##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 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
(State of Incorporation)
    
    56-1838519
(I.R.S. Employer Identification Number)
 
 
 
 þ o
 þ o
 o o




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TRIAD GUARANTY INC.
 INDEX
  
 PageNumberPart I. Financial Information:Item 1.Financial Statements:Consolidated Balance Sheets as of September 30, 2005 (Unaudited)
and December 31, 2004
    
    
    1Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 2005 and 2004 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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
    
    
    38Item 4.Controls and Procedures
    
    
    38Part II. Other Information:Item 1.Legal Proceedings
    
    
    38Item 2.Changes in Securities and Use of Proceeds
    
    
    38Item 3.Defaults Upon Senior Securities
    
    
    38Item 4.Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.Other Information
    
    
    38Item 6.Exhibits
    
    
    38Signature
    
    
    39Ex-31(i)Ex-31(ii)Ex-32




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30
    
    
    December 312005
    
    
    2004(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $495,341 and $435,432)
    
    $
    512,555
    
    
    $
    454,121Equity securities (cost: $8,004 and $8,626)
    
    
    9,715
    
    
    
    10,272Short-term investments
    
    
    16,027
    
    
    
    16,095538,297
    
    
    
    480,488Cash
    
    
    1,391
    
    
    
    6,865Real estate acquired in claim settlement
    
    
    2,684
    
    
    
    211Accrued investment income
    
    
    6,555
    
    
    
    6,229Deferred policy acquisition costs
    
    
    33,332
    
    
    
    32,453Prepaid federal income taxes
    
    
    132,947
    
    
    
    119,132Property and equipment
    
    
    8,157
    
    
    
    8,945Income taxes recoverable
    
    
    1,139
    
    
    
    977Reinsurance recoverable
    
    
    991
    
    
    
    1,164Other assets
    
    
    16,720
    
    
    
    15,571Total assets
    
    $
    742,213
    
    
    $
    672,035LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    41,823
    
    
    $
    34,042Unearned premiums
    
    
    14,148
    
    
    
    15,942Amounts payable to reinsurer
    
    
    4,656
    
    
    
    4,467Deferred income taxes
    
    
    152,444
    
    
    
    137,925Unearned ceding commission
    
    
    51
    
    
    
    200Long-term debt
    
    
    34,499
    
    
    
    34,493Accrued interest on debt
    
    
    584
    
    
    
    1,275Current taxes payable
    
    
    576
    
    
    
    Accrued expenses and other liabilities
    
    
    6,501
    
    
    
    6,348Total liabilities
    
    
    255,282
    
    
    
    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 14,818,506 shares
at September 30, 2005 and 14,631,678 shares at December 31, 2004
    
    
    148
    
    
    
    146Additional paid-in capital
    
    
    103,274
    
    
    
    94,852Accumulated other comprehensive income, net of income tax
liability of $6,624 at September 30, 2005 and $7,117 at
December 31, 2004
    
    
    12,301
    
    
    
    13,218Deferred compensation
    
    
    (3,674
    )
    
    
    (1,501
    )Retained earnings
    
    
    374,882
    
    
    
    330,628Total stockholders equity
    
    
    486,931
    
    
    
    437,343Total liabilities and stockholders equity
    
    $
    742,213
    
    
    $
    672,035
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands, except per share information)Revenue:Premiums written:Direct
    
    $
    53,272
    
    
    $
    45,453
    
    
    $
    152,158
    
    
    $
    128,798Ceded
    
    
    (10,299
    )
    
    
    (9,137
    )
    
    
    (29,863
    )
    
    
    (25,859
    )Net premiums written
    
    
    42,973
    
    
    
    36,316
    
    
    
    122,295
    
    
    
    102,939Change in unearned premiums
    
    
    1,155
    
    
    
    (497
    )
    
    
    1,731
    
    
    
    875Earned premiums
    
    
    44,128
    
    
    
    35,819
    
    
    
    124,026
    
    
    
    103,814Net investment income
    
    
    5,896
    
    
    
    5,255
    
    
    
    17,054
    
    
    
