##### Table of Contents



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




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##### Table of Contents



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2006
(Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.

    

Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    38Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    39Item 1A.
    
    Risk Factors
    
    
    39Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3.
    
    Defaults Upon Senior Securities
    
    
    39Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    39Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    39Signature
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30
    
    
    December 312006
    
    
    2005(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $572,341 and $518,137)
    
    $
    590,040
    
    
    $
    534,064Equity securities (cost: $9,602 and $7,001)
    
    
    10,113
    
    
    
    8,159Other investments
    
    
    5,000
    
    
    
    Short-term investments
    
    
    6,023
    
    
    
    4,796611,176
    
    
    
    547,019Cash and cash equivalents
    
    
    9,230
    
    
    
    8,934Real estate acquired in claim settlement
    
    
    7,982
    
    
    
    5,721Accrued investment income
    
    
    7,695
    
    
    
    7,237Deferred policy acquisition costs
    
    
    34,681
    
    
    
    33,684Prepaid federal income taxes
    
    
    159,268
    
    
    
    139,465Property and equipment
    
    
    7,842
    
    
    
    7,827Income taxes recoverable
    
    
    200
    
    
    
    181Reinsurance recoverable
    
    
    1
    
    
    
    948Other assets
    
    
    19,904
    
    
    
    16,487Total assets
    
    $
    857,979
    
    
    $
    767,503LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    60,123
    
    
    $
    51,074Unearned premiums
    
    
    12,457
    
    
    
    13,494Amounts payable to reinsurers
    
    
    5,838
    
    
    
    4,810Deferred income taxes
    
    
    175,728
    
    
    
    155,189Long-term debt
    
    
    34,508
    
    
    
    34,501Accrued interest on debt
    
    
    584
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    7,819
    
    
    
    7,969Total liabilities
    
    
    297,057
    
    
    
    268,312Commitments and contingencies  Note 4Stockholders equity:Preferred stock, par value $0.01 per share  authorized
1,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share  authorized
33,091,400 shares; issued and outstanding 14,887,889 shares
at September 30, 2006 and 14,774,153 shares at December 31, 2005
    
    
    149
    
    
    
    148Additional paid-in capital
    
    
    103,964
    
    
    
    103,657Accumulated other comprehensive income, net of income tax
liability of $6,373 at September 30, 2006 and $5,980 at
December 31, 2005
    
    
    11,836
    
    
    
    11,106Deferred compensation
    
    
    
    
    
    
    (3,161
    )Retained earnings
    
    
    444,973
    
    
    
    387,441Total stockholders equity
    
    
    560,922
    
    
    
    499,191Total liabilities and stockholders equity
    
    $
    857,979
    
    
    $
    767,503
  1




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##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except share data)Revenue:Premiums written:Direct
    
    $
    65,828
    
    
    $
    53,272
    
    
    $
    186,101
    
    
    $
    152,158Ceded
    
    
    (11,925
    )
    
    
    (10,299
    )
    
    
    (34,498
    )
    
    
    (29,863
    )Net premiums written
    
    
    53,903
    
    
    
    42,973
    
    
    
    151,603
    
    
    
    122,295Change in unearned premiums
    
    
    174
    
    
    
    1,155
    
    
    
    1,031
    
    
    
    1,731Earned premiums
    
    
    54,077
    
    
    
    44,128
    
    
    
    152,634
    
    
    
    124,026Net investment income
    
    
    6,761
    
    
    
    5,896
    
    
    
    19,518
    
    
    
    17,054Net realized investment (losses) gains
    
    
    (36
    )
    
    
    (170
    )
    
    
    1,636
    
    
    
    (124
    )Other income
    
    
    3
    
    
    
    2
    
    
    
    6
    
    
    
    1360,805
    
    
    
    49,856
    
    
    
    173,794
    
    
    
    140,969Losses and expenses:Net losses and loss adjustment expenses
    
    
    19,305
    
    
    
    16,958
    
    
    
    52,927
    
    
    
    44,876Interest expense on debt
    
    
    693
    
    
    
    694
    
    
    
    2,080
    
    
    
    2,080Amortization of deferred policy acquisition costs
    
    
    4,109
    
    
    
    3,714
    
    
    
    12,089
    
    
    
    11,066Other operating expenses (net of acquisition
costs deferred)
    
    
    9,279
    
    
    
    7,494
    
    
    
    26,288
    
    
    
    21,72833,386
    
    
    
    28,860
    
    
    
    93,384
    
    
    
    79,750Income before income taxes
    
    
    27,419
    
    
    
    20,996
    
    
    
    80,410
    
    
    
    61,219Income taxes:Current
    
    
    979
    
    
    
    706
    
    
    
    2,930
    
    
    
    2,107Deferred
    
    
    7,048
    
    
    
    4,996
    
    
    
    19,948
    
    
    
    14,8598,027
    
    
    
    5,702
    
    
    
