##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2006ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number: 0-22342
 
 Triad Guaranty Inc.
 (Exact name of registrant as specified in its charter)
 DELAWARE(State or other jurisdiction of
incorporation or organization)
    
    56-1838519(I.R.S. Employer
Identification No.)101 South Stratford Road
Winston-Salem, North Carolina(Address of principal executive offices)
    
    27104(Zip Code)
 (336) 723-1282  (Registrants telephone number, including area code)
 R £
  £ R £
 £ R




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##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    38Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    39Item 1A.
    
    Risk Factors
    
    
    39Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3.
    
    Defaults Upon Senior Securities
    
    
    39Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    39Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    39Signature
    
    
    40Ex-31.1Ex-31.2Ex-32.1Ex-32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30
    
    
    December 312006
    
    
    2005(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $552,792 and $518,137)
    
    $
    556,378
    
    
    $
    534,064Equity securities (cost: $9,605 and $7,001)
    
    
    9,660
    
    
    
    8,159Other investments
    
    
    5,000
    
    
    
    Short-term investments
    
    
    4,277
    
    
    
    4,796575,315
    
    
    
    547,019Cash and cash equivalents
    
    
    5,191
    
    
    
    8,934Real estate acquired in claim settlement
    
    
    8,614
    
    
    
    5,721Accrued investment income
    
    
    7,780
    
    
    
    7,237Deferred policy acquisition costs
    
    
    34,203
    
    
    
    33,684Prepaid federal income taxes
    
    
    151,908
    
    
    
    139,465Property and equipment
    
    
    7,954
    
    
    
    7,827Income taxes recoverable
    
    
    179
    
    
    
    181Reinsurance recoverable
    
    
    1
    
    
    
    948Other assets
    
    
    17,878
    
    
    
    16,487Total assets
    
    $
    809,023
    
    
    $
    767,503LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    54,905
    
    
    $
    51,074Unearned premiums
    
    
    12,630
    
    
    
    13,494Amounts payable to reinsurers
    
    
    5,398
    
    
    
    4,810Deferred income taxes
    
    
    163,436
    
    
    
    155,189Long-term debt
    
    
    34,505
    
    
    
    34,501Accrued interest on debt
    
    
    1,275
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    5,721
    
    
    
    7,969Total liabilities
    
    
    277,870
    
    
    
    268,312Commitments and contingencies  Note 4Stockholders equity:Preferred stock, par value $0.01 per share  authorized
1,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share  authorized
33,091,400 shares; issued and outstanding 14,887,984 shares
at June 30, 2006 and 14,774,153 shares at December 31, 2005
    
    
    149
    
    
    
    148Additional paid-in capital
    
    
    103,056
    
    
    
    103,657Accumulated other comprehensive income, net of income tax
liability of $1,274 at June 30, 2006 and $5,980 at
December 31, 2005
    
    
    2,367
    
    
    
    11,106Deferred compensation
    
    
    
    
    
    
    (3,161
    )Retained earnings
    
    
    425,581
    
    
    
    387,441Total stockholders equity
    
    
    531,153
    
    
    
    499,191Total liabilities and stockholders equity
    
    $
    809,023
    
    
    $
    767,503
  
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##### Table of Contents



TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except share data)Revenue:Premiums written:Direct
    
    $
    60,961
    
    
    $
    50,559
    
    
    $
    120,273
    
    
    $
    98,886Ceded
    
    
    (11,603
    )
    
    
    (9,948
    )
    
    
    (22,573
    )
    
    
    (19,564
    )Net premiums written
    
    
    49,358
    
    
    
    40,611
    
    
    
    97,700
    
    
    
    79,322Change in unearned premiums
    
    
    1,309
    
    
    
    510
    
    
    
    857
    
    
    
    576Earned premiums
    
    
    50,667
    
    
    
    41,121
    
    
    
    98,557
    
    
    
    79,898Net investment income
    
    
    6,535
    
    
    
    5,743
    
    
    
    12,757
    
    
    
    11,158Net realized investment gains
    
    
    772
    
    
    
    39
    
    
    
    1,672
    
    
    
    46Other income
    
    
    5
    
    
    
    2
    
    
    
    3
    
    
    
    1157,979
    
    
    
    46,905
    
    
    
    112,989
    
    
    
    91,113Losses and expenses:Net losses and loss adjustment expenses
    
    
    17,271
    
    
    
    17,288
    
    
    
    33,622
    
    
    
    27,918Interest expense on debt
    
    
    694
    
    
    
    693
    
    
    
    1,387
    
    
    
    1,386Amortization of deferred policy acquisition costs
    
    
    4,118
    
    
    
    3,695
    
    
    
    7,980
    
    
    
    7,352Other
operating expenses (net of acquisition costs deferred)
    
    
    8,496
    
    
    
    7,017
    
    
    
    17,009
    
    
    