    14,439Net realized investment (losses) gains
    
    
    (170
    )
    
    
    (142
    )
    
    
    (124
    )
    
    
    416Other income
    
    
    2
    
    
    
    5
    
    
    
    13
    
    
    
    1049,856
    
    
    
    40,937
    
    
    
    140,969
    
    
    
    118,679Losses and expenses:Net losses and loss adjustment expenses
    
    
    16,958
    
    
    
    9,234
    
    
    
    44,876
    
    
    
    25,818Interest expense on debt
    
    
    694
    
    
    
    693
    
    
    
    2,080
    
    
    
    2,079Amortization of deferred policy
acquisition costs
    
    
    3,714
    
    
    
    3,670
    
    
    
    11,066
    
    
    
    10,305Other operating expenses (net of
acquisition costs deferred)
    
    
    7,494
    
    
    
    6,699
    
    
    
    21,728
    
    
    
    19,76828,860
    
    
    
    20,296
    
    
    
    79,750
    
    
    
    57,970Income before income taxes
    
    
    20,996
    
    
    
    20,641
    
    
    
    61,219
    
    
    
    60,709Income taxes:Current
    
    
    706
    
    
    
    571
    
    
    
    2,107
    
    
    
    1,723Deferred
    
    
    4,996
    
    
    
    5,274
    
    
    
    14,859
    
    
    
    15,7715,702
    
    
    
    5,845
    
    
    
    16,966
    
    
    
    17,494Net income
    
    $
    15,294
    
    
    $
    14,796
    
    
    $
    44,253
    
    
    $
    43,215Earnings per common and common
equivalent share:Basic
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    3.01
    
    
    $
    2.98Diluted
    
    $
    1.03
    
    
    $
    1.00
    
    
    $
    2.99
    
    
    $
    2.94Shares used in computing earnings per
common and common equivalent share:Basic
    
    
    14,753,673
    
    
    
    14,546,950
    
    
    
    14,680,355
    
    
    
    14,502,782Diluted
    
    
    14,837,017
    
    
    
    14,747,667
    
    
    
    14,809,568
    
    
    
    14,712,675
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 302005
    
    
    2004(In thousands)Operating activitiesNet income
    
    $
    44,253
    
    
    $
    43,215Adjustments to reconcile net income to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    5,987
    
    
    
    4,456Accrued expenses and other liabilities
    
    
    153
    
    
    
    1,363Current taxes payable
    
    
    576
    
    
    
    714Income taxes recoverable
    
    
    (162
    )
    
    
    Amounts due to/from reinsurer
    
    
    362
    
    
    
    614Accrued investment income
    
    
    (326
    )
    
    
    (1,153
    )Policy acquisition costs deferred
    
    
    (11,945
    )
    
    
    (13,119
    )Amortization of deferred policy acquisition costs
    
    
    11,066
    
    
    
    10,305Net realized investment losses (gains)
    
    
    124
    
    
    
    (416
    )Provision for depreciation
    
    
    2,575
    
    
    
    2,417Accretion of discount on investments
    
    
    (251
    )
    
    
    (689
    )Deferred income taxes
    
    
    14,859
    
    
    
    15,771Prepaid federal income taxes
    
    
    (13,815
    )
    
    
    (14,281
    )Unearned ceding commission
    
    
    (149
    )
    
    
    (353
    )Real estate acquired in claim settlement, net of write-downs
    
    
    (2,473
    )
    
    
    146Accrued interest on debt
    
    
    (691
    )
    
    
    (691
    )Other assets
    
    
    (1,149
    )
    
    
    4,263Other operating activities
    
    
    3,150
    
    
    
    (616
    )Net cash provided by operating activities
    
    
    52,144
    
    
    
    51,946Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (93,536
    )
    
    
    (128,900
    )Sales  fixed maturities
    
    
    33,864
    
    
    
    70,703Purchases  equities
    
    
    
    
    
    
    (370
    )Sales  equities
    
    
    512
    
    
    
    854Net change in short-term investments
    
    
    68
    
    
    
    12,078Purchases of property and equipment
    
    
    (1,787
    )
    