    22,878
    
    
    
    16,966Net income
    
    $
    19,392
    
    
    $
    15,294
    
    
    $
    57,532
    
    
    $
    44,253Earnings per common and common equivalent share:Basic
    
    $
    1.31
    
    
    $
    1.04
    
    
    $
    3.90
    
    
    $
    3.01Diluted
    
    $
    1.30
    
    
    $
    1.03
    
    
    $
    3.86
    
    
    $
    2.99Shares used in computing earnings per common and
common equivalent share:Basic
    
    
    14,774,781
    
    
    
    14,753,673
    
    
    
    14,767,556
    
    
    
    14,680,355Diluted
    
    
    14,923,102
    
    
    
    14,837,017
    
    
    
    14,899,940
    
    
    
    14,809,568
 .
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 302006
    
    
    2005(In thousands)Operating activitiesNet income
    
    $
    57,532
    
    
    $
    44,253Adjustments to reconcile net income to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    8,012
    
    
    
    5,987Accrued expenses and other liabilities
    
    
    (150
    )
    
    
    153Current taxes payable
    
    
    
    
    
    
    576Income taxes recoverable
    
    
    (19
    )
    
    
    (162
    )Amounts due to/from reinsurers
    
    
    1,975
    
    
    
    362Accrued investment income
    
    
    (458
    )
    
    
    (326
    )Policy acquisition costs deferred
    
    
    (13,086
    )
    
    
    (11,945
    )Amortization of deferred policy acquisition costs
    
    
    12,089
    
    
    
    11,066Net realized investment (gains) losses
    
    
    (1,636
    )
    
    
    124Provision for depreciation
    
    
    1,879
    
    
    
    2,575Accretion of discount on investments
    
    
    49
    
    
    
    (251
    )Deferred income taxes
    
    
    19,948
    
    
    
    14,859Prepaid federal income taxes
    
    
    (19,803
    )
    
    
    (13,815
    )Real estate acquired in claim settlement, net of write-downs
    
    
    (2,261
    )
    
    
    (2,473
    )Accrued interest on debt
    
    
    (691
    )
    
    
    (691
    )Other assets
    
    
    (3,417
    )
    
    
    (1,149
    )Other operating activities
    
    
    2,687
    
    
    
    3,001Net cash provided by operating activities
    
    
    62,650
    
    
    
    52,144Investing activitiesSecurities available-for-sale:Purchases
 fixed maturities
    
    
    (125,797
    )
    
    
    (93,536
    )Sales  fixed maturities
    
    
    69,280
    
    
    
    25,614Maturities
 fixed maturities
    
    
    3,020
    
    
    
    8,250Purchases
 equities
    
    
    (4,772
    )
    
    
    Sales  equities
    
    
    3,131
    
    
    
    512Purchases of other investments
    
    
    (5,000
    )
    
    
    Net change in short-term investments
    
    
    (1,227
    )
    
    
    7,710Purchases of property and equipment
    
    
    (1,894
    )
    
    
    (1,787
    )Net cash used in investing activities
    
    
    (63,259
    )
    
    
    (53,237
    )Financing activitiesExcess tax benefits from share-based compensation
    
    
    280
    
    
    
    Proceeds from exercise of stock options
    
    
    625
    
    
    
    3,261Net cash provided by financing activities
    
    
    905
    
    
    
    3,261Net change in cash and cash equivalents
    
    
    296
    
    
    
    2,168Cash and cash equivalents at beginning of period
    
    
    8,934
    
    
    
    10,440Cash and cash equivalents at end of period
    
    $
    9,230
    
    
    $
    12,608Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    24,438
    
    
    $
    16,246Interest
    
    
    2,765
    
    
    
    2,765
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##### Table of Contents



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




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Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006(In thousands, except per share information)Income before income taxes
    
    $
    (306
    )
    
    $
    (899
    )Net income
    
    $
    (198
    )
    
    $
    (584
    )Earnings per
share  basic
    
    $
    (0.01
    )
    
    $
    (0.04
    )Earnings per
share  diluted
    
    $
    (0.01
    )
    
    $
    (0.04
    )
  5




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005(In thousands, except earnings per share information)Net income  as reported
    
    $
    15,294
    
    
    $
    44,253Net income  pro forma
    
    $
    15,143
    
    
    $
    43,822Earnings per share  as
reported:Basic
    
    $
    1.04
    
    
    $
    3.01Diluted
    
    $
    1.03
    
    
    $
    2.99Earnings per share  pro forma:Basic
    
    $
    1.03
    
    
    $
    2.99Diluted
    
    $
    1.02
    
    
    $
    2.96
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the Effects of Prior Year Misstatements in Current Year Financial Statements
 3. Consolidation
  6




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##### Table of Contents



4. Commitments And Contingencies
 Reinsurance
  Insurance In Force, Dividend Restrictions, and Statutory Results
  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Net risk
    
