UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_______________________





FORM
10-Q








T
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended March
31, 2010





OR








£
            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 ofincorporation
      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)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes R No £





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Y es £ No £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):




Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer £
              Smaller
      reporting company R(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R





Number of
shares of common stock, par value $0.01 per share, outstanding as of May 3, 2010
was 15,258,128.











TRIAD
GUARANTY INC.





INDEX








PagePart
      I.  Financial InformationItem
      1.
            Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2010
            1Consolidated
      Statements of Operations for the Three Months Ended March 31, 2010 and
      2009 (Unaudited)
            2Consolidated
      Statements of Cash Flow for the Three Months Ended March 31, 2010 and 2009
      (Unaudited)
            3Notes
      to Consolidated Financial Statements
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            42Item
      4.
            Controls
      and Procedures
            43Part
      II.  Other InformationItem
      1.
            Legal
      Proceedings
            43Item
      6.
            Exhibits
            44SIGNATURE
            
            45EXHIBIT
      INDEX
            
            46





PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements








TRIAD GUARANTY
    INC.CONSOLIDATED
      BALANCE SHEETSMarch
      31,
            
            
            December
      31,(dollars
      in thousands, except per share data)
            
            2010
            
            
            2009(unaudited)ASSETSInvested
      assets:Securities
      available-for-sale, at fair value:Fixed
      maturities (amortized cost:  $762,111 and
    $738,149)
            
            $
            811,040
            
            
            $
            784,830Short-term
      investments
            
            
            146,075
            
            
            
            26,651Total
      invested assets
            
            
            957,115
            
            
            
            811,481Cash
      and cash equivalents
            
            
            38,662
            
            
            
            21,839Accrued
      investment income
            
            
            9,458
            
            
            
            9,048Property
      and equipment
            
            
            3,099
            
            
            
            3,515Reinsurance
      recoverable, net
            
            
            52,963
            
            
            
            233,499Other
      assets
            
            
            41,849
            
            
            
            45,444Total
      assets
            
            $
            1,103,146
            
            
            $
            1,124,826LIABILITIES
      AND STOCKHOLDERS' DEFICITLiabilities:Losses
      and loss adjustment expenses
            
            $
            1,468,719
            
            
            $
            1,537,043Unearned
      premiums
            
            
            12,210
            
            
            
            12,153Long-term
      debt
            
            
            34,543
            
            
            
            34,540Deferred
      payment obligation
            
            
            229,953
            
            
            
            168,386Accrued
      interest
            
            
            1,785
            
            
            
            2,476Accrued
      expenses and other liabilities
            
            
            88,682
            
            
            
            76,586Total
      liabilities
            
            
            1,835,892
            
            
            
            1,831,184Commitments
      and contingencies - Note 5Stockholders'
      deficit:Preferred
      stock, par value $0.01 per share --- authorized 1,000,000shares;
      no shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, par value $0.01 per share --- authorized 32,000,000shares;
      issued and outstanding 15,258,128 shares
            
            
            153
            
            
            
            153Additional
      paid-in capital
            
            
            113,939
            
            
            
            113,848Accumulated
      other comprehensive income, net of income tax liabilityof
      $17,292 and $16,575
            
            
            32,114
            
            
            
            30,782Accumulated
      deficit
            
            
            (878,952
            )
            
            
            (851,141
            )Deficit
      in assets
            
            
            (732,746
            )
            
            
            (706,358
            )Total
      liabilities and stockholders' deficit
            
            $
            1,103,146
            
            
            $
            1,124,826








See
      accompanying notes.


1





TRIAD GUARANTY
    INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(unaudited)Three
      Months EndedMarch
      31,(dollars
      in thousands, except per share data)
            
            2010
            
            
            2009Revenue:Premiums
      written:Direct
            
            $
            54,393
            
            
            $
            55,623Ceded
            
            
            (8,202
            )
            
            
            (11,130
            )Net
      premiums written
            
            
            46,191
            
            
            
            44,493Change
      in unearned premiums
            
            
            (303
            )
            
            
            (135
            )Earned
      premiums
            
            
            45,888
            
            
            
            44,358Net
      investment income
            
            
            9,873
            
            
            
            11,192Net
      realized investment losses
            
            
            (242
            )
            
            
            (4,565
            )Other
      (losses) income
            
            
            (8
            )
            
            
            255,511
            
            
            
            50,987Losses
      and expenses:Net
      losses and loss adjustment expenses
            
            
            72,238
            
            
            
            101,577Interest
      expense
            
            
            2,469
            
            
            
            694Other
      operating expenses
            
            
            9,332
            
            
            
            9,41184,039
            
            
            
            111,682Loss
      before income tax benefit
            
            
            (28,528
            )
            
            
            (60,695
            )Income
      tax benefit:Deferred
            
            
            (717
            )
            
            
            (5,521
            )(717
            )
            
            
            (5,521
            )Net
      loss
            
            $
            (27,811
            )
            
            $
            (55,174
            )Loss
      per common and common equivalent share:Basic
      and diluted
            
            $
            (1.84
            )
            
            $
            (3.68
            )Shares
      used in computing loss per common and
              common
      equivalent share:Basic
      and diluted
            
            
            15,099,299
            
            
            
            14,993,742










See
accompanying notes.


2





TRIAD GUARANTY
    INC.CONSOLIDATED
      STATEMENTS OF CASH FLOW(unaudited)Three
      Months EndedMarch
      31,(dollars
      in thousands)
            
            2010
            
            
            2009Operating
      activitiesNet
      loss
            
            $
            (27,811
            )
            
            $
            (55,174
            )Adjustments
      to reconcile net loss to net cash provided by
              operating
      activities:Losses,
      loss adjustment expenses and unearned premium reserves
            
            
            (68,267
            )
            
            
            75,001Accrued
      expenses and other liabilities
            
            
            12,096
            
            
            
            14,960Deferred
      payment obligation
            
            
            61,567
            
            
            
            -Income
      taxes recoverable
            
            
            -
            
            
            
            78Reinsurance,
      net
            
            
            180,536
            
            
            
            (31,459
            )Accrued
      investment income
            
            
            (410
            )
            
            
            (161
            )Net
      realized investment losses
            
            
            242
            
            
            
            4,565Provision
      for depreciation
            
            
            414
            
            
            
            649(Amortization
      of premium) Accretion of discount on investments
            
            
            (523
            )
            
            
            285Deferred
      income taxes
            
            
            (717
            )
            
            
            (5,521
            )Real
      estate acquired in claim settlement, net of write-downs
            
            
            -
            
            
            
            187Accrued
      interest
            
            
            (691
            )
            
            
            (691
            )Other
      assets
            
            
            728
            
            
            
            357Other
      operating activities
            
            
            90
            
            
            
            259Net
      cash provided by operating activities
            
            
            157,254
            
            
            
            3,335Investing
      activitiesSecurities
      available-for-sale:Purchases
      – fixed maturities
            
            
            (72,318
            )
            
            
            (88,391
            )Sales
      – fixed maturities
            
            
            174
            
            
            
            20,010Maturities
      – fixed maturities
            
            
            50,553
            
            
            
            18,928Sales
      – equities
            
            
            2
            
            
            
            4Purchases
      of other investments
            
            
            581
            
            
            
            -Net
      (increase) decrease in short-term investments
            
            
            (119,425
            )
            
            
            27,566Property
      and equipment
            
            
            2
            
            
            
            2Net
      cash used in investing activities
            
            
            (140,431
            )
            
            
            (21,881
            )Net
      change in cash and cash equivalents
            
            
            16,823
            
            
            
            (18,546
            )Cash
      and cash equivalents at beginning of period
            
            
            21,839
            
            
            
            39,940Cash
      and cash equivalents at end of period
            
            $
            38,662
            
            
            $
            21,394Supplemental
      schedule of cash flow informationCash
      paid during the period for:Interest
            
            $
            1,383
            
            
            $
            1,383








See
accompanying notes.


3


TRIAD
GUARANTY INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2010


(Unaudited)





1.  The
Company





Triad
Guaranty Inc. (“TGI”) is a holding company which, through its wholly-owned
subsidiary, Triad Guaranty Insurance Corporation (“TGIC”), historically has
provided mortgage insurance coverage in the United States.  Unless the
context requires otherwise, references to “Triad” in this quarterly report on
Form 10-Q refer to the operations of TGIC and its wholly-owned subsidiary, Triad
Guaranty Assurance Corporation (“TGAC”).  References to the “Company”
refer collectively to the operations of TGI and Triad.  Mortgage
insurance allows buyers to achieve homeownership with a reduced down payment,
facilitates the sale of mortgage loans in the secondary market and protects
lenders from credit default-related expenses.





TGIC is
an Illinois-domiciled insurance company and TGAC is an Illinois-domiciled
reinsurance company. The Illinois Department of Insurance (the “Insurance
Department”) is the primary regulator of both TGIC and TGAC.  The
Illinois Insurance Code grants broad powers to the Insurance Department and its
director (collectively, the “Department”) to enforce rules or exercise
discretion over almost all significant aspects of our insurance
business.  Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and is operating its business in run-off
under two Corrective Orders issued by the Department.  The first
Corrective Order was issued in August 2008.  The second Corrective
Order was issued in March 2009 and subsequently amended in May
2009.  As used in these financial statements, the term "run-off" means
writing no new mortgage insurance policies, but continuing to service existing
policies.  Servicing existing policies includes: receiving premiums on
policies that remain in force; cancelling coverage at the insured’s request;
terminating policies for non-payment of premium; working with borrowers in
default to remedy the default and/or mitigate our loss; reviewing policies for
the existence of misrepresentation, fraud or non-compliance with stated
programs; and settling all legitimate filed claims per the provisions of the two
Corrective Orders issued by the Department.  The term “settled,” as
used in these financial statements in the context of the payment of a claim,
refers to the satisfaction of Triad’s obligations following the submission of
valid claims by our policyholders.  Prior to June 1, 2009, valid
claims were settled solely by a cash payment.  Effective on and after
June 1, 2009, valid claims are settled by a combination of 60% in cash and 40%
in the form of a deferred payment obligation (“DPO”).  The Corrective
Orders, among other things, allow management to continue to operate Triad under
the close supervision of the Department, include restrictions on the
distribution of dividends or interest on notes payable to TGI by Triad, and
include restrictions on the payment of claims.





2.  Going
Concern





The
Company prepares its financial statements presented in this quarterly report on
Form 10-Q in conformity with accounting principles generally accepted in the
United States of America (“GAAP”).  The financial statements for Triad
that are provided to the Department and that form the basis for our corrective
plan required by the Corrective Orders were prepared in accordance with
Statutory Accounting Principles (“SAP”) as set forth in the Illinois Insurance
Code or prescribed by the Department.  The primary differences between
GAAP and SAP for Triad at March 31, 2010 were the methodology utilized for the
establishment of reserves and the reporting requirements relating to the DPO
stipulated in the second Corrective Order.  A deficit in assets occurs
when recorded liabilities exceed recorded assets in financial statements
prepared under GAAP.  A deficiency in policyholders’ surplus occurs
when recorded liabilities exceed recorded assets in financial statements
prepared under SAP.  A deficit in assets is not necessarily a measure
of insolvency.  However, the Company believes that if Triad were to
report an other-than-temporary deficiency in policyholders’ surplus under SAP,
Illinois law may require the Department to seek receivership of Triad, which
could lead TGI to institute a proceeding seeking relief from creditors under
U.S. bankruptcy laws.  The second Corrective Order attempts to
mitigate the possibility of a


4


deficiency
in policyholders’ surplus by providing for the settlement of claims 60% in cash
and 40% in the form of a DPO, which is accounted for as a component of
policyholders’ surplus under SAP.





The
Company has prepared its financial statements on a going concern basis under
GAAP, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of
business.  However, there is substantial doubt as to the Company's
ability to continue as a going concern.  This uncertainty is based on,
among other things, the possible inability of Triad to comply with the
provisions of the Corrective Orders, the Company's recurring losses from
operations and the Company’s $732.7 million deficit in assets.  The
Company’s financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts of
liabilities that might be necessary should the Company be unable to continue in
existence.





The
Company incurred significant operating losses beginning in 2007, and continuing
through the first quarter of 2010, which has resulted in a deficit in assets of
$732.7 million at March 31, 2010.  The ongoing operating losses and
the deficit in assets are primarily the result of the large amount of settled
claims, a large number of insured policies in default, and the related loss
reserves established.  Contributing to the defaults and claims have
been declines in U.S home prices, particularly in certain distressed markets,
tightened credit markets, rising unemployment, and the overall effects of the
economic recession in the United States.  Additionally, the Company is
unable to offset these operating losses with revenue from new, potentially more
profitable, business as Triad is operating in run-off under the two Corrective
Orders issued by the Department and can no longer issue commitments for new
insurance.





As noted
above, effective on and after June 1, 2009, valid claims are settled by a
combination of 60% in cash and 40% in the form of a DPO.  Absent the
accounting treatment required by the recording of the DPO, Triad would have
reported a deficiency in policyholders’ surplus of $687.3 million at March 31,
2010 under SAP.  Payment of the carrying charges and the DPO will be
subject to Triad’s future financial performance and will require approval of the
Department.  Failure to comply with the provisions of the Corrective
Orders could result in the imposition of fines or penalties or subject Triad to
further legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of Triad. Any actions like this
would likely lead TGI to institute a proceeding seeking relief from creditors
under U.S. bankruptcy laws.  The ability to successfully comply with
the Corrective Orders and maintain statutory solvency by management is unknown
at this time and is dependent upon many factors, including improved
macroeconomic conditions in the United States.





3.  Accounting
Policies and Basis of Presentation





Basis
of Presentation





The
accompanying unaudited consolidated financial statements have been prepared in
conformity with GAAP for interim financial information and with the instructions
to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.  In the opinion of management, all adjustments considered
necessary for a fair presentation have been included.  Operating
results for the three months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2010 or
subsequent quarterly periods.  For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.





Consolidation





The
consolidated financial statements include the accounts of TGI and its wholly
owned subsidiary, TGIC, including TGIC’s wholly-owned subsidiary,
TGAC.  All significant intercompany accounts and transactions have
been eliminated.


5


Corrective
Orders, Dividend Restrictions, and Statutory Results





Triad has
entered into two Corrective Orders with the Department. The first Corrective
Order was entered into on August 5, 2008 and remains in effect. Among other
things, that Corrective Order:





·
            Required
      Triad to submit a corrective plan to the
  Department;


·
            Prohibits
      all stockholder dividends from Triad to TGI without the prior approval of
      the Department;


·
            Prohibits
      interest and principal payments on Triad’s surplus note to TGI 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.





The
Department issued the second Corrective Order effective on March 31, 2009, as
amended on May 26, 2009.  The second Corrective Order stipulates or
prescribes:





·
            Effective
      June 1, 2009, all valid claims under Triad’s mortgage guaranty insurance
      policies are 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 second Corrective Order on future settled
      claims;


·
            The
      DPO requires that Triad accrue a carrying charge based on the investment
      yield earned by Triad’s investment
portfolio;


·
            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 must be
      paid in full, and will deposit any excess reinsurance recovery above the
      60% cash payment into an escrow
account;


·
            Payment
      of the DPO and the carrying charge is subject to Triad’s future financial
      performance and requires the approval of the
  Department;


·
            Procedures
      to account for the impact of the second Corrective Order in the financial
      statements prepared in accordance with
SAP;


·
            Upon
      payment of a claim under these provisions, Triad is 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.





The DPO
recording requirements of the second Corrective Order became effective on June
1, 2009.  At March 31, 2010, the recorded DPO, including a carrying
charge of $3.8 million, amounted to $230.0 million.  The recording of
a DPO does not impact reported settled losses as the Company continues to report
the entire amount of a claim in its statement of operations.  The
accounting for the DPO on a SAP basis is similar to a surplus note which is
reported as a component of statutory surplus; accordingly, any repayment of the
DPO or the associated carrying charge requires approval of the
Department.  However, in the Company’s financial statements prepared
in accordance with GAAP included in this report, the DPO is reported as a
liability.  At March 31, 2010, the cumulative effect of this
requirement on statutory policyholders’ surplus was to increase statutory
policyholders’ surplus by $778.4 million over the amount that would have been
reported absent the second Corrective Order.  There was no such impact
to loss reserves or stockholders’ equity calculated on a GAAP
basis.


