##### 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 June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-22342
 
 Triad Guaranty Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    56-1838519(I.R.S. Employer
Identification No.)101 South Stratford Road 
Winston-Salem, North Carolina(Address of principal executive offices)
    
    27104(Zip Code)
 (336) 723-1282  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 4T.
    
    Controls and Procedures
    
    
    42Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    43Item 1A.
    
    Risk Factors
    
    
    43Item 6.
    
    Exhibits
    
    
    44Signature
    
    
    
    
    45Exhibit Index
    
    
    
    
    46EX-31.1EX-32.1




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(dollars in thousands, except per share data)
    
    2009
    
    
    2008(unaudited)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $806,383 and $844,964)
    
    $
    847,809
    
    
    $
    854,186Equity securities (cost: $17 and $566)
    
    
    31
    
    
    
    583Short-term investments
    
    
    3,800
    
    
    
    40,653Total invested assets
    
    
    851,640
    
    
    
    895,422Cash and cash equivalents
    
    
    31,600
    
    
    
    39,940Real estate acquired in claim settlement
    
    
    
    
    
    
    713Accrued investment income
    
    
    10,115
    
    
    
    10,515Property and equipment
    
    
    6,515
    
    
    
    7,747Reinsurance recoverable, net
    
    
    234,248
    
    
    
    150,848Other assets
    
    
    41,020
    
    
    
    25,349Total assets
    
    $
    1,175,138
    
    
    $
    1,130,534LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    1,591,207
    
    
    $
    1,187,840Unearned premiums
    
    
    14,890
    
    
    
    15,863Amounts payable to reinsurers
    
    
    115
    
    
    
    719Long-term debt
    
    
    34,535
    
    
    
    34,529Deferred payment obligation
    
    
    27,020
    
    
    
    Accrued interest
    
    
    2,476
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    34,585
    
    
    
    26,974Total liabilities
    
    
    1,704,828
    
    
    
    1,267,200Commitments and contingencies  Note 5Stockholders deficit:Preferred stock, par value $0.01 per share  authorized 1,000,000
shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share  authorized 32,000,000
shares; issued and outstanding 15,215,378 shares at June 30, 2009
and 15,161,259 shares at December 31, 2008
    
    
    152
    
    
    
    151Additional paid-in capital
    
    
    112,998
    
    
    
    112,629Accumulated other comprehensive income, net of income tax liability
of $14,680 at June 30, 2009 and $3,265 at December 31, 2008
    
    
    27,262
    
    
    
    6,063Accumulated deficit
    
    
    (670,102
    )
    
    
    (255,509
    )Deficit in assets
    
    
    (529,690
    )
    
    
    (136,666
    )Total liabilities and stockholders deficit
    
    $
    1,175,138
    
    
    $
    1,130,534
  1




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##### Table of Contents



TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:Premiums written:Direct
    
    $
    73,821
    
    
    $
    84,561
    
    
    $
    129,444
    
    
    $
    173,946Ceded
    
    
    (10,027
    )
    
    
    (15,480
    )
    
    
    (21,157
    )
    
    
    (31,475
    )Net premiums written
    
    
    63,794
    
    
    
    69,081
    
    
    
    108,287
    
    
    
    142,471Change in unearned premiums
    
    
    1,039
    
    
    
    784
    
    
    
    904
    
    
    
    (542
    )Earned premiums
    
    
    64,833
    
    
    
    69,865
    
    
    
    109,191
    
    
    
    141,929Net investment income
    
    
    10,859
    
    
    
    9,175
    
    
    
    22,051
    
    
    
    18,722Net realized investment gains (losses)
    
    
    2,017
    
    
    
    (3,799
    )
    
    
    (2,548
    )
    
    
    (1,096
    )Other income
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    477,711
    
    
    
    75,243
    
    
    
    128,698
    
    
    
    159,559Losses and expenses:Net losses and loss adjustment expenses
    
    
    431,368
    
    
    
    292,749
    
    
    
    532,945
    
    
    
    514,008Net change in premium deficiency reserve
    
    
    
    
    
    
    (15,000
    )
    
    
    
    
    
    
    Interest expense
    
    
    1,895
    
    
    
    696
    
    
    
    2,589
    
    
    
    2,172Policy acquisition costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,416Other operating expenses (net of acquisition
costs deferred)
    
    
    8,680
    
    
    
    27,238
    
    
    
    18,091
    
    
    
    41,344441,943
    
    
    
    305,683
    
    
    
    553,625
    
    
    
    596,940Loss before income tax benefit
    
    
    (364,232
    )
    
    
    (230,440
    )
    
    
    (424,927
    )
    
    
    (437,381
    )Income tax benefit:Current
    
    
    1,081
    
    
    
    2
    
    
    
    1,081
    
    
    
    (2
    )Deferred
    
    
    (5,894
    )
    
    
    (31,631
    )
    
    
    (11,415
    )
    
    
    (88,554
    )(4,813
    )
    
    
    (31,629
    )
    
    
    (10,334
    )
    
    
    (88,556
    )Net loss
    
    $
    (359,419
    )
    
    $
    (198,811
    )
    
    $
    (414,593
    )
    
    $
    (348,825
    )Loss per common and common equivalent share:Basic
    
    $
    (23.91
    )
    
    $
    (13.36
    )
    
    $
    (27.65
    )
    
    $
    (23.45
    )Diluted
    
    $
    (23.91
    )
    
    $
    (13.36
    )
    
    $
    (27.65
    )
    
    $
    (23.45
    )Shares used in computing loss per common and
common equivalent share:Basic
    
    
    15,031,394
    
    
    
    14,878,662
    
    
    
    14,994,535
    
    
    
    14,873,636Diluted
    
    
    15,031,394
    
    
    
    14,878,662
    
    
    
    14,994,535
    
    
    
    14,873,636
 .
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW  (unaudited)
 Six Months EndedJune 30,(dollars in thousands)
    
    2009
    
    
    2008Operating activitiesNet loss
    
    $
    (414,593
    )
    
    $
    (348,825
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    402,394
    
    
    
    457,890Accrued expenses and other liabilities
    
    
    7,611
    
    
    
    9,904Deferred payment obligation
    
    
    27,020
    
    
    
    Income taxes recoverable
    
    
    (6,576
    )
    
    
    Reinsurance, net
    
    
    (84,004
    )
    
    
    (56,026
    )Accrued investment (loss) income
    
    
    400
    
    
    
    (586
    )Policy acquisition costs deferred
    
    
    
    
    
    
    (3,173
    )Policy acquisition costs
    
    
    
    
    
    
    39,416Net realized investment losses
    
    
    2,548
    
    
    