    $
    8,065,064
    
    
    $
    7,312,697Statutory capital and surplus
    
    $
    157,934
    
    
    $
    131,582Statutory contingency reserve
    
    
    515,957
    
    
    
    447,826Total
    
    $
    673,891
    
    
    $
    579,408Risk-to-capital ratio
    
    
    12.0 to 1
    
    
    
    12.6 to 1
   7




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##### Table of Contents



Loss Reserves
  Litigation
  5. Earnings Per Share
  6. Comprehensive Income
  8




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##### Table of Contents



7. Income Taxes
  8. Long-Term Stock Incentive Plan
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In thousands)Gross compensation expense
    
    $
    908
    
    
    $
    438
    
    
    $
    2,604
    
    
    $
    1,249Tax benefit
    
    
    317
    
    
    
    153
    
    
    
    911
    
    
    
    437Compensation expense
capitalized as part of
deferred acquisition costs
    
    
    144
    
    
    
    180
    
    
    
    421
    
    
    
    180
  Weighted-Weighted-
    
    
    Aggregate
    
    
    AverageNumber
    
    
    Average
    
    
    Intrinsic
    
    
    Remainingof Shares
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual Term(In thousands)Outstanding, January 1, 2006
    
    
    588,780
    
    
    $
    37.21Granted
    
    
    13,594
    
    
    
    43.00Exercised
    
    
    31,555
    
    
    
    19.80Cancelled
    
    
    4,520
    
    
    
    43.25Outstanding, September 30, 2006
    
    
    566,299
    
    
    
    38.27
    
    
    $
    7,445
    
    
    4.9 yearsExercisable, September 30, 2006
    
    
    421,196
    
    
    
    36.68
    
    
    $
    6,168
    
    
    3.5 years
 9




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##### Table of Contents



2006
    
    2005Expected volatility
    
    
    34.0
    %
    
    
    46.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    5.0 years
    
    7.7 yearsRisk-free rate
    
    
    4.5
    %
    
    
    4.1
    %
   Weighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueNonvested, January 1, 2006
    
    
    101,415
    
    
    $
    46.93Granted
    
    
    46,950
    
    
    
    45.50Vested
    
    
    34,097
    
    
    
    47.05Cancelled
    
    
    1,160
    
    
    
    44.14Nonvested, September 30, 2006
    
    
    113,108
    
    
    
    46.33
    10




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##### Table of Contents



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




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12




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##### Table of Contents



Consolidated Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30%
    
    
    
    
    
    
    
    
    
    %2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In thousands, except percentages and per share information)Earned premiums
    
    $
    54,077
    
    
    $
    44,128
    
    
    
    22.5
    %
    
    $
    152,634
    
    
    $
    124,026
    
    
    
    23.1
    %Net losses and loss
adjustment expenses
    
    
    19,305
    
    
    
    16,958
    
    
    
    13.8
    
    
    
    52,927
    
    
    
    44,876
    
    
    
    17.9Other operating expenses
    
    
    9,279
    
    
    
    7,494
    
    
    
    23.8
    
    
    
    26,288
    
    
    
    21,728
    
    
    
    21.0Net income
    
    
    19,392
    
    
    
    15,294
    
    
    
    26.8
    
    
    
    57,532
    
    
    
    44,253
    
    
    
    30.0Diluted earnings per
share
    
    $
    1.30
    
    
    $
    1.03
    
    
    
    26.2
    %
    
    $
    3.86
    
    
    $
    2.99
    
    
    
    29.1
    %
    13




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##### Table of Contents



Production and In Force
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30%
    
    
    
    
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(In millions, except percentages)Primary insurance written
    
    $
    3,280
    
    
    $
    3,093
    
    
    
    6.0
    %
    
    $
    8,172
    
    
    $
    8,225
    
    
    
    (0.6
    )%Modified pool insurance
written
    
    
    2,956
    
    
    
    4,526
    
    
    
    (34.7
    )
    
    
    10,542
    
    
    
    8,427
    
    
    
    25.1Total insurance written
    
    $
    6,236
    
    
    $
    7,619
    
    
    
    (18.2
    )%
    
    $
    18,714
    
    
    $
    16,652
    
    
    
    12.4
    %
   14




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Flow channel
    
    
    6.0
    %
    
    
    6.0
    %
    
    
    5.7
    %
    
    
    5.9
    %Structured bulk channel
    
    
    17.8
    %
    
    
    17.1
    %
    
    
    16.6
    %
    
    
    12.9
    %Total
    
    
    9.4
    %
    
    
    9.5
    %
    
    
    9.4
    %
    
    
    8.0
    %
  15




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Prime
    
    
    66.5
    %
    
    
    77.1
    %
    
    
    68.2
    %
    
    
    76.1
    %Alt-A
    
    
    31.2
    
    
    
    18.9
    
    
    