    
    (2,501
    )Net cash used in investing activities
    
    
    (60,879
    )
    
    
    (48,136
    )Financing activitiesProceeds from exercise of stock options
    
    
    3,261
    
    
    
    1,796Net cash provided by financing activities
    
    
    3,261
    
    
    
    1,796Net change in cash
    
    
    (5,474
    )
    
    
    5,606Cash at beginning of period
    
    
    6,865
    
    
    
    973Cash at end of period
    
    $
    1,391
    
    
    $
    6,579Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    16,246
    
    
    $
    15,488Interest
    
    
    2,765
    
    
    
    2,765
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##### Table of Contents



TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  4




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Stock Options
 Accounting for Stock Issued to Employees
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302005
    
    2004
    
    2005
    
    2004Net income  as reported
    
    $
    15,294
    
    
    $
    14,796
    
    
    $
    44,253
    
    
    $
    43,215Net income  pro forma
    
    $
    15,143
    
    
    $
    14,675
    
    
    $
    43,822
    
    
    $
    42,832Earnings per share  as reported:Basic
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    3.01
    
    
    $
    2.98Diluted
    
    $
    1.03
    
    
    $
    1.00
    
    
    $
    2.99
    
    
    $
    2.94Earnings per share  pro forma:Basic
    
    $
    1.03
    
    
    $
    1.01
    
    
    $
    2.99
    
    
    $
    2.95Diluted
    
    $
    1.02
    
    
    $
    0.99
    
    
    $
    2.96
    
    
    $
    2.91
  3. Consolidation
  4. Commitments And Contingencies
 Reinsurance
  5




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Insurance In Force, Dividend Restrictions, and Statutory Results
  September 30, 2005
    
    
    December 31, 2004Net risk
    
    $
    7,317,253
    
    
    $
    7,049,102Statutory capital and surplus
    
    $
    134,697
    
    
    $
    135,662Statutory contingency reserve
    
    
    427,155
    
    
    
    369,484Total
    
    $
    561,852
    
    
    $
    505,146Risk-to-capital ratio
    
    13.0 to 1
    
    
    
    14.0 to 1
  .
  6




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




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##### Table of Contents



7. Income Taxes
  8. Subsequent Events
  8




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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 Estimates
   Overview
  9




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10




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Consolidated Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30Favorable/
    
    
    
    
    
    
    
    
    
    
    Favorable/2005
    
    
    2004
    
    
    (Unfavorable)
    
    
    2005
    
    
    2004
    
    
    (Unfavorable)Earned premiums
    
    $
    44,128
    
    
    $
    35,819
    
    
    
    23.2
    %
    
    $
    124,026
    
    
    $
    103,814
    
    
    
    19.5
    %Net investment income
    
    
    5,896
    
    
    
    5,255
    
    
    
    12.2
    
    
    
    17,054
    
    
    
    14,439
    
    
    
    18.1Net realized investment
gains/(losses)
    
    
    (170
    )
    
    
    (142
    )
    
    
    (19.7
    )
    
    
    (124
    )
    
    
    416
    
    
    
    (129.8
    )Other income
    
    
    2
    
    
    
    5
    
    
    
    (60.0
    )
    
    
    13
    
    
    
    10
    
    
    
    30.0Total revenues
    
    
    49,856
    
    
    
    40,937
    
    
    
    21.8
    
    
    
    140,969
    
    
    
    118,679
    
    
    
    18.8Net losses and loss
adjustment expenses
    
    
    16,958
    
    
    
    9,234
    
    
    
    (83.6
    )
    
    
    44,876
    
    
    
    25,818
    
    
    
    (73.8
    )Interest expense on debt
    
    
    694
    
    
    
    693
    
    
    
    (0.1
    )
    
    
    2,080
    
    
    
    2,079
    
    
    
    Amortization of deferred
policy acquisition costs
    
    
    3,714
    
    
    
    3,670
    
    
    
    (1.2
    )
    
    
    11,066
    
    
    
    10,305
    
    
    
    (7.4
    )Other operating expenses
(net of acquisition costs
deferred)
    
    
    7,494
    
    
    
