##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission File Number 0-22342
 
 Triad Guaranty Inc.
  Delaware
    
    56-1838519(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 
 
 
 þ o
 þ o




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##### 



TRIAD GUARANTY INC.
 INDEX
 PageNumberPart I. Financial Information:Item 1.Financial Statements:Consolidated Balance Sheets as of June 30, 2005 (Unaudited)
and December 31, 2004
    
    
    1Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 2005 and 2004 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    9Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4.Controls and Procedures
    
    
    37Part II. Other Information:Item 1.Legal Proceedings
    
    
    37Item 2.Changes in Securities and Use of Proceeds
    
    
    37Item 3.Defaults Upon Senior Securities
    
    
    37Item 4.Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.Other Information
    
    
    38Item 6.Exhibits
    
    
    38Signature
    
    
    39




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30
    
    December 312005
    
    2004(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $476,135 and $435,432)
    
    $
    499,871
    
    
    $
    454,121Equity securities (cost: $8,114 and $8,626)
    
    
    9,698
    
    
    
    10,272Short-term investments
    
    
    14,323
    
    
    
    16,095523,892
    
    
    
    480,488Cash
    
    
    3,527
    
    
    
    6,865Real estate
    
    
    1,440
    
    
    
    211Accrued investment income
    
    
    6,643
    
    
    
    6,229Deferred policy acquisition costs
    
    
    33,082
    
    
    
    32,453Prepaid federal income taxes
    
    
    128,682
    
    
    
    119,132Property and equipment
    
    
    8,534
    
    
    
    8,945Income taxes recoverable
    
    
    1,270
    
    
    
    977Reinsurance recoverable
    
    
    1,037
    
    
    
    1,164Other assets
    
    
    15,402
    
    
    
    15,571Total assets
    
    $
    723,509
    
    
    $
    672,035LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    38,576
    
    
    $
    34,042Unearned premiums
    
    
    15,327
    
    
    
    15,942Amounts payable to reinsurer
    
    
    4,663
    
    
    
    4,467Deferred income taxes
    
    
    149,533
    
    
    
    137,925Unearned ceding commission
    
    
    100
    
    
    
    200Long-term debt
    
    
    34,497
    
    
    
    34,493Accrued interest on debt
    
    
    1,275
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    4,182
    
    
    
    6,348Total liabilities
    
    
    248,153
    
    
    
    234,692Commitments and contingencies  Note 4Stockholders equity:Preferred stock, par value $0.01 per share - authorized
1,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share - authorized
32,000,000 shares; issued and outstanding 14,818,546 shares
at June 30, 2005 and 14,631,678 shares at December 31, 2004
    
    
    148
    
    
    
    146Additional paid-in capital
    
    
    101,792
    
    
    
    94,852Accumulated other comprehensive income, net of income tax
liability of $8,862 at June 30, 2005 and $7,117 at
December 31, 2004
    
    
    16,458
    
    
    
    13,218Deferred compensation
    
    
    (2,630
    )
    
    
    (1,501
    )Retained earnings
    
    
    359,588
    
    
    
    330,628Total stockholders equity
    
    
    475,356
    
    
    
    437,343Total liabilities and stockholders equity
    
    $
    723,509
    
    
    $
    672,035
  1




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##### 



TRIAD
GUARANTY INC.
 CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004(Dollars in thousands, except per share information)Revenue:Premiums written:Direct
    
    $
    50,559
    
    
    $
    43,029
    
    
    $
    98,886
    
    
    $
    83,345Ceded
    
    
    (9,948
    )
    
    
    (8,752
    )
    
    
    (19,564
    )
    
    
    (16,722
    )Net premiums written
    
    
    40,611
    
    
    
    34,277
    
    
    
    79,322
    
    
    
    66,623Change in unearned premiums
    
    
    510
    
    
    
    (94
    )
    
    
    576
    
    
    
    1,372Earned premiums
    
    
    41,121
    
    
    
    34,183
    
    
    
    79,898
    
    
    
    67,995Net investment income
    
    
    5,743
    
    
    
    4,598
    
    
    
    11,158
    
    
    
    9,184Net realized investment gains (losses)
    
    
    39
    
    
    
    (19
    )
    
    
    46
    
    
    