    29.6
    
    
    
    17.7A Minus
    
    
    2.0
    
    
    
    3.1
    
    
    
    2.0
    
    
    
    4.8Sub Prime
    
    
    0.3
    
    
    
    0.9
    
    
    
    0.2
    
    
    
    1.4Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005LTV ratio:Greater than 95%
    
    
    20.7
    %
    
    
    13.8
    %
    
    
    15.1
    %
    
    
    12.8
    %90.01% to 95.00%
    
    
    23.3
    
    
    
    43.3
    
    
    
    23.3
    
    
    
    35.490.00% and below
    
    
    56.0
    
    
    
    42.9
    
    
    
    61.6
    
    
    
    51.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   16




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##### Table of Contents



%2006
    
    
    2005
    
    
    Change(In millions, except percentages)Primary insurance
    
    $
    32,106
    
    
    $
    29,820
    
    
    
    7.7
    %Modified Pool insurance
    
    
    21,779
    
    
    
    13,406
    
    
    
    62.5Total insurance
    
    $
    53,885
    
    
    $
    43,226
    
    
    
    24.7
    %
    2006
    
    2005Primary insurance in force
    
    
    13.7
    %
    
    
    9.2
    %Modified Pool insurance in force
    
    
    70.1
    %
    
    
    66.5
    %Total insurance in force
    
    
    36.5
    %
    
    
    27.0
    %
 17




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##### Table of Contents



Primary
    
    Modified Pool2006
    
    2005
    
    2006
    
    2005Credit quality:Prime
    
    
    81.2
    %
    
    
    84.7
    %
    
    
    30.8
    %
    
    
    33.2
    %Alt-A
    
    
    14.5
    
    
    
    10.1
    
    
    
    68.1
    
    
    
    65.4A Minus
    
    
    3.6
    
    
    
    4.3
    
    
    
    0.9
    
    
    
    1.2Sub Prime
    
    
    0.7
    
    
    
    0.9
    
    
    
    0.2
    
    
    
    0.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan type:Fixed
    
    
    71.0
    %
    
    
    73.6
    %
    
    
    32.1
    %
    
    
    43.2
    %ARM (positive amortization)
    
    
    19.4
    
    
    
    23.1
    
    
    
    56.1
    
    
    
    56.8ARM (potential negative amortization)
    
    
    9.6
    
    
    
    3.3
    
    
    
    11.8
    
    
    
    0.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property type:Condominium
    
    
    9.2
    %
    
    
    7.5
    %
    
    
    7.3
    %
    
    
    4.8
    %Other (principally single-family
detached)
    
    
    90.8
    
    
    
    92.5
    
    
    
    92.7
    
    
    
    95.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy status:Primary residence
    
    
    89.7
    %
    
    
    92.7
    %
    
    
    73.7
    %
    
    
    74.7
    %Second home
    
    
    7.0
    
    
    
    3.9
    
    
    
    6.0
    
    
    
    5.7Non-owner occupied
    
    
    3.3
    
    
    
    3.4
    
    
    
    20.3
    
    
    
    19.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage amount:$200,000 or less
    
    
    61.3
    %
    
    
    68.5
    %
    
    
    39.6
    %
    
    
    46.3
    %Greater than $200,000
    
    
    38.7
    
    
    
    31.5
    
    
    
    60.4
    
    
    
    53.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  2006
    
    2005Primary flow channel insurance in force
    
    
    63.0
    %
    
    
    58.3
    %Total insurance in force
    
    
    36.2
    %
    
    
    39.5
    %
  18




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##### Table of Contents



Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30%
    
    
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(In thousands, except percentages)Direct premium written
    
    $
    65,828
    
    
    $
    53,272
    
    
    
    23.6
    %
    
    $
    186,101
    
    
    $
    152,158
    
    
    
    22.3
    %Ceded premium written
    
    
    (11,925
    )
    
    
    (10,299
    )
    
    
    15.8
    
    
    
    (34,498
    )
    
    
    (29,863
    )
    
    
    15.5Net premium written
    
    
    53,903
    
    
    
    42,973
    
    
    
    25.4
    
    
    
    151,603
    
    
    
    122,295
    
    
    
    24.0Change in unearned premiums
    
    
    174
    
    
    
    1,155
    
    
    
    (84.9
    )
    
    
    1,031
    
    
    
    1,731
    
    
    
    (40.4
    )Earned premiums
    
    $
    54,077
    
    
    $
    44,128
    
    
    
    22.5
    %
    
    $
    152,634
    
    
    $
    124,026
    
    
    
    23.1
    %Net investment income
    
    $
    6,761
    
    
    $
    5,896
    
    
    
    14.7
    %
    
    $
    19,518
    
    
    $
    17,054
    
    
    
    14.4
    %Total revenues
    
    $
    60,805
    
    
    $
    49,856
    
    
    