6


Insurance
regulations generally limit the writing of mortgage guaranty insurance to an
aggregate amount of insured risk no greater than twenty-five times the total of
statutory capital, which is defined as the statutory surplus plus the statutory
contingency reserve. The Corrective Orders under which Triad is currently
operating specifically prohibit the writing of new insurance by
Triad.  The Risk-to-Capital ratio of Triad is substantially greater
than the 25:1 regulatory guideline.  Even if Triad’s risk-to-capital
ratio were to be reduced to 25-to-1 or lower as a result of the second
Corrective Order, we would continue to be prohibited by the Department from
issuing new commitments for insurance.





Under the
Corrective Orders issued by the Department, Triad is currently prohibited, and
expects to be prohibited for the foreseeable future, from paying any dividends
to TGI.  Triad also has a $25 million outstanding surplus note held by
TGI.  Under the terms of the Corrective Orders, Triad is also
prohibited from paying interest on the surplus note and expects to be prohibited
for the foreseeable future.





Reinsurance





Prior to
entering into run-off, Triad entered into various captive reinsurance agreements
that were designed to allow lenders to share in the risks of mortgage
insurance.  Under the typical captive reinsurance agreement, a captive
reinsurer, generally an affiliate of the lender, assumed a portion of the risk
associated with the lender’s book of business insured by Triad in exchange for a
percentage of the premiums that Triad collected.  All of Triad’s
captive reinsurance agreements include, among other things, minimum capital
requirements and excess-of-loss provisions that provide for defined aggregate
layers of coverage and a maximum exposure limit for the captive
reinsurer.  In accordance with the excess-of-loss provisions, Triad
retains the first loss position on the first aggregate layer of risk and
reinsures a second defined aggregate layer with the captive
reinsurer.  Triad generally retains the remaining risk above the
defined aggregate layer reinsured with the captive reinsurer.





Although
a percentage of premiums and certain reserves and losses are ceded to the
captive reinsurer under the captive reinsurance agreements, these agreements do
not relieve Triad from its obligations to policyholders.  Failure of
the captive reinsurer to honor its obligations under the captive reinsurance
agreement could result in losses to Triad; consequently, Triad establishes
allowances for amounts deemed uncollectible from the captive
reinsurer.





Triad
requires each captive reinsurer to establish a trust to partially support its
obligations under the captive reinsurance agreement.  The captive
reinsurer is the grantor of the trust and Triad is the beneficiary of the
trust.  The trust agreement that governs each trust requires the
captive reinsurer to comply with covenants regarding minimum and ongoing
capitalization requirements, required reserves, authorized investments and asset
withdrawals.  The trust is funded by ceded premiums from Triad and
investment earnings on trust assets, as well as capital contributions by the
captive reinsurer.  If certain capitalization requirements of the
trust are not maintained, Triad retains the right to terminate the captive
reinsurance agreement.  The termination of the captive reinsurance
agreement is commonly referred to as a “commutation.”  Upon
commutation, Triad receives all remaining trust assets, reduces the reinsurance
recoverable for amounts due from the captive reinsurer, and ceases ceding
premium to the captive reinsurer.




During
the first quarter of 2010, Triad determined that Triad’s two largest captive
reinsurers had not maintained the required capitalization in their
trusts.  As a result, and with the mutual agreement of each of the
captive reinsurers, Triad commuted both of these captive reinsurance agreements
during the first quarter and received approximately $188.7 million of aggregate
trust assets from the two captive reinsurers.  These two commutations
resulted in an increase in the Company’s invested assets and a corresponding
decrease in reinsurance recoverable during the quarter ended March 31,
2010.  The commutations had no impact on  results of
operations or financial condition for the quarter, as the amount recorded as
reinsurance recoverable under the captive reinsurance agreements was limited to
the captive reinsurers’ accumulated trust balances (see Note 3 to the
consolidated financial statements).  The Company’s receipt of the
$188.7 million of trust assets, however, positively impacted its cash flows in
the 2010 first quarter.


7





At March
31, 2010, Triad had approximately $76.9 million in captive reinsurance trust
balances supporting the risk transferred to the captive
reinsurers.  As Triad cannot force capital contributions by captive
reinsurers, the Company limits the amount of benefit recognized on reserves
ceded to captives to the trust balance.  As of March 31, 2010, there
were certain captive reinsurance agreements where the potential reserves that
could be ceded based upon the terms of the captive reinsurance agreements,
combined with any unpaid ceded claims, had exceeded the trust balance and the
actual reserves ceded were limited to the trust balances.





Loss
Reserves





The
Company establishes loss reserves to provide for the estimated costs of settling
claims on loans reported in default and estimates on loans in default that are
in the process of being reported to the Company as of the date of the financial
statements.  Consistent with industry accounting practices, the
Company does not establish loss reserves for future claims on insured loans that
are not currently in default.  Loss reserves are established by
management using historical experience and by making various assumptions and
judgments about claim rates (frequency) and claim amounts (severity) to estimate
ultimate losses to be paid on loans in default.  The Company’s
reserving methodology gives effect to current economic conditions and profiles
delinquencies by such factors as, among others, default status, policy year, and
the number of months the policy has been in default, as well as the combined
loan-to-value (“LTV”) ratio.  The Company also incorporates in the
calculation of loss reserves the probability that a policy may be rescinded for
underwriting violations.





A number
of factors can impact the actual frequency and severity realized during the year
compared to those utilized in the reserve assumptions at the beginning of the
year including: changes in home prices at a faster rate than anticipated; the
impact of a higher or lower unemployment rate than anticipated; an unanticipated
slowdown or acceleration of the overall economy; or social and cultural changes
that are more accepting of mortgage defaults even when the borrower has the
ability to pay.  The assumptions utilized in the calculation of the
loss reserve estimate are continually reviewed and adjusted as
necessary.  Such adjustments are reflected in the financial statements
in the periods in which the adjustments are made.





Recent
Accounting Pronouncements





Effective
March 31, 2010, the Company adopted Accounting Standards Update (“ASU”) No.
2009-17, Consolidations (Topic
810) — Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities (“ASU 2009-17”).  ASU 2009-17 codifies
Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation
No. 46(R), and amends the consolidation guidance related to a variable
interest entity (“VIE”).  Primarily, the current quantitative analysis
used under Accounting Standards Codification (“ASC”) Topic 810, Consolidations, will be
eliminated and replaced with a qualitative approach that is focused on
identifying the variable interest that has the power to direct the activities
that most significantly impact the performance of the VIE and absorb losses or
receive returns that could potentially be significant to the VIE.  In
addition, this new accounting standard will require an ongoing reassessment of
the primary beneficiary of the VIE, rather than reassessing the primary
beneficiary only upon the occurrence of certain pre-defined
events.  ASU 2009-17 was to be effective as of the beginning of the
annual reporting period that begins after November 15, 2009, and required the
reconsideration of all VIEs for consolidation in which an entity has a variable
interest upon the effective date of these amendments.  The adoption of
ASU 2009-17 did not have a material impact on the Company’s consolidated
financial condition and results of operations.


ASU No.
2010-10, Consolidations (Topic
810) - Amendments for Certain Investment Funds(“ASU 2010-10”) defers the
effective date of the amendments to the consolidation requirements made by ASU
2009-17 with respect to a company’s interest in an entity (i) that has all of
the attributes of an investment company, as specified under ASC Topic 946, Financial Services - Investment
Companies (“ASU 946”) or (ii) for which it is industry practice to apply
measurement principles of financial reporting that are consistent with those in
ASC 946.  As a result of the deferral, a company will not be required
to apply the ASU 2009-17 amendments to the Subtopic 810-


8


10
consolidation requirements to its interest in an entity that meets the criteria
to qualify for the deferral.  ASU 2010-10 also clarifies that any
interest held by a related party should be treated as though it is an entity’s
own interest when evaluating the criteria for determining whether such interest
represents a variable interest.  In addition, ASU 2010-10 clarifies
that a quantitative calculation should not be the sole basis for evaluating
whether a decision maker’s or service provider’s fee is a variable
interest.  The provisions of ASU 2010-10 became effective for the
Corporation as of January 1, 2010 and did not have a significant impact on the
Company’s consolidated financial condition and results of
operations.





Effective
March 31, 2010, the Company adopted ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures and
clarifies existing disclosure requirements about fair value measurement as set
forth in Codification Subtopic 820-10.  ASU 2010-06 amends
Codification Subtopic 820-10 to now require that (1) a reporting entity must
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers;
(2) in the reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present separately information
about purchases, sales, issuances, and settlements and (3) a reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value
measurements.  ASU 2010-06 was effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements.  Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years.  The Company has included the
disclosures required by ASU 2010-06 in the notes to its consolidated financial
statements effective January 1, 2010, except for the disclosures related to
Level 3 fair value measurements, which it plans to include in the notes to its
consolidated financial statements effective January 1, 2011.





Effective
March 31, 2010, the Company adopted ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets (“ASU
2009-16”).  ASU 2009-16 formally codifies SFAS 166, Accounting for Transfers of
Financial Assets.  ASU 2009-16 eliminates the concept of a
qualifying special-purpose entity (“SPE”) and removes the scope exception for a
qualifying SPE from ASC 810, Consolidations.  As
a result, previously unconsolidated qualifying SPEs must be re-evaluated for
consolidation by the sponsor or transferor.  In addition, this
accounting update amends the accounting guidance related to transfers of
financial assets in order to address practice issues that have been highlighted
by the events of the recent economic decline.  ASU 2009-16 was
effective as of the beginning of the annual reporting period that begins after
November 15, 2009.  The recognition and measurement provisions are
applied to transfers that occur on or after the effective date and all
qualifying SPEs that exist on and after the effective date must be evaluated for
consolidation.  The adoption of ASU 2009-16 did not have a material
impact on the Company’s consolidated financial condition and results of
operations.


4.  Litigation





The
Company is involved in litigation and other legal proceedings in the ordinary
course of business as well as the matters identified below.





On
February 6, 2009, James L. Phillips served a complaint against Triad Guaranty
Inc., Mark K. Tonnesen and Kenneth W. Jones in the United States District Court,
Middle District of North Carolina.  The plaintiff purports to
represent a class of persons who purchased or otherwise acquired the common
stock of the Company between October 26, 2006 and April 1, 2008 and the
complaint alleges violations of federal securities laws by the Company and two
of its present or former officers.  The court appointed lead counsel
for the plaintiff and an amended complaint was filed on June 22,
2009.  TGI filed its motion to dismiss the amended complaint on August
21, 2009 and the plaintiff filed its opposition to the motion to dismiss on
October 20, 2009.  TGI’s reply was filed on November 19,
2009.  Oral arguments on the motion are scheduled for August 30,
2010.


9


On
September 4, 2009, Triad filed a complaint against American Home Mortgage
(“AHM”) in the United States Bankruptcy Court for the District of Delaware
seeking rescission of multiple master mortgage guaranty insurance policies
(“master policies”) and declaratory relief.  The complaint seeks
relief from AHM as well as all owners of loans insured under the master policies
by way of a defendant class action.  Triad alleged that AHM failed to
follow the delegated insurance underwriting guidelines approved by Triad, that
this failure breached the master policies as well as the implied covenants of
good faith and fair dealing, and that these breaches were so substantial and
fundamental that the intent of the master policies could not be fulfilled and
Triad should be excused from its obligations under the master policies. The
total amount of risk originated under the AHM master policies, accounting for
any applicable stop loss limits associated with Modified Pool contracts and less
risk originated on policies which have been subsequently rescinded, was $1.5
billion, of which $1.0 billion remains in force at March 31,
2010.  Triad continues to accept premiums and process claims under the
master policies but, as a result of this action, Triad ceased remitting claim
payments to companies servicing loans originated by AHM.  Both
premiums and claim payments subsequent to the filing of the complaint have been
segregated pending resolution of this action.  Triad has not
recognized any benefit in its financial statements pending the outcome of the
litigation.





On
November 4, 2009, AHM filed an action in the Bankruptcy Court seeking to recover
$7.6 million of alleged preferential payments made to Triad. AHM alleges that
such payments constitute a preference and are subject to recovery by the
bankrupt estate. The time period in which to respond to this request has been
tolled pending settlement discussions in the above referenced AHM matter. In the
event a settlement is not successfully concluded, Triad intends to vigorously
defend this matter.





On
December 11, 2009, American Home Mortgage Servicing, Inc. filed a complaint
against Triad for damages, declaratory relief, and injunction in the United
States District Court, Northern District of Texas. The complaint alleges that
Triad denied payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance policies prohibit
denial of claim without evidence of harm, and an injunction against future like
denials.  Triad intends to vigorously defend this matter.





On March
5, 2010, Countrywide Home Loans, Inc. filed a lawsuit in the Los Angeles County
Superior Court of the State of California alleging breach of contract and
seeking a declaratory judgment that bulk rescissions of flow loans is improper
and that Triad is improperly rescinding loans under the terms of its master
policies. Triad intends to vigorously defend this matter.





5.  Investments





All fixed
maturity and equity securities are classified as “available-for-sale” and are
carried at fair value. Unrealized gains on available-for-sale securities, net of
tax, are reported as a separate component of accumulated other comprehensive
income. Effective on and subsequent to December 31, 2008, the Company has
recognized an impairment loss on all securities for which the fair value was
less than the amortized cost at the balance sheet date because the Company is no
longer in a position to retain a security until it recovers value due to the
ongoing losses and the regulatory oversight.





Pursuant
to ASC 820, we have categorized available-for-sale securities into a three-level
hierarchy, based on the priority of the inputs to the respective valuation
technique.  The fair value hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3), as described
herein in Note 6, “Fair Value Measurement”, which also includes additional
disclosures regarding our fair value measurements required by ASC
820.




10




The
amortized cost, gross unrealized gains and losses and fair value of
available-for-sale securities as of March 31, 2010 and December 31, 2009 were as
follows:





As
      of March 31, 2010(dollars
      in thousands)
            
            Cost
      or Amortized Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
              ValueFixed
      maturity securities:U.
      S. government and agency securities
            
            $
            53,804
            
            
            $
            388
            
            
            $
            -
            
            
            $
            54,192Foreign
      government securities
            
            
            9,993
            
            
            
            308
            
            
            
            -
            
            
            
            10,301Corporate
      debt
            
            
            450,850
            
            
            
            33,910
            
            
            
            -
            
            
            
            484,760Residential
      mortgage-backed
            
            
            110,524
            
            
            
            5,231
            
            
            
            -
            
            
            
            115,755Commercial
      mortgage-backed
            
            
            1,365
            
            
            
            -
            
            
            
            -
            
            
            
            1,365Asset-backed
      bonds
            
            
            27,243
            
            
            
            2,333
            
            
            
            -
            
            
            
            29,576State
      and municipal bonds
            
            
            108,332
            
            
            
            6,759
            
            
            
            -
            
            
            
            115,091Subtotal,
      fixed maturities
            
            
            762,111
            
            
            
            48,929
            
            
            
            -
            
            
            
            811,040Short
      term investments
            
            
            146,075
            
            
            
            -
            
            
            
            -
            
            
            
            146,075Total
      securities
            
            $
            908,186
            
            
            $
            48,929
            
            
            $
            -
            
            
            $
            957,115











As
      of December 31, 2009(dollars
      in thousands)
            
            Cost
      or Amortized Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
              ValueFixed
      maturity securities:U.
      S. government and agency securities
            
            $
            24,957
            
            
            $
            303
            
            
            $
            -
            
            
            $
            25,260Foreign
      government securities
            
            
            9,991
            
            
            
            311
            
            
            
            -
            
            
            
            10,302Corporate
      debt
            
            
            468,998
            
            
            
            32,001
            
            
            
            -
            
            
            
            500,999Residential
      mortgage-backed
            
            
            102,392
            
            
            
            5,014
            
            
            
            -
            
            
            
            107,406Asset-backed
      bonds
            
            
            36,844
            
            
            
            2,548
            
            
            
            -
            
            
            
            39,392State
      and municipal bonds
            
            
            94,967
            
            
            
            6,504
            
            
            
            -
            
            
            
            101,471Subtotal,
      fixed maturities
            
            
            738,149
            
            
            
            46,681
            
            
            
            -
            
            
            
            784,830Short
      term investments
            
            
            26,650
            
            
            
            1
            
            
            
            -
            
            
            
            26,651Total
      securities
            
            $
            764,799
            
            
            $
            46,682
            
            
            $
            -
            
            
            $
            811,481








The
unrealized gains are partly due to the recovery in value of previous impairments
of our fixed income securities. These unrealized gains do not necessarily
represent future gains that the Company will realize.  Changing
conditions related to specific securities, overall market interest rates, or
credit spreads, as well as our decisions concerning the timing of a sale, may
impact values the Company ultimately realizes.  Taxable securities
typically exhibit greater volatility in value than tax-preferred securities and
thus we expect greater volatility in unrealized gains and realized losses going
forward.  Volatility may increase in periods of uncertain market or
economic conditions.