    558Other income
    
    
    2
    
    
    
    2
    
    
    
    11
    
    
    
    546,905
    
    
    
    38,764
    
    
    
    91,113
    
    
    
    77,742Losses and expenses:Net losses and loss adjustment expenses
    
    
    17,288
    
    
    
    7,701
    
    
    
    27,918
    
    
    
    16,584Interest expense on debt
    
    
    693
    
    
    
    693
    
    
    
    1,386
    
    
    
    1,386Amortization of deferred policy
acquisition costs
    
    
    3,695
    
    
    
    3,450
    
    
    
    7,352
    
    
    
    6,635Other operating expenses (net of
acquisition costs deferred)
    
    
    7,017
    
    
    
    6,729
    
    
    
    14,234
    
    
    
    13,06928,693
    
    
    
    18,573
    
    
    
    50,890
    
    
    
    37,674Income before income taxes
    
    
    18,212
    
    
    
    20,191
    
    
    
    40,223
    
    
    
    40,068Income taxes:Current
    
    
    707
    
    
    
    594
    
    
    
    1,401
    
    
    
    1,152Deferred
    
    
    4,306
    
    
    
    5,222
    
    
    
    9,863
    
    
    
    10,4975,013
    
    
    
    5,816
    
    
    
    11,264
    
    
    
    11,649Net income
    
    $
    13,199
    
    
    $
    14,375
    
    
    $
    28,959
    
    
    $
    28,419Earnings per common and common
equivalent share:Basic
    
    $
    0.90
    
    
    $
    0.99
    
    
    $
    1.98
    
    
    $
    1.96Diluted
    
    $
    0.89
    
    
    $
    0.98
    
    
    $
    1.96
    
    
    $
    1.93Shares used in computing earnings per
common and common equivalent share:Basic
    
    
    14,667,734
    
    
    
    14,502,215
    
    
    
    14,643,095
    
    
    
    14,480,514Diluted
    
    
    14,812,532
    
    
    
    14,718,499
    
    
    
    14,795,243
    
    
    
    14,694,996
 .
 2




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##### 



TRIAD GUARANTY INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 302005
    
    2004(In thousands)Operating activitiesNet income
    
    $
    28,959
    
    
    $
    28,419Adjustments to reconcile net income to net cash provided by
operating activities:Loss, loss adjustment expenses and unearned premium reserves
    
    
    3,919
    
    
    
    2,182Accrued expenses and other liabilities
    
    
    (2,166
    )
    
    
    (2,349
    )Current taxes payable
    
    
    
    
    
    
    1,052Income taxes recoverable
    
    
    (293
    )
    
    
    Amounts due to/from reinsurer
    
    
    323
    
    
    
    320Accrued investment income
    
    
    (414
    )
    
    
    (620
    )Policy acquisition costs deferred
    
    
    (7,981
    )
    
    
    (8,825
    )Amortization of deferred policy acquisition costs
    
    
    7,352
    
    
    
    6,635Net realized investment gains
    
    
    (46
    )
    
    
    (558
    )Provision for depreciation
    
    
    1,660
    
    
    
    1,601Accretion of discount on investments
    
    
    (189
    )
    
    
    (442
    )Deferred income taxes
    
    
    9,863
    
    
    
    10,497Prepaid federal income taxes
    
    
    (9,550
    )
    
    
    (9,084
    )Unearned ceding commission
    
    
    (100
    )
    
    
    (238
    )Real estate acquired in claim settlement, net of write-downs
    
    
    (1,229
    )
    
    
    1Other assets
    
    
    169
    
    
    
    4,027Other operating activities
    
    
    2,557
    
    
    
    580Net cash provided by operating activities
    
    
    32,834
    
    
    
    33,198Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (56,186
    )
    
    
    (92,965
    )Sales  fixed maturities
    
    
    15,077
    
    
    
    50,214Purchases  equities
    
    
    
    
    
    
    (286
    )Sales  equities
    
    
    1,153
    
    
    
    762Net change in short-term investments
    
    
    1,772
    
    
    
    14,336Purchases of property and equipment
    
    
    (1,249
    )
    
    
    (2,028
    )Net cash used in investing activities
    
    
    (39,433
    )
    