    1,096Provision for depreciation
    
    
    1,266
    
    
    
    2,338Accretion of discount on investments
    
    
    704
    
    
    
    793Deferred income taxes
    
    
    (11,415
    )
    
    
    (88,554
    )Prepaid federal income taxes
    
    
    
    
    
    
    52,825Real estate acquired in claim settlement, net of write-downs
    
    
    713
    
    
    
    4,658Accrued interest
    
    
    1,201
    
    
    
    (80
    )Other assets
    
    
    577
    
    
    
    4,104Other operating activities
    
    
    514
    
    
    
    2,433Net cash (used in) provided by operating activities
    
    
    (71,640
    )
    
    
    78,213Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (128,623
    )
    
    
    (584,572
    )Sales  fixed maturities
    
    
    120,024
    
    
    
    430,107Maturities  fixed maturities
    
    
    34,631
    
    
    
    20,333Sales  equities
    
    
    533
    
    
    
    266Net change in short-term investments
    
    
    36,769
    
    
    
    31,655Property and equipment
    
    
    (34
    )
    
    
    (1,080
    )Net cash provided by (used in) investing activities
    
    
    63,300
    
    
    
    (103,291
    )Financing activitiesRepayment of revolving credit facility
    
    
    
    
    
    
    (80,000
    )Net cash used in financing activities
    
    
    
    
    
    
    (80,000
    )Foreign currency translation adjustment on cash and cash equivalents
    
    
    
    
    
    
    (64
    )Net change in cash and cash equivalents
    
    
    (8,340
    )
    
    
    (105,142
    )Cash and cash equivalents at beginning of period
    
    
    39,940
    
    
    
    124,811Cash and cash equivalents at end of period
    
    $
    31,600
    
    
    $
    19,669Supplemental schedule of cash flow informationCash paid (received) during the period for:Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds
    
    $
    7,736
    
    
    $
    (410
    )Interest
    
    $
    1,383
    
    
    $
    2,248
  3




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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
 1. The Company
  2. Going Concern
  4




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3. Accounting Policies and Basis of Presentation
 Basis of Presentation
  5




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Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 Amendments to FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
 Accounting for Transfers of Financial Assets Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
 Subsequent Events
 6




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Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Values of Financial
Instruments, Interim Financial Reporting
 Recognition and
Presentation of Other-Than-Temporary Impairments
 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 4. Consolidation
  7




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5. Commitments and Contingencies
 Reinsurance
   Insurance In Force, Dividend Restrictions, and Statutory Results
  June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008Net risk
    
    $
    10,049,236
    
    
    $
    11,019,036
    
    
    $
    11,721,202Statutory capital and surplus
    
    $
    178,580
    
    
    $
    88,027
    
    
    $
    192,096Statutory contingency reserve
    
    
    
    
    
    
    
    
    
    
    82,615Total
    
    $
    178,580
    
    
    $
    88,027
    
    
    $
    274,711Risk-to-capital ratio
    
    56.3 to 1
    
    
    125.2 to 1
    
    
    42.7 to 1
   8




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Loss Reserves
  Litigation
    9




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##### Table of Contents



6. Investments
 Available-for-sale Securities
 Fair Value Measurements
  As of June 30, 2009Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    5,415
    
    
    $
    308
    
    
    $
    
    
    
    $
    5,723State, municipal, and other
government bonds
    
    
    132,917
    
    
    
    6,450
    
    
    
    
    
    
    
    139,367Corporate bonds
    
    
    504,575
    
    
    
    27,573
    
    
    
    
    
    
    
    532,148Asset-backed bonds
    
    
    49,345
    
    
    
    2,703
    
    
    
    
    
    
    
    52,048Residential mortgage-backed bonds
    
    
    114,131
    
    
    
    4,392
    
    
    
    
    
    
    
    118,523Subtotal, fixed maturities
    
    
    806,383
    
    
    
    41,426
    
    
    
    
    
    
    
    847,809Equity securities
    
    
    17
    
    
    
    14
    
    
    
    
    
    
    
    31Short term investments
    
    
    3,796
    
    
    
    4
    
    
    
    
    
    
    
    3,800Total securities
    
    $
    810,196
    
    
    $
    41,444
    
    
    $
    
    
    
    $
    851,640
 10




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As of December 31, 2008Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    7,646
    
    
    $
    350
    
    
    $
    
    
    
    $
    7,996State, municipal, and other
government bonds
    
    
    168,694
    
    
    
    2,872
    
    
    
    
    
    
    
    171,566Corporate bonds
    
    
    479,563
    
    
    
    2,633
    
    
    
    
    
    
    
    482,196Asset-backed bonds
    
    
    65,667
    
    
    
    82
    
    
    
    
    
    
    
    65,749Residential mortgage-backed bonds
    
    
    123,394
    
    
    
    3,285
    
    
    
    
    
    
    
    126,679Subtotal, fixed maturities
    
    
    844,964
    
    
    
    9,222
    
    
    
    
    
    
    
    854,186Equity securities
    
    
    566
    
    
    
    17
    
    
    
    
    
    
    
    583Short term investments
    
    
    40,565
    
    
    
    88
    
    
    
    
    
    
    
    40,653Total securities
    
    $
    886,095
    
    
    $
    9,327
    
    
    $
    
    
    
    $
    895,422
  Available-for-SaleAmortized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    ValueMaturity:One year or less
    
    $
    86,254
    
    
    $
    89,539After one year through five years
    
    
    452,465
    
    
    
    475,568After five years through ten years
    
    
    79,686
    
    
    
    84,862After ten years
    
    
    187,978
    
    
    
    197,840Total
    
    $
    806,383
    
    
    $
    847,809
  Realized Gains (Losses) Related to Investments
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Securities available-for-sale:Fixed maturity securities:Gross realized gains
    
    $
    1,844
    
    
    $
    5,103
    
    
    $
    2,682
    
    
    $
    5,879Gross realized losses
    
    
    (47
    )
    
    
    (8,886
    )
    
    
    (5,352
    )
    
    
    (9,820
    )Equity securities:Gross realized gains
    
    
    58
    
    
    
    
    
    
    
    62
    
    
    
    22Gross realized losses
    
    
    
    
    
    
    (6
    )
    
    
    (83
    )
    
    
    (6
    )Foreign currency gross realized gains
    
    
    116
    
    
    
    (10
    )
    
    
    95
    
    
    
    2,827Other investment gains
    
    
    46
    
    
    
    
    
    
    
    48
    
    
    
    2Net realized losses
    
    $
    2,017
    
    
    $
    (3,799
    )
    
    $
    (2,548
    )
    