11


The
amortized cost and estimated fair value of fixed maturity available-for-sale
securities, at March 31, 2010, are summarized by stated maturity as
follows:








Available-for-Sale(dollars
      in thousands)
            
            Amortized
      Cost
            
            
            Fair
              ValueMaturity:One
      year or less
            
            $
            115,877
            
            
            $
            118,252After
      one year through five years
            
            
            413,408
            
            
            
            442,246After
      five years through ten years
            
            
            87,124
            
            
            
            94,523After
      ten years
            
            
            145,702
            
            
            
            156,019Total
            
            $
            762,111
            
            
            $
            811,040





Actual
maturities may differ from contractual maturities because issuers may have the
right to call or pre-pay obligations.





Realized
Gains (Losses) Related to Investments





The
details of net realized investment gains (losses) are as follows:




Three
      Months EndedMarch
      31,(dollars
      in thousands)
            
            2010
            
            
            2009Securities
      available-for-sale:Fixed
      maturity securities:Gross
      realized gains
            
            $
            12
            
            
            $
            991Gross
      realized losses
            
            
            (255
            )
            
            
            (5,456
            )Equity
      securities:Gross
      realized gains
            
            
            4
            
            
            
            4Gross
      realized losses
            
            
            -
            
            
            
            (83
            )Foreign
      currency gross realized losses
            
            
            -
            
            
            
            (21
            )Other
      investment gains
            
            
            (3
            )
            
            
            -Net
      realized losses
            
            $
            (242
            )
            
            $
            (4,565
            )








12




6.  Fair
Value Measurement
 
 Fair
Value of Financial Instruments
 
 The
carrying values and fair values of financial instruments as of March 31, 2010
and December 31, 2009 are summarized below:




March
      31, 2010
            
            
            December
      31, 2009(dollars
      in thousands)
            
            Carrying
      Value
            
            
            Fair
              Value
            
            
            Carrying
      Value
            
            
            Fair
              ValueFinancial
      AssetsFixed
      maturity securities available-for-sale
            
            $
            811,040
            
            
            $
            811,040
            
            
            $
            784,830
            
            
            $
            784,830Short-term
      investments
            
            
            146,075
            
            
            
            146,075
            
            
            
            26,651
            
            
            
            26,651Cash
      and cash equivalents
            
            
            38,662
            
            
            
            38,662
            
            
            
            21,839
            
            
            
            21,839Financial
      LiabilitiesLong-term
      debt
            
            
            34,543
            
            
            
            5,801
            
            
            
            34,540
            
            
            
            7,268





Valuation
Methodologies and Associated Inputs





The
Company utilizes the provisions of ASC 820 in its estimation and disclosures
about fair value.  ASC 820 defines fair value, establishes a framework
for measuring fair value under GAAP, and expands disclosures about fair value
measurements.  ASC 820 applies to other accounting pronouncements that
require or permit fair value measurements.  The Company adopted ASC
820 effective for its fiscal year beginning January 1, 2008. Effective for its
fiscal year beginning January 1, 2010, the Company adopted the provisions of ASU
2010-06, which amended ASC 820 to require a number of additional disclosures
regarding fair value measurements.





ASC 820
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value.  The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value
hierarchy under ASC 820 are as follows:





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).





An
asset’s or a liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement. An
asset’s or liability’s level within the fair value hierarchy is determined at
the end of the reporting period. At March 31, 2010, approximately 0.2% of our
invested assets were Level 3 securities.





Investments
carried at fair value are measured based on assumptions used by market
participants in pricing the security.  The Company relies primarily on
a third-party pricing service to determine the fair value of its investments.
Prices received from third parties are not adjusted; however, the third-party
pricing services’ valuation methodologies and related inputs are analyzed and
additional evaluations are performed to determine the appropriate level within
the fair value hierarchy. Fair value measurement is based on a market approach,
which utilizes prices and other relevant information generated by market
transactions involving identical or comparable securities.  In
addition to the third-party pricing service, sources of inputs to the market
approach may include independent broker quotations or pricing
matrices.





Observable
and unobservable inputs are used in the valuation methodologies and these are
based on a set of standard inputs that are generally used to evaluate all of our
available-for-sale securities.  The standard inputs used in order of
priority are benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bids, offers and reference
data.  Depending on the type of security or the daily market activity,
standard inputs may be prioritized differently or may not be available for all
available-for-sale securities on any given day.  In addition, market
indicators, industry and economic events are monitored and further market
data


13


is
acquired if certain triggers are met.  For certain security types,
additional inputs may be used, or some of the inputs described above may not be
applicable.





For
broker-quoted only securities, quotes from market makers or broker-dealers are
obtained from sources recognized to be market participants.   For
those securities trading in less liquid or illiquid markets with limited or no
pricing information, unobservable inputs are used in order to measure the fair
value of these securities.  In cases where this information is not
available, such as for privately placed securities, fair value is estimated
using an internal pricing matrix.  This matrix relies on judgment
concerning the discount rate used in calculating expected future cash flows,
credit quality, industry sector performance and expected maturity.





The
following is a description of the valuation methodologies used in determining
the fair value of our assets and liabilities.





Fixed
maturities





U.S.
Government and agency securities – U.S. Government and agency securities include
U.S. Treasury securities, agency/GSE issues, and corporate government-backed
obligations issued under the Temporary Liquidity Guarantee Program. The fair
value for U.S. Treasury securities is based on regularly updated quotes from
active market makers and brokers. The fair value for agency and other
government-backed obligations is based on regularly updated dealer quotes,
secondary trading levels, and the new issue market. U.S Government and agency
securities are categorized as Level 2.





Foreign
Government securities – The fair value of Foreign Government securities is based
on discounted cash flow models incorporating observable option-adjusted spread
features where necessary. Foreign Government securities are generally
categorized as Level 2.





Corporate
debt – The fair value for corporate debt is based on regularly updated dealer
quotes, secondary trading, and the new issue market incorporating observable
option-adjusted spread features where necessary. Corporate debt is generally
categorized as Level 2.





Residential
mortgage-backed securities – Residential mortgage-backed securities include
securities issued by the GSEs, the Government National Mortgage Association
(GNMA), as well as private-label securities. The fair value of residential
mortgage-backed securities is based on prices of similar securities and
discounted cash flow analysis incorporating prepayment and default assumptions.
Residential mortgage-backed securities are generally categorized as Level
2.





Commercial
mortgage-backed securities – The fair value of commercial mortgage-backed
securities is based on prices of similar securities and discounted cash flow
analysis incorporating prepayment and default assumptions. Commercial
mortgage-backed securities are generally categorized as Level 2.





Asset-backed
bonds – The fair value of asset-backed bonds is based on prices of similar
securities and discounted cash flow analysis incorporating prepayment and
default assumptions. Asset-backed bonds are generally categorized as Level 2.
For certain securities, if cash flow or other security structure or market
information is not available, the fair value may be based on broker quotes or
benchmarked to an index. In such instances, these asset-backed bonds are
generally categorized as Level 3.





State and
municipal bonds – The fair value for state and municipal bonds is based on
regularly updated trades, bid-wanted lists, and offerings from active market
makers and brokers. Evaluations incorporate current market conditions, trading
spreads, spread relationships and the slope of the yield curve, among others.
Information is applied to bond sectors and individual bond evaluations are
extrapolated. Evaluation for distressed or non-performing bonds may be based on
liquidation value or restructuring value. State and municipal bonds are
generally categorized as Level 2.


14





Short-term
investments





Money
market instruments – The fair value is based on unadjusted quoted prices that
are readily and regularly available in active markets. Money market instruments
are categorized as Level 1.





Other
short-term instruments – Other short-term instruments primarily include
discounted and coupon bearing commercial paper. The fair value is based on a
matrix-based approach incorporating days to maturity, current rates from market
makers, as well as the coupon rate where appropriate. Other short-term
instruments are generally categorized as Level 2.





Long-Term
Debt





The $35
million outstanding long-term debt is the obligation of TGI and not of
Triad.  Debt service amounts to $2.8 million per year and is paid by
TGI.  Given
the limited sources of funds available to service the long-term debt and the
continued deterioration in the Company’s financial condition,the fair
value of the Company’s long-term debt at March 31, 2010 and December 31, 2009
was calculated using a discounted cash flow methodology, giving effect only to
the anticipated interest payments based upon available funds at March 31,
2010.





Fair
Value of Investments





The
Company did not have any material assets or liabilities measured at fair value
on a non-recurring basis as of March 31, 2010 or at December 31,
2009.  During the first quarter of 2010, there were no transfers of
securities within the fair value hierarchy. The following table summarizes the
assets measured at fair value on a recurring basis and the source of the inputs
in the determination of fair value as of March 31, 2010 and December 31,
2009:








Fair
      Value at Reporting Date Using(dollars
      in thousands)
            
            March
      31, 2010
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)AssetsSecurities
      available-for-saleFixed
      maturities:U.
      S. government and agency securities
            
            $
            54,192
            
            
            $
            -
            
            
            $
            54,192
            
            
            $
            -Foreign
      government securities
            
            
            10,301
            
            
            
            -
            
            
            
            10,301
            
            
            
            -Corporate
      debt
            
            
            484,760
            
            
            
            -
            
            
            
            484,760
            
            
            
            -Residential
      mortgage-backed
            
            
            115,755
            
            
            
            -
            
            
            
            115,755
            
            
            
            -Commercial
      mortgage-backed
            
            
            1,365
            
            
            
            -
            
            
            
            1,365
            
            
            
            -Asset-backed
      bonds
            
            
            29,576
            
            
            
            -
            
            
            
            27,594
            
            
            
            1,982State
      and municipal bonds
            
            
            115,091
            
            
            
            -
            
            
            
            115,091
            
            
            
            -Total
      fixed maturities
            
            
            811,040
            
            
            
            -
            
            
            
            809,058
            
            
            
            1,982Short-term
      investmentsMoney
      market instruments
            
            
            52,035
            
            
            
            52,035
            
            
            
            -
            
            
            
            -Commercial
      paper
            
            
            94,040
            
            
            
            -
            
            
            
            94,040
            
            
            
            -Total
            
            $
            957,115
            
            
            $
            52,035
            
            
            $
            903,098
            
            
            $
            1,982





15





Fair
      Value at Reporting Date Using(dollars
      in thousands)
            
            December
      31, 2009
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)AssetsSecurities
      available-for-saleFixed
      maturities:U.
      S. government and agency securities
            
            $
            25,260
            
            
            $
            -
            
            
            $
            25,260
            
            
            $
            -Foreign
      government securities
            
            
            10,302
            
            
            
            -
            
            
            
            10,302
            
            
            
            -Corporate
      debt
            
            
            500,999
            
            
            
            -
            
            
            
            500,999
            
            
            
            -Residential
      mortgage-backed
            
            
            107,406
            
            
            
            -
            
            
            
            107,406
            
            
            
            -Asset-backed
      bonds
            
            
            39,392
            
            
            
            -
            
            
            
            37,398
            
            
            
            1,994State
      and municipal bonds
            
            
            101,471
            
            
            
            -
            
            
            
            101,471
            
            
            
            -Total
      fixed maturities
            
            
            784,830
            
            
            
            -
            
            
            
            782,836
            
            
            
            1,994Short-term
      investmentsMoney
      market instruments
            
            
            25,889
            
            
            
            25,889
            
            
            
            -
            
            
            
            -Commercial
      paper
            
            
            762
            
            
            
            -
            
            
            
            762
            
            
            
            -Total
            
            $
            811,481
            
            
            $
            25,889
            
            
            $
            783,598
            
            
            $
            1,994




Significant
unobservable inputs (Level 3) were used in determining the fair value on certain
bonds in the fixed maturities portfolio during this period.  The
following table provides a reconciliation of the beginning and ending balances
of these Level 3 bonds and the related gains and losses related to these assets
during the first three months of 2010, respectively.




Fair
      Value Measurement Using Significant Unobservable Inputs (Level
      3)Three
      Months EndedMarch
      31,(dollars
      in thousands)
            
            2010
            
            
            2009Securities
      available-for-saleAsset-backed
      bonds:Beginning
      balance
            
            $
            1,994
            
            
            $
            2,535Transfers
      into Level 3
            
            
            -
            
            
            
            -Transfers
      out of Level 3
            
            
            -
            
            
            
            -Total
      gains and losses (realized and unrealized):Included
      in operations
            
            
            (121
            )
            
            
            (288
            )Included
      in other comprehensive income
            
            
            17
            
            
            
            (83
            )Purchases,
      issuances and settlementsPurchases
            
            
            93
            
            
            
            -Issuances
            
            
            -
            
            
            
            -Sales
            
            
            (1
            )
            
            
            (407
            )Settlements
            
            
            -
            
            
            
            -Ending
      balance
            
            $
            1,982
            
            
            $
            1,757The
      amount of total gains and losses for the period included inoperations
      attributable to realized losses and the change inunrealized
      gains or losses relating to assets still held at thereporting
      date.
            
            $
            (104
            )
            
            $
            (371
            )








16


7.  Earnings
(Loss) Per Share ("EPS")





Basic and
diluted EPS are based on the weighted-average daily number of shares
outstanding.  In computing diluted EPS, only potential common shares
that are dilutive – those that reduce EPS or increase loss per share – are
included.  Exercise of options and unvested restricted stock are not
assumed if the result would be antidilutive, such as when a loss from operations
is reported.  For the three months ended March 31, 2010 and 2009, the
basic and diluted EPS denominators are the same weighted-average daily number of
shares outstanding.  The numerator used in both the basic EPS and
diluted EPS calculation is the loss reported for the period
represented.  For the three months ended March 31, 2010, options to
purchase approximately 13,304 shares of the Company’s common stock were excluded
from the calculation of EPS because they were antidilutive.





8.  Comprehensive
Income (Loss)





Comprehensive
income (loss) consists of net income (loss) and other comprehensive income
(loss).  For the Company, other comprehensive income (loss) is
composed of unrealized gains or losses on available-for-sale securities, net of
income taxes.  Effective with the issuance of the first Corrective
Order, the Company no longer has the ability to hold securities in an unrealized
loss position until such time that the securities recover in value or mature due
to the possibility that Illinois law may require the Department to seek
receivership if the corrective plan were deemed ineffective.  Thus,
any security with a fair value less than the book value at the balance sheet
date is considered to be other-than-temporarily impaired and the loss is
recognized as a realized loss in the Statements of Operations. For the three
months ended March 31, 2010 and March 31, 2009, the Company’s other
comprehensive income was $1.3 million and $10.3 million, respectively and the
Company’s comprehensive loss was $26.5 million and $44.9 million,
respectively.





9.  Income
Taxes





The
income tax benefit for the three months ended March 31, 2010 and March 31, 2009
differs substantially from that which is computed by applying the Federal
statutory income tax rate of 35% to the loss before income taxes. This
difference is primarily due to the Company’s inability to recognize a benefit
for expected tax loss carry forwards through the recording of a valuation
allowance against all of the Company’s deferred tax assets.





10.
Exit Costs


In June
2008, the Company recorded an accrual for certain exit costs in connection with
the transition of its business into run-off.  As part of the
transition to run-off, Triad implemented a reduction in workforce by terminating
approximately 100 employees based primarily in the sales, marketing, technology
and underwriting functions.  The remaining workforce of approximately
100 full-time employees is focused on the payment of legitimate claims and
servicing the insurance portfolio during the run-off period.





As a
result of the transition into run-off, the Company recorded an estimated pre-tax
charge of approximately $8.3 million in other operating costs on the Statements
of Operations for the quarter ended June 30, 2008.  These charges
included approximately $7.1 million in severance and related personnel costs,
approximately $1.0 million related primarily to the abandonment of a portion of
Triad’s main office lease that is expected to continue through 2012, and
approximately $0.2 million related to the termination of certain other leases,
including those related to underwriting offices, equipment and
automobiles.  At March 31, 2010, there remained approximately $0.6
million of accrued severance and related personnel costs and approximately $0.1
million of lease abandonment costs.  There have been no significant
changes to the estimates established at June 30, 2008.