    22.0
    %
    
    $
    173,794
    
    
    $
    140,969
    
    
    
    23.3
    %
  19




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Premium cede rate
(ceded premiums
written as a
percentage of
direct premiums
written)
    
    
    18.1
    %
    
    
    19.3
    %
    
    
    18.5
    %
    
    
    19.6
    %Captive reinsurance
premium cede rate
(ceded premiums
written under
captive reinsurance
arrangements as a
percentage of
direct premiums
written)
    
    
    17.0
    %
    
    
    17.8
    %
    
    
    17.4
    %
    
    
    18.1
    %Average captive
premium cede rate
(ceded premiums
written under
captive reinsurance
arrangements as a
percentage of
direct premiums
written under
captive reinsurance
arrangements)
    
    
    36.5
    %
    
    
    37.1
    %
    
    
    36.8
    %
    
    
    36.6
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Primary flow insurance written
    
    
    61.5
    %
    
    
    58.1
    %
    
    
    59.7
    %
    
    
    53.8
    %Total insurance written
    
    
    28.1
    %
    
    
    23.6
    %
    
    
    23.5
    %
    
    
    26.6
    %
  20




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##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30%

    
    
    
    
    
    
    
    %2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In thousands, except percentages)Net losses and
loss adjustment
expenses
    
    $
    19,305
    
    
    $
    16,958
    
    
    
    13.8
    %
    
    $
    52,927
    
    
    $
    44,876
    
    
    
    17.9
    %Amortization of
deferred policy
acquisition costs
    
    $
    4,109
    
    
    $
    3,714
    
    
    
    10.6
    
    
    $
    12,089
    
    
    $
    11,066
    
    
    
    9.2Other operating
expenses (net of
acquisition costs
deferred)
    
    $
    9,279
    
    
    $
    7,494
    
    
    
    23.8
    
    
    $
    26,288
    
    
    $
    21,728
    
    
    
    21.0Loss ratio
    
    
    35.7
    %
    
    
    38.4
    %
    
    
    
    
    
    
    34.7
    %
    
    
    36.2
    %Expense ratio
    
    
    24.8
    %
    
    
    26.1
    %
    
    
    
    
    
    
    25.3
    %
    
    
    26.8
    %Combined ratio
    
    
    60.5
    %
    
    
    64.5
    %
    
    
    
    
    
    
    60.0
    %
    
    
    63.0
    %
 21




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30%
    
    
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(Dollars in thousands)Paid claims:Primary insurance
    
    $
    13,038
    
    
    $
    11,982
    
    
    
    8.8
    %
    
    $
    39,823
    
    
    $
    32,810
    
    
    
    21.4
    %Modified Pool insurance
    
    
    581
    
    
    
    1,473
    
    
    
    (60.6
    )
    
    
    2,611
    
    
    
    3,593
    
    
    
    (27.3
    )Total
    
    $
    13,619
    
    
    $
    13,455
    
    
    
    1.2
    %
    
    $
    42,434
    
    
    $
    36,403
    
    
    
    16.6
    %Number of claims paid:Primary insurance
    
    
    506
    
    
    
    457
    
    
    
    10.7
    %
    
    
    1,535
    
    
    
    1,230
    
    
    
    24.8
    %Modified Pool insurance
    
    
    32
    
    
    
    67
    
    
    
    (52.2
    )
    
    
    147
    
    
    
    169
    
    
    
    (13.0
    )Total
    
    
    538
    
    
    
    524
    
    
    
    2.7
    %
    
    
    1,682
    
    
    
    1,399
    
    
    
    20.2
    %Average severity:Primary insurance
    
    $
    25.8
    
    
    $
    26.2
    
    
    
    
    
    
    $
    25.9
    
    
    $
    26.7Modified Pool insurance
    
    $
    18.2
    
    
    $
    22.0
    
    
    
    
    
    
    $
    17.8
    
    
    $
    21.3Total
    
    $
    25.3
    
    
    $
    25.7
    
    
    
    
    
    
    $
    25.2
    
    
    $
    26.0
   22




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##### Table of Contents



%2006
    
    
    2005
    
    
    Change(In thousands, except percentages)Primary insurance:Reserves for reported defaults
    
    $
    50,237
    
    
    $
    35,206
    
    
    
    42.7
    %Reserves for defaults incurred but not reported
    
    
    5,240
    
    
    
    4,646
    
    
    
    12.8Total Primary insurance
    
    
    55,477
    
    
    
    39,852
    
    
    
    39.2Modified Pool insurance:Reserves for reported defaults
    
    
    3,683
    
    
    
    1,305
    
    
    
    182.2Reserves for defaults incurred but not reported
    
    
    858
    
    
    
    563
    
    
    
    52.4Total Modified Pool insurance
    
    
    4,541
    
    
    
    1,868
    
    
    
    143.1Reserve for loss adjustment expenses
    
    
    105
    
    
    