    $
    (1,096
    )
  11




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7. Fair Value Measurement
 Fair Value of Financial Instruments
  June 30, 2009
    
    December 31, 2008Fair
    
    
    
    
    
    Fair(dollars in thousands)
    
    Carrying Value
    
    Value
    
    Carrying Value
    
    ValueFinancial AssetsFixed maturity securities
available-for-sale
    
    $
    847,809
    
    
    $
    847,809
    
    
    $
    854,186
    
    
    $
    854,186Equity securities available-for-sale
    
    
    31
    
    
    
    31
    
    
    
    583
    
    
    
    583Financial LiabilitiesLong-term debt
    
    
    34,535
    
    
    
    16,256
    
    
    
    34,529
    
    
    
    10,124
 Valuation Methodologies and Associated Inputs
 Investments
  12




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Cash and Cash Equivalents
  Long-Term Debt
  Fair Value of Investments
   Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.Level 2:
    
    Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the full term of the
asset or liability.Level 3:
    
    Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e., supported with
little or no market activity).
  13




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Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(dollars in thousands)
    
    June 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsSecurities
available-for-saleFixed maturities
    
    $
    847,809
    
    
    $
    
    
    
    $
    845,972
    
    
    $
    1,837Equity securities
    
    
    31
    
    
    
    31
    
    
    
    
    
    
    
    Total
    
    $
    847,840
    
    
    $
    31
    
    
    $
    845,972
    
    
    $
    1,837
 Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(dollars in thousands)
    
    December 31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsSecurities
available-for-saleFixed maturities
    
    $
    854,186
    
    
    $
    
    
    
    $
    851,651
    
    
    $
    2,535Equity securities
    
    
    583
    
    
    
    583
    
    
    
    
    
    
    
    Total
    
    $
    854,769
    
    
    $
    583
    
    
    $
    851,651
    
    
    $
    2,535
  Fair Value Measurement Using SignificantUnobservable Inputs (Level 3)Certain Bonds in Fixed Maturities AFS PortfolioThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Beginning balance
    
    $
    1,757
    
    
    $
    3,345
    
    
    $
    2,535
    
    
    $
    7,402Total gains and losses (realized and unrealized):Included in operations
    
    
    (43
    )
    
    
    1
    
    
    
    (331
    )
    
    
    (130
    )Included in other comprehensive income
    
    
    133
    
    
    
    (300
    )
    
    
    50
    
    
    
    (343
    )Purchases, issuances and settlements
    
    
    (10
    )
    
    
    29,265
    
    
    
    (417
    )
    
    
    25,382Transfers in and/or out of Level 3
    
    
    
    
    
    
    897
    
    
    
    
    
    
    
    897Ending balance
    
    $
    1,837
    
    
    $
    33,208
    
    
    $
    1,837
    
    
    $
    33,208The amount of total gains and losses for the period included in
operations attributable to the change in unrealized gains
or losses relating to assets still held at the reporting date
    
    $
    90
    
    
    $
    (284
    )
    
    $
    (281
    )
    
    $
    (347
    )
 14




---



##### Table of Contents



8. Earnings (Loss) Per Share (EPS)
  9. Comprehensive Income (Loss)
  10. Income Taxes
  11. Exit Costs
   15




---



##### Table of Contents



12. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
  16




---



##### Table of Contents




    
    earned renewal premiums from the remaining insurance in force, net of:
 
    
    reinsurance premiums ceded, primarily for captive reinsurance, and
    
    refunds paid or accrued resulting from the
cancellation of insurance in force or for coverage anticipated to be
rescinded due to violations of certain provisions of a master policy;
and
 
    
    investment income.
   
    
    settled claims;
    
    changes in reserves for estimated future claim payments on loans that are
currently in default;
    
    general and administrative costs of servicing existing policies;
    
    other general business expenses;
    
    interest expense on deferred payment obligations (each, a DPO); and
    
    interest expense on long-term debt.
  
    
    the conditions of the housing, mortgage and capital markets that have a
direct impact on default rates, mitigation efforts, cure rates and ultimately
the amount of claims settled;
    
    the overall general state of the economy and job market;
    
    persistency levels on our remaining insurance in force;
    
    operating efficiencies; and
    
    the level of investment yield, including realized gains and losses, on our
investment portfolio.
  17




---



##### Table of Contents



Recent Events Affecting our Business
  
    
    Required Triad to submit a corrective plan to the Department;
    
    Prohibits all stockholder dividends from Triad to its parent company without
the prior approval of the Department;
    
    Prohibits interest and principal payments on Triads surplus note to its
parent company without the prior approval of the Department;
    
    Restricts Triad from making any payments or entering into any transaction
that involves the transfer of assets to, or liabilities from, any affiliated
parties without the prior approval of the Department;
    
    Requires Triad to obtain prior written approval from the Department before
entering into certain transactions with unaffiliated parties;
    
    Requires Triad to meet with the Department in person or via teleconference
as necessary; and
    
    Requires Triad to furnish to the Department certain reports, agreements,
actuarial opinions and information on an ongoing basis at specified times.
    
    
    Effective June 1, 2009, all valid claims under Triads mortgage guaranty insurance
policies will be settled 60% in cash and 40% by recording a DPO;
    
    At March 31, 2009, Triad was required to adjust surplus and reserves reflecting the
impact of the Corrective Order on future settled claims;
    
    The DPO will accrue a carrying charge based on the investment yield earned by Triads
investment portfolio;
 18




---



##### Table of Contents




    
    Triad will establish an escrow account at least equal to the DPO balance and any
associated carrying charges;
    
    Triad will require that any risk or obligation of any captive reinsurer shall be paid in
full, and will deposit any excess reinsurance recovery above the 60% cash payment into an
escrow account;
    
    Payment of the carrying charge and the DPO will be subject to Triads future financial
performance and will require the approval of the Department;
    
    Procedures to account for the impact of the Corrective Order in the financial statements
prepared in accordance with SAP;
    
    Upon payment of a claim under these provisions, Triad shall be deemed to have fully
satisfied its obligations under the respective insurance policy;
    
    Other restrictions and requirements affecting the payment and transferability of the
DPOs and associated carrying charge; and
    
    Certain reporting requirements.
     19




---



##### Table of Contents



Consolidated Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands, except
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    %per share data)
    
    2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeEarned premiums
    
    $
    64,833
    
    
    $
    69,865
    
    
    
    (7
    )
    
    $
    109,191
    
    
    $
    141,929
    
    
    
    (23
    )Net losses and loss
adjustment expenses
    
    
    431,368
    
    
    
    292,749
    
    
    
    47
    
    
    
    532,945
    
    
    
    514,008
    
    
    
    4Net loss
    
    
    (359,419
    )
    
    
    (198,811
    )
    
    
    81
    
    
    
    (414,593
    )
    
    
    (348,825
    )
    
    
    19Diluted loss per share
    
    
    (23.91
    )
    
    
    (13.36
    )
    
    
    79
    
    
    
    (27.65
    )
    
    
    (23.45
    )
    
    
    18
  20




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##### Table of Contents




    
    Loans on properties in California, Florida, Arizona, and Nevada (which we refer
to collectively as distressed markets)  At June 30, 2009, the default rate for
the distressed markets was 32.2% compared to 11.1% for the remaining portfolio and
defaults in the distressed markets comprised 58.5% of the gross risk in default
while only comprising 34.2 % of total risk in force.
    