In the
quarter ended March 31, 2010, the Company accrued an additional $1.1 million of
severance-related expenses attributable to the Company’s continuing
run-off.  Most of these severance expenses are now paid in
the


17


first
payroll following the termination, so the Company expects only slight changes in
the amounts accrued and eventually paid.





11.
Subsequent Events





Management
has evaluated subsequent events to determine if events or transactions occurring
through the filing date of this Form 10-Q require potential adjustment or
disclosure in the financial statements.  We are
not aware of any significant events that occurred subsequent to the balance
sheet date but prior to the filing of this report that would have a material
impact on our Consolidated Financial Statements.





Item
2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations





Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes our consolidated financial condition, changes in financial position,
and results of operations for the three months ended March 31, 2010 and
2009.  This discussion supplements Management’s Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended December 31, 2009, and should be read in
conjunction with the interim financial statements and notes contained
herein.





Certain
of the statements contained in this quarterly report on Form 10-Q are
"forward-looking statements" and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. These statements
include estimates and assumptions related to economic, competitive, regulatory,
operational and legislative developments and typically are identified by use of
terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential,” “continue” and similar words,
although some forward-looking statements are expressed differently. These
forward-looking statements are subject to change, uncertainty and circumstances
that are, in many instances, beyond our control and they have been made based
upon our current expectations and beliefs concerning future developments and
their potential effect on us. Actual developments and their results could differ
materially from those expected by us, depending on the outcome of a number of
factors, including: the possibility that the Illinois Department of Insurance
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; our ability to operate our
business in run-off and maintain a solvent run-off; our ability to continue as a
going concern; the possibility of general economic and business conditions that
are different than anticipated; legislative, regulatory, and other similar
developments; changes in interest rates, employment rates, the housing market,
the mortgage industry and the stock market; the possibility that there will not
be adequate interest in the Company’s common stock to ensure efficient pricing;
and the relevant factors described in this report under the headings “Risk
Factors” and "Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995," in our Annual Report on Form 10-K for the year ended
December 31, 2009, as well as in other reports and statements that we file with
the Securities and Exchange Commission.  Forward-looking statements
are based upon our current expectations and beliefs concerning future events and
we undertake no obligation to update or revise any forward-looking statements to
reflect the impact of circumstances or events that arise after the date the
forward-looking statements are made, except as required by the federal
securities laws.





Overview





Triad
Guaranty Inc. (“TGI”) is a holding company that historically provided private
mortgage insurance coverage in the United States through its wholly-owned
subsidiary, Triad Guaranty Insurance Corporation (“TGIC”).  Unless the
context requires otherwise, references to “Triad” in this quarterly report on
Form 10-Q refer to the operations of TGIC and its wholly-owned subsidiary, Triad
Guaranty Assurance Corporation (“TGAC”).  References to “we,” “us,”
“our,” and the “Company” refer collectively to the operations of TGI and
Triad.  TGIC is an Illinois-domiciled insurance company and TGAC is an
Illinois-domiciled reinsurance company. The Illinois Department of Insurance
(the “Insurance Department”) is the primary regulator of both TGIC and
TGAC.  The Illinois Insurance Code grants broad powers to the
Insurance Department and its director (collectively, the “Department”) to
enforce rules or exercise discretion over almost all significant aspects of our
insurance business. Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and is operating


18


its
remaining business in run-off.  As used in this quarterly report on
Form 10-Q, the term "run-off" means writing no new mortgage insurance policies
and continuing to service existing policies.  Servicing includes:
receiving premiums on policies that remain in force; cancelling coverage at the
insured’s request; terminating policies for non-payment of premium; working with
borrowers in default to remedy the default and/or mitigate our loss; reviewing
policies for the existence of misrepresentation, fraud or non-compliance with
stated programs; and settling all legitimate filed claims per the provisions of
the two Corrective Orders issued by the Department.  The term
“settled,” as used in these financial statements in the context of the payment
of a claim, refers to the satisfaction of Triad’s obligations following the
submission of valid claims by our policyholders.  Prior to June 1,
2009, valid claims were settled solely by a cash payment.  Effective
on and after June 1, 2009, valid claims are settled by a combination of 60% in
cash and 40% in the form of a deferred payment obligation
(“DPO”).  The first Corrective Order was issued in August
2008.  The second Corrective Order was issued in March 2009 and
subsequently amended in May 2009.  These Corrective Orders, among
other things, include restrictions on the distribution of dividends or interest
on notes payable to TGI by Triad, allow management to continue to operate Triad
under close supervision, and include restrictions on the payment of
claims.  Failure to comply with the provisions of the Corrective
Orders may result in the imposition of fines or penalties or subject Triad to
further legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of Triad.





We have
historically provided Primary and Modified Pool mortgage guaranty insurance
coverage on U.S. residential mortgage loans.  We classify insurance as
Primary when we are in the first loss position and the loan-to-value amount, or
LTV, is 80% or greater when the loan is first insured.  We classify
all other insurance as Modified Pool.  The majority of our Primary
insurance has been delivered through the flow channel, which is defined as loans
originated by lenders and submitted to us on a loan-by-loan basis.  We
have also historically provided mortgage insurance to lenders and investors who
seek additional default protection (typically secondary coverage or on loans for
which the individual borrower has greater than 20% equity), capital relief, and
credit-enhancement on groups of loans that are sold in the secondary
market.  Insurance provided on these individual transactions was
provided through the structured bulk channel.  Those individual loans
in the structured bulk channel in which we are in the first loss position and
the LTV ratio is greater than 80% are classified as
Primary.   All of our Modified Pool insurance has been delivered
through the structured bulk channel.  Our insurance remains effective
until one of the following events occurs:  the policy is cancelled at
the insured’s request; coverage is cancelled due to pre-determined aggregate
stop loss limits being met for certain Modified Pool transactions; we terminate
the policy for non-payment of premium; the policy defaults and we satisfy our
obligations under the insurance contract; or we rescind or deny the policy for
violations of provisions of a master policy.





In
run-off, our revenues principally consist of:


·
            earned
      renewal premiums from the remaining insurance in force, net
      of:


o
            reinsurance
      premiums ceded, primarily for captive reinsurance,
  and


o
            refunds
      paid or accrued resulting from the cancellation of insurance in force or
      for coverage rescinded or anticipated to be rescinded due to violations of
      certain provisions of a master
policy;


·
            investment
      income; and


·
            proceeds
      from the sale of assets other than the sale of
  securities.





We also
realize investment gains and investment losses on the sale and impairment of
securities, with the net gain or loss reported as a component of
revenue.





In
run-off, our expenses consist primarily of:


·
            settled
      claims net of any losses ceded to captive
  reinsurers;


·
            changes
      in reserves for estimated future claim payments on loans that are
      currently in default net of any reserves ceded to captive
      reinsurers;


·
            general
      and administrative costs of servicing existing
  policies;


·
            other
      general business expenses; and


19


·
            interest
      expense.





Our
results of operations in run-off depend largely on:


·
            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.





Our
results of operations in run-off could also be impacted significantly by recent
federal government and private initiatives to stabilize the housing and
financial markets.  See the discussion below for further details on
these initiatives.





Corrective
Orders





Triad has
entered into two Corrective Orders with the Department.  The first
Corrective Order was entered into on August 5, 2008 and remains in effect. This
Corrective Order was implemented as a result of our decision to cease writing
new mortgage guaranty insurance and to commence a run-off of our existing
insurance in force as of July 15, 2008.  Among other things, that
Corrective Order:





·
            Required
      Triad to submit a corrective plan to the
  Department;


·
            Prohibits
      all stockholder dividends from Triad to TGI without the prior approval of
      the Department;


·
            Prohibits
      interest and principal payments on Triad’s surplus note to TGI 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.





After the
submission and approval of the Department of the initial corrective plan in
2008, we have made several subsequent revisions to the plan -- particularly to
the five-year statutory financial projections based upon our actual experience
and the changes in the economy.  In the first quarter of 2009 we
revised the assumptions as a result of continued deteriorating economic
conditions impacting our financial condition, results of operations and future
prospects. The revised assumptions produced a range of potential ultimate
outcomes for our run-off, but included projections showing that absent
additional action by the Department or favorable changes in our business, we
would have reported a deficiency in policyholders’ surplus as calculated in
accordance with SAP as early as March 31, 2009.  If this statutory
insolvency had occurred, the Department likely would have instituted a
receivership proceeding against Triad, which in turn would likely have led to
the institution of bankruptcy proceedings by TGI.  In an effort to
protect existing policyholders, the Department issued the second Corrective
Order effective on March 31, 2009, as amended on May 26, 2009.  The
second Corrective Order stipulates or prescribes:





·
            Effective
      June 1, 2009, all valid claims under Triad’s mortgage guaranty insurance
      policies are settled 60% in cash and 40% by recording a
    DPO;


20


·
            At
      March 31, 2009, Triad was required to adjust surplus and reserves
      reflecting the impact of the second Corrective Order on future settled
      claims;


·
            The
      DPO requires that Triad accrue a carrying charge based on the investment
      yield earned by Triad’s investment
portfolio;


·
            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 must be
      paid in full, and will deposit any excess reinsurance recovery above the
      60% cash payment into an escrow
account;


·
            Payment
      of the DPO and the carrying charge is subject to Triad’s future financial
      performance and requires the approval of the
  Department;


·
            Procedures
      to account for the impact of the second Corrective Order in the financial
      statements prepared in accordance with
SAP;


·
            Upon
      payment of a claim under these provisions, Triad is 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.





The DPO
recording requirements of the second Corrective Order became effective on June
1, 2009.  At March 31, 2010, the recorded DPO, including a carrying
charge of $3.8 million, amounted to $230.0 million.  The recording of
a DPO does not impact reported settled losses as we continue to report the
entire amount of a claim in our statement of operations.  The
accounting for the DPO on a SAP basis is similar to a surplus note which is
reported as a component of statutory surplus; accordingly, any repayment of the
DPO or the associated carrying charge requires approval of the
Department.  However, in our financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) included in this report, the DPO is reported as a
liability.





We
continue to make updates to the five-year financial projections as required by
the Corrective Orders based upon the actual development of the remaining
insurance in force and other changes to the economy. Failure to comply with the
provisions of the Corrective Orders or any other violation of the Illinois
Insurance Code may result in the imposition of fines or penalties or subject
Triad to further legal proceedings, including the institution by the Department
of receivership proceedings for the conservation, rehabilitation or liquidation
of Triad.  See Item 1A, “Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2009 for more information.





Triad is
also subject to comprehensive regulation by the insurance departments of the
various other states in which it is licensed to transact
business.  Currently, the insurance departments of the other states
are working with the Department in the implementation of the Corrective
Orders.





Going
Concern





Our
ability to continue as a going concern is dependent on: the successful
implementation of the revised corrective plan; reversing a large deficit in
assets; and continuing to meet our debt obligations.





Prior to
the second Corrective Order, our recurring losses from operations and resulting
decline in policyholders’ surplus as calculated in accordance with SAP increased
the likelihood that Triad would be placed into receivership and raised
substantial doubt about our ability to continue as a going
concern.  The positive impact on surplus resulting from the second
Corrective Order has resulted in Triad reporting a policyholders’ surplus in its
SAP financial statements of $91.1 million at March 31, 2010, as opposed to a
deficiency in policyholders’ surplus of $687.3 million on the same date had the
second Corrective Order not been implemented.  While implementation of
the second Corrective Order has deferred the institution of an involuntary
receivership proceeding, no assurance


21


can be
given that the Department will not seek receivership of Triad in the future and
there continues to be substantial doubt about our ability to continue as a going
concern.  The Department may seek receivership of Triad based on its
determination that Triad will ultimately become insolvent or for other reasons
stated above.  If the Department were to seek receivership of Triad,
TGI could be compelled to institute a proceeding seeking relief from creditors
under U.S. bankruptcy laws.  Our consolidated financial statements
that are presented in this report do not include any adjustments that reflect
the financial risks of Triad entering receivership proceedings and assume that
we will continue as a going concern.  We expect losses from operations
to continue and our ability to continue as a going concern is dependent on the
successful implementation of the revised corrective plan.





At March
31, 2010, we reported a deficit in assets under GAAP of $732.7 million compared
to a deficit in assets of $706.4 million at December 31, 2009 and $181.4 million
at March 31, 2009.  A deficit in assets occurs when recorded
liabilities exceed recorded assets in financial statements prepared under GAAP
and is not necessarily a measure of insolvency.  The growth in the
deficit in assets is the result of the substantial increase in loss reserves and
settled claims over the past two years, reflecting the continued decline in
housing and mortgage loan conditions.  We will have to earn in excess
of $732.7 million on a GAAP basis during the remaining run-off period in order
to become financially solvent and continue as a going concern.





We have
$35.0 million outstanding long-term debt and an annual debt service of $2.8
million. This debt and debt service are the obligations of TGI and not Triad.
TGI has limited assets and even more limited sources of revenues.  TGI’s
ability to pay its $2.8 million annual debt service obligation is limited to its
cash and invested assets, which amounted to an aggregate of approximately $7.5
million as of March 31, 2010.  Unless other sources of funds are
obtained by TGI, it is likely that TGI will default in the payment of interest
due under its $35 million notes within the next three years and file for
bankruptcy protection.  See further discussion under the heading,
“Liquidity – Holding Company Specific”.





See Item
1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2009 for more information about our financial solvency and going concern
risks and uncertainties.





Captive
Reinsurer Commutations





Prior to
entering into run-off, we entered into various captive reinsurance agreements
that were designed to allow lenders to share in the risks of mortgage
insurance.  Under the typical captive reinsurance agreement, a captive
reinsurer, generally an affiliate of the lender, assumed a portion of the risk
associated with the lender’s book of business insured by us in exchange for a
percentage of the premiums that we collected.  All of our captive
reinsurance agreements include, among other things, minimum capital requirements
and excess-of-loss provisions that provide for defined aggregate layers of
coverage and a maximum exposure limit for the captive reinsurer.  In
accordance with the excess-of-loss provisions, we retain the first loss position
on the first aggregate layer of risk and reinsure a second defined aggregate
layer with the captive reinsurer.  We generally retain the remaining
risk above the defined aggregate layer reinsured with the captive
reinsurer.





Although
a percentage of premiums and certain reserves and losses are ceded to the
captive reinsurer under the captive reinsurance agreements, these agreements do
not relieve us from our obligations to policyholders.  Failure of the
captive reinsurer to honor its obligations under the captive reinsurance
agreement could result in losses to us; consequently, we establish allowances
for amounts deemed uncollectible from the captive reinsurer (see Note 3 to the
consolidated financial statements).





We
require each captive reinsurer to establish a trust to partially support its
obligations under the captive reinsurance agreement.  The captive
reinsurer is the grantor of the trust and we are the beneficiary of the
trust.  The trust agreement that governs each trust requires the
captive reinsurer to comply with covenants regarding minimum and ongoing
capitalization requirements, required reserves, authorized investments and asset
withdrawals.  The trust is funded by ceded premiums from us and
investment earnings on trust assets, as well as capital contributions by the
captive reinsurer.  If certain capitalization requirements of the
trust are not maintained, we retain the right to


22


terminate
the captive reinsurance agreement.  The termination of the captive
reinsurance agreement is commonly referred to as a
“commutation.”  Upon commutation, we receive all remaining trust
assets, reduce the reinsurance recoverable for amounts due from the captive
reinsurer, and cease ceding premium to the captive reinsurer.





During
the first quarter of 2010, we determined that our two largest captive reinsurers
had not maintained the required capitalization in their trusts.  As a
result, and with the mutual agreement of each of the captive reinsurers, we
commuted both of these captive reinsurance agreements during the first quarter
and received approximately $188.7 million of aggregate trust assets from the two
captive reinsurers.  These two commutations resulted in an increase in
our invested assets and a corresponding decrease in reinsurance recoverable
during the quarter ended March 31, 2010.  The commutations had no
impact on our results of operations or financial condition for the quarter, as
the amount recorded as reinsurance recoverable under the captive reinsurance
agreements was limited to the captive reinsurers’ accumulated trust balances
(see Note 3 to the consolidated financial statements).  Our receipt of
the $188.7 million of trust assets, however, positively impacted our cash flows
in the 2010 first quarter.





