer requires mortgage
guaranty insurance. For a more detailed description of our industry and operations, refer to the Business
section of our Form 10-K. 10




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Consolidated Results of Operations Following is a summary of our results of operations for the three months ended March 31, 2005
and 2004 (in thousands, except per share information): Three Months EndedMarch 31Favorable/2005
    
    
    2004
    
    
    (Unfavorable)Earned premiums
    
    $
    38,777
    
    
    $
    33,812
    
    
    
    14.7
    %Net investment income
    
    
    5,415
    
    
    
    4,586
    
    
    
    18.1Net realized investment gains
    
    
    7
    
    
    
    577
    
    
    
    (98.8
    )Other income
    
    
    9
    
    
    
    3
    
    
    
    200.0Total revenues
    
    
    44,208
    
    
    
    38,978
    
    
    
    13.4Net losses and loss adjustment
expenses
    
    
    10,630
    
    
    
    8,883
    
    
    
    (19.7
    )Interest expense on debt
    
    
    693
    
    
    
    693
    
    
    
    Amortization of deferred
policy acquisition costs
    
    
    3,657
    
    
    
    3,185
    
    
    
    (14.8
    )Other operating expenses (net
of acquisition costs deferred)
    
    
    7,217
    
    
    
    6,340
    
    
    
    (13.8
    )Income before income taxes
    
    
    22,011
    
    
    
    19,877
    
    
    
    10.7Income taxes
    
    
    6,251
    
    
    
    5,833
    
    
    
    (7.2
    )Net income
    
    $
    15,760
    
    
    $
    14,044
    
    
    
    12.2
    %Diluted earnings per share
    
    $
    1.07
    
    
    $
    0.96
    
    
    
    11.5
    %
 Two important drivers of our results were persistency, due to its impact on both renewal
earned premiums and the amortization of DAC, and the development of losses and loss adjustment
expenses. Increased persistency means that more of our business is being retained and renewal earned
premiums increase as a result. Further, amortization of DAC is based on assumed persistency
levels. When actual persistency levels are lower than those assumed in our DAC models, we
accelerate the amortization of the DAC asset. Estimated annual persistency for the first quarter
of 2005 remained lower than that assumed in our models despite an improvement over the first
quarter of 2004, which resulted in the continued acceleration of the amortization of DAC. Net losses and loss adjustment expenses increased more than the increase in our insurance in
force due to a further seasoning of the portfolio as a greater portion of our insurance in force
approaches the period where higher delinquencies are expected. We describe our results in greater detail in the discussions that follow. The information is
presented in three categories: Production and In Force, Revenues, and Losses and Expenses. 11




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Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Net income for the first quarter of 2005 increased 12.2% over the first quarter of 2004 driven
by a 14.7% increase in earned premiums due to growth in renewal premiums. Net loss and loss
adjustment expense increased 19.7%, which was generally consistent with the growth of our insurance
in force, our increasing participation in the bulk market, and further seasoning of our portfolio.
There was no effect from diluted realized gains and losses per share for the first three months of
2005 compared to a $0.03 per share contribution for the first three months of 2004. Diluted
realized gains and losses per share is a non-GAAP measure. We believe this is relevant and useful
information to investors because, except for write-downs on other-than-temporarily impaired
securities, it shows the effect that our discretionary sales of investments had on earnings. Production and In Force Total insurance written in the first three months of 2005 was $4.3 billion compared to $4.7
billion for the same period of 2004, a decrease of 8.5%. Total insurance written includes
insurance written from flow production and structured bulk transactions. Flow insurance written for the first quarter of 2005 decreased 8.3% to $2.2 billion from $2.4
billion in the first quarter of 2004. Insurance written for the entire industry declined 13.2% in
the first quarter of 2005 from the first quarter of 2004, primarily due to a drop in refinancing
activity as interest rates began to rise. Further, the continued expansion of alternative credit
enhancements such as 80/10/10 structures (a combination of an 80% first mortgage loan, a 10% second
mortgage loan usually issued by the same lender, and a 10% down payment) continues to erode the
mortgage insurance industrys overall penetration into the mortgage marketplace. However, should
short-term interest rates rise further, these types of arrangements will become less attractive to
borrowers. Insurance written in the first quarter of 2005 attributable to structured bulk transactions
totaled $2.1 billion compared to $2.3 billion in the first quarter of 2004. Insurance written
attributed to structured bulk transactions is likely to vary significantly from period to period
due to: a) the limited number of transactions (but with larger size) occurring in this market, b)
the level of competition from other mortgage insurers, c) the relative attractiveness in the
marketplace of mortgage insurance versus other forms of credit enhancement, and d) our willingness
to accept the changing loan composition and underwriting criteria of the market. 12




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##### Table of Contents



The following table provides estimates of our national market share of net new primary
insurance written based on information available from the industry association and other public
sources: Three Months Ended March 312005
    
    
    2004Flow business
    
    
    5.5
    %
    
    
    4.7
    %Structured bulk transactions
    
    
    16.5
    %
    
    
    21.4
    %Total
    
    
    8.0
    %
    
    
    7.0
    %
 Our market share of flow business increased in the first quarter of 2005 from that of 2004 due
to increased market penetration and acceptance of our Alt-A lender paid products, which are defined
below. Our bulk market share will vary from period to period since the structured bulk market has
significantly larger individual transactions. Our bulk market share is also dependent on the
availability of transactions that meet our credit quality and pricing benchmarks on which we were
able to successfully bid. Periodically we enter into structured bulk transactions involving loans that have insurance
effective dates within the current reporting period but for which detailed loan information
regarding the insured loans is not provided by the issuer of the transaction until later. When this
situation occurs, we accrue premiums that are due but not yet paid based upon the estimated
commitment amount of the transaction in the reporting period with respect to each loans insurance
effective date. However, the policies are not reflected in our in force, insurance written, or
related industry data totals until the loan level detail is reported to us. At March 31, 2005, we
had approximately $0.9 billion of structured transactions with effective dates within the first
quarter of 2005 for which loan level detail had not been received and, therefore, is not included
in our data or industry totals. These amounts will be reported as new production and insurance in
force totals in the second quarter of 2005 when the issuer of the transactions provides loan level
detail to us. We have properly included in premium written and premium earned the respective
estimated amounts due and earned during the first quarter of 2005 related to this insurance. At
March 31, 2004, we had approximately $0.4 billion of structured transactions with effective dates
within the first quarter of 2004 for which loan level detail had not been received. 13