    
    (29,967
    )Financing activitiesProceeds from exercise of stock options
    
    
    3,261
    
    
    
    1,747Net cash provided by financing activities
    
    
    3,261
    
    
    
    1,747Net change in cash
    
    
    (3,338
    )
    
    
    4,978Cash at beginning of period
    
    
    6,865
    
    
    
    973Cash at end of period
    
    $
    3,527
    
    
    $
    5,951Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    11,240
    
    
    $
    9,825Interest
    
    
    1,383
    
    
    
    1,383
  3




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##### 



TRIAD GUARANTY INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  4




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##### 



Stock Options
 Accounting for Stock Issued to Employees
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Net income  as reported
    
    $
    13,199
    
    
    $
    14,375
    
    
    $
    28,959
    
    
    $
    28,419Net income  pro forma
    
    $
    13,065
    
    
    $
    14,250
    
    
    $
    28,679
    
    
    $
    28,157Earnings per share  as reported:Basic
    
    $
    0.90
    
    
    $
    0.99
    
    
    $
    1.98
    
    
    $
    1.96Diluted
    
    $
    0.89
    
    
    $
    0.98
    
    
    $
    1.96
    
    
    $
    1.93Earnings per share  pro forma:Basic
    
    $
    0.89
    
    
    $
    0.98
    
    
    $
    1.96
    
    
    $
    1.94Diluted
    
    $
    0.88
    
    
    $
    0.97
    
    
    $
    1.94
    
    
    $
    1.92
  3. Consolidation
  4. Commitments And Contingencies
 Reinsurance
  5




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##### 



Insurance In Force, Dividend Restrictions, and Statutory Results
  June 30, 2005
    
    December 31, 2004Net risk
    
    $
    7,128,804
    
    
    $
    7,049,102Statutory capital and surplus
    
    $
    136,042
    
    
    $
    135,662Statutory contingency reserve
    
    
    406,681
    
    
    
    369,484Total
    
    $
    542,723
    
    
    $
    505,146Risk-to-capital ratio
    
    13.1 to 1
    
    
    14.0 to 1
  .
  6




---



##### 



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




---



##### 



7. Income Taxes
  8




---



##### 



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Update on Critical Accounting Estimates
   Overview
  9




---



##### 



10




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##### 



Consolidated Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 30Favorable/
    
    
    
    
    
    
    
    
    
    Favorable/2005
    
    2004
    
    (Unfavorable)
    
    2005
    
    2004
    
    (Unfavorable)Earned premiums
    
    $
    41,121
    
    
    $
    34,183
    
    
    
    20.3
    %
    
    $
    79,898
    
    
    $
    67,995
    
    
    
    17.5
    %Net investment income
    
    
    5,743
    
    
    
    4,598
    
    
    
    24.9
    
    
    
    11,158
    
    
    
    9,184
    
    
    
    21.5Net realized investment
gains/(losses)
    
    
    39
    
    
    
    (19
    )
    
    
    305.3
    
    
    
    46
    
    
    
    558
    
    
    
    (91.8
    )Other income
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    11
    
    
    
    5
    
    
    
    120.0Total revenues
    
    
    46,905
    
    
    
    38,764
    
    
    
    21.0
    
    
    
    91,113
    
    
    
    77,742
    
    
    
    17.2Net losses and loss
adjustment expenses
    
    
    17,288
    
    
    
    7,701
    
    
    
    (124.5
    )
    
    
    27,918
    
    
    
    16,584
    
    
    
    (68.3
    )Interest expense on debt
    
    
    693
    
    
    
    693
    
    
    
    
    
    
    
    1,386
    
    
    
    1,386
    
    
    
    Amortization of deferred
policy acquisition costs
    
    
    3,695
    
    
    
    3,450
    
    
    
    (7.1
    )
    
    
    7,352
    
    
    
    6,635
    
    
    
    (10.8
    )Other operating expenses
(net of acquisition costs
deferred)
    
    
    7,017
    
    
    
    6,729
    
    
    
    (4.3
    )
    
    
    14,234
    
    
    
    13,069
    
    
    
    (8.9
    )Income before income taxes
    
    
    18,212
    
    
    
    20,191
    
    
    
    (9.8
    )
    
    
    40,223
    
    
    
    40,068
    
    
    