    Policies originated in 2006 and 2007  At June 30, 2009, the default rate for
these policy years was 22.3% compared to 11.1% for the other policy years and
defaults in these policy years comprised 72.9% of the gross risk in default while
only comprising 57.1% of total risk in force.
     Production
  21




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##### Table of Contents



Insurance and Risk in Force
  June 30,(dollars in millions)
    
    2009
    
    
    2008
    
    
    % ChangePrimary insurance:Primary flow insurance
    
    $
    35,969
    
    
    $
    41,646
    
    
    
    (14
    )Structured bulk insurance
    
    
    3,579
    
    
    
    4,248
    
    
    
    (16
    )Total Primary insurance
    
    
    39,548
    
    
    
    45,894
    
    
    
    (14
    )Modified Pool insurance
    
    
    17,965
    
    
    
    20,439
    
    
    
    (12
    )Total insurance
    
    $
    57,513
    
    
    $
    66,333
    
    
    
    (13
    )
   
    
    The percentage of business defined as non-prime credit quality;
    
    The percentage of Alt-A business;
    
    The percentage of business with a loan-to-value (LTV) greater than 95%;
    
    The percentage of interest only loans and adjustable rate mortgages
(ARMs), particularly ARMs with potential negative amortization;
    
    The percentage of condominium property types;
    
    The percentage of non-primary residence occupancy status;
    
    The percentage of loans in excess of $250,000;
    
    The concentration of risk in distressed market states; and
    
    The presence of multiple risk factors on a single insured loan.
 22




---



##### Table of Contents



Risk in Force (1)
 Primary
    
    
    Modified PoolJune 30,
    
    
    June 30,(dollars in millions)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Gross Risk in Force
    
    $
    10,316
    
    
    $
    11,943
    
    
    $
    5,254
    
    
    $
    5,965Credit Quality:Prime
    
    
    76.8
    %
    
    
    75.6
    %
    
    
    28.4
    %
    
    
    27.8
    %Alt-A
    
    
    19.7
    
    
    
    20.9
    
    
    
    70.8
    
    
    
    71.4A-Minus
    
    
    3.1
    
    
    
    3.1
    
    
    
    0.7
    
    
    
    0.7Sub Prime
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %LTV:Greater than 95%
    
    
    25.1
    %
    
    
    25.1
    %
    
    
    
    %
    
    
    
    %90.01% to 95.00%
    
    
    32.8
    
    
    
    32.5
    
    
    
    0.2
    
    
    
    0.290.00% and below
    
    
    42.1
    
    
    
    42.4
    
    
    
    99.8
    
    
    
    99.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    67.5
    %
    
    
    66.2
    %
    
    
    26.8
    %
    
    
    26.2
    %Interest Only
    
    
    10.3
    
    
    
    10.4
    
    
    
    23.3
    
    
    
    23.3ARM (amortizing) fixed period 5 years or
greater
    
    
    8.4
    
    
    
    8.8
    
    
    
    31.1
    
    
    
    31.3ARM (amortizing) fixed period less than 5
years
    
    
    2.1
    
    
    
    2.2
    
    
    
    5.6
    
    
    
    5.7ARM (potential negative amortization)
    
    
    11.7
    
    
    
    12.4
    
    
    
    13.2
    
    
    
    13.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    11.0
    %
    
    
    10.6
    %
    
    
    9.8
    %
    
    
    9.5
    %Other (principally single-family detached)
    
    
    89.0
    
    
    
    89.4
    
    
    
    90.2
    
    
    
    90.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    87.6
    %
    
    
    87.7
    %
    
    
    73.1
    %
    
    
    73.5
    %Secondary home
    
    
    8.0
    
    
    
    7.9
    
    
    
    6.1
    
    
    
    6.1Non-owner occupied
    
    
    4.4
    
    
    
    4.4
    
    
    
    20.8
    
    
    
    20.4Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$0 - $50,000
    
    
    0.9
    %
    
    
    0.8
    %
    
    
    0.5
    %
    
    
    0.5
    %$51,000 - $100,000
    
    
    9.5
    
    
    
    9.3
    
    
    
    5.4
    
    
    
    5.3$100,001 - $250,000
    
    
    52.0
    
    
    
    51.8
    
    
    
    45.8
    
    
    
    45.4$250,001 - $500,000
    
    
    32.1
    
    
    
    32.2
    
    
    
    42.0
    
    
    
    42.2Over $500,000
    
    
    5.5
    
    
    
    5.9
    
    
    
    6.3
    
    
    
    6.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Market Status:Distressed market states (AZ, CA, FL, NV)
    
    
    26.8
    %
    
    
    27.2
    %
    
    
    48.6
    %
    
    
    48.8
    %Non-distressed market states
    
    
    73.2
    
    
    
    72.8
    
    
    
    51.4
    
    
    
    51.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Percentages represent distribution of gross risk in force on a per policy basis and do not account for
risk ceded to captive reinsurers or applicable stop-loss amounts and deductibles on Modified Pool
structured bulk transactions.  23




---



##### Table of Contents



June 30, 2009Primary
    
    
    Modified PoolGross Risk
    
    
    
    
    
    
    Gross Risk(dollars in millions)
    
    in Force *
    
    
    Percent
    
    
    in Force *
    
    
    PercentVintage Year2004 and before
    
    $
    2,205.7
    
    
    
    21.4
    
    
    $
    758.3
    
    
    
    14.42005
    
    
    1,303.2
    
    
    
    12.6
    
    
    
    1,795.2
    
    
    
    34.22006
    
    
    2,135.6
    
    
    
    20.7
    
    
    
    1,942.5
    
    
    
    37.02007
    
    
    4,050.5
    
    
    
    39.3
    
    
    
    757.4
    
    
    
    14.42008
    
    
    621.4
    
    
    
    6.0
    
    
    