    6,699
    
    
    
    (11.9
    )
    
    
    21,728
    
    
    
    19,768
    
    
    
    (9.9
    )Income before income taxes
    
    
    20,996
    
    
    
    20,641
    
    
    
    1.7
    
    
    
    61,219
    
    
    
    60,709
    
    
    
    0.8Income taxes
    
    
    5,702
    
    
    
    5,845
    
    
    
    2.4
    
    
    
    16,966
    
    
    
    17,494
    
    
    
    3.0Net income
    
    $
    15,294
    
    
    $
    14,796
    
    
    
    3.4
    %
    
    $
    44,253
    
    
    $
    43,215
    
    
    
    2.4
    %Diluted earnings per share
    
    $
    1.03
    
    
    $
    1.00
    
    
    
    3.0
    %
    
    $
    2.99
    
    
    $
    2.94
    
    
    
    1.7
    %
  11




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Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
  Production and In Force
    12




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2005
    
    2004Flow business
    
    
    6.0
    %
    
    
    4.9
    %Structured bulk transactions
    
    
    17.1
    %
    
    
    8.2
    %Total
    
    
    9.5
    %
    
    
    5.5
    %
   13




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2005
    
    
    2004Primary insurance
    
    $
    29,820
    
    
    $
    28,811Modified Pool insurance
    
    
    13,406
    
    
    
    7,010Total
    
    $
    43,226
    
    
    $
    35,821
    
    
    The strength of the borrower as measured by a variety of factors including the
borrowers housing and total debt ratios, FICO credit score and employment status
    
    The attributes of loans insured including LTV ratio, purpose of the loan, type of
loan instrument, level of loan documentation and type of underlying property
securing the loan
    
    The seasoning of the loans insured
    
    The economic conditions of the geographic regions of the underlying properties
subject to mortgage insurance
    
    The quality, integrity and loan underwriting and servicing performance of lenders
from which we receive loans to insure.
 14




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2005
    
    2004Primary Insurance:FICO credit score distribution:Credit score less than 575
    
    
    0.9
    %
    
    
    1.1
    %Credit score between 575 and 619
    
    
    4.4
    %
    
    
    4.7
    %Credit score greater than 619
    
    
    94.7
    %
    
    
    94.2
    %LTV:95.01% and above
    
    
    14.2
    %
    
    
    11.9
    %90.01% to 95.00%
    
    
    42.0
    %
    
    
    42.6
    %90.00% and below
    
    
    43.8
    %
    
    
    45.5
    %Loan Type:Fixed
    
    
    73.4
    %
    
    
    77.5
    %ARM (positive amortization)
    
    
    23.3
    %
    
    
    22.2
    %ARM (potential negative amortization)
    
    
    3.3
    %
    
    
    0.3
    %ARM (scheduled amortization)
    
    
    0.0
    %
    
    
    0.0
    %Other
    
    
    0.0
    %
    
    
    0.0
    %Modified Pool Insurance:FICO credit score distribution:Credit score less than 575
    
    
    0.2
    %
    
    
    0.5
    %Credit score between 575 and 619
    
    
    1.2
    %
    
    
    2.3
    %Credit score greater than 619
    
    
    98.6
    %
    
    
    97.2
    %LTV:95.01% and above
    
    
    0.0
    %
    
    
    0.0
    %90.01% to 95.00%
    
    
    0.6
    %
    
    
    0.4
    %90.00% and below
    
    
    99.4
    %
    
    
    99.6
    %Loan Type:Fixed
    
    
    43.2
    %
    
    
    61.4
    %ARM (positive amortization)
    
    
    56.8
    %
    
    
    38.6
    %ARM (potential negative amortization)
    
    
    0.0
    %
    
    
    0.0
    %ARM (scheduled amortization)
    
    
    0.0
    %
    
    
    0.0
    %Other
    
    
    0.0
    %
    
    
    0.0
    %
 15




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2005
    
    2004Primary insurance
    
    
    9.2
    %
    
    
    6.7
    %Modified Pool insurance
    
    
    66.5
    %
    
    
    50.5
    %Total
    
    
    27.0
    %
    
    
    15.2
    %
  Revenues
   16




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##### Table of Contents



2005
    
    2004Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    19.3
    %
    
    
    20.1
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    17.8
    %
    
    
    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)
    