    0.4Income taxes
    
    
    5,013
    
    
    
    5,816
    
    
    
    13.8
    
    
    
    11,264
    
    
    
    11,649
    
    
    
    3.3Net income
    
    $
    13,199
    
    
    $
    14,375
    
    
    
    (8.2
    )%
    
    $
    28,959
    
    
    $
    28,419
    
    
    
    1.9
    %Diluted earnings per share
    
    $
    0.89
    
    
    $
    0.98
    
    
    
    (9.2
    )%
    
    $
    1.96
    
    
    $
    1.93
    
    
    
    1.6
    %
  11




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##### 



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




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##### 



Three Months Ended June 302005
    
    2004Flow business
    
    
    6.2
    %
    
    
    4.8
    %Structured bulk transactions
    
    
    6.7
    %
    
    
    11.8
    %Total
    
    
    6.3
    %
    
    
    5.8
    %
   13




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##### 



2005
    
    2004Quarterly
    
    
    
    
    
    QuarterlyAnnual
    
    Persistency
    
    Annual
    
    PersistencyPersistency
    
    Run Rate
    
    Persistency
    
    Run RateFlow
    
    
    71.5
    %
    
    
    66.9
    %
    
    
    61.1
    %
    
    
    57.9
    %Structured bulk
    
    
    61.0
    %
    
    
    55.0
    %
    
    
    51.1
    %
    
    
    52.2
    %Total
    
    
    69.3
    %
    
    
    64.0
    %
    
    
    59.9
    %
    
    
    56.9
    %
   Flow
    
    Structured Bulk2005
    
    2004
    
    2005
    
    2004Credit score less than 575
    
    
    0.8
    %
    
    
    0.8
    %
    
    
    0.9
    %
    
    
    2.3
    %Credit score between 575 and 619
    
    
    4.8
    %
    
    
    4.7
    %
    
    
    2.8
    %
    
    
    5.2
    %Credit score greater than 619
    
    
    94.4
    %
    
    
    94.5
    %
    
    
    96.3
    %
    
    
    92.5
    %
  14




---



##### 



2005
    
    2004Flow
    
    
    7.7
    %
    
    
    4.8
    %Structured bulk
    
    
    97.8
    %
    
    
    93.4
    %Total
    
    
    31.9
    %
    
    
    23.6
    %
  Revenues
   15




---



##### 



2005
    
    2004Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    19.7
    %
    
    
    20.3
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    18.1
    %
    
    
    18.3
    %Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements)
    
    
    36.1
    %
    
    
    36.7
    %
    16




---



##### 



Losses and Expenses
  17




---



##### 



2005
    
    2004Direct Losses Paid:Flow business
    
    $
    10,931
    
    
    $
    5,883Structured bulk business
    
    
    2,366
    
    
    
    832Total
    
    $
    13,297
    
    
    $
    6,715
   18




---



##### 



2005
    
    2004Flow business:Reserves for reported defaults
    
    $
    30,261
    
    
    $
    23,134Reserves for defaults incurred but not reported
    
    
    3,075
    
    
    
    3,062Total flow
    
    
    33,336
    
    
    
    26,196Structured bulk business:Reserves for reported defaults
    
    
    4,403
    
    
    
    4,167Reserves for defaults incurred but not reported
    
    
    733
    
    
    
    310Total structured bulk transactions
    
    
    5,136
    
    
    
    4,477Reserve for loss adjustment expenses
    
    
    104
    
    
    
    93Total reserves for losses and loss adjustment expenses
    
    $
    38,576
    
    
    $
    30,766
   2005
    
    2004Loss Ratio:Flow business
    
    
    46.6
    %
    
    
    25.5
    %Structured bulk business
    
    
    25.5
    %
    
    
    11.7
    %Total business
    
    
    42.0
    %
    
    
    22.5
    %
   19




---



##### 



2005
    
    2004Loans in DefaultFlow business
    
    
    3,593
    
    
    
    3,319Structured bulk business:With deductibles
    
    
    612
    
    
    
    121Without deductibles
    
    
    1,120
    
    
    
    1,325Total structured bulk
    
    
    1,732
    
    
    
    1,446Total
    
    
    5,325
    
    
    