    
    
    
    
    Total
    
    $
    10,316.4
    
    
    
    100.0
    
    
    $
    5,253.4
    
    
    
    100.0
 
 *
    
    Gross risk in force is on a per policy basis and does not account for risk ceded to captive reinsurers or
applicable stop-loss amounts and deductibles on Modified Pool structured bulk transactions.  24




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##### Table of Contents



Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeDirect premium written before
the impact of
refunds
    
    $
    75,631
    
    
    $
    87,129
    
    
    
    (13
    )
    
    $
    156,405
    
    
    $
    178,288
    
    
    
    (12
    )Less:Cash refunds primarily
related to
rescissions
    
    
    (10,701
    )
    
    
    (2,738
    )
    
    
    291
    
    
    
    (16,800
    )
    
    
    (4,167
    )
    
    
    303Change in refund
accruals primarily
related to rescissions
    
    
    8,891
    
    
    
    170
    
    
    
    5,130
    
    
    
    (10,161
    )
    
    
    (175
    )
    
    
    5,706Direct premium written
    
    
    73,821
    
    
    
    84,561
    
    
    
    (13
    )
    
    
    129,444
    
    
    
    173,946Ceded premium written
    
    
    (10,027
    )
    
    
    (15,480
    )
    
    
    (35
    )
    
    
    (21,157
    )
    
    
    (31,475
    )
    
    
    (33
    )Net premium written
    
    
    63,794
    
    
    
    69,081
    
    
    
    (8
    )
    
    
    108,287
    
    
    
    142,471
    
    
    
    (24
    )Change in unearned premiums
    
    
    1,039
    
    
    
    784
    
    
    
    33
    
    
    
    904
    
    
    
    (542
    )
    
    
    (267
    )Earned premiums
    
    $
    64,833
    
    
    $
    69,865
    
    
    
    (7
    )
    
    $
    109,191
    
    
    $
    141,929
    
    
    
    (23
    )Net investment income
    
    $
    10,859
    
    
    $
    9,175
    
    
    
    18
    
    
    $
    22,051
    
    
    $
    18,722
    
    
    
    18Net realized investment
(losses) gains
    
    $
    2,017
    
    
    $
    (3,799
    )
    
    
    (153
    )
    
    $
    (2,548
    )
    
    $
    (1,096
    )
    
    
    132Total revenues
    
    $
    77,711
    
    
    $
    75,243
    
    
    
    3
    
    
    $
    128,698
    
    
    $
    159,559
    
    
    
    (19
    )
   25




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##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeNet losses and loss
adjustment expenses:Net settled claims
    
    $
    149,863
    
    
    $
    68,263
    
    
    
    120
    
    
    $
    203,783
    
    
    $
    108,350
    
    
    
    88Net change in loss
reserves
    
    
    278,956
    
    
    
    218,568
    
    
    
    28
    
    
    
    318,584
    
    
    
    393,512
    
    
    
    (19
    )Loss adjustment
expenses
    
    
    2,549
    
    
    
    5,918
    
    
    
    (57
    )
    
    
    10,578
    
    
    
    12,146
    
    
    
    (13
    )Total
    
    
    431,368
    
    
    
    292,749
    
    
    
    47
    
    
    
    532,945
    
    
    
    514,008
    
    
    
    4Net change in premium
deficiency
    
    
    
    
    
    
    (15,000
    )
    
    
    (100
    )
    
    
    
    
    
    
    Policy acquisition costs
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    39,416
    
    
    
    (100
    )Other operating expenses
(net of acquisition
costs deferred)
    
    
    8,680
    
    
    
    27,238
    
    
    
    (68
    )
    
    
    18,091
    
    
    
    41,344
    
    
    
    (56
    )Loss ratio
    
    
    665.4
    %
    
    
    419.0
    %
    
    
    59
    
    
    
    488.1
    %
    
    
    362.2
    %
    
    
    35Expense ratio
    
    
    13.6
    %
    
    
    39.4
    %
    
    
    (65
    )
    
    
    16.7
    %
    
    
    32.2
    %
    
    
    (48
    )Combined ratio
    
    
    679.0
    %
    
    
    458.4
    %
    
    
    48
    
    
    
    504.8
    %
    
    
    394.4
    %
    
    
    28
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeDirect settled claims:Primary insurance
    
    $
    114,947
    
    
    $
    48,187
    
    
    
    139
    
    
    $
    171,224
    
    
    $
    77,423
    
    
    
    121Modified Pool
insurance
    
    
    48,826
    
    
    
    20,192
    
    
    
    142
    
    
    
    56,561
    
    
    
    31,044
    
    
    
    82Total
    
    $
    163,773
    
    
    $
    68,379
    
    
    
    140
    
    
    $
    227,785
    
    
    $
    108,467
    
    
    
    110Number of claims settled:Primary insurance
    
    
    1,775
    
    
    
    919
    
    
    
    93
    
    
    
    2,819
    
    
    
    1,605
    
    
    
    76Modified Pool
insurance
    
    
    827
    
    
    
    363
    
    
    
    128
    
    
    
    958
    
    
    
    530
    
    
    
    81Total
    
    
    2,602
    
    
    
    1,282
    
    
    
    103
    
    
    
    3,777
    
    
    
    2,135
    
    
    
    77
  26




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##### Table of Contents




    
    the aging of the default inventory,
    
    the end of certain lender and government-sponsored entity (GSE) foreclosure
moratoriums that had previously delayed the completion of the foreclosure process, which is
generally necessary before a claim can be filed, and
    
    the completion of a large number of investigations relating to early payment defaults in
a claim filed status.
   Primary
    
    Modified PoolAverage
    
    Average
    
    Average
    
    AverageLoan Size
    
    Insured Risk
    
    Loan Size
    
    Insured RiskVintage Year2004 and Prior
    
    $
    116,241
    
    
    $
    29,785
    
    
    $
    139,174
    
    
    $
    41,4512005
    
    
    154,968
    
    
    
    40,854
    
    
    
    175,815
    
    
    
    57,2012006
    
    
    204,003
    
    
    
    52,830
    
    
    
    258,502
    
    
    
    68,8052007
    
    
    205,662
    
    
    
    55,352
    
    
    
    270,858
    
    
    
    78,8162008
    
    
    202,766
    
    
    
    46,604
    
    
    
    
    
    
    
    Overall Average
    
    $
    169,860
    
    
    $
    44,309
    
    
    $
    205,264
    
    
    $
    60,025
  Primary
    
    
    Modified PoolAverage
    
    
    Average
    
    
    Average
    
    
    AverageLoan Size
    
    
    Insured Risk
    
    
    Loan Size
    
    
    Insured RiskDistressed States:California
    
    $
    331,595
    
    
    $
    82,829
    
    
    $
    327,509
    
    
    $
    88,301Florida
    
    
    199,770
    
    
    