    14,23430,579
    
    
    
    28,693
    
    
    
    59,998
    
    
    
    50,890Income before income taxes
    
    
    27,400
    
    
    
    18,212
    
    
    
    52,991
    
    
    
    40,223Income taxes:Current
    
    
    979
    
    
    
    707
    
    
    
    1,951
    
    
    
    1,401Deferred
    
    
    6,834
    
    
    
    4,306
    
    
    
    12,900
    
    
    
    9,8637,813
    
    
    
    5,013
    
    
    
    14,851
    
    
    
    11,264Net income
    
    $
    19,587
    
    
    $
    13,199
    
    
    $
    38,140
    
    
    $
    28,959Earnings per common and common equivalent share:Basic
    
    $
    1.33
    
    
    $
    0.90
    
    
    $
    2.58
    
    
    $
    1.98Diluted
    
    $
    1.31
    
    
    $
    0.89
    
    
    $
    2.56
    
    
    $
    1.96Shares used in computing earnings per common and
common equivalent share:Basic
    
    
    14,769,367
    
    
    
    14,667,734
    
    
    
    14,763,889
    
    
    
    14,643,095Diluted
    
    
    14,914,075
    
    
    
    14,812,532
    
    
    
    14,888,304
    
    
    
    14,795,243
 .
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##### Table of Contents



TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 302006
    
    
    2005(In thousands)Operating activitiesNet income
    
    $
    38,140
    
    
    $
    28,959Adjustments to reconcile net income to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    2,967
    
    
    
    3,919Accrued expenses and other liabilities
    
    
    (2,248
    )
    
    
    (2,266
    )Income taxes recoverable
    
    
    2
    
    
    
    (293
    )Amounts due to/from reinsurers
    
    
    1,535
    
    
    
    323Accrued investment income
    
    
    (543
    )
    
    
    (414
    )Policy acquisition costs deferred
    
    
    (8,499
    )
    
    
    (7,981
    )Amortization of deferred policy acquisition costs
    
    
    7,980
    
    
    
    7,352Net realized investment gains
    
    
    (1,672
    )
    
    
    (46
    )Provision for depreciation
    
    
    1,231
    
    
    
    1,660Accretion of discount on investments
    
    
    (50
    )
    
    
    (189
    )Deferred income taxes
    
    
    12,900
    
    
    
    9,863Prepaid federal income taxes
    
    
    (12,443
    )
    
    
    (9,550
    )Real estate acquired in claim settlement, net of write-downs
    
    
    (2,893
    )
    
    
    (1,229
    )Other assets
    
    
    (1,391
    )
    
    
    169Other operating activities
    
    
    1,633
    
    
    
    2,557Net cash provided by operating activities
    
    
    36,649
    
    
    
    32,834Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (90,826
    )
    
    
    (56,186
    )Sales  fixed maturities
    
    
    54,081
    
    
    
    10,143Maturities  fixed maturities
    
    
    2,933
    
    
    
    4,934Purchases  equities
    
    
    (4,647
    )
    
    
    Sales  equities
    
    
    3,001
    
    
    
    1,153Purchases of other investments
    
    
    (5,000
    )
    
    
    Net change in short-term investments
    
    
    519
    
    
    
    7,539Purchases of property and equipment
    
    
    (1,358
    )
    
    
    (1,249
    )Net cash used in investing activities
    
    
    (41,297
    )
    
    
    (33,666
    )Financing activitiesExcess tax benefits from share-based compensation
    
    
    280
    
    
    
    Proceeds from exercise of stock options
    
    
    625
    
    
    
    3,261Net cash provided by financing activities
    
    
    905
    
    
    
    3,261Net change in cash and cash equivalents
    
    
    (3,743
    )
    
    
    2,429Cash and cash equivalents at beginning of period
    
    
    8,934
    
    
    
    10,440Cash and cash equivalents at end of period
    
    $
    5,191
    
    
    $
    12,869Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    15,343
    
    
    $
    11,240Interest
    
    
    1,383
    
    
    
    1,383
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##### Table of Contents



TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  Other Investments
  Share-Based Compensation
 Accounting for Stock Issued to Employees Share-Based Payment
 4




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Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006(In thousands, except per share information)Income before income taxes
    
    $
    (313
    )
    
    $
    (593
    )Net income
    
    $
    (204
    )
    
    $
    (386
    )Earnings per share  basic
    
    $
    (0.01
    )
    
    $
    (0.03
    )Earnings per share  diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )
  5




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005(In thousands, except earnings per share information)Net income  as reported
    