We are
currently assessing our other captive reinsurers’ compliance with their
capitalization requirements, and we are in discussions with certain captive
reinsurers regarding the potential commutation of their captive reinsurance
agreements.  We currently do not expect the impact of any future
commutations to have a material impact on our results of operations or financial
condition.





Foreclosure
Prevention Initiatives





Since the
latter part of 2008, the federal government has initiated several programs that
have been implemented through the government sponsored entities (“GSEs”) and
lenders that are, in general, designed to prevent foreclosures and provide
relief to homeowners and to the financial markets.  These programs
involve both modifications to the original terms of existing mortgages and
complete refinancings.  These programs are designed to provide a means
for borrowers to qualify for lower payments by modifying the interest rate or
extending the term of the mortgage.  Several of these programs have
subsequently been expanded or extended and may continue to change as the Federal
government continues to seek ways to help prevent foreclosures.  If
successful, these programs could result in an increase in the cure rate of
existing defaults.  To a large degree, the benefit we receive from
these programs is dependent on the efforts of servicers and the GSEs. While we
are actively working with both servicers and the GSEs in the implementation of
these programs, it is not clear to what extent these programs may ultimately
impact our operations.  If a loan is modified or refinanced as part of
one of these programs, we intend to maintain insurance on the loan and are
subject to the same ongoing risk if the policy were to
re-default.  During the 2010 first quarter, the GSEs issued a mandate
to complete as many loan modifications as possible, which we believe had a
positive impact on the increase in cures during that period.  The
ultimate impact of these government programs on our future results of operations
and prospects is unknown at this time.  This uncertainty around the
impact of these programs is amplified by the complexity of the programs, our
reliance on loan servicers to implement the programs, and conditions within the
housing market and the economy, among other factors.  See Item 1A,
“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2009 for more information.





23


Consolidated
Results of Operations





Following
is selected financial information for the three months ended March 31, 2010 and
2009:





Three
      Months EndedMarch
      31,(dollars
      in thousands, exceptper
      share data)
            
            2010
            
            
            2009
            
            
            %
      ChangeEarned
      premiums
            
            $
            45,888
            
            
            $
            44,358
            
            
            
            3Net
      losses and loss adjustment expenses
            
            
            72,238
            
            
            
            101,577
            
            
            
            (29
            )Net
      loss
            
            
            (27,811
            )
            
            
            (55,174
            )
            
            
            (50
            )Diluted
      loss per share
            
            
            (1.84
            )
            
            
            (3.68
            )
            
            
            (50
            )





The net
loss for the first quarter of 2010 was primarily due to the continued high level
of net losses and loss adjustment expenses (“LAE”). Net losses and LAE were
$72.2 million for the three months ended March 31, 2010, down from $101.6
million at March 31, 2009.  Net losses and LAE are comprised of net
settled claims and LAE as well as the increase in the loss and LAE reserves net
of any reinsurance recoverables. The components of net losses and LAE in the
first quarter of 2010 were significantly affected by the commutation of our two
largest captive reinsurance agreements and our related receipt of $188.7 million
of trust assets. While the commutations had no material impact on our overall
results of operations or financial condition, the funds received from the
commutations are recorded as a reimbursement of claims paid, and the recognition
of these ceded paid losses resulted in a negative amount of net settled claims
for the quarter ended March 31, 2010 of $43.7 million. The statement of
operations was not impacted, however, as the increase in ceded paid losses was
offset by a similar decrease to reinsurance recoverable.





Earned
premiums increased slightly in the first quarter of 2010 compared to the first
quarter of 2009 primarily due to a smaller impact from expected premium refunds
from rescission activity. The loss ratio for the first quarter of 2010 was
157.4% compared to a loss ratio of 229.0% for the quarter ended March 31,
2009.





Certain
segments of our insured portfolio continue to perform more adversely when
compared to the rest of the portfolio. These segments include:





·
            Loans
      on properties in California, Florida, Arizona, and Nevada (collectively
      referred to as "distressed markets") - At March 31, 2010, the distressed
      markets comprised 49% of risk in default while only comprising 31% of
      total risk in force.  We believe the adverse performance of the
      distressed markets was, in part, due to non-sustainable levels of house
      price appreciation in the years prior to 2007 and the subsequent
      unprecedented depreciation in house prices.  In general, the
      non-distressed markets have not experienced the significant collapse in
      house prices that have occurred in the distressed
      markets.  However, risk in default in the non-distressed markets
      grew by 25% in the twelve months ended March 31, 2010 compared to a
      decline of 21% in the distressed markets.  We believe the
      growing deterioration in the non-distressed markets is a result of high
      unemployment, although the general depressed conditions in house prices
      and credit markets have also had an adverse impact. Defaults in the
      distressed markets also comprised a large percentage of paid claims and
      rescinded policies, which have contributed to the decline in risk in
      default in these markets.





·
            Policies
      originated in 2006 and 2007 - At March 31, 2010, defaults in these policy
      years comprised 69% of our gross risk in default while only comprising 56%
      of our total risk in force. These policy years have also comprised a large
      percentage of both paid claims and rescinded policies over the previous
      twelve months.


24


We
describe our results of operations in greater detail in the discussion that
follows.  The information is presented in four
categories:  Production; Insurance and Risk in Force; Revenues; and
Losses and Expenses.





Production





On July
15, 2008, we ceased issuing commitments for mortgage
insurance.  Production during the first quarter of 2010 was
immaterial. Our future production, if any, will consist of certificates issued
from commitments for mortgage insurance that were entered into prior to July 15,
2008 and will be immaterial to our results of operations.





Insurance
and Risk in Force





The
following table provides detail on our direct insurance in force at
March 31, 2010 and 2009:





March
      31,(dollars
      in millions)
            
            2010
            
            
            2009
            
            
            %
      ChangePrimary
      insurance
            
            
            34,567
            
            
            
            41,661
            
            
            
            (17
            )Modified
      Pool insurance
            
            
            13,051
            
            
            
            18,825
            
            
            
            (31
            )Total
      insurance
            
            $
            47,618
            
            
            $
            60,486
            
            
            
            (21
            )





Insurance
in force at March 31, 2010 declined by 21.3% from March 31, 2009, reflecting the
lack of production during the previous twelve months as well as the cancellation
of insurance coverage resulting primarily from claim settlement and rescission
activity. Furthermore, during the fourth quarter of 2009 and first quarter of
2010, insurance coverage was terminated on a number of Modified Pool
transactions where pre-determined aggregate stop loss limits in the contracts
were met on a settled basis.  A small portion of our Modified Pool
contracts contain provisions that terminate coverage and the contract when
cumulative settled losses reach the stop loss limit. No future premium is
received following the termination of one of these Modified Pool
contracts.  We expect that several other Modified Pool transactions
will also reach their respective stop loss limits during 2010 and
terminate.  The majority of our Modified Pool contracts do not
terminate when settled losses reach the stop loss limit and premiums will
continue to be collected until such time that the remaining insurance in force
is less than 10% of the original amount.





Persistency
levels have declined somewhat over the previous twelve months due to
cancellation activity. Persistency is an important metric in understanding our
premium revenue, especially in run-off as no new business is being written and
our overall premium base declines over time.  Generally, the longer a
policy remains on our books, or “persists”, the greater the amount of premium
revenue we will earn from the policy.  Primary insurance persistency
declined to 82.9% at March 31, 2010 compared to 86.9% at March 31,
2009. Modified pool insurance persistency declined to 69.3% at March 31,
2010 compared to 88.8% at March 31, 2009 and was impacted by the
cancellation of the Modified Pool transactions.





Given the
lack of production since 2008 and the relatively high level of persistency, the
composition of our risk in force has remained relatively consistent with that of
a year ago.  Additionally, while our exposure to the distressed
markets expressed as a percentage of our total risk in force remained relatively
constant, the contribution to losses from the distressed markets has been
disproportionally higher.





At March
31, 2010 and March 31, 2009, respectively, approximately 26.9% and 29.5% of our
Primary risk in force and 64.6% and 72.9% of our Modified Pool risk in force is
comprised of coverage on loans with the potential for negative amortization
(“pay option ARM”) and interest only loans, respectively. An inherent risk in
both a pay option ARM loan and an interest only loan is the impact of the
scheduled milestone in which the borrower must begin making amortizing
payments.  These payments can be substantially greater than the
minimum payments required before the milestone is met.  An additional
risk to a pay option ARM loan is that the payment


25


being
made may be less than the amount of interest accruing, creating negative
amortization on the outstanding principal of the loan.  We are not
provided with information on whether a borrower is required to make amortizing
payments but we are provided information on the accumulation of negative
amortization.  The majority of our pay-option ARM loan portfolio has
accumulated negative amortization and we believe the majority of this portfolio
is approaching the milestone where amortizing payments will be
required.  As a result, our pay-option ARM loans may face a
significant payment shock in the current and future periods which increases our
risk of loss. Many of these pay option ARM loans are also from the 2006 and 2007
vintage years and are located in the distressed states.  Historically,
the performance of pay-option ARM loans has benefitted from, and the risk has
been mitigated by, home price appreciation and the ability to refinance before
amortizing payments are required.  We do not believe these historical
mitigating factors are present to any meaningful degree in the current
environment.





At March
31, 2010, approximately 18.1% of our Primary risk in force and 71.3% of our
Modified Pool risk in force is comprised of coverage on Alt-A
loans.  We define Alt-A loans as loans that have been underwritten
with reduced or no documentation verifying the borrower’s income, assets, or
employment and where the borrower has a FICO score greater than 619. We have
found a substantial amount of misrepresentation and fraud on the Alt-A loans in
our portfolio.  Due in part to recent conditions in the housing
markets, the Alt-A loans, pay option ARM loans, and interest only loans have, as
a group, performed significantly worse than the remaining prime fixed rate loans
through March 31, 2010.





The
following table shows direct risk in force as of March 31, 2010 and March 31,
2009 by year of loan origination. Business originated in 2006 and 2007 continues
to comprise the majority of our risk in force.  This is due to the
significant amounts of production during these two years as well as the large
number of policies that have been cancelled from prior origination
years.  In general, policies originated during these years have
significantly higher amounts of average risk per policy than policies originated
prior to 2006. Furthermore, policies originated during these vintage years have
also exhibited higher default and claim rates than preceding vintage
years.  For additional information regarding these vintage years, see
“Losses and Expenses,” below.





March
      31, 2010Primary
            
            
            Modified
      Pool(dollars
      in millions)
            
            Gross
      Risk
              in
      Force *
            
            
            Percent
            
            
            Gross
      Risk
              in
      Force *
            
            
            PercentVintage Year2004
      and before
            
            $
            1,948.8
            
            
            
            21.6
            
            
            $
            693.6
            
            
            
            18.62005
            
            
            1,172.3
            
            
            
            13.1
            
            
            
            1,189.2
            
            
            
            32.12006
            
            
            1,824.0
            
            
            
            20.2
            
            
            
            1,229.3
            
            
            
            33.02007
            
            
            3,503.7
            
            
            
            38.8
            
            
            
            607.9
            
            
            
            16.32008
            
            
            571.8
            
            
            
            6.3
            
            
            
            -
            
            
            
            -Total
            
            $
            9,020.7
            
            
            
            100.0
            
            
            $
            3,720.0
            
            
            
            100.0*
      Gross risk in force is on a per policy basis and does not account for risk
      ceded to captive reinsurers orapplicable
      stop-loss amounts and deductibles on Modified Pool structured bulk
      transactions.





The
commutation of the captive reinsurance agreements during the first quarter of
2010 reduced the percentage of our Primary flow insurance in force subject to
captive reinsurance arrangements to 15.5% at March 31, 2010 from 53.1% at
December 31, 2009 and 55.3% at March 31, 2009. Assets held in trusts supporting
the reinsured risk also declined to $76.9 million at March 31, 2010 from $257.3
million and $251.9 million at December 31, 2009 and March 31, 2009,
respectively. Certain of the remaining captive reinsurance arrangements have
trust balances below the reserves ceded under the contracts.  In those
cases, the net reserve credit that we recognize in our financial statements is
limited to the trust balance.  Given this limitation as well as the
decline in insurance in force subject to captive reinsurance, we expect limited
benefit in future periods from these arrangements.





26


Revenues





A summary
of the individual components of our revenue for the first quarter of 2010 and
2009 follows.





Three
      Months EndedMarch
      31,(dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            %
      ChangeDirect
      premium written before the impact ofrefunds
            
            $
            69,724
            
            
            $
            80,773
            
            
            
            (14
            )Less:Cash
      refunds primarily related torescissions
            
            
            (15,010
            )
            
            
            (6,099
            )
            
            
            146Change
      in refund accruals primarilyrelated
      to rescissions
            
            
            (321
            )
            
            
            (19,051
            )
            
            
            (98
            )Direct
      premium written
            
            
            54,393
            
            
            
            55,623
            
            
            
            (2
            )Ceded
      premium written
            
            
            (8,202
            )
            
            
            (11,130
            )
            
            
            (26
            )Net
      premium written
            
            
            46,191
            
            
            
            44,493
            
            
            
            4Change
      in unearned premiums
            
            
            (303
            )
            
            
            (135
            )
            
            
            124Earned
      premiums
            
            $
            45,888
            
            
            $
            44,358
            
            
            
            3Net
      investment income
            
            $
            9,873
            
            
            $
            11,192
            
            
            
            (12
            )Net
      realized investment (losses) gains
            
            $
            (242
            )
            
            $
            (4,565
            )
            
            
            (95
            )Total
      revenues
            
            $
            55,511
            
            
            $
            50,987
            
            
            
            9





The
decline in direct premium written before the impact of refunds for the three
months ended March 31, 2010 was due to a 21.3% decline in insurance in force
since March 31, 2009. However, direct premium written after the impact of
rescission-related premium refunds was essentially flat compared to the 2009
first quarter as a result of a smaller impact from expected premium refunds from
rescission activity during the quarter ended March 31, 2010.  While
cash premium refunded in the first quarter of 2010 increased to $15.0 million
from $6.1 million in the first quarter of 2009, the accrual we establish for
expected premium refunds on policies that are currently under investigation for
rescission increased minimally in the first quarter of 2010 compared to a $19.1
million increase in the first quarter of 2009. At March 31, 2010, the accrual we
have established for expected premium refunds was $47.2 million compared to
$47.5 million at December 31, 2009 and $36.1 million at March 31,
2009.





Ceded
premium written is comprised primarily of premiums written under excess of loss
reinsurance treaties with captives.  The decline in ceded premium
during the first quarter of 2010 compared to the first quarter of 2009 was
primarily due to a decrease in insurance in force subject to captive
reinsurance, as multiple captive reinsurance agreements have been commuted over
the previous twelve months. The decline was moderated by the reversal of the
accrual for expected rescission of policies in our two largest captive
reinsurance agreements which were commuted during the first quarter of 2010.
Going forward, ceded premium will be substantially lower than the 2010 first
quarter level. The premium cede rate decreased to 15.1% for the first quarter of
2010 compared to 20.0% for the first quarter of 2009.





Net
investment income decreased by 12% during the first quarter of 2010 compared to
the first quarter of 2009 primarily due to a decrease in average invested
assets. The receipt of the $188.7 million of trust assets due to the commutation
of the two reinsurance agreements occurred late in the 2010 first quarter and,
as a result, had minimal impact on investment income during the
quarter.  For a discussion of the composition of our investment
portfolio, see “Investment Portfolio.”