    53,001
    
    
    
    207,468
    
    
    
    57,430Arizona
    
    
    196,089
    
    
    
    51,516
    
    
    
    201,148
    
    
    
    62,667Nevada
    
    
    238,104
    
    
    
    64,061
    
    
    
    224,232
    
    
    
    71,314Average distressed states
    
    $
    237,250
    
    
    $
    61,548
    
    
    $
    255,649
    
    
    $
    71,818Average non-distressed states
    
    $
    153,740
    
    
    $
    40,186
    
    
    $
    170,757
    
    
    $
    51,949
  27




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##### Table of Contents



Quarter EndedJune 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,Book Year
    
    2009
    
    2009
    
    2008
   
    2008

    
    20082000 & Prior
    
    
    1.00
    %
    
    
    0.99
    %
    
    
    0.99
    %
    
    
    0.98
    %
    
    
    0.97
    %2001
    
    
    1.44
    %
    
    
    1.42
    %
    
    
    1.42
    %
    
    
    1.38
    %
    
    
    1.34
    %2002
    
    
    2.01
    %
    
    
    1.94
    %
    
    
    1.92
    %
    
    
    1.87
    %
    
    
    1.81
    %2003
    
    
    1.86
    %
    
    
    1.70
    %
    
    
    1.66
    %
    
    
    1.59
    %
    
    
    1.46
    %2004
    
    
    3.50
    %
    
    
    2.86
    %
    
    
    2.52
    %
    
    
    2.21
    %
    
    
    1.88
    %2005
    
    
    8.85
    %
    
    
    6.71
    %
    
    
    5.30
    %
    
    
    4.45
    %
    
    
    3.71
    %2006
    
    
    15.19
    %
    
    
    10.46
    %
    
    
    9.39
    %
    
    
    7.83
    %
    
    
    6.16
    %2007
    
    
    12.05
    %
    
    
    7.72
    %
    
    
    6.46
    %
    
    
    5.66
    %
    
    
    4.33
    %2008
    
    
    2.83
    %
    
    
    1.83
    %
    
    
    1.30
    %
    
    
    0.60
    %
    
    
    0.05
    %Total
    
    
    6.39
    %
    
    
    4.63
    %
    
    
    4.03
    %
    
    
    3.49
    %
    
    
    2.87
    %
    28




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeIncrease in reserve for
losses and LAE on a
gross basis before the
benefit of captives
and Modified Pool
structures
    
    $
    562,956
    
    
    $
    275,170
    
    
    
    105
    
    
    $
    705,132
    
    
    $
    474,061
    
    
    
    49Less:Ceded reserves to
captive reinsurers
    
    
    50,874
    
    
    
    46,715
    
    
    
    9
    
    
    
    80,890
    
    
    
    55,349
    
    
    
    46Impact of Modified
Pool structures
    
    
    234,495
    
    
    
    5,674
    
    
    
    4,033
    
    
    
    301,764
    
    
    
    16,737
    
    
    
    1,703Net increase in reserve
for losses
and loss adjustment
expenses
    
    $
    277,587
    
    
    $
    222,781
    
    
    
    25
    
    
    $
    322,478
    
    
    $
    401,975
    
    
    
    (20
    )
    June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008Primary insurance:Reserves for reported defaults
    
    $
    1,045,348
    
    
    $
    728,981
    
    
    $
    530,734Reserves for defaults incurred but not
reported
    
    
    48,575
    
    
    
    65,671
    
    
    
    53,593Total Primary insurance
    
    
    1,093,923
    
    
    
    794,652
    
    
    
    584,327Modified Pool insurance:Reserves for reported defaults
    
    
    433,278
    
    
    
    344,112
    
    
    
    193,505Reserves for defaults incurred but not
reported
    
    
    42,576
    
    
    
    31,539
    
    
    
    26,250Total Modified Pool insurance
    
    
    475,854
    
    
    
    375,651
    
    
    
    219,755Reserve for loss adjustment expenses
    
    
    21,430
    
    
    
    17,537
    
    
    
    13,180Total reserves for losses and loss adjustment
expenses
    
    $
    1,591,207
    
    
    $
    1,187,840
    
    
    $
    817,262
  29




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008% of Gross Risk In Force:California
    
    
    14.4
    %
    
    
    14.6
    %
    
    
    15.3
    %Florida
    
    
    11.7
    %
    
    
    11.6
    %
    
    
    12.1
    %Arizona
    
    
    5.2
    %
    
    
    5.2
    %
    
    
    5.5
    %Nevada
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.1
    %Total Distressed Market States
    
    
    34.3
    %
    
    
    34.4
    %
    
    
    36.0
    %% of Gross Risk in Default:California
    
    
    24.3
    %
    
    
    25.1
    %
    
    
    24.2
    %Florida
    
    
    21.5
    %
    
    
    23.1
    %
    
    
    24.0
    %Arizona
    
    
    7.4
    %
    
    
    7.2
    %
    
    
    6.3
    %Nevada
    
    
    5.3
    %
    
    
    5.0
    %
    
    
    4.3
    %Total Distressed Market States
    
    
    58.5
    %
    
    
    60.4
    %
    
    
    58.8
    %% of Gross Reserves:California
    
    
    24.6
    %
    
    
    24.4
    %
    
    
    23.4
    %Florida
    
    
    22.5
    %
    
    
    23.5
    %
    
    
    24.6
    %Arizona
    
    
    8.2
    %
    
    
    7.4
    %
    
    
    6.2
    %Nevada
    
    
    5.6
    %
    
    
    5.0
    %
    
    
    4.2
    %Total Distressed Market States
    
    
    60.9
    %
    
    
    60.3
    %
    
    
    58.4
    %
   30




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in millions)
    
    2009
    
    
    2008
    
    
    2008Gross risk on loans in default
    
    $
    3,532
    
    
    $
    2,729
    
    
    $
    1,780Risk expected to be rescinded on loans in default
    
    
    (1,094
    )
    
    
    (888
    )
    
    
    (312
    )Risk in default net of expected rescissions
    
    $
    2,438
    
    
    $
    1,841
    
    
    $
    1,468Gross case reserve (1)
    
    $
    1,889
    
    
    $
    1,146
    
    
    $
    801Gross case reserves on loans expected to be rescinded
    
    
    (353
    )
    
    
    (239
    )
    