    $
    13,199
    
    
    $
    28,959Net income  pro forma
    
    $
    13,065
    
    
    $
    28,679Earnings per share  as
reported:Basic
    
    $
    0.90
    
    
    $
    1.98Diluted
    
    $
    0.89
    
    
    $
    1.96Earnings per share  pro forma:Basic
    
    $
    0.89
    
    
    $
    1.96Diluted
    
    $
    0.88
    
    
    $
    1.94
 3. Consolidation
  4. Commitments And Contingencies
 Reinsurance
  6




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##### Table of Contents



Insurance In Force, Dividend Restrictions, and Statutory Results
  June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Net risk
    
    $
    7,640,954
    
    
    $
    7,312,697Statutory capital and surplus
    
    $
    154,695
    
    
    $
    131,582Statutory contingency reserve
    
    
    492,013
    
    
    
    447,826Total
    
    $
    646,708
    
    
    $
    579,408Risk-to-capital ratio
    
    
    11.8 to 1
    
    
    
    12.6 to 1
    Loss Reserves
  7




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##### Table of Contents



Litigation
  5. Earnings Per Share
  6. Comprehensive Income
  7. Income Taxes
  8. Long-Term Stock Incentive Plan
  8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Gross compensation expense
    
    $
    896
    
    
    $
    414
    
    
    $
    1,696
    
    
    $
    811Tax benefit
    
    
    314
    
    
    
    145
    
    
    
    594
    
    
    
    284Compensation expense
capitalized as part of
deferred acquisition costs
    
    
    152
    
    
    
    
    
    
    
    277
    
    
    
    
  Weighted-Weighted-
    
    
    Aggregate
    
    
    AverageAverage
    
    
    Intrinsic
    
    
    RemainingNumber of Shares
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual Term(In thousands)Outstanding, January 1, 2006
    
    
    588,780
    
    
    $
    37.21Granted
    
    
    13,594
    
    
    
    43.00Exercised
    
    
    31,555
    
    
    
    19.80Cancelled
    
    
    4,317
    
    
    
    43.31Outstanding, June 30, 2006
    
    
    566,502
    
    
    
    38.27
    
    
    $
    6,234
    
    
    5.1 yearsExercisable, June 30, 2006
    
    
    418,862
    
    
    
    36.61
    
    
    $
    5,251
    
    
    3.7 years
 9




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##### Table of Contents



2006
    
    
    2005Expected volatility
    
    
    34.0
    %
    
    
    39.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    5.0 years
    
    5.0 yearsRisk-free rate
    
    
    4.5
    %
    
    
    3.7
    %
   Weighted-AverageNumber of
    
    
    Grant-DateShares
    
    
    Fair ValueNonvested, January 1, 2006
    
    
    101,415
    
    
    $
    46.93Granted
    
    
    46,005
    
    
    
    45.37Vested
    
    
    34,097
    
    
    
    47.05Cancelled
    
    
    120
    
    
    
    53.94Nonvested, June 30, 2006
    
    
    113,203
    
    
    
    46.26
    10




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Update on Critical Accounting Policies and Estimates
   Overview
  11




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12




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##### Table of Contents



Consolidated Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In thousands, except percentages and per share information)Earned premiums
    
    $
    50,667
    
    
    $
    41,121
    
    
    
    23.2
    %
    
    $
    98,557
    
    
    $
    79,898
    
    
    
    23.4
    %Net losses and loss
adjustment expenses
    
    
    17,271
    
    
    
    17,288
    
    
    
    (0.1
    )
    
    
    33,622
    
    
    
    27,918
    
    
    
    20.4Net income
    
    
    19,587
    
    
    
    13,199
    
    
    
    48.4
    
    
    
    38,140
    
    
    
    28,959
    
    
    
    31.7Diluted earnings
per share
    
    $
    1.31
    
    
    $
    0.89
    
    
    
    47.2
    
    
    $
    2.56
    
    
    $
    1.96
    
    
    
    30.6
   13




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##### Table of Contents



Production and In Force
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions, except percentages)Primary insurance written
    
    $
    2,944
    
    
    $
    2,941
    
    
    
    0.1
    %
    
    $
    4,892
    
    
    $
    5,132
    
    
    
    (4.7
    )%Modified pool insurance
written
    
    
    2,980
    
    
    
    1,798
    
    
    
    65.7
    
    
    
    7,586
    
    
    
    3,901
    
    
    
    94.5Total insurance written
    
    $
    5,924
    
    
    $
    4,739
    
    
    
    25.0
    %
    
    $
    12,478
    
    
    $
    9,033
    
    
    
    38.1
    %
  14




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Flow channel
    
    
    5.7
    %
    
    
    6.2
    %
    
    
    5.5
    %
    
    
    5.9
    %Structured bulk channel
    
    
    15.3
    %
    
    
    6.7
    %
    
    
    16.1
    %
    
    
    10.0
    %Total
    
    
    8.8
    %
    
    
    6.3
    %
    
    
    9.4
    %
    
    
    7.0
    %
  15




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Prime
    
    
    65.5
    %
    
    
    73.7
    %
    
    
    69.3
    %
    
    
    75.6
    %Alt-A
    
    
    32.3
    
    
    