    4,765Total excluding defaults on
loans with deductibles
    
    
    4,713
    
    
    
    4,644
     20




---



##### 



Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
  Production
    Revenues
   21




---



##### 



2005
    
    2004Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    19.8
    %
    
    
    20.1
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    18.2
    %
    
    
    18.0
    %Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements)
    
    
    36.3
    %
    
    
    37.0
    %
     22




---



##### 



Losses and Expenses
  2005
    
    2004Flow business
    
    $
    19,214
    
    
    $
    11,137Bulk business
    
    
    3,734
    
    
    
    1,587Total
    
    $
    22,948
    
    
    $
    12,724
   2005
    
    2004Loss Ratio:Flow business
    
    
    37.2
    %
    
    
    26.7
    %Structured bulk business
    
    
    26.4
    %
    
    
    15.6
    %Total business
    
    
    34.9
    %
    
    
    24.4
    %
   23




---



##### 



Significant Customers
  Financial Position
  Deferred Policy Acquisition Costs
  24




---



##### 



Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Balance  beginning of period
    
    $
    33,023
    
    
    $
    30,863
    
    
    $
    32,453
    
    
    $
    29,363Costs capitalized
    
    
    3,754
    
    
    
    4,140
    
    
    
    7,981
    
    
    
    8,825Amortization  normal
    
    
    (3,262
    )
    
    
    (3,029
    )
    
    
    (6,577
    )
    
    
    (6,126
    )Amortization  dynamic
adjustment
    
    
    (433
    )
    
    
    (421
    )
    
    
    (775
    )
    
    
    (509
    )Total amortization
    
    
    (3,695
    )
    
    
    (3,450
    )
    
    
    (7,352
    )
    
    
    (6,635
    )Balance  end of period
    
    $
    33,082
    
    
    $
    31,553
    
    
    $
    33,082
    
    
    $
    31,553
  25




---



##### 



Prepaid Federal Income Taxes and Deferred Income Taxes
   Reserve for Losses and Loss Adjustment Expenses
    26




---



##### 



27




---



##### 



June 30
    
    December 312005
    
    2004Total business:Number of insured loans in force
    
    
    278,837
    
    
    
    266,574Number of loans in default
    
    
    5,325
    
    
    
    5,445Percentage of loans in default
(default rate)
    
    
    1.91
    %
    
    
    2.04
    %Flow business:Number of insured loans in force
    
    
    214,964
    
    
    
    212,596Number of loans in default
    
    
    3,593
    
    
    
    3,739Percentage of loans in default
    
    
    1.67
    %
    
    
    1.76
    %Structured bulk business:Number of insured loans in force
    
    
    63,873
    
    
    
    53,978Number of loans in default
    
    
    1,732
    
    
    
    1,706With deductibles
    
    
    612
    
    
    
    410Without deductibles
    
    
    1,120
    
    
    
    1,296Percentage of loans in default*
    
    
    2.71
    %
    
    
    3.16
    %Alt-A business**:Number of insured loans in force
    
    
    75,152
    
    
    
    62,944Number of loans in default
    
    
    1,977
    
    
    
    1,920Percentage of loans in default
    
    
    2.63
    %
    
    
    3.05
    %
 
 *
    
    Calculated based on total number of loans in default**
    
    Alt-A is included in flow and structured bulk business amounts above   28




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##### 



Investment Portfolio
 Portfolio Description
   June 30, 2005
    
    December 31, 2004Amount
    
    Percent
    
    Amount
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    12,832
    
    
    
    2.4
    %
    
    $
    12,728
    
    
    
    2.7
    %Mortgage-backed bonds
    
    
    70
    
    
    
    0.0
    
    
    
    80
    
    
    
    0.0State and municipal bonds
    
    
    463,409
    
    
    
    88.5
    
    
    
    415,250
    
    
    
    86.4Corporate bonds
    
    
    23,560
    
    
    
    4.5
    
    
    
    26,063
    
    
    
    5.4Total fixed maturities
    
    
    499,871
    
    
    
    95.4
    
    
    
    454,121
    
    
    
    94.5Equity securities
    
    
    9,698
    
    
    
    1.9
    
    
    
    10,272
    
    
    
    2.2Total
available-for-sale
securities
    
    
    509,569
    
    
    
    97.3
    
    
    