27


Losses
and Expenses





A summary
of the significant individual components of losses and expenses for the three
months ended March 31, 2010 and 2009 follows:





Three
      Months EndedMarch
      31,(dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            %
      ChangeNet
      losses and loss adjustment expenses
            
            $
            72,238
            
            
            $
            101,577
            
            
            
            (29
            )Other
      operating expenses (net of acquisition costs deferred)
            
            
            9,332
            
            
            
            9,411
            
            
            
            (1
            )Interest
      expense
            
            
            2,469
            
            
            
            694
            
            
            
            256Total
      losses and expenses
            
            $
            84,039
            
            
            $
            111,682
            
            
            
            (25
            )Loss
      ratio
            
            
            157.4
            %
            
            
            229.0
            %
            
            
            (31
            )Expense
      ratio
            
            
            20.2
            %
            
            
            21.2
            %
            
            
            (5
            )Combined
      ratio
            
            
            177.6
            %
            
            
            250.2
            %
            
            
            (29
            )





Net
losses and LAE are comprised of settled claims and LAE as well as the increase
in the loss and LAE reserve during the period.  The following table
presents the impact of the captive commutations on the components of net losses
and LAE for the first quarter of 2010:





(dollars
      in thousands)
            
            Before
      Impact of Commutations
            
            
            Impact
      of Commutations
            
            
            After
      Impact of CommutationsNet
      settled claims
            
            $
            144,973
            
            
            $
            (188,657
            )
            
            $
            (43,684
            )Net
      change in loss reserves
            
            
            (77,453
            )
            
            
            188,657
            
            
            
            111,204Loss
      adjustment expenses
            
            
            4,718
            
            
            
            -
            
            
            
            4,718Total
            
            $
            72,238
            
            
            $
            -
            
            
            $
            72,238





The
following table provides details on the amount of settled claims and the number
of settled claims of both Primary and Modified Pool insurance for the periods
ended March 31, 2010 and 2009:





Three
      Months EndedMarch
      31,(dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            %
      ChangeNet
      settled claims:Primary
      insurance
            
            $
            107,621
            
            
            $
            56,277
            
            
            
            91Modified
      Pool insurance
            
            
            41,613
            
            
            
            7,735
            
            
            
            438Total
      direct settled claims
            
            
            149,234
            
            
            
            64,012
            
            
            
            133Ceded
      paid losses
            
            
            (4,261
            )
            
            
            (10,092
            )
            
            
            (58
            )Sub-total
            
            
            144,973
            
            
            
            53,920
            
            
            
            169Impact
      from captive commutations
            
            
            (188,657
            )
            
            
            -
            
            
            
            n/aTotal
      net settled claims
            
            $
            (43,684
            )
            
            $
            53,920
            
            
            
            (181
            )Number
      of claims settled:Primary
      insurance
            
            
            2,078
            
            
            
            1,044
            
            
            
            99Modified
      Pool insurance
            
            
            700
            
            
            
            131
            
            
            
            434Total
            
            
            2,778
            
            
            
            1,175
            
            
            
            136





28


The
individual components of net losses and LAE were significantly affected by the
commutation of our two largest captive reinsurance agreements. The funds
received from the commutations are recorded as a reimbursement of claims paid
and, as the tables above illustrate, the recognition of these ceded paid losses
resulted in a negative amount of net settled claims for the quarter ended March
31, 2010. The statement of operations was not impacted, however, as the increase
in ceded paid losses was offset by a decrease to reinsurance recoverable, which
was the driver of the increase in loss reserves.





The
number of claims settled during the first quarter of 2010 increased
significantly over the same period of 2009 as more foreclosures were completed
and the respective claims for loss were submitted by
servicers.  Average severity, which is calculated by dividing total
direct settled claims by the number of claims settled, decreased to $53,700
during the first quarter of 2010 from $64,000 in the fourth quarter of 2009 and
$54,500 in the first quarter of 2009. This decrease from the 2009 fourth quarter
level reflects a smaller percentage of our paid claims from our Modified Pool
business and the distressed markets which have, in general, higher average risk
per policy.





The
following table shows the average loan size and average risk per policy by
vintage year.  Policies originated during 2006 and 2007 comprised 64%
of our 2010 first quarter settled claims compared to 65% in the fourth quarter
of 2009 and 47% in the first quarter of 2009.





Primary
            
            
            Modified
      PoolAverage
            
            
            Average
            
            
            Average
            
            
            AverageLoan
      Size
            
            
            Insured
      Risk
            
            
            Loan
      Size
            
            
            Insured
      RiskVintage Year2004
      and Prior
            
            $
            114,495
            
            
            $
            29,519
            
            
            $
            136,957
            
            
            $
            40,7862005
            
            
            153,977
            
            
            
            40,761
            
            
            
            165,589
            
            
            
            52,9252006
            
            
            198,664
            
            
            
            51,520
            
            
            
            262,993
            
            
            
            65,8042007
            
            
            201,814
            
            
            
            54,093
            
            
            
            267,855
            
            
            
            77,9682008
            
            
            202,152
            
            
            
            46,718
            
            
            
            -
            
            
            
            -Overall
      Average
            
            $
            166,833
            
            
            $
            43,537
            
            
            $
            197,886
            
            
            $
            56,404





The
following table shows the average loan size and average risk per policy for the
distressed markets compared to the remainder of the portfolio. Policies from the
distressed markets comprised 47% of our 2010 first quarter settled claims
compared to 54% in the fourth quarter of 2009 and 38% in the first quarter of
2009.





Primary
            
            
            Modified
      PoolAverage
            
            
            Average
            
            
            Average
            
            
            AverageLoan
      Size
            
            
            Insured
      Risk
            
            
            Loan
      Size
            
            
            Insured
      RiskDistressed
      States:California
            
            $
            318,233
            
            
            $
            78,932
            
            
            $
            330,733
            
            
            $
            86,129Florida
            
            
            194,324
            
            
            
            51,461
            
            
            
            202,990
            
            
            
            54,413Arizona
            
            
            190,083
            
            
            
            49,474
            
            
            
            197,093
            
            
            
            58,944Nevada
            
            
            232,018
            
            
            
            61,557
            
            
            
            216,910
            
            
            
            66,646Average
      distressed states
            
            $
            228,603
            
            
            $
            59,000
            
            
            $
            254,575
            
            
            $
            68,780Average
      non-distressed states
            
            $
            152,614
            
            
            $
            39,978
            
            
            $
            164,508
            
            
            $
            49,117Overall
      Average
            
            $
            166,833
            
            
            $
            43,537
            
            
            $
            197,886
            
            
            $
            56,404





Average
severity continues to be influenced by our reduced ability to mitigate
claims.  The decline in home prices since 2007 across almost all
markets, with significant declines in the distressed markets, combined with
reduced mortgage credit availability have continued to negatively impact our
ability to mitigate losses through the sale of
properties.   Policies originated in 2006 and 2007 have been
particularly impacted by the decline in home prices as these borrowers had less
time to build up equity before the decline in prices. We expect our ability to
mitigate losses will continue to be adversely affected by the continued pressure
on home prices combined with the limited availability of credit in the U.S.
financial markets. A greater concentration of settled claims in distressed
markets or more recent policy years will exacerbate this
effect.


29





Future
claim settlement activity remains uncertain due to rescission activity as well
as government and other efforts to stem the level of foreclosures. During the
first quarter of 2010, we rescinded coverage on loans with $204 million of risk
in default compared to $96 million of risk in default during the respective
period of 2009. We believe the majority of the rescinded risk in default would
have ultimately proceeded to foreclosure and resulted in settled
claims.  At March 31, 2010, approximately 27.0% of the policies in our
default inventory were under review for fraud or misrepresentation and we
currently expect a significant percentage of these to be rescinded. The degree
to which policies are rescinded could have a substantial impact on settled claim
activity and our results of operations in 2010.





Several
programs initiated by the federal government are, in general, designed to
prevent foreclosures and provide relief to homeowners and to the financial
markets. One such program is the HAMP, which provides incentives to borrowers,
servicers, and lenders to modify loans with the modifications jointly paid for
by lenders and the U.S. government. At March 31, 2010, we had been notified that
approximately 13,000 of the loans that we insure were in some stage of
participation in HAMP, although less than 10% have successfully completed the
trial modification period.  We rely on information concerning HAMP
provided to us by the GSEs and servicers.  We do not believe that we
receive timely information on all of the loans participating in these programs
nor the current status of the participating loans and we do not have the
necessary information to determine the number of our policies in force that
would be eligible for such modification programs.  Furthermore, once a
policy completes the trial modification period, it may re-default and we cannot
predict with any degree of precision the re-default rate. These factors affect
our ability to evaluate the ultimate success rate of HAMP and other such
programs and, therefore, the impact on our results of operations and financial
condition.  If HAMP and/or similar programs prove to be effective in
preventing ultimate foreclosure, future settled claim activity could be
reduced.





The table
below provides a trend analysis of the gross cumulative incurred loss incidence
rate by book year for our Primary business (calculated as cumulative gross
losses settled plus loss reserves, excluding the impact of captive structures,
divided by policy risk originated, in each case for a particular book year) as
it has developed for each three-month period beginning September 30,
2008.





Quarter
      EndedMarch
      31,
            
            December
      31,
            
            September
      30,
            
            June
      30,
            
            March
      31,
            
            December
      31,Book
      Year
            
            2010
            
            2009
            
            2009
            
            2009
            
            2009
            
            20082000
      & Prior
            
            1.02
            %
            
            1.01
            %
            
            1.00
            %
            
            0.99
            %
            
            0.98
            %
            
            0.98
            %2001
            
            1.89
            %
            
            1.85
            %
            
            1.81
            %
            
            1.78
            %
            
            1.75
            %
            
            1.75
            %2002
            
            2.12
            %
            
            2.05
            %
            
            2.00
            %
            
            1.93
            %
            
            1.87
            %
            
            1.84
            %2003
            
            2.47
            %
            
            2.32
            %
            
            2.19
            %
            
            2.06
            %
            
            1.92
            %
            
            1.86
            %2004
            
            5.31
            %
            
            4.93
            %
            
            4.48
            %
            
            4.13
            %
            
            3.58
            %
            
            3.29
            %2005
            
            12.16
            %
            
            11.56
            %
            
            10.77
            %
            
            10.09
            %
            
            8.59
            %
            
            7.42
            %2006
            
            15.56
            %
            
            14.90
            %
            
            14.14
            %
            
            14.38
            %
            
            10.59
            %
            
            10.31
            %2007
            
            13.89
            %
            
            13.18
            %
            
            11.78
            %
            
            10.70
            %
            
            7.08
            %
            
            6.07
            %2008
            
            4.95
            %
            
            4.28
            %
            
            3.65
            %
            
            2.83
            %
            
            1.82
            %
            
            1.29
            %Total
            
            6.57
            %
            
            6.24
            %
            
            5.77
            %
            
            5.48
            %
            
            4.23
            %
            
            3.88
            %





Prior to
2007, the policies that we insured historically defaulted for a variety of
reasons, but primarily due to loss of employment, divorce, or illness of a
mortgage holder.  Historically, we expected the gross cumulative
incurred loss incidence rate for a specific book year to also increase over time
as the incidence of default is relatively low in the first few years of
development, typically reaches its peak in the second through the fifth year
after loan origination, and will moderately increase over time as a small number
of policies continue to default.





However,
in addition to the above factors, the incidence of default in the current
environment has been and continues to be adversely impacted by the significant
decline in home prices throughout the United States. The more recent book years
particularly have been impacted and, as the above table indicates, the 2005,
2006 and 2007





30





book
years are exhibiting significantly adverse performance compared to the more
developed earlier book years.  We do not expect this adverse performance to
subside and expect the gross cumulative incurred loss incidence rate of these
book years to ultimately be significantly higher than our previous books of
business.





Net
losses and LAE also include the change in the reserve for losses.  The
following table shows the change in the reserve for losses for the three months
ended March 31, 2010 and March 31, 2009:





Three
      Months EndedMarch
      31,(dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            %
      Change(Decrease)
      Increase in reserve for losses ona
      gross basis before the
              benefit
      of captives
            
            $
            (66,955
            )
            
            $
            69,645
            
            
            
            (196
            )Less:Ceded
      reserves to captive reinsurers
            
            
            10,498
            
            
            
            30,018
            
            
            
            (65
            )Sub-total
            
            
            (77,453
            )
            
            
            39,627Impact
      from captive commutations
            
            
            188,657
            
            
            
            -
            
            
            
            n/aNet
      increase in reserve for losses
            
            $
            111,204
            
            
            $
            39,627
            
            
            
            181





The
reserve for losses on a gross basis, before the benefit of captive reinsurance,
decreased by $67.0 million during the first quarter of 2010.  We
believe this decrease was primarily attributable to an increase in the cure
rate, in part due to the impact of HAMP, and the addition of a lower number of
new policies into the default inventory compared to recent prior
quarters.  The rescission factor incorporated in the loss reserve
calculation mitigated gross reserves and LAE by 23% at March 31, 2010 compared
to 21% at March 31, 2009.  We did not change the factors related to
rescissions embedded in the frequency factors utilized in our reserve
methodology during the 2010 first quarter.





The
commutations of certain captive reinsurance agreements and receipt of trust
assets in the first quarter of 2010 resulted in a decrease in loss reserves
ceded to captive reinsurers to $51.0 million at March 31, 2010 from $229.0
million at December 31, 2009 and $186.9 million at March 31,
2009.  For captive reinsurance arrangements where total ceded
reserves, combined with any unpaid ceded claims, have exceeded the respective
trust balance, the net reserve credit that we recognize in our financial
statements is limited to the trust balance. Given the commutations and this
limitation, we do not expect any material benefit from these arrangements in
future periods.





We
continue to realize substantial benefit from stop loss limits incorporated in
Modified Pool transactions.  We do not provide reserves on Modified
Pool defaults where the cumulative incurred losses to date for the related
transaction have exceeded the stop loss limit. Furthermore, once a Modified Pool
transaction breaches its respective stop loss limit on a paid basis, we no
longer report policies in default or provide reserves on that transaction. Since
September 30, 2009, we have had a number of Modified Pool transactions breach
their respective stop loss limits on a paid basis.





The table
below reports on the remaining risk exposure of our Modified Pool transactions
including the distribution by policy year.  A significant portion of
the Modified Pool transactions from the 2005, 2006 and 2007 policy years have
reached the transactions’ stop loss limit on an incurred basis given the adverse
development of this business.  As a result, additional new defaults on
this Modified Pool business will have a limited net impact on future
results.


31





March
      31,
            
            
            December
      31,(dollars
      in millions)
            
            2010
            
            
            2009Modified Pool SummaryGross
      risk in force prior to stop losses and deductible
            
            $
            3,835
            
            
            $
            4,331%
      of risk covered by stop losses and deductibles
            
            
            84.5
            %
            
            
            85.0
            %Net
      risk in force (accounting for stop loss amounts and
      deductibles)
            
            $
            595
            
            
            $
            651Carried
      reserves on net risk in force
            
            
            311
            
            
            
            337Remaining
      aggregate loss exposure on Modified Pool contracts
            
            $
            284
            
            
            $
            314Remaining
      Aggregate Loss Exposure by Policy Year2003
      and Prior
            
            $
            151
            
            
            $
            1612004
            
            
            90
            
            
            
            972005
            
            
            9
            
            
            
            112006
            
            
            30
            
            
            
            392007
            
            
            4
            
            
            
            6$
            284
            
            
            $
            314





The
following table provides further information about our loss reserves, absent the
impact of reserves ceded to the lender-sponsored captive reinsurers, carried on
our balance sheet at the respective period end.








March
      31,
            
            
            December
      31,(dollars
      in thousands)
            
            2010
            
            
            2009Primary
      insurance:Reserves
      for reported defaults
            
            $
            1,080,231
            
            
            $
            1,088,776Reserves
      for defaults incurred but not reported
            
            
            34,788
            
            
            
            44,454Total
      Primary insurance
            
            
            1,115,019
            
            
            
            1,133,230Modified
      Pool insurance:Reserves
      for reported defaults
            
            
            312,059
            
            
            
            340,504Reserves
      for defaults incurred but not reported
            
            
            21,193
            
            
            
            41,492Total
      Modified Pool insurance
            
            
            333,252
            
            
            
            381,996Reserve
      for loss adjustment expenses
            
            
            20,448
            
            
            
            21,817Total
      reserves for losses and loss adjustment
              expenses
            
            $
            1,468,719
            
            
            $
            1,537,043





The
following table shows the percentage of gross risk in force, gross risk in
default, and gross reserves in the four distressed market states at the
respective period end.


32


March
      31,
              
              December
      31,2010
              
              2009%
      of Gross Risk In Force:California
              
              12.8%
              
              13.3%Florida
              
              11.4%
              
              11.5%Arizona
              
              4.4%
              
              4.6%Nevada
              
              2.6%
              
              2.7%Total
      Distressed Market States
              
              31.2%
              
              32.1%%
      of Gross Risk in Default:California
              
              18.9%
              
              21.1%Florida
              
              19.7%
              
              20.2%Arizona
              
              5.8%
              
              6.5%Nevada
              
              4.6%
              
              4.8%Total
      Distressed Market States
              
              49.0%
              
              52.6%%
      of Gross Reserves:California
              
              18.4%
              
              20.8%Florida
              
              21.5%
              
              21.6%Arizona
              
              6.3%
              
              7.2%Nevada
              
              4.9%
              
              5.3%Total
      Distressed Market States
              
              51.1%
              
              54.9%






During
the twelve months ended March 31, 2010, risk in default in the non-distressed
markets grew by 25% compared to a 21% decrease in the distressed markets. We
believe the growing deterioration in the non-distressed markets is primarily a
result of high unemployment and the slower, more gradual decline in home
prices.  Defaults in the distressed markets also comprised a large
percentage of settled claims and rescinded policies, which was the main
determinant of the decline in risk in default in these markets.