    103
    
    
    
    1.9Total reserves for losses and loss adjustment
expenses
    
    $
    60,123
    
    
    $
    41,823
    
    
    
    43.8
    %
   23




---



##### Table of Contents



2006
    
    2005Total business:Number of insured loans in force
    
    
    329,937
    
    
    
    297,400Number of loans in default
    
    
    6,939
    
    
    
    5,653With deductibles
    
    
    1,230
    
    
    
    709Without deductibles
    
    
    5,709
    
    
    
    4,944Percentage of loans in default (default rate)
    
    
    2.10
    %
    
    
    1.90
    %Percentage of loans in default excluding deductibles*
    
    
    2.11
    %
    
    
    1.99
    %Primary insurance:Number of insured loans in force
    
    
    219,287
    
    
    
    219,159Number of loans in default
    
    
    4,972
    
    
    
    4,312Percentage of loans in default
    
    
    2.27
    %
    
    
    1.97
    %Modified Pool insurance:Number of insured loans in force
    
    
    110,650
    
    
    
    78,241Number of loans in default
    
    
    1,967
    
    
    
    1,341With deductibles
    
    
    1,230
    
    
    
    709Without deductibles
    
    
    737
    
    
    
    632Percentage of loans in default
    
    
    1.78
    %
    
    
    1.71
    %Percentage of loans in default excluding deductibles*
    
    
    1.44
    %
    
    
    2.17
    %Primary Alt-A business**:Number of insured loans in force
    
    
    20,186
    
    
    
    15,554Number of loans in default
    
    
    674
    
    
    
    500Percentage of loans in default
    
    
    3.34
    %
    
    
    3.21
    %
 
 *
    
    Excludes loans written as part of structured bulk transactions with deductibles and defaults on these loans**
    
    Included in Primary insurance amounts above   24




---



##### Table of Contents



Number of defaults in FEMA-designated areas at December 31, 2005
    
    
    891Number of defaults in FEMA-designated areas cured during the first
nine months of 2006 with no loss incurred
    
    
    (781
    )Number of new defaults in FEMA-designated areas reported during the
first nine months of 2006
    
    
    410Number of defaults in FEMA-designated areas at September 30, 2006
    
    
    520Number of defaults in FEMA-designated areas at September 30, 2006
excluding deductibles
    
    
    426
    25




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##### Table of Contents



Significant Customers
  26




---



##### Table of Contents



Financial Position
  Deferred Policy Acquisition Costs
  27




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except percentages)Balance  beginning of period
    
    $
    34,203
    
    
    $
    33,082
    
    
    $
    33,684
    
    
    $
    32,453Costs capitalized
    
    
    4,587
    
    
    
    3,964
    
    
    
    13,086
    
    
    
    11,945Amortization  normal
    
    
    (4,031
    )
    
    
    (3,296
    )
    
    
    (11,868
    )
    
    
    (9,873
    )Amortization  dynamic adjustment
    
    
    (78
    )
    
    
    (418
    )
    
    
    (221
    )
    
    
    (1,193
    )Total amortization
    
    
    (4,109
    )
    
    
    (3,714
    )
    
    
    (12,089
    )
    
    
    (11,066
    )Balance  end of period
    
    $
    34,681
    
    
    $
    33,332
    
    
    $
    34,681
    
    
    $
    33,332Annual Persistency
    
    
    
    
    
    
    
    
    
    
    75.1
    %
    
    
    68.4
    %
  Prepaid Federal Income Taxes and Deferred Income Taxes
  28




---



##### Table of Contents



29




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##### Table of Contents



Investment Portfolio
 Portfolio Description
   September 30, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Available-for-sale securities:Fixed maturity securities:U. S. government obligations
    
    $
    11,876
    
    
    
    1.9
    %
    
    $
    12,124
    
    
    
    2.2
    %State and municipal bonds
    
    
    560,958
    
    
    
    91.8
    
    
    
    500,027
    
    
    
    91.4Corporate bonds
    
    
    17,155
    
    
    
    2.8
    
    
    
    21,855
    
    
    
    4.0Mortgage-backed bonds
    
    
    51
    
    
    
    0.0
    
    
    
    58
    
    
    
    0.0Total fixed maturities
    
    
    590,040
    
    
    
    96.5
    
    
    
    534,064
    
    
    
    97.6Equity securities
    
    
    10,113
    
    
    
    1.7
    
    
    
    8,159
    
    
    
    1.5Total available-for-sale
securities
    
    
    600,153
    
    
    
    98.2
    
    
    
    542,223
    
    
    
    99.1Other investments
    
    
    5,000
    
    
    
    0.8
    
    
    
    
    
    
    
    0.0Short-term investments
    
    
    6,023
    
    
    
    1.0
    
    
    
    4,796
    
    
    
    0.9$
    611,176
    
    
    
    100.0
    %
    
    $
    547,019
    
    
    