    19.0
    
    
    
    28.5
    
    
    
    17.0A Minus
    
    
    1.9
    
    
    
    5.6
    
    
    
    1.9
    
    
    
    5.8Sub Prime
    
    
    0.3
    
    
    
    1.7
    
    
    
    0.3
    
    
    
    1.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005ARMs
    
    
    45.8
    %
    
    
    43.7
    %
    
    
    40.5
    %
    
    
    41.3
    %LTV greater than 95%
    
    
    12.2
    %
    
    
    11.6
    %
    
    
    11.3
    %
    
    
    12.2
    %
 16




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Fixed rate period:Less than 1 year
    
    
    34.6
    %
    
    
    14.7
    %
    
    
    27.7
    %
    
    
    10.7
    %1 year to less than 5 years
    
    
    2.7
    
    
    
    16.1
    
    
    
    3.3
    
    
    
    24.75 years or greater
    
    
    8.5
    
    
    
    12.7
    
    
    
    9.5
    
    
    
    5.9Total ARMs
    
    
    45.8
    %
    
    
    43.7
    %
    
    
    40.5
    %
    
    
    41.3
    %
    17




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##### Table of Contents



2006
    
    
    2005
    
    
    % Change(In millions, except percentages)Primary insurance
    
    $
    30,783
    
    
    $
    29,489
    
    
    
    4.4
    %Modified Pool insurance
    
    
    20,022
    
    
    
    10,018
    
    
    
    99.9Total insurance
    
    $
    50,805
    
    
    $
    39,507
    
    
    
    28.6
    %
    2006
    
    
    2005Primary insurance in force
    
    
    12.3
    %
    
    
    8.4
    %Modified Pool insurance in force
    
    
    68.0
    %
    
    
    64.7
    %Total insurance in force
    
    
    34.3
    %
    
    
    22.7
    %
 18




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##### Table of Contents



2006
    
    
    2005Credit quality:Prime
    
    
    82.6
    %
    
    
    85.3
    %Alt-A
    
    
    12.8
    
    
    
    9.3A Minus
    
    
    3.9
    
    
    
    4.5Sub Prime
    
    
    0.7
    
    
    
    0.9Total
    
    
    100.0
    %
    
    
    100.0
    %Loan type:Fixed
    
    
    72.6
    %
    
    
    74.1
    %ARM
    
    
    27.4
    
    
    
    25.9Total
    
    
    100.0
    %
    
    
    100.0
    %
   2006
    
    
    2005Primary flow insurance in force
    
    
    62.7
    %
    
    
    57.2
    %Total insurance in force
    
    
    37.1
    %
    
    
    41.8
    %
   19




---



##### Table of Contents



Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In thousands, except percentages)Direct premium written
    
    $
    60,961
    
    
    $
    50,559
    
    
    
    20.6
    %
    
    $
    120,273
    
    
    $
    98,886
    
    
    
    21.6
    %Ceded premium written
    
    
    (11,603
    )
    
    
    (9,948
    )
    
    
    16.6
    
    
    
    (22,573
    )
    
    
    (19,564
    )
    
    
    15.4Net premium written
    
    
    49,358
    
    
    
    40,611
    
    
    
    21.5
    
    
    
    97,700
    
    
    
    79,322
    
    
    
    23.2Change in unearned premiums
    
    
    1,309
    
    
    
    510
    
    
    
    156.7
    
    
    
    857
    
    
    
    576
    
    
    
    48.8Earned premiums
    
    $
    50,667
    
    
    $
    41,121
    
    
    
    23.2
    %
    
    $
    98,557
    
    
    $
    79,898
    
    
    
    23.4
    %Net investment income
    
    $
    6,535
    
    
    $
    5,743
    
    
    
    13.8
    %
    
    $
    12,757
    
    
    $
    11,158
    
    
    
    14.3
    %Total revenues
    
    $
    57,979
    
    
    $
    46,905
    
    
    
    23.6
    %
    
    $
    112,989
    
    
    $
    91,113
    
    
    
    24.0
    %
   20




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Premium cede rate
(ceded premiums
written as a
percentage of direct
premiums written)
    
    
    19.0
    %
    
    
    19.7
    %
    
    
    18.8
    %
    
    
    19.8
    %Captive reinsurance
premium cede rate
(ceded premiums
written under captive
reinsurance
arrangements as a
percentage of direct
premiums written)
    
    
    17.8
    %
    
    
    18.1
    %
    
    
    17.5
    %
    
    
    18.2
    %Average captive
premium cede rate
(ceded premiums
written under captive
reinsurance
arrangements as a
percentage of direct
premiums written
under captive
reinsurance
arrangements)
    