Certificates
originated during 2007 and 2006 comprise 59.8% of the number of loans in
default, but 68.7% of the risk in default at March 31, 2010.  Both
measures are down slightly from 2009 year-end and one-year prior levels due
primarily to a large amount of claim activity and rescission activity
attributable to the 2006 and 2007 policy years. The difference in percentages of
loans in default and risk in default primarily reflects the higher loan amounts
associated with these policy years.





To
illustrate the impact of the changes in the frequency and severity factors
utilized in the reserve model, the following table details the amount of risk in
default and the reserve balance as a percentage of risk in default at the
respective period end. The table also provides the impact of the rescission
factor, which is a component of the frequency factor utilized in the reserve
model, on gross case reserves at the respective period end.


33





March
      31,
            
            
            December
      31,(dollars
      in millions)
            
            2010
            
            
            2009Gross
      risk on loans in default
            
            $
            3,205
            
            
            $
            3,638Risk
      expected to be rescinded on loans in default
            
            
            (604
            )
            
            
            (725
            )Risk
      in default net of expected rescissions
            
            $
            2,601
            
            
            $
            2,913Gross
      case reserve (1)
            
            $
            2,123
            
            
            $
            2,427Gross
      case reserves on loans expected to be rescinded
            
            
            (443
            )
            
            
            (540
            )Gross
      case reserves net of expected rescissions
            
            $
            1,680
            
            
            $
            1,887Gross
      case reserves net of expected rescissions as a percentage
              of
      gross risk in default
            
            
            52.4
            %
            
            
            51.9
            %Gross
      case reserves net of expected rescissions as a percentage
              of
      gross risk in default, net of expected rescissions
            
            
            64.4
            %
            
            
            64.6
            %Percentage
      decrease in gross case reserves from rescission factor
            
            
            20.9
            %
            
            
            22.2
            %(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.





The
following table shows default statistics at the respective period
end.




March
      31,
            
            December
      31,(dollars
      in thousands)
            
            2010
            
            2009Total
      business:Number
      of insured loans in force
            
            273,148
            
            287,026Number
      of loans in default
            
            52,883
            
            57,775Primary
      insurance:Number
      of insured loans in force
            
            207,195
            
            214,164Number
      of loans in default
            
            37,142
            
            38,023Modified
      Pool insurance:Number
      of insured loans in force
            
            65,953
            
            72,862Number
      of loans in default
            
            15,741
            
            19,752





The
number of loans in default includes all reported delinquencies that are in
excess of two payments in arrears at the reporting date and all reported
delinquencies that were previously in excess of two payments in arrears and have
not been brought current.  Part of the decrease in the number of loans
in force and loans in default for Modified Pool loans was due to the
terminations resulting from reaching the stop loss level on a paid
basis.





Expenses
      and Taxes





Other
operating expenses declined by less than 1% during the first quarter of 2010
compared to the same period of 2009. In general, the majority of our operating
expenses are related to personnel cost which is expected to decline over time as
we transition through run-off.  During the first quarter of 2010,
although we reduced our headcount by approximately 14% in response to the
declining insurance in force, the severance cost associated with these
terminations offset any immediate cost savings.




34


Interest
expense increased by $1.8 million in the first quarter of 2010 compared to the
first quarter of 2009. The difference in interest expense between the two
periods is due to the accrual of $1.8 million in the first quarter of 2010
related to the DPO liability.





The tax
benefit that we realized in the 2010 first quarter Statement of Operations
reflects the tax effect of the increase in unrealized gains in securities from
December 31, 2009. Under GAAP accounting, this actually reflects the reduction
of the valuation allowance related to the deferred tax asset established from
the net operating loss (“NOL”) carryforward.  Going forward, we could
recognize a current tax benefit or expense depending on the movement of the
unrealized gain in investment securities. We remain in an NOL carryforward
position and will not recognize a benefit until or if we become profitable
again.





Financial
Position





Total
assets were $1.1 billion at both March 31, 2010 and December 31,
2009.  Total cash and invested assets increased to $995.8 million at
March 31, 2010 from $833.3 million December 31, 2009 as a result of the
commutation of our two largest captive reinsurance agreements and the receipt of
$188.7 million of trust assets.  The commutation of the captive
reinsurance agreements was also the primary reason for the decline in
reinsurance recoverable by $180.5 million.





Total
liabilities were $1.8 billion at both March 31, 2009 and December 31, 2009. Loss
reserves decreased by $68.3 million but the deferred payment obligation and
related accrued interest increased by $61.6 million.





Investment
Portfolio





The
majority of our assets are included in our investment portfolio.  Our
goal for managing our investment portfolio is to preserve capital, provide
liquidity when necessary, optimize investment returns, and adhere to regulatory
requirements.  We have established a formal investment policy that
describes our overall quality and diversification objectives and
limits.  We classify our entire investment portfolio as available for
sale.  All investments are carried on our balance sheet at fair
value.





Our
portfolio is composed of taxable publicly-traded fixed income securities and
tax-preferred state and municipal securities.  Our taxable
publicly-traded fixed income securities primarily include corporate debt
obligations, residential mortgage-backed securities, obligations of the U.S.
Government and its agencies, and commercial mortgage-backed
securities.  During the first quarter of 2010, we commuted our two
largest captive reinsurance agreements and received approximately $188.7 million
of trust assets. The majority of the assets we received from the captive trusts
were in the form of cash and have been invested on a short-term basis as we
evaluate investment options. The assets remaining are primarily U.S. Treasury
securities and investment-grade asset-backed securities and mortgage-backed
securities.  We are currently evaluating our options related to the
securities we received to determine if they conform to our existing portfolio
strategy.





We
anticipate negative cash flow from operations in the remainder of 2010 due to
the expected increase in claims settled and we expect the proceeds from the
maturity and sale of securities during 2010 will be used to fund the
shortfall.





35


The
following table shows the makeup of our investment portfolio at March 31, 2010
and December 31, 2009:




March
      31, 2010
              
              
              December
      31, 2009(dollars
      in thousands)
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentFixed
      maturity securities:U.
      S. government and agency securities
              
              $
              54,192
              
              
              
              5.7
              %
              
              $
              25,260
              
              
              
              3.1
              %Foreign
      government securities
              
              
              10,301
              
              
              
              1.1
              %
              
              
              10,302
              
              
              
              1.3
              %Corporate
      debt
              
              
              484,760
              
              
              
              50.6
              %
              
              
              500,999
              
              
              
              61.7
              %Residential
      mortgage-backed
              
              
              115,755
              
              
              
              12.1
              %
              
              
              107,406
              
              
              
              13.2
              %Commercial
      mortgage-backed
              
              
              1,365
              
              
              
              0.1
              %
              
              
              -
              
              
              
              0.0
              %Asset-backed
      bonds
              
              
              29,576
              
              
              
              3.1
              %
              
              
              39,392
              
              
              
              4.9
              %State
      and municipal bonds
              
              
              115,091
              
              
              
              12.0
              %
              
              
              101,471
              
              
              
              12.5
              %Total
      fixed maturities
              
              
              811,040
              
              
              
              84.7
              %
              
              
              784,830
              
              
              
              96.7
              %Equity
      securities
              
              
              -
              
              
              
              0.0
              %
              
              
              -
              
              
              
              0.0
              %Total
      available-for-sale securities
              
              
              811,040
              
              
              
              84.7
              %
              
              
              784,830
              
              
              
              96.7
              %Short-term
      investments
              
              
              146,075
              
              
              
              15.3
              %
              
              
              26,651
              
              
              
              3.3
              %$
              957,115
              
              
              
              100.0
              %
              
              $
              811,481
              
              
              
              100.0
              %





The
increase in our investment portfolio from December 31, 2009 is primarily due to
the receipt of the trust assets.





Terms of
the second Corrective Order require that Triad establish a separate custody
account with investments at least equal to the unpaid DPOs.  At March
31, 2010, approximately 24% of our invested assets were supporting the DPOs and
related accrued interest.





Unrealized
Gains and Losses





The
following table summarizes by category our unrealized gains and losses in our
securities portfolio at March 31, 2010:





As
      of March 31, 2010(dollars
      in thousands)
            
            Cost
      or Amortized Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
              ValueFixed
      maturity securities:U.
      S. government and agency securities
            
            $
            53,804
            
            
            $
            388
            
            
            $
            -
            
            
            $
            54,192Foreign
      government securities
            
            
            9,993
            
            
            
            308
            
            
            
            -
            
            
            
            10,301Corporate
      debt
            
            
            450,850
            
            
            
            33,910
            
            
            
            -
            
            
            
            484,760Residential
      mortgage-backed
            
            
            110,524
            
            
            
            5,231
            
            
            
            -
            
            
            
            115,755Commercial
      mortgage-backed
            
            
            1,365
            
            
            
            -
            
            
            
            -
            
            
            
            1,365Asset-backed
      bonds
            
            
            27,243
            
            
            
            2,333
            
            
            
            -
            
            
            
            29,576State
      and municipal bonds
            
            
            108,332
            
            
            
            6,759
            
            
            
            -
            
            
            
            115,091Subtotal,
      fixed maturities
            
            
            762,111
            
            
            
            48,929
            
            
            
            -
            
            
            
            811,040Short
      term investments
            
            
            146,075
            
            
            
            -
            
            
            
            -
            
            
            
            146,075Total
      securities
            
            $
            908,186
            
            
            $
            48,929
            
            
            $
            -
            
            
            $
            957,115





Given our
recurring losses from operations, strict regulatory oversight of our operations,
and the significant doubt regarding our ability to continue as a going concern,
we no longer have the ability to hold impaired assets for a sufficient time to
recover their value.  As a result, we recognize an impairment loss on
all securities whose amortized cost is greater than the market value and thus
have no unrealized losses at March 31, 2010.




36


The
unrealized gains are partly due to the recovery in value of previously impaired
fixed income securities. These unrealized gains do not necessarily represent
future gains that we will realize.  Changing conditions relatedto
specific securities, overall market interest rates, credit spreads, as well as
our decisions concerning the timing of a sale, may impact values we ultimately
realize.  Taxable securities typically exhibit greater volatility in
value than tax-preferred securities; accordingly, we expect greater volatility
in unrealized gains and realized losses in future periods.  Volatility
also may increase in periods of uncertain market or economic
conditions.





Credit
Risk





Credit
risk is inherent in an investment portfolio. One way we attempt to limit the
inherent credit risk in our portfolio is to maintain investments with relatively
high ratings.  The following table shows our investment portfolio by
credit ratings.





March
      31, 2010
            
            
            December
      31, 2009(dollars
      in thousands)
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentFixed
      Maturities:U.S.
      treasury and agency bonds
            
            
            $
            54,192
            
            
            
            6.7
            
            
            $
            25,260
            
            
            
            3.2AAA
            
            
            
            166,058
            
            
            
            20.5
            
            
            
            169,326
            
            
            
            21.6AA
            
            
            
            174,102
            
            
            
            21.5
            
            
            
            160,399
            
            
            
            20.4A
            
            
            
            365,053
            
            
            
            45.0
            
            
            
            391,141
            
            
            
            49.8BBB
            
            
            
            31,871
            
            
            
            3.9
            
            
            
            24,014
            
            
            
            3.2BB
            
            
            
            1,916
            
            
            
            0.2
            
            
            
            1,817
            
            
            
            0.2B
            
            
            
            1,491
            
            
            
            0.2
            
            
            
            -
            
            
            
            -CCC
            
            
            
            941
            
            
            
            0.1
            
            
            
            -
            
            
            
            -CC
      and lower
            
            
            
            2,479
            
            
            
            0.3
            
            
            
            239
            
            
            
            -Not
      rated
            
            
            
            12,937
            
            
            
            1.6
            
            
            
            12,634
            
            
            
            1.6Total
      fixed maturities
            
            
            $
            811,040
            
            
            
            100.0
            
            
            $
            784,830
            
            
            
            100.0





We
evaluate the credit risk of a security by analyzing the underlying credit
qualities of the security. We also seek value in enhancements provided by
financial guaranty insurers to our tax-preferred state and municipal fixed
income securities which may benefit the credit rating.  Taxable
securities generally do not have such credit enhancements and the credit rating
reflects only the securities’ underlying credit qualities.





Liquidity
and Capital Resources





The
accompanying consolidated financial statements have been prepared in accordance
with GAAP and assume that we will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business.  However, our ability to
continue as a going concern will be dependent on our ability to comply with
terms of the Corrective Orders.  If we are unable to comply with the
terms of the Corrective Orders, the Department may institute legal proceedings
to place Triad in receivership.  If Triad were placed into
receivership, all of the assets and future cash flows of Triad would be
allocated to Triad’s policyholders to pay insurance claims and the
administrative expenses of the receivership, and none of such assets or cash
flows would be available to TGI and its stockholders.  As Triad is
TGI’s primary source of current and potential future cash flow, if Triad were
placed in receivership proceedings by the Department, TGI would likely be forced
to institute a proceeding seeking relief from creditors under U.S. bankruptcy
laws and it is likely that no funds would ever be available for distribution to
our stockholders.  The report of our independent registered public
accounting firm with respect to our December 31, 2009 and 2008 financial
statements included a statement that they believe there is substantial doubt
about our ability to continue as a going concern.





Under the
Department’s Corrective Orders, all valid claims under Triad’s mortgage guaranty
insurance policies are settled 60% in cash and 40% by the recording of a
DPO.  In addition to the DPO, Triad also accrues a carrying charge
based on the investment yield earned by Triad’s investment
portfolio.  The ultimate payment of both the DPO and the carrying
charge are subject to Triad’s future financial performance and requires the
approval




37





of the
Department.  At March 31, 2010, the total amount of DPOs was $230.0
million, including a carrying charge of $3.8 million.  During the 2010
first quarter, the DPO grew by $59.9 million and $1.8 million of additional
carrying charges were recorded.  The DPOs are supported by a
segregated custodial account containing primarily corporate securities which are
reported in our total invested assets.  The specific terms of the
Corrective Order requiring the recording of a DPO have and will continue to
positively impact our operating cash flows.  However, because we
remain obligated to pay the DPOs and will accrue a carrying charge on the DPOs
based on the investment yield earned by Triad’s investment portfolio, we do not
expect any ultimate financial benefit to us from recording a DPO.





We
previously reported the sale of our information technology and operating
platform to Essent. Under the terms of the purchase agreement, Essent acquired
all of our proprietary mortgage insurance software and substantially all of the
supporting hardware, as well as certain other assets, in exchange for up to $30
million in cash and the assumption by Essent of certain contractual
obligations.  Approximately $15 million of the consideration is fixed
and up to an additional $15 million is contingent on Essent writing a certain
minimum amount of insurance in the five-year period following
closing.  We received the initial $10 million installment of the
purchase price in the 2009 fourth quarter and are scheduled to receive payments
of $2.5 million in each of the fourth quarters of 2010 and 2011 as part of the
fixed consideration.  Essent has established its operations and
technology center in Winston-Salem, North Carolina and a number of our former
information technology and operations employees have joined Essent as
contemplated by the agreement. We also entered into a services agreement,
pursuant to which Essent is providing ongoing information systems maintenance
and services, customer service and policy administration support to
Triad.  Until December 2010, we pay a pre-determined amount for each
month of service amounting to approximately $450,000 per month; after December
2010 the fees will be based on the number of policies in
force.  During the initial five-year term of the services agreement,
the fees we pay to Essent will be at least $150,000 per month.





Generally,
our sources of operating funds consist of premiums written and investment
income.  Operating cash flow is applied to the payment of claims,
interest and expenses.  During 2009, we had a deficit in operating
cash flow of $134.9 million reflecting a decline in premiums written and
substantially increased claim payments.  In the first quarter of 2010,
we reported a positive cash flow from operations of $157.3 million, primarily
the result of $188.7 million received as a result of the commutation of our two
largest captive reinsurers.  Going forward, we do not anticipate any
other such significant cash receipts as the result of captive commutations. The
second Corrective Order that stipulated the payment in cash of 60% of each
settled claim and the establishment of a DPO for the remainder of each claim
that was effective June 1, 2009 has had a significant positive impact on
operating cash flows. The operating cash flow shortfall in 2009 was funded
through sales and maturities of short-term investments and other longer-term
investment securities.  See “Investment Portfolio” for more
information.