    
    37.1
    %
    
    
    36.8
    %
    17




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##### Table of Contents



Losses and Expenses
  2005
    
    
    2004Primary insurance
    
    $
    11,980
    
    
    $
    6,547Modified Pool insurance
    
    
    1,475
    
    
    
    733Total
    
    $
    13,455
    
    
    $
    7,280
  18




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2005
    
    
    2004Primary insurance:Reserves for reported defaults
    
    $
    35,206
    
    
    $
    26,432Reserves for defaults incurred but not reported
    
    
    4,646
    
    
    
    3,544Total Primary insurance
    
    
    39,852
    
    
    
    29,976Modified Pool insurance:Reserves for reported defaults
    
    
    1,305
    
    
    
    2,266Reserves for defaults incurred but not reported
    
    
    563
    
    
    
    206Total Modified Pool insurance
    
    
    1,868
    
    
    
    2,472Reserve for loss adjustment expenses
    
    
    103
    
    
    
    99Total reserves for losses and loss adjustment expenses
    
    $
    41,823
    
    
    $
    32,547
  2005
    
    2004Primary insurance
    
    
    4,312
    
    
    
    3,902Modified Pool insurance:With deductibles
    
    
    709
    
    
    
    197Without deductibles
    
    
    632
    
    
    
    909Total Modified Pool insurance
    
    
    1,341
    
    
    
    1,106Total
    
    
    5,653
    
    
    
    5,008Total excluding defaults on
loans with deductibles
    
    
    4,944
    
    
    
    4,811
  20




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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
  21




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Production
    Revenues
   22




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##### Table of Contents



2005
    
    2004Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    19.6
    %
    
    
    20.1
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    18.1
    %
    
    
    18.1
    %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
    %
    
    
    36.9
    %
     23




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##### Table of Contents



Losses and Expenses
  2005
    
    
    2004Primary insurance
    
    $
    32,810
    
    
    $
    18,558Modified Pool insurance
    
    
    3,595
    
    
    
    1,447Total
    
    $
    36,405
    
    
    $
    20,005
      24




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##### Table of Contents



Significant Customers
  Financial Position
  Deferred Policy Acquisition Costs
  25




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Balance  beginning of period
    
    $
    33,082
    
    
    $
    31,553
    
    
    $
    32,453
    
    
    $
    29,363Costs capitalized
    
    
    3,964
    
    
    
    4,294
    
    
    
    11,945
    
    
    
    13,119Amortization  normal
    
    
    (3,296
    )
    
    
    (3,040
    )
    
    
    (9,873
    )
    
    
    (9,166
    )Amortization  dynamic
adjustment
    
    
    (418
    )
    
    
    (630
    )
    
    
    (1,193
    )
    
    
    (1,139
    )Total amortization
    
    
    (3,714
    )
    
    
    (3,670
    )
    
    
    (11,066
    )
    
    
    (10,305
    )Balance  end of period
    
    $
    33,332
    
    
    $
    32,177
    
    
    $
    33,332
    
    
    $
    32,177
  Prepaid Federal Income Taxes and Deferred Income Taxes
  26




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##### Table of Contents



Reserve for Losses and Loss Adjustment Expenses
    27




---



##### Table of Contents



September 30
    
    December 312005
    
    2004Total business:Number of insured loans in force
    
    
    297,400
    
    
    
    266,574Number of loans in default
    
    
    5,653
    
    
    
    5,445Percentage of loans in default
(default rate)
    
    
    1.90
    %
    
    
    2.04
    %Primary insurance:Number of insured loans in force
    
    
    219,159
    
    
    
    218,011Number of loans in default
    
    
    4,312
    
    
    
    4,203Percentage of loans in default
    
    
    1.97
    %
    
    
    1.93
    %Modified Pool insurance:Number of insured loans in force
    
    
    78,241
    
    
    
    48,563Number of loans in default
    
    
    1,341
    
    
    