    
    36.7
    %
    
    
    36.1
    %
    
    
    36.9
    %
    
    
    36.3
    %
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Primary insurance written
    
    
    53.2
    %
    
    
    54.6
    %
    
    
    54.0
    %
    
    
    51.3
    %Total insurance written
    
    
    26.5
    %
    
    
    33.9
    %
    
    
    21.2
    %
    
    
    29.1
    %
    21




---



##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In thousands, except percentages)Net losses and
loss adjustment
expenses
    
    $
    17,271
    
    
    $
    17,288
    
    
    
    (0.1
    )%
    
    $
    33,622
    
    
    $
    27,918
    
    
    
    20.4
    %Amortization of
deferred policy
acquisition costs
    
    $
    4,118
    
    
    $
    3,695
    
    
    
    11.4
    
    
    $
    7,980
    
    
    $
    7,352
    
    
    
    8.5Other operating
expenses (net of
acquisition costs
deferred)
    
    $
    8,496
    
    
    $
    7,017
    
    
    
    21.1
    
    
    $
    17,009
    
    
    $
    14,234
    
    
    
    19.5Loss ratio
    
    
    34.1
    %
    
    
    42.0
    %
    
    
    
    
    
    
    34.1
    %
    
    
    34.9
    %Expense ratio
    
    
    25.6
    %
    
    
    26.4
    %
    
    
    
    
    
    
    25.6
    %
    
    
    27.2
    %Combined ratio
    
    
    59.7
    %
    
    
    68.4
    %
    
    
    
    
    
    
    59.7
    %
    
    
    62.1
    %
  22




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(Dollars in thousands)Paid claims:Primary insurance
    
    $
    13,501
    
    
    $
    12,147
    
    
    
    11.1
    %
    
    $
    26,785
    
    
    $
    20,828
    
    
    
    28.6
    %Modified Pool insurance
    
    
    930
    
    
    
    1,150
    
    
    
    (19.1
    )
    
    
    2,030
    
    
    
    2,120
    
    
    
    (4.2
    )Total
    
    $
    14,431
    
    
    $
    13,297
    
    
    
    8.5
    %
    
    $
    28,815
    
    
    $
    22,948
    
    
    
    25.6
    %Number of claims paid:Primary insurance
    
    
    523
    
    
    
    421
    
    
    
    24.2
    %
    
    
    1,029
    
    
    
    773
    
    
    
    33.1
    %Modified Pool insurance
    
    
    48
    
    
    
    47
    
    
    
    2.1
    
    
    
    115
    
    
    
    102
    
    
    
    12.7Total
    
    
    571
    
    
    
    468
    
    
    
    22.0
    %
    
    
    1,144
    
    
    
    875
    
    
    
    30.7
    %Average severity:Primary insurance
    
    $
    25.8
    
    
    $
    28.9
    
    
    
    
    
    
    $
    26.0
    
    
    $
    26.9Modified Pool insurance
    
    $
    19.4
    
    
    $
    24.5
    
    
    
    
    
    
    $
    17.7
    
    
    $
    20.8Total
    
    $
    25.3
    
    
    $
    28.4
    
    
    
    
    
    
    $
    25.2
    
    
    $
    26.2
   23




---



##### Table of Contents



2006
    
    
    2005
    
    
    % Change(In thousands, except percentages)Primary insurance:Reserves for reported defaults
    
    $
    46,560
    
    
    $
    33,003
    
    
    
    41.1
    %Reserves for defaults incurred but not reported
    
    
    4,362
    
    
    
    3,274
    
    
    
    33.2Total Primary insurance
    
    
    50,922
    
    
    
    36,277
    
    
    
    40.4Modified Pool insurance:Reserves for reported defaults
    
    
    3,193
    
    
    
    1,661
    
    
    
    92.2Reserves for defaults incurred but not reported
    
    
    685
    
    
    
    534
    
    
    
    28.3Total Modified Pool insurance
    
    
    3,878
    
    
    
    2,195
    
    
    
    76.7Reserve for loss adjustment expenses
    
    
    105
    
    
    
    104
    
    
    
    1.0Total reserves for losses and loss adjustment
expenses
    
    $
    54,905
    
    
    $
    38,576
    
    
    
    42.3
    %
  24




---



##### Table of Contents



2006
    
    
    2005Total business:Number of insured loans in force
    
    
    324,111
    
    
    
    278,837Number of loans in default
    
    
    6,485
    
    
    
    5,325With deductibles
    
    
    1,099
    
    
    
    612Without deductibles
    
    
    5,386
    
    
    
    4,713Percentage of loans in default (default rate)
    
    
    2.00
    %
    
    
    1.91
    %Percentage of loans in default excluding deductibles*
    
    
    1.66
    %
    
    
    1.69
    %Primary insurance:Number of insured loans in force
    
    
    216,458
    
    
    
    219,256Number of loans in default
    
    
    4,787
    
    
    