    
    (87
    )Gross case reserves net of expected rescissions
    
    $
    1,536
    
    
    $
    907
    
    
    $
    714Gross case reserves as a percentage of gross risk in default
    
    
    53.5
    %
    
    
    42.0
    %
    
    
    45.0
    %Gross case reserves net of expected rescissions as a percentage
of gross risk in default, net of expected rescissions
    
    
    63.0
    %
    
    
    49.3
    %
    
    
    48.7
    %Percentage decrease in gross case reserves from rescission factor
    
    
    18.7
    %
    
    
    20.8
    %
    
    
    10.8
    %
 
 (1)
    
    Reflects gross case reserves, which excludes IBNR, ceded reserves and the benefit from Modified Pool structures, as a percentage
of risk in default for total delinquent loans.  June 30,
    
    December 31,
    
    June 30,(dollars in thousands)
    
    2009
    
    2008
    
    2008Total business:Number of insured loans in force
    
    
    320,350
    
    
    
    345,055
    
    
    
    365,649Number of loans in default
    
    
    52,608
    
    
    
    40,286
    
    
    
    26,601Percentage of loans in default (default rate)
    
    
    16.42
    %
    
    
    11.68
    %
    
    
    7.28
    %Primary insurance:Number of insured loans in force
    
    
    232,828
    
    
    
    252,368
    
    
    
    267,689Number of loans in default
    
    
    31,338
    
    
    
    24,241
    
    
    
    16,075Percentage of loans in default
    
    
    13.46
    %
    
    
    9.61
    %
    
    
    6.01
    %Modified Pool insurance:Number of insured loans in force
    
    
    87,522
    
    
    
    92,687
    
    
    
    97,960Number of loans in default
    
    
    21,270
    
    
    
    16,045
    
    
    
    10,526Percentage of loans in default
    
    
    24.30
    %
    
    
    17.31
    %
    
    
    10.75
    %
   31




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Expenses and Taxes
      32




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##### Table of Contents



Financial Position
   Deferred Policy Acquisition Costs
  Investment Portfolio
 Portfolio Description
   33




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June 30, 2009
    
    
    December 31, 2008(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    5,723
    
    
    
    0.7
    %
    
    $
    7,996
    
    
    
    0.9
    %State, municipal, and other government
bonds
    
    
    139,367
    
    
    
    16.4
    %
    
    
    171,566
    
    
    
    19.2
    %Corporate bonds
    
    
    532,148
    
    
    
    62.5
    %
    
    
    482,196
    
    
    
    53.9
    %Asset-backed bonds
    
    
    52,048
    
    
    
    6.1
    %
    
    
    65,749
    
    
    
    7.3
    %Residential mortgage-backed bonds
    
    
    118,523
    
    
    
    13.9
    %
    
    
    126,679
    
    
    
    14.1
    %Total fixed maturities
    
    
    847,809
    
    
    
    99.6
    %
    
    
    854,186
    
    
    
    95.4
    %Equity securities
    
    
    31
    
    
    
    0.0
    %
    
    
    583
    
    
    
    0.1
    %Total available-for-sale securities
    
    
    847,840
    
    
    
    99.6
    %
    
    
    854,769
    
    
    
    95.5
    %Short-term investments
    
    
    3,800
    
    
    
    0.4
    %
    
    
    40,653
    
    
    
    4.5
    %$
    851,640
    
    
    
    100.0
    %
    
    $
    895,422
    
    
    
    100.0
    %
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Average investments at cost or amortized cost
    
    $
    852,044
    
    
    $
    811,592
    
    
    $
    848,145
    
    
    $
    818,051Pre-tax net investment income
    
    $
    10,859
    
    
    $
    9,175
    
    
    $
    22,051
    
    
    $
    18,722Book yield
    
    
    5.2
    %
    
    
    4.7
    %
    
    
    5.2
    %
    
    
    4.7
    %Pre-tax realized investment (losses) gains
    
    $
    2,017
    
    
    $
    (3,799
    )
    
    $
    (2,548
    )
    
    $
    (1,096
    )
  34




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Unrealized Gains and Losses
  As of June 30, 2009Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    5,415
    
    
    $
    308
    
    
    $
    
    
    
    $
    5,723State, municipal, and other government bonds
    
    
    132,917
    
    
    
    6,450
    
    
    
    
    
    
    
    139,367Corporate bonds
    
    
    504,575
    
    
    
    27,573
    
    
    
    
    
    
    
    532,148Asset-backed bonds
    
    
    49,345
    
    
    
    2,703
    
    
    
    
    
    
    
    52,048Residential mortgage-backed bonds
    
    
    114,131
    
    
    
    4,392
    
    
    
    
    
    
    
    118,523Subtotal, fixed maturities
    
    
    806,383
    
    
    
    41,426
    
    
    
    
    
    
    
    847,809Equity securities
    
    
    17
    
    
    
    14
    
    
    
    
    
    
    
    31Short term investments
    
    
    3,796
    
    
    
    4
    
    
    
    
    
    
    
    3,800Total securities
    
    $
    810,196
    
    
    $
    41,444
    
    
    $
    
    
    
    $
    851,640
   35




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##### Table of Contents



Credit Risk
  June 30, 2009
    
    
    December 31, 2008(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    5,723
    
    
    
    0.7
    
    
    $
    7,996
    
    
    
    0.9AAA
    
    
    208,573
    
    
    
    24.6
    
    
    
    236,975
    
    
    
    27.7AA
    
    
    151,727
    
    
    
    17.9
    
    
    
    196,088
    
    
    
    23.0A
    
    
    432,217
    
    
    
    51.0
    
    
    
    381,936
    
    
    
    44.7BBB
    
    
    29,896
    
    
    
    3.5
    
    
    
    25,203
    
    
    
    3.0BB
    
    
    15,076
    
    
    
    1.8
    
    
    
    1,239
    
    
    
    0.1B
    
    
    1,019
    
    
    
    0.1
    
    
    
    619
    
    
    
    0.1CCC
    
    
    1,923
    
    
    
    0.2
    
    
    
    1,523
    
    
    
    0.2CC and lower
    
    
    341
    
    
    
    0.0
    
    
    
    48
    
    
    
    0.0Not rated
    
    
    1,314
    
    
    
    0.2
    
    
    
    2,559
    
    
    
    0.3Total fixed maturities
    
    $
    847,809
    
    
    
    100.0
    
    
    $
    854,186
    
    
    
    100.0Equity Securities:Preferred stocks:A
    
    
    1
    
    
    
    1.6
    
    
    
    429
    
    
    
    73.6BBB
    
    
    
    
    
    
    
    
    
    
    133
    
    
    