    100.0
    %
  30




---



##### Table of Contents



Carrying
    
    % of TotalName of Creditor/Issuer
    
    Value
    
    Invested Assets(In thousands, except percentages)Atlanta, Georgia Airport
    
    $
    6,845
    
    
    
    1.12
    %State of Connecticut
    
    
    6,641
    
    
    
    1.09State of Pennsylvania
    
    
    6,137
    
    
    
    1.00State of Hawaii
    
    
    5,416
    
    
    
    0.89Federal National Mortgage Association
    
    
    5,415
    
    
    
    0.89City of San Diego, California
    
    
    5,000
    
    
    
    0.82Structured Credit Holdings Plc (common stock)
    
    
    5,000
    
    
    
    0.82Port of Seattle, Washington
    
    
    4,599
    
    
    
    0.75City of Chicago, Illinois
    
    
    4,545
    
    
    
    0.74Denver, Colorado City and County Airport
    
    
    4,241
    
    
    
    0.69
   Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In thousands, except percentages)Average investments at
cost or amortized cost
    
    $
    582,320
    
    
    $
    498,693
    
    
    $
    561,450
    
    
    $
    482,366Pre-tax net investment income
    
    $
    6,761
    
    
    $
    5,896
    
    
    $
    19,518
    
    
    $
    17,054Pre-tax yield
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.6
    %
    
    
    4.7
    %Pre-tax realized investment
(losses) gains
    
    $
    (36
    )
    
    $
    (170
    )
    
    $
    1,636
    
    
    $
    (124
    )
  31




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##### Table of Contents



Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available-for-sale securities:Fixed maturity securities:U. S. government obligations
    
    $
    12,114
    
    
    $
    6
    
    
    $
    (244
    )
    
    $
    11,876State and municipal bonds
    
    
    544,211
    
    
    
    17,217
    
    
    
    (470
    )
    
    
    560,958Corporate bonds
    
    
    15,968
    
    
    
    1,191
    
    
    
    (4
    )
    
    
    17,155Mortgage-backed bonds
    
    
    48
    
    
    
    3
    
    
    
    
    
    
    
    51Subtotal, fixed maturities
    
    
    572,341
    
    
    
    18,417
    
    
    
    (718
    )
    
    
    590,040Equity securities
    
    
    9,602
    
    
    
    669
    
    
    
    (158
    )
    
    
    10,113Total available-for-sale
securities
    
    
    581,943
    
    
    
    19,086
    
    
    
    (876
    )
    
    
    600,153Other investments
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000$
    586,943
    
    
    $
    19,086
    
    
    $
    (876
    )
    
    $
    605,153
  32




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##### Table of Contents



Credit Risk
  September 30, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed Maturities:U.S. treasury and agency bonds
    
    $
    11,876
    
    
    
    2.0
    %
    
    $
    12,124
    
    
    
    2.3
    %AAA
    
    
    470,439
    
    
    
    79.7
    
    
    
    420,489
    
    
    
    78.7AA
    
    
    69,568
    
    
    
    11.8
    
    
    
    52,812
    
    
    
    9.9A
    
    
    24,225
    
    
    
    4.1
    
    
    
    30,176
    
    
    
    5.7BBB
    
    
    11,125
    
    
    
    1.9
    
    
    
    9,780
    
    
    
    1.8BB
    
    
    50
    
    
    
    0.0
    
    
    
    781
    
    
    
    0.1Not rated
    
    
    2,757
    
    
    
    0.5
    
    
    
    7,902
    
    
    
    1.5Total fixed maturities
    
    $
    590,040
    
    
    
    100.0
    %
    
    $
    534,064
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,716
    
    
    
    17.0
    %
    
    $
    1,709
    
    
    
    20.9
    %A
    
    
    2,030
    
    
    
    20.1
    
    
    
    1,559
    
    
    
    19.1BBB
    
    
    1,128
    
    
    
    11.1
    
    
    
    1,125
    
    
    
    13.8Not rated
    
    
    
    
    
    
    0.0
    
    
    
    490
    
    
    
    6.04,874
    
    
    
    48.2
    
    
    
    4,883
    
    
    
    59.8Common stocks
    
    
    5,239
    
    
    
    51.8
    
    
    
    3,276
    
    
    
    40.2Total equities
    
    $
    10,113
    
    
    
    100.0
    %
    
    $
    8,159
    
    
    
    100.0
    %
  §
    
    Length of time the fair value was below amortized cost§
    
    Industry factors or conditions related to a geographic area negatively affecting
the security§
    