    4,013Percentage of loans in default
    
    
    2.21
    %
    
    
    1.83
    %Modified Pool insurance:Number of insured loans in force
    
    
    107,653
    
    
    
    59,581Number of loans in default
    
    
    1,698
    
    
    
    1,312With deductibles
    
    
    1,099
    
    
    
    612Without deductibles
    
    
    599
    
    
    
    700Percentage of loans in default
    
    
    1.58
    %
    
    
    2.20
    %Percentage of loans in default excluding deductibles*
    
    
    0.56
    %
    
    
    1.17
    %Primary Alt-A business**:Number of insured loans in force
    
    
    18,581
    
    
    
    14,427Number of loans in default
    
    
    628
    
    
    
    460Percentage of loans in default
    
    
    3.38
    %
    
    
    3.19
    %
  *
    
    Excludes defaults on loans written as part of structured bulk transactions with deductibles**
    
    Included in Primary insurance amounts above   25




---



##### Table of Contents



Number of defaults in FEMA-designated areas at December 31, 2005
    
    
    891Number of defaults in FEMA-designated areas cured during the first
six months of 2006 with no loss incurred
    
    
    (565
    )Number of new defaults in FEMA-designated areas reported during the
first six months of 2006
    
    
    286Number of defaults in FEMA-designated areas at June 30, 2006
    
    
    612Number of defaults in FEMA-designated areas at June 30, 2006 without
deductibles
    
    
    483
     26




---



##### Table of Contents



Significant Customers
  27




---



##### Table of Contents



Financial Position
  Deferred Policy Acquisition Costs
   28




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except percentages)Balance  beginning of period
    
    $
    33,904
    
    
    $
    33,023
    
    
    $
    33,684
    
    
    $
    32,453Costs capitalized
    
    
    4,417
    
    
    
    3,754
    
    
    
    8,499
    
    
    
    7,981Amortization  normal
    
    
    (3,988
    )
    
    
    (3,262
    )
    
    
    (7,837
    )
    
    
    (6,577
    )Amortization  dynamic adjustment
    
    
    (130
    )
    
    
    (433
    )
    
    
    (143
    )
    
    
    (775
    )Total amortization
    
    
    (4,118
    )
    
    
    (3,695
    )
    
    
    (7,980
    )
    
    
    (7,352
    )Balance  end of period
    
    $
    34,203
    
    
    $
    33,082
    
    
    $
    34,203
    
    
    $
    33,082Annual Persistency
    
    
    
    
    
    
    
    
    
    
    72.1
    %
    
    
    69.3
    %
   Prepaid Federal Income Taxes and Deferred Income Taxes
   29




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
   June 30, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Available-for-sale securities:Fixed maturity securities:U. S. government obligations
    
    $
    11,570
    
    
    
    2.0
    %
    
    $
    12,124
    
    
    
    2.2
    %State and municipal bonds
    
    
    527,653
    
    
    
    91.7
    
    
    
    500,027
    
    
    
    91.4Corporate bonds
    
    
    17,102
    
    
    
    3.0
    
    
    
    21,855
    
    
    
    4.0Mortgage-backed bonds
    
    
    53
    
    
    
    0.0
    
    
    
    58
    
    
    
    0.0Total fixed maturities
    
    
    556,378
    
    
    
    96.7
    
    
    
    534,064
    
    
    
    97.6Equity securities
    
    
    9,660
    
    
    
    1.7
    
    
    
    8,159
    
    
    
    1.5Total available-for-sale
securities
    
    
    566,038
    
    
    
    98.4
    
    
    
    542,223
    
    
    
    99.1Other investments
    
    
    5,000
    
    
    
    0.9
    
    
    
    
    
    
    
    0.0Short-term investments
    
    
    4,277
    
    
    
    0.7
    
    
    
    4,796
    
    
    
    0.9$
    575,315
    
    
    
    100.0
    %
    
    $
    547,019
    
    
    
    100.0
    %
  30




---



##### Table of Contents



Carrying
    
    
    % of TotalName of Creditor/Issuer
    
    Value
    
    
    Invested Assets(In thousands, except percentages)Atlanta, Georgia Airport
    
    $
    6,700
    
    
    
    1.16
    %State of Connecticut
    
    
    6,375
    
    
    
    1.11State of Pennsylvania
    
    
    5,962
    
    
    
    1.04Federal National Mortgage Association
    
    
    5,275
    
    
    
    0.92State of Hawaii
    
    
    5,240
    
    
    
    0.91State of California
    
    
    5,000
    
    
    
    0.87Structured Credit Holdings Plc (common stock)
    
    
    5,000
    
    
    
    0.87Port of Seattle, Washington
    
    
    4,526
    
    
    
    0.79City of Chicago, Illinois
    
    
    4,373
    
    
    