    22.8C
    
    
    30
    
    
    
    98.4
    
    
    
    21
    
    
    
    3.6Total equity securities
    
    $
    31
    
    
    
    100.0
    
    
    $
    583
    
    
    
    100.0
   Credit Quality Without Benefitof Credit Enhancements(dollars in thousands)
    
    Amount
    
    
    PercentU.S. treasury and agency bonds
    
    $
    5,723
    
    
    
    0.7AAA
    
    
    178,488
    
    
    
    21.1AA
    
    
    100,936
    
    
    
    11.9A
    
    
    495,778
    
    
    
    58.4BBB
    
    
    28,636
    
    
    
    3.4BB
    
    
    14,632
    
    
    
    1.7B
    
    
    854
    
    
    
    0.1CCC
    
    
    
    
    
    
    CC and below
    
    
    1,786
    
    
    
    0.2Not rated
    
    
    20,976
    
    
    
    2.5Total Fixed Maturities
    
    $
    847,809
    
    
    
    100.0
 36




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##### Table of Contents



Financial Guarantors
 Credit Enhanced State andMunicipal Portfolio(dollars in thousands)
    
    Amount
    
    
    PercentMBIA
    
    $
    30,699
    
    
    
    26.6FSA
    
    
    26,900
    
    
    
    23.4FGIC
    
    
    24,816
    
    
    
    21.6AMBAC
    
    
    16,894
    
    
    
    14.7Others (four companies)
    
    
    15,703
    
    
    
    13.7Total
    
    $
    115,012
    
    
    
    100.0
 Realized Gains (Losses) and Impairments
  Liquidity and Capital Resources
   37




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38




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39




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in millions)
    
    2009
    
    
    2008
    
    
    2008Statutory policyholders surplus
    
    $
    178.6
    
    
    $
    88.0
    
    
    $
    192.1Statutory contingency reserve
    
    
    
    
    
    
    
    
    
    
    82.6Total
    
    $
    178.6
    
    
    $
    88.0
    
    
    $
    274.7Risk-to-capital ratio
    
    56.3 to 1
    
    
    125.2 to 1
    
    
    42.7 to 1
  Update on Critical Accounting Policies and Estimates
 Reserve for Losses and LAE
    40




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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
  
    
    a deeper or more prolonged recession in the United States coupled with the
tightening of the mortgage credit markets could increase defaults and limit
opportunities for borrowers to cure defaults or for Triad to mitigate losses, which
could have an adverse material impact on our business or results of operations;
    
    the possibility that the Department may take various actions regarding Triad if it
does not operate its business in accordance with its revised financial and operating
plan and the Corrective Orders, including seeking receivership proceedings, which
would effectively eliminate all remaining stockholder value;
    
    our ability to continue as a going concern;
    
    the ability of the parent company to pay the debt service with funds obtained from
Triad, whether in the form of dividends, payments on the surplus note or otherwise,
will require the approval of the Department, and it is unlikely that such approval
will be sought or, if sought, will be obtained in the foreseeable future;
    
    our loss reserves estimates are subject to uncertainties and are based on
assumptions that are currently volatile in the housing and mortgage industries and
therefore settled claims may be substantially different from our loss reserves;
    
    we may not continue to realize benefits from rescissions at the levels that we
have recently experienced;
    
    if house prices continue to fall, additional borrowers may default and claims
could be higher than anticipated;
    
    if unemployment rates continue to rise, especially in those areas that have
already experienced significant declines in house prices, defaults and claims could
be higher than anticipated;
    
    further economic downturns in regions where we have larger concentrations of risk
and in markets already distressed could have a particularly adverse effect on our
financial condition and loss development;
    
    the appointment of the Federal Housing Finance Agency (FHFA) as the conservator
of both Fannie Mae and Freddie Mac has resulted in changes in the business practices
of the GSEs;
    
    the impact of recently adopted programs and legislation affecting modifications
and refinancings of mortgages could materially impact our financial performance in
run-off;
 41




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##### Table of Contents




    
    our financial condition and performance in run-off could be affected by
legislation adopted in the future, if any, impacting the mortgage industry, the GSEs
specifically, or the financial services industry in general;
    
    if the GSEs or our lender customers choose to cancel the insurance on policies
that we insure, our financial performance in run-off could be adversely affected;
    
    a significant decline in interest rates coupled with an increase in available
credit could increase refinancings and decrease the persistency of renewal premiums
and the quality of our insurance in force;
    
    if we have failed to properly underwrite mortgage loans under contract
underwriting service agreements, we may be required to assume the costs of
repurchasing those loans or face other remedies;
    
    any impediment to our ability to rescind coverage on insurance policies, which
would be detrimental to our success in run-off;
    
    our ability to lower operating expenses to the most efficient level while still
providing the ability to mitigate losses effectively during run-off, which will
directly impact our financial performance in run-off; and
    
    if we are unable to satisfy its continued listing requirements, we may be delisted
from The NASDAQ Stock Market.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4T. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including our Principal Executive Officer (PEO) and Principal Financial
Officer (PFO), of the effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based on that evaluation, our management, including our PEO and PFO, concluded, as of the
end of the period covered by this report, that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is (a) accumulated and communicated to our
management, including our PEO and PFO, as appropriate to allow timely decisions regarding
required disclosure, and (b) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. 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 were no changes to our internal control over financial reporting during the
period ended June 30, 2009 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
 42




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
 We reported a deficit in assets at June 30, 2009 of $529.7 million. In order to overcome this
deficit in assets, our future net income on the remaining insurance in force must exceed $529.7
million during the run-off period. There is substantial risk that the future net income during the
run-off will not exceed this amount, which could result in the institution of receivership
proceedings for Triad and subsequently could compel us to institute a proceeding seeking relief
from creditors under U.S. bankruptcy laws.
  43




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##### Table of Contents



The U.S. economic environment, particularly with respect to the level of unemployment and home
prices, continues to have a significant negative impact on the U.S. housing and mortgage markets.
Although we regularly review and consider our methodology for recording our loss reserve estimates,
these estimates are subject to uncertainties and are based on assumptions that we are required to
make during a time of unprecedented economic volatility. As a result, settled claims may
ultimately be substantially different than our loss reserves that we have recorded and may have a
material adverse impact on our financial condition and results of operations.
  
 Item 6. Exhibits
  44




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##### Table of Contents



SIGNATURE
  Triad Guaranty Inc./s/ Kenneth W. JonesAugust 7, 2009
    Kenneth W. JonesPresident and Chief Executive Officer  (Duly Authorized
Officer, Principal Executive Officer and Principal
Financial Officer) 45




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Exchange Act Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 46