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##### Table of Contents



Total direct insurance in force reached $38.2 billion at March 31, 2005 compared to $33.9
billion at March 31, 2004 as a result of continued production and an improvement in persistency.
The following table shows our persistency rates at March 31, 2005 and 2004: 2005
    
    
    2004Quarterly
    
    
    
    
    
    
    QuarterlyAnnual
    
    
    Persistency
    
    
    Annual
    
    
    PersistencyPersistency
    
    
    Run Rate
    
    
    Persistency
    
    
    Run RateFlow
    
    
    69.7
    %
    
    
    71.5
    %
    
    
    56.3
    %
    
    
    69.8
    %Structured bulk
    
    
    60.3
    %
    
    
    60.2
    %
    
    
    38.5
    %
    
    
    61.5
    %Total
    
    
    67.8
    %
    
    
    68.8
    %
    
    
    54.6
    %
    
    
    68.5
    %
 As stated earlier, we define annual persistency as the percentage of insurance in force
remaining from twelve months prior. Annual persistency at March 31, 2005 improved over March 31,
2004 as a result of a decline in cancellations during the twelve months prior to each of these
dates. Average mortgage coupon rates in our existing portfolio have declined over the past two
years while mortgage rates in the market have generally increased over this period, which has
caused a reduction in cancellations from refinancings. We anticipate a slight increase in
persistency rates throughout the remainder of 2005. However, persistency may be adversely affected
if market interest rates decline from the levels experienced during the first quarter of 2005. Our direct insurance in force grew 12.7% from March 31, 2004 to March 31, 2005, and the credit
quality of our in force portfolio has remained relatively consistent. As shown below, the credit
quality of our structured bulk business at March 31, 2005 has improved over March 31, 2004 as we
have focused our efforts on transactions consisting of higher quality loans. FICO credit scores
are one of the major factors used in assessing credit risk. Generally, FICO scores of 620 and
above are considered A quality by the industry. The following table presents the FICO credit
score distribution of our risk in force for both flow and structured bulk business at March 31,
2005 and 2004. Flow
    
    
    Structured Bulk2005
    
    
    2004
    
    
    2005
    
    
    2004Credit score less than 575
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1.1
    %
    
    
    3.0
    %Credit score between 575 and 619
    
    
    4.8
    %
    
    
    4.2
    %
    
    
    3.2
    %
    
    
    6.2
    %Credit score greater than 619
    
    
    94.5
    %
    
    
    95.0
    %
    
    
    95.7
    %
    
    
    90.8
    %
 As the table shows, we insure some loans that have FICO credit scores below 575. We believe
that these loans have a higher probability of loss than a loan with a FICO credit score of 575 or
greater. We do not expect loans with FICO scores less than 575 to become a significant portion of
our insurance in force. In our flow business, we have defined Alt-A as individual loans generally having FICO scores
greater than 619 and that have been underwritten with reduced or no documentation. Alt-A continues
to grow as a percentage of our flow business, and the 14




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##### Table of Contents



majority of our structured bulk business is classified as Alt-A. Our classification for
structured bulk transactions is based on the transaction as a whole as compared to an individual
loan-by-loan characterization. Structured bulk transactions that we have defined as Alt-A have
high overall credit quality, but include loans that vary from guidelines typical for Fannie Mae and
Freddie Mac regarding one or more of the following characteristics: loan amount, documentation
level, loan purpose, employment status or occupancy. The following table shows the percentage of
our insurance in force that we have classified as Alt-A at March 31, 2005 and December 31, 2004: March 31
    
    
    December 312005
    
    
    2004Flow
    
    
    7.1
    %
    
    
    6.5
    %Structured bulk
    
    
    97.2
    %
    
    
    96.1
    %Total
    
    
    30.4
    %
    
    
    27.5
    %
 As part of our risk management strategy, we have structured most of the bulk transactions
entered into in the last two years with deductibles that put us in the second loss position.
Approximately 88% of our insurance written attributable to structured bulk transactions during the
first quarter of 2005 was structured with deductibles. Revenues Total direct premiums written were $48.3 million for the first quarter of 2005, an increase of
19.9% over $40.3 million written for the first quarter of 2004. This increase was driven by a $7.6
million increase in direct renewal premiums written as well as a $0.4 million increase in direct
initial premiums. Increased persistency was the primary factor that caused the increase in renewal
premiums written in the first three months of 2005. As further described in our Form 10-K, we cede a portion of premiums under risk-sharing
arrangements with our lender partners (referred to as captive reinsurance arrangements) as well as
under excess of loss reinsurance treaties. The difference between direct premiums written and net
premiums written is ceded premium. Net premiums written increased 19.7% to $38.7 million in the
first three months of 2005 over $32.3 million in the first three months of 2004. Consistent with
the growth in direct premiums written, ceded premiums written increased 20.6% to $9.6 million in
the first quarter of 2005 from $8.0 million in the first quarter of 2004. 15




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##### Table of Contents



The following table provides further data on ceded premiums for the first three months ended
March 31, 2005 and 2004: 2005
    
    
    2004Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    19.9
    %
    
    
    19.8
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    18.3
    %
    
    
    17.6
    %Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements)
    