Net cash
received from premiums was $44.3 million during the 2010 first quarter compared
to $61.3 million in the first quarter of 2009.  This decrease was due
primarily to the overall decline in insurance in force as well as premium
refunds related to rescission activity. During the 2010 first quarter, premium
refunds were $15.0 million compared to $6.1 million in the same quarter of
2009.  We anticipate more refunds of premiums related to rescission
activity in 2010 and have established a $47.2 million premium refund liability
at March 31, 2010 to account for anticipated rescission activity.





During
the 2010 first quarter, after taking into consideration the amounts received
from the captive commutations and the impact of the DPO, we had net cash
received of $101.7 million in the first quarter of 2010 from claim settlements
compared to a cash outflow of $53.9 million during the 2009 first
quarter.  Cash outflows on settled claims during the first quarter of
2010 were reduced by $59.8 million as a result of the DPO
requirement.  The DPO was not in effect during the 2009 first
quarter.  While the DPO requirement will mitigate the actual cash paid
on claims in any period in the short run, we expect that the amount of settled
claims and the related cash paid will continue to increase in subsequent
quarters, and the increase may be substantial.





38




Without
the benefit of any significant future captive commutations, we expect to report
negative cash flow from operations throughout the remainder of 2010 because we
expect claims and expenses will exceed our net premium and investment
income.  We anticipate that the cash necessary to meet the negative
operating cash flow will be
funded by the scheduled maturities of invested assets and, if needed, sales of
other assets in our investment portfolio.





At March
31, 2010, the Company reported a deficit in assets of $732.7 million compared to
a deficit in assets of $706.4 million at December 31, 2009.  A deficit
in assets occurs when recorded liabilities exceed recorded assets and the
primary factor contributing to the deficit has been our historical net losses
from operations.  We expect to continue to report a deficit in assets
for the foreseeable future.





Insurance
Company Specific





The
insurance laws of the State of Illinois impose certain restrictions on dividends
that an insurance subsidiary, such as Triad, can pay its parent company. As
discussed above, the Corrective Orders prohibit the payment of dividends by
Triad to TGI without prior approval from the Department, which is highly
unlikely for the foreseeable future.





Included
in policyholders’ surplus of the primary insurance subsidiary, TGIC, is a
surplus note of $25 million payable to TGI.  The Corrective Orders
prohibit the accrual and payment of the interest on the surplus note without
prior approval by the Department, which has broad discretion to approve or
disapprove any such payment.  We do not expect that TGIC will be able
to pay any principal or interest on this note for the foreseeable
future.





Triad’s
ability to incur any material operating and capital expenditures, as well as its
ability to enter into any new contracts with unaffiliated parties, also requires
the Department’s approval (except for certain operating expenditures that have
been preapproved by the Department).





Triad
cedes business to captive reinsurance affiliates of certain mortgage lenders,
primarily under excess-of-loss reinsurance agreements.  Generally,
reinsurance recoverables on loss reserves and unearned premiums ceded to these
captives are backed by trust accounts where Triad is the sole
beneficiary.  When we commute a captive reinsurance agreement, all
reinsurance coverage terminates, Triad ceases to cede premium to the reinsurer,
and the supporting trust agreement is terminated and the trust assets are
distributed to us per terms of the agreement.  During the first
quarter of 2010, we commuted our two largest captive reinsurance agreements and
received approximately $188.7 million of trust assets as a
result.  These two commutations did not have any impact on our results
of operations or financial condition for the first quarter of 2010. We are
currently in discussions with other captive reinsurers regarding the commutation
of their captive reinsurance agreements, although none of the potential
commutations would be as large as the two commutations that occurred during this
quarter.





At March
31, 2010, we had approximately $77 million in captive reinsurance trust
balances. Due to the adverse performance of the reinsured policies and the
general under-capitalization of the trusts supporting our remaining captive
reinsurance agreements, we expect the majority of the trust assets to eventually
be delivered to Triad by means of reimbursed settled losses or through the
commutation of the agreements.





Triad
ceased writing new mortgage commitments on July 15, 2008 and is operating its
business in run-off.  The risk-to-capital ratio, which is utilized as
a measure by many states and regulators of an insurer’s capital adequacy and
ability to underwrite new business, is no longer relevant for Triad because we
are operating in run-off.





Statutory
capital, for the purpose of computing the net risk in force to statutory capital
ratio, historically included both policyholders’ surplus and the special
contingency reserve.  However, due to the ongoing operating losses,
all of the contingency reserve has been released and therefore statutory capital
consists solely of policyholders’ surplus.  Policyholders’ surplus at
March 31, 2010 amounted to $91.1 million compared to


39





$122.8
million at December 31, 2009.  The decrease in policyholders’ surplus
from December 31, 2009 was primarily the result of the statutory results of
operations for the first quarter of 2010.  As a result of the
implementation of the DPO requirement, Triad reported policyholders’ surplus in
its SAP financial statements of $91.1 million at March 31, 2010,
as compared to a deficiency in policyholders’ surplus of $687.3 million had the
DPO requirement not been implemented.





Holding
Company Specific





TGI has
very limited sources of cash flow.  TGI’s $35 million outstanding
long-term debt is the obligation of TGI and not of Triad.  Debt
service amounts to $2.8 million per year and is paid by TGI.  The
primary source of funds for TGI debt service has historically been the interest
paid by Triad to TGI on the $25 million surplus note, which has provided $2.2
million on an annual basis.  We do not expect this source of cash to
be available for the foreseeable future.  On a separate company
reporting basis, TGI wrote off the $25 million surplus note in 2009 and reversed
accrued interest of $4.4 million on its financial statements as an
other-than-temporary impairment.  Excluding the surplus note
receivable from Triad, total cash and invested assets at TGI totaled $7.5
million at March 31, 2010, down from $8.7 million at December 31, 2009 as a
result of the semi-annual payment of interest on the long-term debt in the first
quarter of 2010.  While the remaining $7.5 million of available funds
are expected to be used for debt service payments and expenses of the holding
company, we cannot provide any assurance that future debt service payments will
be made and the ultimate ability of TGI to repay the entire $35 million is
subject to substantial risks and cannot be assured unless a source of funds is
secured.  The ability of TGI 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 obtained in the foreseeable
future.





We may
from time to time seek to retire or purchase our outstanding debt through cash
purchases or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise.  Such repurchases or
exchanges, if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors and the amounts
involved may be material.





As part
of the sale of the information technology and operating platform to Essent, TGI
also sold the software related to the establishment of Canadian operations. In
the fourth quarter of 2009, TGI received approximately $0.4 million from the
sale and accrued an additional $0.2 million for software owned exclusively by
TGI.  Additionally, under the terms of the agreement, TGI may receive
an additional $0.6 million in contingent payments through 2014 if certain sales
goals are met.





Triad has
historically reimbursed TGI for a majority of its operating cash expenses under
a management agreement. Pursuant to the Corrective Orders, we are required to
submit to the Department a request for reimbursement of these expenses on a
quarterly basis. During the first quarter of 2010, TGI cash expenses were
approximately $0.3 million and all requested reimbursements, which include the
majority of these expenses, were approved.  TGI’s cash expenses range
from approximately $250,000 to $600,000 per quarter depending on certain
activities and include legal, director, accounting, and consulting
fees.  There can be no assurance these quarterly expenditures will not
increase in the future.  If the Department prohibits or limits the
reimbursement by Triad of TGI’s operating expenses, the cash resources of TGI
will be adversely affected.





Update
on Critical Accounting Policies and Estimates





In our
Annual Report on Form 10-K for the year ended December 31, 2009, we identified
the establishment of the reserves for losses and LAE as well as the valuations
on our investments as the two areas that require a significant amount of
judgment and estimates.  We provided a sensitivity analysis
surrounding the reserve for losses and LAE and the two most sensitive areas of
judgment, specifically the frequency and severity factors used in the
establishment of reserves.  We continue to believe that a 20% change,
plus or minus, in the frequency factor (which includes our estimate of future
rescissions in the existing defaults) is possible given the uncertainty
surrounding home prices and the economy.  Additionally, we believe the
5% increase or decrease in the severity factor remains a viable range through
2010.


40


Economic
conditions that could give rise to an increase in the frequency rate include a
sudden increase or a prolonged period of elevated unemployment rates, further
deterioration in home prices, especially in geographical areas that had
previously been less susceptible to such downward trends, or increased cultural
or social acceptance of strategic defaults.  Conversely, an improved
housing market or a sustained period of economic and job growth could
potentially decrease the frequency rate.  Any factor that would affect
our ability to sell a home of a borrower in default prior to foreclosure would
affect our severity.  The most prominent of these would be the value
of the underlying home. Government and private industry programs designed to
stem the level of foreclosure could also impact frequency and severity and the
impact of these programs would most likely have a positive effect on our
severity and frequency factors.





While
rescission activity was significantly elevated in 2009 from our historical
experience, our recent level of rescission activity is not necessarily
indicative of future trends. Furthermore, our ability to rescind a policy may be
adversely impacted by legal challenges from policyholders of our right to
rescind policies.  The increased level of rescission and claims denial
activity by mortgage insurers has caused certain policyholders and loan
servicers to institute legal actions to challenge the validity of rescissions
and claim denials, and we are currently a defendant in two such
proceedings.  See Part II, Item 1, “Legal Proceedings” for further
information.  We believe it is likely that other lenders and mortgage
servicers will challenge the ability of mortgage insurers to rescind and deny
coverage, including the filing of additional lawsuits.  An adverse
court decision against us or another mortgage insurer could set a precedent that
has the effect of significantly restricting or limiting our ability to rescind
policies or deny coverage of claims and require a corresponding decrease in our
rescission factor.





Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations





We had no
material off-balance sheet arrangements at March 31, 2010.





We lease
office facilities and office equipment under operating leases with minimum lease
commitments that range from one to five years.  We currently sublease
space on two floors of our office facility to Essent. We had no capitalized
leases or material purchase commitments at March 31, 2010.





Our
long-term debt has a single maturity date in 2028.  There were no
material changes during the three months ended March 31, 2010 to the aggregate
contractual obligations shown in our Annual Report on Form 10-K for the year
ended December 31, 2009.





Safe
Harbor Statement under the Private Securities Litigation Reform Act of
1995





Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
other portions of this report contain forward-looking statements relating to
future plans, expectations and performance, which involve various risks and
uncertainties, including, but not limited to, the following:





·
            a
      deeper or more prolonged recession in the United States coupled with the
      continued decline in home prices and increased unemployment levels could
      increase defaults and limit opportunities for borrowers to cure defaults
      or for us 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
      instituting receivership proceedings, which would likely eliminate all
      remaining stockholder value;


·
            our
      ability to operate our business and maintain a solvent
      run-off;


·
            our
      ability to continue as a going
concern;


·
            the
      ability of TGI to pay its 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;


41




·
            if
      Triad is not permitted or is otherwise unable to provide funds to TGI, the
      available resources of TGI will be insufficient to satisfy future debt
      service obligations on its $35 million outstanding long-term
      debt;


·
            our
      ability to rescind coverage or deny claims could be restricted or limited
      by legal challenges from policyholders and loan
  servicers;


·
            our
      loss reserve 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, particularly in non-distressed markets, or
      remain depressed, additional borrowers may default and claims could be
      higher than anticipated;


·
            if
      unemployment rates continue to rise or remain at high levels, 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
      impact of programs and legislation affecting modifications and
      refinancings of mortgages could materially impact our financial
      performance in run-off;


·
            our
      financial condition and performance in run-off could be affected by
      legislation adopted in the future 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;


·
            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;


·
            the
      possibility that there will not be adequate interest in our common stock
      to ensure efficient pricing on the over the counter markets;
      and


·
            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.





Accordingly,
actual results may differ from those set forth in these forward-looking
statements.  Attention also is directed to other risks and
uncertainties set forth in documents that we file from time to time with the
Securities and Exchange Commission (the “SEC”).





Item 3.  Quantitative and Qualitative
Disclosures about Market Risk




The
information required by this Item 3 is not required to be provided by issuers,
such as us, that satisfy the definition of "smaller reporting company" under SEC
rules.





42


Item
4.  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 March 31, 2010 that materially affected, or are
      reasonably likely to materially affect, our internal control over
      financial reporting.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





The
Company is involved in litigation and other legal proceedings in the ordinary
course of business as well as the matters identified below.





On
February 6, 2009, James L. Phillips served a complaint against Triad Guaranty
Inc., Mark K. Tonnesen and Kenneth W. Jones in the United States District Court,
Middle District of North Carolina.  The plaintiff purports to
represent a class of persons who purchased or otherwise acquired the common
stock of the Company between October 26, 2006 and April 1, 2008 and the
complaint alleges violations of federal securities laws by the Company and two
of its present or former officers.  The court appointed lead counsel
for the plaintiff and an amended complaint was filed on June 22,
2009.  We filed our motion to dismiss the amended complaint on August
21, 2009 and the plaintiff filed its opposition to the motion to dismiss on
October 20, 2009.  Our reply was filed on November 19,
2009.  Oral arguments on the motion are scheduled for August 30,
2010.





On
September 4, 2009, Triad filed a complaint against American Home Mortgage
(“AHM”) in the United States Bankruptcy Court for the District of Delaware
seeking rescission of multiple master mortgage guaranty insurance policies
(“master policies”) and declaratory relief.  The complaint seeks
relief from AHM as well as all owners of loans insured under the master policies
by way of a defendant class action.  Triad alleged that AHM failed to
follow the delegated insurance underwriting guidelines approved by Triad, that
this failure breached the master policies as well as the implied covenants of
good faith and fair dealing, and that these breaches were so substantial and
fundamental that the intent of the master policies could not be fulfilled and
Triad should be excused from its obligations under the master policies. The
total amount of risk originated under the AHM master policies, accounting for
any applicable stop loss limits associated with Modified Pool contracts and less
risk originated on policies which have been subsequently rescinded, was $1.5
billion, of which $1.0 billion remains in force at March 31,
2010.  Triad continues to accept premiums and process claims under the
master policies but, as a result of this action, Triad ceased remitting claim
payments to companies servicing loans originated by AHM.  Both
premiums and claim payments subsequent to the filing of the complaint have been
segregated pending resolution of this action.  We have not recognized
any benefit in our financial statements pending the outcome of the
litigation.





On
November 4, 2009, AHM filed an action in the Bankruptcy Court seeking to recover
$7.6 million of alleged preferential payments made to Triad. AHM alleges that
such payments constitute a preference and are


43


subject
to recovery by the bankrupt estate. The time period in which to respond to this
request has been tolled pending settlement discussions in the above referenced
AHM matter. In the event a settlement is not successfully concluded, Triad
intends to vigorously defend this matter.





On
December 11, 2009, American Home Mortgage Servicing, Inc. filed a complaint
against Triad for damages, declaratory relief, and injunction in the United
States District Court, Northern District of Texas. The complaint alleges that
Triad denied payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance policies prohibit
denial of claim without evidence of harm, and an injunction against future like
denials.  Triad intends to vigorously defend this matter.





On March
5, 2010, Countrywide Home Loans, Inc. filed a lawsuit in the Los Angeles County
Superior Court of the State of California alleging breach of contract and
seeking a declaratory judgment that bulk rescissions of flow loans is improper
and that Triad is improperly rescinding loans under the terms of its master
policies. Triad intends to vigorously defend this matter.





Item
6.  Exhibits
 
 The
exhibits filed with this quarterly report on Form 10-Q are set forth in the
Exhibit Index on page 46 and are incorporated herein by
reference.


44


SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.


Triad Guaranty
      Inc./s/
      Kenneth S. DwyerMay
      11, 2010
            
            Kenneth
      S. Dwyer
                Vice
      President and Chief Accounting Officer
                (Duly
      Authorized Officer and Principal Accounting
  Officer)





45


EXHIBIT
INDEX





Exhibit
      Number
            Description10.62
            Summary
      of Executive Severance Program.*31.1
            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.
                
                Management
      contract or compensatory plan or arrangement.











46