    0.76Denver, Colorado City and County Airport
    
    
    4,166
    
    
    
    0.72
   Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except percentages)Average investments at cost
or amortized cost
    
    $
    558,506
    
    
    $
    481,131
    
    
    $
    550,804
    
    
    $
    472,904Pre-tax net investment income
    
    $
    6,535
    
    
    $
    5,743
    
    
    $
    12,757
    
    
    $
    11,158Pre-tax yield
    
    
    4.7
    %
    
    
    4.8
    %
    
    
    4.6
    %
    
    
    4.7
    %Pre-tax realized investment gains
    
    $
    772
    
    
    $
    39
    
    
    $
    1,672
    
    
    $
    46
  31




---



##### Table of Contents



Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available-for-sale securities:Fixed maturity securities:U. S. government obligations
    
    $
    12,108
    
    
    $
    3
    
    
    $
    (541
    )
    
    $
    11,570State and municipal bonds
    
    
    524,413
    
    
    
    7,598
    
    
    
    (4,358
    )
    
    
    527,653Corporate bonds
    
    
    16,220
    
    
    
    917
    
    
    
    (35
    )
    
    
    17,102Mortgage-backed bonds
    
    
    51
    
    
    
    2
    
    
    
    
    
    
    
    53Subtotal, fixed maturities
    
    
    552,792
    
    
    
    8,520
    
    
    
    (4,934
    )
    
    
    556,378Equity securities
    
    
    9,605
    
    
    
    423
    
    
    
    (368
    )
    
    
    9,660Total available-for-sale
securities
    
    
    562,397
    
    
    
    8,943
    
    
    
    (5,302
    )
    
    
    566,038Other investments
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000$
    567,397
    
    
    $
    8,943
    
    
    $
    (5,302
    )
    
    $
    571,038
  32




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##### Table of Contents



Credit Risk
  June 30, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed Maturities:U.S. treasury and agency bonds
    
    $
    11,570
    
    
    
    2.1
    %
    
    $
    12,124
    
    
    
    2.3
    %AAA
    
    
    441,236
    
    
    
    79.3
    
    
    
    420,489
    
    
    
    78.7AA
    
    
    61,666
    
    
    
    11.1
    
    
    
    52,812
    
    
    
    9.9A
    
    
    28,201
    
    
    
    5.1
    
    
    
    30,176
    
    
    
    5.7BBB
    
    
    10,960
    
    
    
    2.0
    
    
    
    9,780
    
    
    
    1.8BB
    
    
    50
    
    
    
    0.0
    
    
    
    781
    
    
    
    0.1Not rated
    
    
    2,695
    
    
    
    0.4
    
    
    
    7,902
    
    
    
    1.5Total fixed maturities
    
    $
    556,378
    
    
    
    100.0
    %
    
    $
    534,064
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,594
    
    
    
    16.5
    %
    
    $
    1,709
    
    
    
    20.9
    %A
    
    
    1,998
    
    
    
    20.7
    
    
    
    1,559
    
    
    
    19.1BBB
    
    
    1,088
    
    
    
    11.2
    
    
    
    1,125
    
    
    
    13.8Not rated
    
    
    
    
    
    
    0.0
    
    
    
    490
    
    
    
    6.04,680
    
    
    
    48.4
    
    
    
    4,883
    
    
    
    59.8Common stocks
    
    
    4,980
    
    
    
    51.6
    
    
    
    3,276
    
    
    
    40.2Total equities
    
    $
    9,660
    
    
    
    100.0
    %
    
    $
    8,159
    
    
    
    100.0
    %
  
    
    Length of time the fair value was below amortized cost
    
    Industry factors or conditions related to a geographic area negatively affecting
the security
    
    Downgrades by a rating agency
    
    Past due interest or principal payments or other violation of covenants
    
    Deterioration of the overall financial condition of the specific issuer
  33




---



##### Table of Contents



Realized Losses and Impairments
   34




---



##### Table of Contents



Liquidity and Capital Resources
       35




---



##### Table of Contents



June 30, 2006
    
    
    December 31, 2005Statutory policyholders surplus
    
    $
    154.7
    
    
    $
    131.6Statutory contingency reserve
    
    
    492.0
    
    
    