    
    36.6
    %
    
    
    37.4
    %
 During the first three months of 2005, 47.5% of flow insurance written and 23.9% of total
insurance written was subject to captive reinsurance arrangements, compared to 60.3% of flow
insurance written and 30.8% of total insurance written in the first quarter of 2004. The decrease
in the percentage of flow insurance written subject to captive reinsurance arrangements is
primarily a result of an increase in production of our lender paid product that is not subject to
captive reinsurance arrangements. At March 31, 2005, 56.7% of direct flow insurance in force and
42.0% of total direct insurance in force was subject to captive reinsurance arrangements, compared
to 53.5% of direct flow insurance in force and 43.0% of total insurance in force at March 31, 2004.
None of our insurance in force under structured bulk transactions is subject to captive
reinsurance arrangements. We believe captive reinsurance arrangements are an effective risk management tool as selected
lenders share in the risk under these arrangements. Additionally, captive reinsurance arrangements
are structured so that Triad receives credit against the capital required in certain risk-based
capital models utilized by rating agencies. We remain committed to the concept of captive
reinsurance arrangements, including deep ceded arrangements where the net premium cede rate is
greater than 25%, on a lender-by-lender basis as we deem it to be prudent. We will continue to be
an active participant with our lender partners in structures utilizing alternative attachment
points, risk bands, cede rates, and ceding commissions. Earned premiums increased 14.7% to $38.8 million for the first quarter of 2005 from $33.8
million for the first quarter of 2004. The difference between net written premiums and earned
premiums is the change in the unearned premium reserve. Our unearned premium liability decreased
$0.1 million from December 31, 2004 to March 31, 2005 compared to a decrease of $1.5 million from
December 31, 2003 to March 31, 2004. An unearned premium reserve is established primarily on
premiums received on annual products. Direct written premium from the annual premium product
represented 14.5% of direct premium written in the first three months of 2005 compared to 12.0% in
the first three months of 2004. 16




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##### Table of Contents



Assuming no significant decline in interest rates, we anticipate our persistency will remain
at current levels or improve slightly during the remainder of 2005. This should continue to have a
positive effect on renewal earned premiums and total earned premiums throughout the remainder of
2005. Net investment income for the first three months of 2005 grew 18.1% over the first three
months of 2004 despite a slight decline in portfolio yields, primarily due to the growth in average
invested assets and an increase in the market value during the first quarter of 2005 of a certain
security that requires changes in market value to be reflected in investment income. Average
invested assets at cost or amortized cost grew by 17.1% in the first quarter of 2005 over the first
quarter of 2004 as a result of the investment of cash flows from operations throughout the year.
Our investment portfolio tax-equivalent yield declined to 6.91% at March 31, 2005 from 7.08% at
March 31, 2004. Net realized investment gains/(losses), except for write-downs on other-than-temporarily
impaired securities, are the result of our discretionary dispositions of investment securities in
the context of our overall portfolio management strategies and are likely to vary significantly
from period to period. There were no write-downs on other-than-temporarily impaired securities in
the first quarter of 2005 compared to $0.1 million in the first quarter of 2004. See further
discussion of impairment write-downs in the Realized Losses and Impairments section below. Losses and Expenses Net losses and loss adjustment expenses (net of reinsurance recoveries) increased 19.7% in the
first three months of 2005 over the first three months of 2004. This increase was due to the
growth in the number of delinquencies and paid losses and is reflective of our overall growth of
insurance in force and the seasoning of our in force business. Net paid losses, excluding loss
adjustment expenses, increased to $9.7 million for the first quarter of 2005 from $6.0 million for
the first quarter of 2004, an increase of 61.7%. Average severity (direct paid losses divided by
number of claims paid) for all loans combined declined to approximately $25,700 for the first three
months of 2005 compared to $27,700 for the first three months of 2004. This decline in average
severity occurred in both our flow business and our structured bulk business, although we do not
believe this reflects a trend that will continue. The following table provides detail on direct
paid losses for our flow business and structured bulk business for the three months ended March 31,
2005 and 2004 (in thousands): 2005
    
    
    2004Direct Losses Paid:Flow business
    
    $
    8,283
    
    
    $
    5,254Structured bulk business
    
    
    1,368
    
    
    
    755Total
    
    $
    9,651
    
    
    $
    6,009
 The increase in paid losses is consistent with our expectations as a greater amount of our
insurance in force reaches its anticipated highest claim frequency years. Due to 17




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the growth of our inforce business, we believe aggregate direct paid losses will begin to
plateau during the remainder of 2005. Net losses and loss adjustment expenses also includes the change in reserves for losses and
loss adjustment expenses. The following table shows further detail about the Companys loss
reserves at March 31, 2005 and December 31, 2004 broken out by flow business and structured bulk
business (in thousands): March 31
    
    
    December 312005
    
    
    2004Flow business:Reserves for reported defaults
    
    $
    27,052
    
    
    $
    26,031Reserves for defaults incurred but not reported
    
    
    2,405
    
    
    
    3,418Total flow
    
    
    29,457
    
    
    
    29,449Structured bulk business:Reserves for reported defaults
    
    
    4,626
    
    
    
    4,185Reserves for defaults incurred but not reported
    
    
    643
    
    
    
    311Total structured bulk transactions
    
    
    5,269
    
    
    
    4,496Reserve for loss adjustment expenses
    
    
    99
    
    
    
    97Total reserves for losses and loss adjustment expenses
    
    $
    34,825
    
    
    $
    34,042
 In the first three months of 2005 and 2004, 88% and 95%, respectively, of our structured bulk
production was structured with deductibles that put us in the second loss position, which we expect
to moderate the loss development in the bulk portfolio. Prior to the fourth quarter of 2004, there
were few reported defaults on the structured bulk production that included deductibles. Beginning
in fourth quarter 2004, as the loss development pattern began to emerge on the structured bulk
business with deductibles, we took these deductibles into consideration when calculating our
reserves and determined it was not necessary to establish reserves for those claims on which we
were in the second loss position. As of March 31, 2005, no claims have been reported that approach
these deductible amounts. The following table shows our loss ratios (the ratio of incurred losses and loss adjustment
expense to premiums earned) for our flow business and our structured bulk business for the three
months ended March 31, 2005 and 2004: 2005
    