    Downgrades by a rating agency§
    
    Past due interest or principal payments or other violation of covenants§
    
    Deterioration of the overall financial condition of the specific issuer
  33




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##### Table of Contents



Realized Losses and Impairments
   
    
    An approximate $75,000 write-down on preferred stock of a U.S. automobile
manufacturer for which the fair value had fluctuated to approximately 76% of
cost for the previous nine months. The impairment was primarily the result of
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weak operating results for 2005 and recent rating agency downgrades. The
circumstances surrounding this impairment caused us to review a bond holding of
an affiliated finance company of the same U.S. automobile manufacturer. The
fair value was approximately 91% of the book value of this security and had been
in an unrealized loss position continuously for the previous nine months. We
wrote down this security by approximately $60,000 to a value that approximated
its market value. No other securities in our portfolio were impacted by these
circumstances.
 Liquidity and Capital Resources
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September 30, 2006
    
    
    December 31, 2005Statutory policyholders surplus
    
    $
    157.9
    
    
    $
    131.6Statutory contingency reserve
    
    
    516.0
    
    
    
    447.8Total
    
    $
    673.9
    
    
    $
    579.4
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Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  §
    
    interest rates may increase or decrease from their current levels;§
    
    housing prices may increase or decrease from their current levels;§
    
    housing transactions requiring mortgage insurance may decrease for many reasons
including changes in interest rates or economic conditions or alternative credit
enhancement products;§
    
    our market share may change as a result of changes in underwriting criteria or
competitive products or rates;§
    
    the amount of insurance written could be adversely affected by changes in federal
housing legislation, including changes in the Federal Housing Administration loan
limits and coverage requirements of Freddie Mac and Fannie Mae (Government Sponsored
Enterprises);§
    
    our financial condition and competitive position could be affected by legislation
or regulation impacting the mortgage guaranty industry or the Government Sponsored
Entities, specifically, and the financial services industry in general;§
    
    rating agencies may revise methodologies for determining our financial strength
ratings and may revise or withdraw the assigned ratings at any time;§
    
    decreases in persistency, which are affected by loan refinancings in periods of
low interest rates, may have an adverse effect on earnings;§
    
    the amount of insurance written and the growth in insurance in force or risk in
force as well as our performance may be adversely impacted by the competitive
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environment in the private mortgage insurance industry, including the type,
structure, mix and pricing of our products and services and our competitors;§
    
    if we fail to properly underwrite mortgage loans under contract underwriting
service agreements, we may be required to assume the costs of repurchasing those
loans;§
    
    with consolidation occurring among mortgage lenders and our concentration of
insurance in force generated through relationships with significant lender
customers, our margins may be compressed and the loss of a significant customer or a
change in their business practices affecting mortgage insurance may have an adverse
effect on our earnings;§
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions;§
    
    economic downturns in regions where our risk is more concentrated could have a
particularly adverse effect on our financial condition and loss development;§
    
    revisions in risk-based capital rules by the Office of Federal Housing Enterprise
Oversight for Fannie Mae and Freddie Mac could severely limit our ability to compete
against various types of credit protection counterparties, including AAA rated
private mortgage insurers;§
    
    changes in the eligibility guidelines of Fannie Mae or Freddie Mac could have an
adverse effect on the Company;§
    
    proposed regulation by the Department of Housing and Urban Development to exclude
packages of real estate settlement services, which may include any required mortgage
insurance premium paid at closing, from the anti-referral provisions of the Real
Estate Settlement Procedures Act could adversely affect our earnings;§
    
    our financial and competitive position could be affected by regulatory activity
requiring changes to mortgage industry business practices, such as captive
reinsurance.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our management, including
our CEO and CFO, concluded, as of the end of the period covered by this report, that our
disclosure controls and procedures were effective.
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Disclosure controls and procedures include controls and procedures designed to ensure that
management, including our CEO and CFO, is alerted to material information required to be
disclosed in our filings under the Act so as to allow timely decisions regarding our
disclosures. In designing and evaluating disclosure controls and procedures, we recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to
do.b)
    
    There have been no changes in internal controls over financial reporting during the
first nine months of 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 Item 1A. Risk Factors
 There have been no material changes with respect to the risk factors disclosed in our
annual report on Form 10-K for the year ended December 31, 2005.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3. Defaults Upon Senior Securities 
 
 Item 4. Submission of Matters to a Vote of Security Holders 
 
 Item 5. Other Information 
 
 Item 6. Exhibits 
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SIGNATURE
  TRIAD GUARANTY INC.Date: November 9, 2006/s/ Kenneth W. JonesKenneth W. JonesSenior Vice President and Chief Financial Officer 40




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EXHIBIT INDEX
 Exhibit Number
    
    Description10.36
    
    
    Amendment to Employment Agreement between Registrant and
Ron D. Kessinger dated July 15, 2006 (filed as an exhibit
to the Registrants Form 8-K dated July 15, 2006 and
incorporated by reference herein).10.39
    
    
    Employment Agreement between Registrant and Kenneth N. Lard
dated August 15, 2006 (filed as an exhibit to the
Registrants
Form 8-K dated August 15, 2006 and incorporated by
reference herein).31.1
    
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 41