    447.8Total
    
    $
    646.7
    
    
    $
    579.4
      36




---



##### Table of Contents



Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  
    
    interest rates may increase or decrease from their current levels;
    
    housing prices may increase or decrease from their current levels;
    
    housing transactions requiring mortgage insurance may decrease for many reasons
including changes in interest rates or economic conditions or alternative credit
enhancement products;
    
    our market share may change as a result of changes in underwriting criteria or
competitive products or rates;
    
    the amount of insurance written could be adversely affected by changes in federal
housing legislation, including changes in the Federal Housing Administration loan
limits and coverage requirements of Freddie Mac and Fannie Mae (Government Sponsored
Enterprises);
    
    our financial condition and competitive position could be affected by legislation
or regulation impacting the mortgage guaranty industry or the Government Sponsored
Entities, specifically, and the financial services industry in general;
    
    rating agencies may revise methodologies for determining our financial strength
ratings and may revise or withdraw the assigned ratings at any time;
    
    decreases in persistency, which are affected by loan refinancings in periods of
low interest rates, may have an adverse effect on earnings;
    
    the amount of insurance written and the growth in insurance in force or risk in
force as well as our performance may be adversely impacted by the competitive
environment in the private mortgage insurance industry, including the type,
structure, mix and pricing of our products and services and our competitors;
 37




---



##### Table of Contents




    
    if we fail to properly underwrite mortgage loans under contract underwriting
service agreements, we may be required to assume the costs of repurchasing those
loans;
    
    with consolidation occurring among mortgage lenders and our concentration of
insurance in force generated through relationships with significant lender
customers, our margins may be compressed and the loss of a significant customer or a
change in their business practices affecting mortgage insurance may have an adverse
effect on our earnings;
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions;
    
    economic downturns in regions where our risk is more concentrated could have a
particularly adverse effect on our financial condition and loss development;
    
    revisions in risk-based capital rules by the Office of Federal Housing Enterprise
Oversight for Fannie Mae and Freddie Mac could severely limit our ability to compete
against various types of credit protection counterparties, including AAA rated
private mortgage insurers;
    
    changes in the eligibility guidelines of Fannie Mae or Freddie Mac could have an
adverse effect on the Company;
    
    proposed regulation by the Department of Housing and Urban Development to exclude
packages of real estate settlement services, which may include any required mortgage
insurance premium paid at closing, from the anti-referral provisions of the Real
Estate Settlement Procedures Act could adversely affect our earnings;
    
    our financial and competitive position could be affected by regulatory activity
requiring changes to mortgage industry business practices, such as captive
reinsurance.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our management, including
our CEO and CFO, concluded, as of the end of the period covered by this report, that our
disclosure controls and procedures were effective. Disclosure controls and procedures
include controls and procedures designed to ensure that management, including our CEO and
CFO, is alerted to material information required to be disclosed in our filings under the
Act so as to allow timely decisions
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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 six months of 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 Item 1A. Risk Factors
 There have been no material changes with respect to the risk factors disclosed in our
annual report on Form 10-K for the year ended December 31, 2005.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3. Defaults Upon Senior Securities 
 
 Item 4. Submission of Matters to a Vote of Security Holders
 The Annual Meeting of Stockholders was held on May 17, 2006. Shares entitled to vote at
the Annual Meeting totaled 14,831,560 of which 13,356,675 shares were represented.
 The following seven directors were elected at the Annual Meeting. Shares voted for and
authorized withheld for each nominee were as follows:
 Name of Nominee
    
    Number of Votes for
    
    
    Authorization WithheldGlenn T. Austin, Jr.
    
    
    13,219,639
    
    
    
    137,036Robert T. David
    
    
    13,223,739
    
    
    
    132,936William T. Ratliff, III
    
    
    13,032,509
    
    
    
    324,166Michael A.F. Roberts
    
    
    13,186,180
    
    
    
    170,495Richard S. Swanson
    
    
    13,172,843
    
    
    
    183,832Mark K. Tonnesen
    
    
    13,262,487
    
    
    
    94,188David W. Whitehurst
    
    
    13,234,314
    
    
    
    122,361
 The 2006 Long-Term Stock Incentive Plan was approved with the number of shares voted as
follows: 11,715,631 for, 39,494 withheld, and 868,128 against.
 
 Item 5. Other Information 
 
 Item 6. Exhibits 
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SIGNATURE
  TRIAD GUARANTY INC.
Date: August 9, 2006/s/ Kenneth W. JonesKenneth W. JonesSenior Vice President and Chief Financial Officer 
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EXHIBIT INDEX
 Exhibit Number
    
    Description10.35
    
    Form of 2006 Triad Guaranty Inc. 2006 Long-Term Stock
Incentive Plan (filed as an exhibit to the Registrants
Form 8-K dated May 17, 2006 and incorporated by reference
herein).10.36
    
    Amendment to Employment Agreement between Registrant and
Ron D. Kessinger (filed as an exhibit to the Registrants
Form 8-K dated July 15, 2006 and incorporated by reference
herein).10.37
    
    Employment Agreement between Registrant and Kenneth W.
Jones (filed as an exhibit to the Registrants Form 8-K
dated March 30, 2006 and incorporated by reference herein).10.38
    
    Resignation and Release Agreement between Registrant and
Eric B. Dana (filed as an exhibit to the Registrants Form
8-K dated March 30, 2006 and incorporated by reference
herein)31.1
    
    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 2002.31.2
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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