    
    2004Loss Ratio:Flow business
    
    
    27.4
    %
    
    
    27.9
    %Structured bulk business
    
    
    27.4
    %
    
    
    19.8
    %Total business
    
    
    27.4
    %
    
    
    26.3
    %
 Our loss ratio for the flow business for the first quarter of 2005 shown above was relatively
flat compared to the first quarter of 2004. Average paid claims on structured bulk transactions
increased during 2004. After studying this increase, we determined this 18




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trend would affect long-term loss development. As a result, we increased our severity factors
utilized in the structured bulk reserve calculations in 2004 and further increased these factors in
the first quarter of 2005. This increase in severity factors combined with the increase in paid
losses discussed above, caused the growth in the structured bulk loss ratio for the first quarter
of 2005 over the first quarter of 2004. As of March 31, 2005, approximately 81% of our insurance in force was originated in 2003 or
later. Based upon our experience and industry data, we believe that claims incidence for flow
business is generally highest in the third through sixth years after loan origination. We believe
that claims incidence for structured bulk transactions is generally highest in the second through
fourth years after loan origination. Changes in the economic environment could accelerate paid and
incurred loss development. Due to the inherent uncertainty of future premium levels, losses,
economic conditions, and other factors that affect earnings, it is difficult to predict with any
degree of certainty the impact of such higher claim frequencies on future earnings. The factors
most significant to our loss development will continue to be the level of new delinquent loans and
their subsequent cure performance. Because of the growth of our inforce business, we believe the
number of loans in default for both flow and structured bulk business will increase, although
moderating from the 2004 growth level. The following table compares the number of loans in default
at March 31, 2005 and 2004: 2005
    
    
    2004Loans in DefaultFlow business
    
    
    3,694
    
    
    
    3,343Structured bulk business:With deductibles
    
    
    538
    
    
    
    66Without deductibles
    
    
    1,231
    
    
    
    1,313Total structured bulk
    
    
    1,769
    
    
    
    1,379Total
    
    
    5,463
    
    
    
    4,722
 Amortization of DAC increased by 14.8% in the first quarter of 2005 from the same period of
2004 primarily due to a refinement in methodology for the calculation of the dynamic adjustment
used to reflect persistency levels. See further discussion in the Deferred Policy Acquisition
Costs section below. The increase in other operating expenses in the first three months of 2005 over the first
three months of 2004 of 13.8% is relatively consistent with the growth in our insurance in force
and is also the result of increased premium taxes corresponding to the growth in premiums written.
The expense ratio (ratio of the amortization of deferred policy acquisition costs and other
operating expenses to net premiums written) for the first three months of 2005 improved to 28.1%
from 29.4% for the first three months of 2004. We have made substantial investments in technology
that allow for growth in both our flow and structured bulk business without proportional increases
in operating expenses. Expenses were incurred in the first quarter of 2005 related to
Sarbanes-Oxley compliance and other general and administrative expenses that hindered the
improvement in our expense ratio but that we do not anticipate to recur during the remainder of
2005. 19




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##### Table of Contents



Our effective tax rate was 28.4% for the first quarter of 2005 and 29.3% for the first quarter
of 2004. The decrease in the effective tax rate is due primarily to an increase in tax-exempt
interest resulting from a higher percentage of assets being invested in tax-preferred municipal
securities. We expect our effective tax rate to remain near current levels or increase slightly as
earned premium may grow faster than tax-preferred income. Significant Customers Our objective is controlled, profitable growth in both the flow and bulk arenas while adhering
to our risk management strategies. Our strategy is to continue our focus on national lenders while
maintaining the productive relationships that we have built with regional lenders. Our ten largest
customers were responsible for 74.6% and 72.0% of flow insurance written during the first three
months of 2005 and 2004, respectively. Our two largest customers were responsible for 58.8% and
54.3% of flow insurance written during the first three months of 2005 and 2004, respectively. The
loss of one or more of these significant customers could have an adverse effect on our business. Financial Position Total assets increased to $687 million at March 31, 2005, an annualized growth rate of 8.7%
over December 31, 2004, primarily the result of growth in invested assets. Total liabilities
increased moderately to $236 million at March 31, 2005, from $235 million at December 31, 2004,
primarily due to an increase in deferred tax liabilities. This section identifies several items on
our balance sheet that are important in the overall understanding of our financial position. These
items include deferred policy acquisition costs, prepaid federal income tax and related deferred
income taxes, and loss and loss adjustment expense reserves. Our mortgage insurance operations and
reserves are primarily supported by our investment portfolio. The majority of our assets are
contained in the investment portfolio. A separate Investments section follows the Financial
Position section and reviews our investment portfolio, key portfolio management strategies, and
methodologies by which we manage credit risk. Deferred Policy Acquisition Costs Costs expended to acquire new business are capitalized as DAC and recognized as expense over
the anticipated premium paying life of the policy in a manner that approximates the estimated
profits. We employ a dynamic model that calculates amortization of DAC separately for each year of
policy origination. The model relies on assumptions that we make based upon historical industry
experience and our own unique experience regarding the annual persistency development of each year
of policy origination. Persistency is the most important assumption utilized in determining the
timing of reported amortization expense reflected in the income statement and the carrying value of
DAC on the balance sheet. A change in the assumed persistency can impact the current and future
amortization expense as well as the carrying value on the balance sheet. Our model accelerates DAC
amortization through a dynamic adjustment 20




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##### Table of Contents



when actual persistency for a particular year of policy origination is lower than the
estimated persistency originally utilized in the model. This dynamic adjustment is capped at the
levels assumed in the models, and we do not decrease DAC amortization below the levels assumed in
the model when persistency increases above those levels. When actual persistency is lower than
that assumed in our models, the dynamic adjustment effectively adjusts the estimated policy life
originally utilized in the model to a revised policy life based upon the current actual
persistency. Our DAC models separate the costs capitalized and the amortization streams between
transactions arising from structured bulk and flow business. Generally, structured bulk
transactions have significantly lower acquisition costs associated with the production of the
business and they also have a shorter original estimated policy life. We apply the dynamic
adjustment utilizing the same methodology to the structured bulk DAC models. At March 31, 2005 and
December 31, 2004, net unamortized DAC relating to structured bulk transactions amounted to 5.7%
and 5.4% of the total DAC on the balance sheet. DAC amortization increased in the first quarter of 2005 over the first quarter of 2004 due to
growth in the overall DAC asset and due to a refinement in methodology for the calculation of the
dynamic adjustment used to reflect changes in persistency levels described below. The following
table shows the DAC asset for the three months ended March 31, 2005 and 2004 and the effect of
persistency on amortization (dollar amounts in thousands): DAC Asset2005
    