    464,393
    
    
    
    96.7Short-term investments
    
    
    14,323
    
    
    
    2.7
    
    
    
    16,095
    
    
    
    3.3$
    523,892
    
    
    
    100.0
    %
    
    $
    480,488
    
    
    
    100.0
    %
  29




---



##### 



Carrying
    
    % of TotalName of Creditor
    
    Value
    
    Invested AssetsAtlanta, Georgia Airport
    
    $
    6,994
    
    
    
    1.34
    %Federal National Mortgage Association
    
    
    5,510
    
    
    
    1.05AAM/ZAZOVE Institutional Income Fund
    
    
    5,142
    
    
    
    0.98City of New York, New York
    
    
    5,051
    
    
    
    0.96Port of Seattle, Washington
    
    
    4,692
    
    
    
    0.90Denver, Colorado City and County Airport
    
    
    4,297
    
    
    
    0.82Cook County, Illinois
    
    
    4,292
    
    
    
    0.82Charlotte, North Carolina Airport
    
    
    4,252
    
    
    
    0.81State of Nevada Water Pollution Control
    
    
    4,122
    
    
    
    0.79University of Texas
    
    
    4,098
    
    
    
    0.78
   Unrealized Gains and Losses
  Cost or
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    12,851
    
    
    $
    81
    
    
    $
    (100
    )
    
    $
    12,832Mortgage-backed bonds
    
    
    66
    
    
    
    4
    
    
    
    
    
    
    
    70State and municipal bonds
    
    
    442,271
    
    
    
    21,269
    
    
    
    (131
    )
    
    
    463,409Corporate bonds
    
    
    20,947
    
    
    
    2,680
    
    
    
    (67
    )
    
    
    23,560Subtotal, fixed maturities
    
    
    476,135
    
    
    
    24,034
    
    
    
    (298
    )
    
    
    499,871Equity securities
    
    
    8,114
    
    
    
    1,781
    
    
    
    (197
    )
    
    
    9,698Total securities
    
    $
    484,249
    
    
    $
    25,815
    
    
    $
    (495
    )
    
    $
    509,569
  30




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##### 



Credit Risk
  June 30, 2005
    
    December 31, 2004Amount
    
    Percent
    
    Amount
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    12,832
    
    
    
    2.6
    %
    
    $
    12,808
    
    
    
    2.8
    %AAA
    
    
    383,960
    
    
    
    76.8
    
    
    
    332,929
    
    
    
    73.3AA
    
    
    52,518
    
    
    
    10.5
    
    
    
    53,285
    
    
    
    11.7A
    
    
    31,966
    
    
    
    6.4
    
    
    
    33,530
    
    
    
    7.4BBB
    
    
    8,703
    
    
    
    1.7
    
    
    
    12,680
    
    
    
    2.8BB
    
    
    851
    
    
    
    0.2
    
    
    
    254
    
    
    
    0.1B
    
    
    
    
    
    
    0.0
    
    
    
    205
    
    
    
    0.0CCC and lower
    
    
    230
    
    
    
    0.0
    
    
    
    215
    
    
    
    0.1Not rated
    
    
    8,811
    
    
    
    1.8
    
    
    
    8,215
    
    
    
    1.8Total fixed maturities
    
    $
    499,871
    
    
    
    100.0
    %
    
    $
    454,121
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,537
    
    
    
    15.8
    %
    
    $
    1,519
    
    
    
    14.8
    %A
    
    
    1,874
    
    
    
    19.3
    
    
    
    2,165
    
    
    
    21.1BBB
    
    
    1,143
    
    
    
    11.8
    
    
    
    1,155
    
    
    
    11.2BB
    
    
    203
    
    
    
    2.1
    
    
    
    
    
    
    
    0.0Not rated
    
    
    500
    
    
    
    5.2
    
    
    
    525
    
    
    
    5.15,257
    
    
    
    54.2
    
    
    
    5,364
    
    
    
    52.2Common stocks
    
    
    4,441
    
    
    
    45.8
    
    
    
    4,908
    
    
    
    47.8Total equities
    
    $
    9,698
    
    
    
    100.0
    %
    
    $
    10,272
    
    
    