    1,242With deductibles
    
    
    709
    
    
    
    410Without deductibles
    
    
    632
    
    
    
    832Percentage of loans in default*
    
    
    1.71
    %
    
    
    2.56
    %Alt-A business**:Number of insured loans in force
    
    
    65,695
    
    
    
    39,047Number of loans in default
    
    
    1,122
    
    
    
    988Percentage of loans in default
    
    
    1.71
    %
    
    
    2.53
    %
 
 *
    
    Calculated based on total number of loans in default**
    
    Alt-A is included in Primary and Modified Pool insurance amounts above. As of
September 30, 2005 we changed our Alt-A classification to be based on the individual loan
characteristics, regardless of whether it was written through the flow or structured bulk
channel. Prior year amounts reflect the revised Alt-A classification. 28




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##### Table of Contents



Investment Portfolio
 Portfolio Description
  29




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##### Table of Contents



September 30, 2005
    
    
    December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    13,422
    
    
    
    2.5
    %
    
    $
    12,728
    
    
    
    2.7
    %State and municipal bonds
    
    
    475,970
    
    
    
    88.4
    
    
    
    415,250
    
    
    
    86.4Corporate bonds
    
    
    23,100
    
    
    
    4.3
    
    
    
    26,063
    
    
    
    5.4Mortgage-backed bonds
    
    
    63
    
    
    
    0.0
    
    
    
    80
    
    
    
    0.0Total fixed maturities
    
    
    512,555
    
    
    
    95.2
    
    
    
    454,121
    
    
    
    94.5Equity securities
    
    
    9,715
    
    
    
    1.8
    
    
    
    10,272
    
    
    
    2.2Total
available-for-sale
securities
    
    
    522,270
    
    
    
    97.0
    
    
    
    464,393
    
    
    
    96.7Short-term investments
    
    
    16,027
    
    
    
    3.0
    
    
    
    16,095
    
    
    
    3.3$
    538,297
    
    
    
    100.0
    %
    
    $
    480,488
    
    
    
    100.0
    %
   Carrying
    
    % of TotalName of Creditor
    
    Value
    
    Invested AssetsAtlanta, Georgia Airport
    
    $6,873
    
    1.28%Federal National Mortgage Association
    
    5,483
    
    1.02AAM/ZAZOVE Institutional Income Fund
    
    5,240
    
    0.97Port of Seattle, Washington
    
    4,631
    
    0.86Denver, Colorado City and County Airport
    
    4,253
    
    0.79Cook County, Illinois
    
    4,238
    
    0.79Charlotte, North Carolina Airport
    
    4,198
    
    0.78State of Nevada Water Pollution Control
    
    4,073
    
    0.76University of Texas
    
    4,038
    
    0.75Chicago, Illinois OHare International
Airport
    
    3,968
    
    0.74
  30




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Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    13,460
    
    
    $
    72
    
    
    $
    (110
    )
    
    $
    13,422State and municipal bonds
    
    
    460,881
    
    
    
    15,904
    
    
    
    (815
    )
    
    
    475,970Corporate bonds
    
    
    20,940
    
    
    
    2,310
    
    
    
    (150
    )
    
    
    23,100Mortgage-backed bonds
    
    
    60
    
    
    
    3
    
    
    
    
    
    
    
    63Subtotal, fixed maturities
    
    
    495,341
    
    
    
    18,289
    
    
    
    (1,075
    )
    
    
    512,555Equity securities
    
    
    8,004
    
    
    
    1,864
    
    
    
    (153
    )
    
    
    9,715Total securities
    
    $
    503,345
    
    
    $
    20,153
    
    
    $
    (1,228
    )
    
    $
    522,270
  31




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##### Table of Contents



Credit Risk
  September 30, 2005
    
    
    December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed
Maturities:U.S. treasury and agency bonds
    
    $
    13,422
    
    
    
    2.6
    %
    
    $
    12,808
    
    
    
    2.8
    %AAA
    
    
    394,149
    
    
    
    76.9
    
    
    
    332,929
    
    
    
    73.3AA
    
    
    55,285
    
    
    