    
    2004Balance  beginning of period
    
    $
    32,453
    
    
    $
    29,363Costs capitalized
    
    
    4,227
    
    
    
    4,685Amortization  normal
    
    
    (3,315
    )
    
    
    (3,097
    )Amortization  dynamic adjustment
    
    
    (342
    )
    
    
    (88
    )Total amortization
    
    
    (3,657
    )
    
    
    (3,185
    )Balance  end of period
    
    $
    33,023
    
    
    $
    30,863Quarterly Persistency Rate
    
    
    68.8
    %
    
    
    68.5
    %
 In the first quarter of 2005, we refined the intra-period estimation of actual persistency for
the calculation of the dynamic adjustment to DAC amortization. Rather than utilizing a quarterly
persistency rate to calculate the dynamic adjustment as in prior periods, we utilized a projected
annual persistency rate through December 31 of the current year for this calculation. This
refinement in the estimation resulted in an increase in DAC amortization for the first quarter of
2005 of approximately $0.2 million. 21




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##### Table of Contents



Assuming no large swings in persistency, we expect the dynamic adjustment for the remaining
quarters of 2005 to# approximate the first quarter adjustment shown above. Prepaid Federal Income Taxes and Deferred Income Taxes We purchase ten-year non-interest bearing United States Mortgage Guaranty Tax and Loss Bonds
(Tax and Loss Bonds) in lieu of paying current federal income taxes to take advantage of a
special contingency reserve deduction for mortgage guaranty companies. We record these bonds on
our balance sheet as prepaid federal income taxes. Purchases of Tax and Loss Bonds are essentially
a prepayment of federal income taxes that will become due in ten years when the contingency reserve
is released, and the Tax and Loss Bonds mature. Prepaid income taxes were $118.8 million at March
31, 2005 and $119.1 million at December 31, 2004. Deferred income taxes are provided for the differences in reporting taxable income in the
financial statements and on the tax return. The largest cumulative difference is the special
contingency reserve deduction for mortgage insurers mentioned above. The remainder of the deferred
tax liability has primarily arisen from book and tax reporting differences related to deferred
policy acquisition costs and unrealized investment gains.  Reserve for Losses and Loss Adjustment Expenses We calculate our best estimate of reserves to provide for the estimated costs of settling
claims on loans reported in default and loans in default that are in the process of being reported
to us, utilizing various factors that have been developed and tested over time. With respect to
loans reported in default, loss and loss adjustment expense reserves are established when notices
of default are received. Consistent with industry practices, we do not establish loss reserves for
future claims on insured loans that are not currently in default. Our reserving methodology
focuses on the determination of a loss severity factor and a projected claim rate (frequency
factor) for each reported delinquent loan category at the valuation date. We analyze various components in determining the loss severity factor, including the baseline
severity, policy year, geography and salvage recoverable. In determining the frequency factor, we
focus our analysis on the policy year/policy age, the number of previous reported defaults to
identify chronic late payers, and the number of months that the payment is past due. We utilize
historical long-term performance in our reserving methodology and adjust our factors for current
economic events when we believe the events will significantly impact the long-term loss
development. For these reasons, there may be fluctuations in the reserve factors utilized from
year to year. Further, we analyze defaults within individual structured bulk transactions to
determine whether the business was written with a deductible that would put us in a second loss
position. Until the projected loss reserve for the aggregate defaults within a transaction
structured with a deductible exceed a pre-established threshold, no reserves are established.
Because the estimate for loss reserves is sensitive to the estimates of claims frequency and
severity, 22




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##### Table of Contents



we perform analyses to test the reasonableness of the best estimate generated by the loss
reserve process. Adjustments to reserve estimates are reflected in the financial statements in the
periods in which the adjustments are made. Our loss and loss adjustment expense reserves increased to $34.8 million at March 31, 2005
from $34.0 million at December 31, 2004. Experience indicates that years three through six have
the highest incidence of defaults for the flow business and years two to four have the highest
incidence of defaults for the structured bulk business. Approximately 81% of our insurance in
force was written in 2003 or later. Because of this fact, we expect loss reserves to continue to
grow, reflecting the growth and aging of our insurance in force. However, we anticipate the
increase in the loss reserves to moderate somewhat as the number of structured bulk transactions
with deductibles incorporated into the risk structure continues to increase. Based upon the
current and reasonable estimates of future economic conditions, we expect cash flows from
operations to be sufficient to cover the anticipated increase in expected claim payments. The following table shows default statistics as of March 31, 2005, and December 31, 2004. March 31
    
    
    December 312005
    
    
    2004Total business:Number of insured loans in force
    
    
    272,839
    
    
    
    266,574Number of loans in default
    
    
    5,463
    
    
    
    5,445Percentage of loans in default
(default rate)
    
    
    2.00
    %
    
    
    2.04
    %Flow business:Number of insured loans in force
    
    
    212,754
    
    
    
    212,596Number of loans in default
    
    
    3,694
    
    
    
    3,739Percentage of loans in default
    
    
    1.74
    %
    
    
    1.76
    %Structured bulk business:Number of insured loans in force
    
    
    60,085
    
    
    
    53,978Number of loans in default
    
    
    1,769
    
    
    
    1,706With deductibles
    
    
    538
    
    
    
    410Without deductibles
    
    
    1,231
    
    
    
    1,296Percentage of loans in default*
    
    
    2.94
    %
    
    
    3.16
    %Alt-A business**:Number of insured loans in force
    
    
    70,285
    
    
    
    62,944Number of loans in default
    
    
    1,999
    
    
    