    100.0
    %
 31




---



##### 




    
    Length of time the fair value was below amortized cost
    
    Industry factors or conditions related to a geographic area negatively affecting
the security
    
    Downgrades by a rating agency
    
    Past due interest or principal payments or other violation of covenants
    
    Deterioration of the overall financial condition of the specific issuer
     32




---



##### 



Realized Losses and Impairments
  Liquidity and Capital Resources
     33




---



##### 



34




---



##### 



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 Enterprises, specifically, and the financial services industry
in general;
    
    rating agencies may revise methodologies for determining our financial strength
ratings and may revise or withdraw the assigned ratings at any time;
    
    decreases in persistency, which are affected by loan refinancings in periods of
low interest rates, may have an adverse effect on earnings;
 35




---



##### 




    
    the amount of insurance written and the growth in insurance in force or risk in
force as well as our performance may be adversely impacted by the competitive
environment in the private mortgage insurance industry, including the type,
structure, and pricing of our products and services and our competitors;
    
    if we fail to properly underwrite mortgage loans under contract underwriting
service agreements, we may be required to assume the costs of repurchasing those
loans;
    
    with consolidation occurring among mortgage lenders and our insurance production
becoming concentrated in large lenders, our margins may be compressed and the loss
of a significant customer or a change in their business practices affecting
mortgage insurance may have an adverse effect on our earnings;
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions;
    
    economic downturns in regions where our risk is more concentrated could have a
particularly adverse effect on our financial condition and loss development;
    
    revisions in risk-based capital rules by the Office of Federal Housing
Enterprise Oversight for Fannie Mae and Freddie Mac could limit our ability to
compete against various types of credit protection counterparties, including AAA
rated private mortgage insurers;
    
    changes in the mortgage insurance provider eligibility guidelines of Fannie Mae
or Freddie Mac could have an adverse effect on the Company;
    
    proposed regulation by the Department of Housing and Urban Development to
exclude packages of real estate settlement services, which may include any required
mortgage insurance premium paid at closing, from the anti-referral provisions of
the Real Estate Settlement Procedures Act could adversely affect our earnings;
    
    our financial and competitive position could be affected by regulatory reviews
requiring changes to mortgage industry business practices such as captive
reinsurance.
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
  36




---



##### 



Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our management,
including our CEO and CFO, concluded, as of the end of the period covered by this report,
that our disclosure controls and procedures were effective. Disclosure controls and
procedures include controls and procedures designed to ensure that management, including
our CEO and CFO, is alerted to material information required to be disclosed in our
filings under the Act so as to allow timely decisions regarding our disclosures. In
designing and evaluating disclosure controls and procedures, we recognized that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to
do.b)
    
    There have been no changes in internal controls over financial reporting during the
second quarter of 2005 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
 Part II. OTHER INFORMATION
 Item 1. Legal Proceedings 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 Item 3. Defaults Upon Senior Securities 
 37




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
   Name of Nominee
    
    Number of Votes for
    
    Authorization withheldGlenn T. Austin, Jr.
    
    
    13,818,187
    
    
    
    518,533Robert T. David
    
    
    14,135,326
    
    
    
    201,394William T. Ratliff, III
    
    
    13,840,853
    
    
    
    495,867Michael A. F. Roberts
    
    
    13,775,838
    
    
    
    560,882Richard S. Swanson
    
    
    13,628,039
    
    
    
    708,681Darryl W. Thompson
    
    
    13,867,796
    
    
    
    468,924David W. Whitehurst
    
    
    9,196,475
    
    
    
    5,140,245
 Item 5. Other Information 
 Item 6. Exhibits 
 38




---



##### 



SIGNATURE
  Date: August 8, 2005
    TRIAD GUARANTY INC./s/ Kenneth S. DwyerKenneth S. DwyerVice President and Chief Accounting Officer 39




---



##### 



EXHIBIT INDEX
 Exhibit Number
    
    Description10.29
    
    Employment Agreement between the Registrant and Eric B. Dana10.30
    

    Exchange Agreement by and among the Registrant, Collateral
Investment Corp. and the Shareholders of Collateral
Investment Corp. Listed on the Signature Pages Hereto10.31
    
    Amendment to Employment Agreement between the Registrant
and Kenneth N. Lard31(i)
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31(ii)
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 40