    10.8
    
    
    
    53,285
    
    
    
    11.7A
    
    
    30,120
    
    
    
    5.9
    
    
    
    33,530
    
    
    
    7.4BBB
    
    
    9,827
    
    
    
    1.9
    
    
    
    12,680
    
    
    
    2.8BB
    
    
    828
    
    
    
    0.2
    
    
    
    254
    
    
    
    0.1B
    
    
    
    
    
    
    0.0
    
    
    
    205
    
    
    
    0.0CCC and lower
    
    
    230
    
    
    
    0.0
    
    
    
    215
    
    
    
    0.1Not rated
    
    
    8,694
    
    
    
    1.7
    
    
    
    8,215
    
    
    
    1.8Total fixed maturities
    
    $
    512,555
    
    
    
    100.0
    %
    
    $
    454,121
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,532
    
    
    
    15.8
    %
    
    $
    1,519
    
    
    
    14.8
    %A
    
    
    1,828
    
    
    
    18.8
    
    
    
    2,165
    
    
    
    21.1BBB
    
    
    1,132
    
    
    
    11.6
    
    
    
    1,155
    
    
    
    11.2BB
    
    
    175
    
    
    
    1.8
    
    
    
    
    
    
    
    0.0Not rated
    
    
    485
    
    
    
    5.0
    
    
    
    525
    
    
    
    5.15,152
    
    
    
    53.0
    
    
    
    5,364
    
    
    
    52.2Common stocks
    
    
    4,563
    
    
    
    47.0
    
    
    
    4,908
    
    
    
    47.8Total equities
    
    $
    9,715
    
    
    
    100.0
    %
    
    $
    10,272
    
    
    
    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
  32




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##### Table of Contents



Realized Losses and Impairments
  
    
    An approximate $75,000 write-down on preferred stock of a U.S. automobile
manufacturer for which the fair value had fluctuated to approximately 76% of cost
for the previous nine months. The impairment was primarily the result of weak
operating results for 2005 and recent rating agency downgrades. The circumstances
surrounding this impairment caused us to review a bond holding of an affiliated
finance company of the same U.S. automobile manufacturer. The fair value was
approximately 91% of the book value of this security and had been in an unrealized
loss position continuously for the previous nine months. We wrote down this
security by approximately $60,000 to a value that
 33




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##### Table of Contents



approximated its market value. No other securities in our portfolio were impacted
by these circumstances.
  
    
    An approximate $67,000 write-down on common stock of a pharmaceutical company
for which the fair value had fluctuated to approximately 86% of cost for the
previous seven to nine months. We sold this security in the fourth quarter of
2004 and realized a small gain. The circumstances surrounding this impairment did
not impact other securities in our portfolio.
    
    An approximate $53,000 write-down on preferred stock of an international
airline for which the value had fluctuated below 80% of amortized cost for over a
year. We had previously written down this security by approximately $139,000 in
prior quarters. The additional write-down in the third quarter of 2004 resulted
from our assessment that the security was other than temporarily impaired because
of a reduction in credit quality by rating agencies. We sold this security in the
fourth quarter of 2004 at an amount that approximated its carrying value after the
write-down. The circumstances surrounding this impairment did not impact other
securities in our portfolio.
 Liquidity and Capital Resources
    34




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35




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##### 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
 36




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##### Table of Contents



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;§
    
    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 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 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.
 37




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##### Table of Contents



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 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
third 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 
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3. Defaults Upon Senior Securities 
 
 Item 4. Submission of Matters to a Vote of Security Holders 
 
 Item 5. Other Information 
 
 Item 6. Exhibits 
 38




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##### Table of Contents



SIGNATURE
  TRIAD GUARANTY INC.Date: November 7, 2005/s/ Kenneth S. Dwyer

Kenneth S. DwyerVice President and Chief Accounting Officer
 39




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.32
    
    
    Employment Agreement between the Registrant and Mark K.
Tonnesen (filed as an exhibit to the Registrants Form 8-K
dated September 16, 2005 and incorporated by reference
herein).31(i)
    
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31(ii)
    
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 40