    1,920Percentage of loans in default
    
    
    2.84
    %
    
    
    3.05
    %
   *
    
    Calculated based on total number of loans in default**
    
    Alt-A is included in flow and structured bulk business amounts above 23




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The number of loans in default reported above includes all reported delinquencies that
are in excess of two payments in arrears at the reporting date and all reported delinquencies that
were previously in excess of two payments in arrears and have not been brought current. The
default rate for flow business remained essentially flat from December 31, 2004 to March 31, 2005.
The decline in the percentage of loans in default for structured bulk business is primarily the
result of the growth of that business and is consistent with managements expectation. Investment Portfolio  Portfolio Description Our strategy for managing our investment portfolio is to provide an appropriate level of
investment income while managing credit risk in the portfolio. We invest for the long term, and
most of our investments are held until they mature. Our investment portfolio includes primarily
fixed income securities, and the majority of these are tax-preferred state and municipal bonds. We
have established a formal investment policy that describes our overall quality and diversification
objectives and limits. Our investment policies and strategies are subject to change depending upon
regulatory, economic, and market conditions as well as our existing financial condition and
operating requirements, including our tax position. While we invest for the long term and most of
our investments are held until they mature, we classify our entire investment portfolio as
available for sale. This classification allows us the flexibility to dispose of securities in
order to meet our investment strategies and operating requirements. All investments are carried on
our balance sheet at fair value. The following schedule shows the growth and diversification of our investment portfolio
(dollars in thousands). March 31, 2005
    
    
    December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    12,700
    
    
    
    2.6
    %
    
    $
    12,728
    
    
    
    2.7
    %Mortgage-backed bonds
    
    
    75
    
    
    
    0.0
    
    
    
    80
    
    
    
    0.0State and municipal bonds
    
    
    436,107
    
    
    
    87.5
    
    
    
    415,250
    
    
    
    86.4Corporate bonds
    
    
    24,108
    
    
    
    4.8
    
    
    
    26,063
    
    
    
    5.4Total fixed maturities
    
    
    472,990
    
    
    
    94.9
    
    
    
    454,121
    
    
    
    94.5Equity securities
    
    
    10,118
    
    
    
    2.0
    
    
    
    10,272
    
    
    
    2.2Total
available-for-sale
securities
    
    
    483,108
    
    
    
    96.9
    
    
    
    464,393
    
    
    
    96.7Short-term investments
    
    
    15,354
    
    
    
    3.1
    
    
    
    16,095
    
    
    
    3.3$
    498,462
    
    
    
    100.0
    %
    
    $
    480,488
    
    
    
    100.0
    %
 We seek to provide liquidity in our investment portfolio through cash equivalent
investments and through diversification and investment in publicly traded securities. We attempt
to maintain a level of liquidity and duration in our investment portfolio consistent 24




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##### Table of Contents



with our business outlook and the expected timing, direction, and degree of changes in
interest rates. The effective duration of the fixed maturity portfolio was 7.16 years at March 31,
2005 compared to 7.59 years at December 31, 2004. We also manage risk and liquidity by limiting our exposure on individual securities. The
following table shows the ten largest exposures to an individual creditor in our investment
portfolio as of March 31, 2005 (dollars in thousands): Carrying
    
    
    % of TotalName of Creditor
    
    Value
    
    
    Invested AssetsAtlanta, Georgia Airport
    
    $
    6,854
    
    
    
    1.38
    %Federal National Mortgage Association
    
    
    5,471
    
    
    
    1.10AAM/ZAZOVE Institutional Income Fund
    
    
    5,093
    
    
    
    1.02Port of Seattle, Washington
    
    
    4,618
    
    
    
    0.93Denver, Colorado City and County Airport
    
    
    4,225
    
    
    
    0.85Cook County, Illinois
    
    
    4,185
    
    
    
    0.84Charlotte, North Carolina Airport
    
    
    4,179
    
    
    
    0.84State of Nevada Water Pollution Control
    
    
    4,036
    
    
    
    0.81University of Texas
    
    
    3,995
    
    
    
    0.80Chicago, Illinois OHare International
Airport
    
    
    3,932
    
    
    
    0.79
 As shown above, no investment in the securities of any single issuer exceeded 2% of our
investment portfolio at March 31, 2005. Our effective pre-tax yield was 4.87% at March 31, 2005 compared to 4.96% at December 31,
2004. The drop in the effective pre-tax yield reflects the decrease in new money rates available
for investment coupled with our strategies to increase the overall credit quality of the portfolio
and increase our investment in tax-preferred state and municipal bonds. Unrealized Gains and Losses The following table summarizes by category our unrealized gains and losses in our securities
portfolio at March 31, 2005 (in thousands): Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    12,862
    
    
    $
    55
    
    
    $
    (217
    )
    
    $
    12,700Mortgage-backed bonds
    
    
    71
    
    
    
    4
    
    
    
    
    
    
    
    75State and municipal bonds
    
    
    424,572
    
    
    
    12,509
    
    
    
    (974
    )
    
    
    436,107Corporate bonds
    
    
    21,728
    
    
    
    2,444
    
    
    
    (64
    )
    
    
    24,108Subtotal, fixed maturities
    
    
    459,233
    
    
    
    15,012
    
    
    
    (1,255
    )
    
    
    472,990Equity securities
    
    
    8,626
    
    
    
    1,725
    
    
    
    (233
    )
    
    
    10,118Total securities
    
    $
    467,859
    
    
    $
    16,737
    
    
    $
    (1,488
    )
    
    $
    483,108
 25




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##### Table of Contents



These unrealized gains and losses do not necessarily represent future gains or losses that we
will realize. Changing conditions related to specific securities, overall market interest rates,
or credit spreads, as well as our decisions concerning the timing of a sale, may impact values we
ultimately realize. We monitor unrealized losses through further analysis according to maturity
date, credit quality, individual creditor exposure and the length of time the individual security
has continuously been in an unrealized loss position. Of the gross unrealized losses on fixed
maturity securities shown above, approximately $0.9 million related to bonds with a maturity date
in excess of ten years. The largest individual unrealized loss on any one security at March 31,
2005 was approximately $92 thousand on preferred stock with an amortized cost of $1.0 million.
Gross unrealized gains and losses at December 31, 2004 were $20.9 million and $(0.6) million,
respectively. Credit Risk Credit risk is inherent in an investment portfolio. We manage this risk through a structured
approach to internal investment quality guidelines and diversification while assessing the effects
of the changing economic landscape. One way we attempt to limit the credit risk in the portfolio
is to maintain investments with high ratings. The following table shows our investment portfolio
by credit ratings (dollars in thousands). March 31, 2005
    
    
    December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    12,700
    
    
    
    2.7
    %
    
    $
    12,808
    
    
    
    2.8
    %AAA
    
    
    358,186
    
    
    
    75.7
    
    
    
    332,929
    
    
    
    73.3AA
    
    
    50,893
    
    
    
    10.8
    
    
    
    53,285
    
    
    
    11.7A
    
    
    32,281
    
    
    
    6.8
    
    
    
    33,530
    
    
    
    7.4BBB
    
    
    9,729
    
    
    
    2.1
    
    
    
    12,680
    
    
    
    2.8BB
    
    
    253
    
    
    
    0.1
    
    
    
    254
    
    
    
    0.1B
    
    
    
    
    
    
    0.0
    
    
    
    205
    
    
    
    0.0CCC and lower
    
    
    472
    
    
    
    0.1
    
    
    
    215
    
    
    
    0.1Not rated
    
    
    8,476
    
    
    
    1.8
    
    
    
    8,215
    
    
    
    1.8Total fixed maturities
    
    $
    472,990
    
    
    
    100.0
    %
    
    $
    454,121
    
    
    
    100.0
    %Equities:Preferred stocks:AAA
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    
    0.0
    %AA
    
    
    1,509
    
    
    
    14.9
    
    
    
    1,519
    
    
    
    14.8A
    
    
    2,109
    
    
    
    20.9
    
    
    
    2,165
    
    
    
    21.1BBB
    
    
    1,105
    
    
    
    10.9
    
    
    
    1,155
    
    
    
    11.2Not rated
    
    
    520
    
    
    
    5.1
    
    
    
    525
    
    
    
    5.15,243
    
    
    
    51.8
    
    
    
    5,364
    
    
    
    52.2Common stocks
    
    
    4,875
    
    
    
    48.2
    
    
    
    4,908
    
    
    
    47.8Total equities
    
    $
    10,118
    
    
    
    100.0
    %
    
    $
    10,272
    
    
    
    100.0
    %
 26




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##### Table of Contents



Further, we regularly review our investment portfolio to identify securities that may
have suffered impairments in value that will not be recovered, termed potentially distressed
securities. In identifying potentially distressed securities, we first screen for all securities
that have a fair value to cost or amortized cost ratio of less than 80%. Additionally, as part of
this identification process, we utilize the following information:  §
    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 In analyzing our potentially distressed securities list for other-than-temporary impairments,
we pay special attention to securities that have been on the list for a period greater than six
months. Our ability and intent to retain the investment for a sufficient time to recover its value
is also considered. We assume that, absent reliable contradictory evidence, a security that is
potentially distressed for a continuous period greater than nine months has incurred an
other-than-temporary impairment. Such reliable contradictory evidence might include, among other
factors, a liquidation analysis performed by our investment advisors or outside consultants,
improving financial performance of the issuer, or valuation of underlying assets specifically
pledged to support the credit. When we conclude that a decline is other than temporary, the security is written down to fair
value through a charge to realized investment gains and losses. We adjust the amortized cost for
securities that have experienced other-than-temporary impairments to reflect fair value at the time
of the impairment. We consider factors that lead to an other-than-temporary impairment of a
particular security in order to determine whether these conditions have impacted other similar
securities. Of the approximate $1.5 million of gross unrealized losses at March 31, 2005, no securities
had a fair value to cost or amortized cost ratio of less than 80%. Information about unrealized gains and losses is subject to changing conditions. Securities
with unrealized gains and losses will fluctuate, as will those securities that we identify as
potentially distressed. Our current evaluation of other-than-temporary impairments reflects our
intent to hold certain securities for a reasonable period of time sufficient for a forecasted
recovery of fair value. However, we may subsequently decide to sell certain of these securities in
future periods as a result of facts and circumstances impacting a specific security. If we make
the decision to dispose of a security with an unrealized loss, we will write down the security to
its fair value if we have not sold it by the end of the reporting period. 27




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##### Table of Contents



Realized Losses and Impairments Realized losses include both write-downs of securities with other-than-temporary impairments
and losses from the sales of securities. During the first three months of 2005, we did not write
down any securities. During the first three months of 2004, our only write-down was for $100,000
on preferred stock in an international airline for which the value had fluctuated below 80% of
amortized cost for over a year. The write-down resulted from our assessment that the security was
other-than-temporarily impaired because of a reduction in credit quality by rating agencies. We
later sold this security in 2004 and realized a small gain. The circumstances surrounding this
impairment did not impact other securities in our portfolio. Liquidity and Capital Resources Our sources of operating funds consist primarily of premiums written and investment income.
Operating cash flow is applied primarily to the payment of claims, interest, expenses, and prepaid
federal income taxes in the form of Tax and Loss Bonds. We generated positive cash flow from operating activities of $20.8 million in the first
quarter of 2005 compared to $17.1 million for the same period of 2004. The increase in cash flow
from operating activities in 2005 reflects the growth in premiums and investment income partially
offset by an increase in losses and other operating expenses paid. Our business does not routinely
require significant capital expenditures other than for enhancements to our computer systems and
technological capabilities. Positive cash flows are invested pending future payments of claims and
expenses. Cash flow shortfalls, if any, could be funded through sales of short-term investments
and other investment portfolio securities. We have no existing lines of credit due to the
sufficiency of the operating funds from the sources described above. The insurance laws of the State of Illinois impose certain restrictions on dividends that an
insurance subsidiary can pay the parent company. These restrictions, based on statutory accounting
practices, include requirements that dividends may be paid only out of statutory earned surplus and
that limit the amount of dividends that may be paid without prior approval of the Illinois
Insurance Department. There have been no dividends paid by the insurance subsidiaries to the
parent company. Further, there are no restrictions or requirements for capital support
arrangements between the parent company and Triad or its subsidiaries. We cede business to captive reinsurance subsidiaries of certain mortgage lenders (captives),
primarily under excess of loss reinsurance agreements. Generally, reinsurance recoverables on loss
reserves and unearned premiums ceded to these captives are backed by trust funds or letters of
credit. Total stockholders equity increased to $450.8 million at March 31, 2005, from $437.3 million
at December 31, 2004. This increase resulted primarily from net income for the first quarter of
2005 of $15.8 million and additional paid-in-capital of $2.2 million 28




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##### Table of Contents



resulting from the exercise of employee stock options and the related tax benefit. These
increases were partially offset by an increase in deferred compensation of $1.2 due to restricted
stock grants in the first quarter of 2005 and a decline in unrealized gains on securities of $3.3
million, net of unrealized losses and related income tax effects. Total statutory policyholders surplus for our insurance subsidiaries decreased to $132.2
million at March 31, 2005, from $135.7 million at December 31, 2004 primarily due to a temporary
increase in deferred tax liabilities that flows through statutory surplus. The deferred tax
liability will be reversed in the second quarter of 2005 when we purchase Tax and Loss Bonds in
April 2005. The primary difference between statutory policyholders surplus and equity computed
under generally accepted accounting principles is the statutory contingency reserve. The balance
in the statutory contingency reserve was $387.5 million at March 31, 2005, compared to $369.4
million at December 31, 2004. Statutory capital, for the purpose of computing the net risk in
force to statutory capital ratio, includes both policyholders surplus and the contingency reserve.
Statutory capital amounted to $519.7 million at March 31, 2005, compared to $505.1 million at
December 31, 2004. Triads ability to write insurance depends on the maintenance of its financial strength
ratings and the adequacy of its capital in relation to risk in force. A significant reduction of
capital or a significant increase in risk may impair Triads ability to write additional insurance.
A number of states also generally limit Triads risk-to-capital ratio to 25-to-1. As of March 31,
2005, Triads risk-to-capital ratio was 13.7-to-1 as compared to 14.0-to-1 at December 31, 2004.
The risk-to-capital ratio is calculated using net risk in force as the numerator, and statutory
capital as the denominator. Net risk in force is risk in force reduced by risk ceded under
reinsurance arrangements, including captive risk-sharing arrangements as well as any applicable
stop-loss limits. Triad is rated AA by both Standard & Poors Ratings Services and Fitch Ratings and Aa3 by
Moodys Investors Service. S&P changed its rating outlook for the U.S. private mortgage insurance
industry to Stable in February 2005. In December 2004, Fitch maintained its Negative rating
outlook for the U.S. private mortgage insurance industry. Currently, Fitch, S&P, and Moodys all
report a Stable ratings outlook for Triad. A reduction in Triads rating or outlook could
adversely affect our operations. Fannie Mae revised its approval requirements for mortgage insurers in 2004. The rules require
prior approval by Fannie Mae for many of Triads activities and new products, allow for other
approved types of mortgage insurers rated less than AA, and give Fannie Mae increased rights to
revise the eligibility standards of mortgage insurers. We do not see any material impact on our
current or future operations as a result of the new rules, although a material impact could still
occur if Fannie Mae were to begin to utilize mortgage insurers rated below AA or revise
eligibility standards of mortgage insurers in a way that would be adverse to Triad. 29




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##### Table of Contents



The Office of Federal Housing Enterprise Oversight (OFHEO) issued its risk-based capital rules
for Fannie Mae and Freddie Mac in the first quarter of 2002. The regulation provides capital
guidelines for Fannie Mae and Freddie Mac in connection with their use of various types of credit
protection counterparties including a more preferential capital credit for insurance from a AAA
rated private mortgage insurer than for insurance from a AA rated private mortgage insurer. The
phase-in period for OFHEOs risk-based capital rules is ten years. We do not believe the new
risk-based capital rules will have a significant adverse impact on our financial condition in the
future. However, if the risk-based capital rules result in future changes to the preferences of
Fannie Mae and Freddie Mac regarding their use of the various types of credit enhancements or their
choice of mortgage insurers based on their credit rating, our financial condition could be
significantly harmed. Off Balance Sheet Arrangements and Aggregate Contractual Obligations We lease office facilities, automobiles, and office equipment under operating leases with
minimum lease commitments that range from one to ten years. We have no capitalized leases or
material purchase commitments. Our long-term debt has a single maturity date of 2028. There have been no material changes to
the aggregate contractual obligations shown in our Form 10-K. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Managements Discussion and Analysis and this Report contain forward-looking statements
relating to future plans, expectations, and performance, which involve various risks and
uncertainties, including, but not limited to, the following:  §
    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 Enterprises, 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; 30




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##### Table of Contents



§
    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, 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 insurance production
becoming concentrated in large lenders, our margins may be compressed and the loss
of a significant customer 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 mortgage insurance provider 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 reviews
requiring changes to mortgage industry business practices such as captive
reinsurance. Accordingly, actual results may differ from those set forth in the forward-looking statements.
Attention also is directed to other risk factors set forth in documents filed by the Company with
the Securities and Exchange Commission. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Companys market risk exposures at March 31, 2005 have not materially changed from those
identified in Form 10-K for the year ended December 31, 2004. 31




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##### Table of Contents



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 acting Chief Financial Officer
(CFO), of the effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our
management, including our CEO and acting 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 acting 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 2005 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 None 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders- None 
 Item 5. Other Information None 
 Item 6. Exhibits See exhibit index on page 34. 32




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##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. TRIAD GUARANTY INC.Date: May 9, 2005/s/ Kenneth S. DwyerKenneth S. DwyerVice President and Chief Accounting Officer
 33




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##### Table of Contents



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 Acting 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 Acting Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 34