##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission file number: 0-22342
 
 Triad Guaranty Inc.
 (Exact name of registrant as specified in its charter)
 DELAWARE(State or other jurisdiction of 
incorporation or organization)
    
    56-1838519(I.R.S. Employer
Identification No.)101 South Stratford Road 
Winston-Salem, North Carolina(Address of principal executive offices)
    
    27104(Zip Code)
 (336) 723-1282  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of June 30, 2007
(Unaudited) and December 31, 2006
    
    
    1Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 2007 and 2006 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4.
    
    Controls and Procedures
    
    
    39Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    40Item 1A.
    
    Risk Factors
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3.
    
    Defaults Upon Senior Securities
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42Signature
    
    
    
    
    43Exhibit 10.47Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRIAD GUARANTY INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(dollars in thousands, except per share data)
    
    2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $614,182 and $568,992)
    
    $
    618,034
    
    
    $
    586,594Equity securities (cost: $3,744 and $9,530)
    
    
    3,781
    
    
    
    10,417Other investments
    
    
    
    
    
    
    5,000Short-term investments
    
    
    52,384
    
    
    
    5,301674,199
    
    
    
    607,312Cash and cash equivalents
    
    
    26,711
    
    
    
    38,609Real estate acquired in claim settlement
    
    
    7,923
    
    
    
    10,170Accrued investment income
    
    
    8,972
    
    
    
    8,054Deferred policy acquisition costs
    
    
    35,157
    
    
    
    35,143Prepaid federal income taxes
    
    
    170,076
    
    
    
    166,908Property and equipment
    
    
    10,086
    
    
    
    7,678Other assets
    
    
    27,153
    
    
    
    21,757Total assets
    
    $
    960,277
    
    
    $
    895,631LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    122,061
    
    
    $
    84,352Unearned premiums
    
    
    15,461
    
    
    
    13,193Amounts payable to reinsurers
    
    
    6,272
    
    
    
    5,909Deferred income taxes
    
    
    177,889
    
    
    
    176,483Long-term debt
    
    
    34,514
    
    
    
    34,510Accrued interest on debt
    
    
    1,275
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    8,182
    
    
    
    9,685Total liabilities
    
    
    365,654
    
    
    
    325,407Commitments 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 14,920,108 shares
at June 30, 2007 and 14,856,401 shares at December 31, 2006
    
    
    149
    
    
    
    149Additional paid-in capital
    
    
    107,541
    
    
    
    104,981Accumulated other comprehensive income, net of income tax
liability of $1,362 at June 30, 2007 and $6,471 at December 31, 2006
    
    
    4,507
    
    
    
    12,018Retained earnings
    
    
    482,426
    
    
    
    453,076Total stockholders equity
    
    
    594,623
    
    
    
    570,224Total liabilities and stockholders equity
    
    $
    960,277
    
    
    $
    895,631
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Premiums written:Direct
    
    $
    83,153
    
    
    $
    60,961
    
    
    $
    161,561
    
    
    $
    120,273Ceded
    
    
    (12,988
    )
    
    
    (11,603
    )
    
    
    (25,689
    )
    
    
    (22,573
    )Net premiums written
    
    
    70,165
    
    
    
    49,358
    
    
    
    135,872
    
    
    
    97,700Change in unearned premiums
    
    
    (433
    )
    
    
    1,309
    
    
    
    (2,192
    )
    
    
    857Earned premiums
    
    
    69,732
    
    
    
    50,667
    
    
    
    133,680
    
    
    
    98,557Net investment income
    
    
    7,673
    
    
    
    6,535
    
    
    
    15,022
    
    
    
    12,757Net realized investment (losses) gains
    
    
    (3,867
    )
    
    
    772
    
    
    
    (3,105
    )
    
    
    1,672Other income
    
    
    2
    
    
    
    5
    
    
    
    4
    
    
    
    373,540
    
    
    
    57,979
    
    
    
    145,601
    
    
    
    112,989Losses and expenses:Net losses and loss adjustment expenses
    
    
    41,893
    
    
    
    17,271
    
    
    
    74,474
    
    
    
    33,622Interest expense on debt
    
    
    694
    
    
    
    694
    
    
    
    1,387
    
    
    
    1,387Amortization of deferred policy acquisition costs
    
    
    4,670
    
    
    
    4,118
    
    
    
    9,293
    
    
    
    7,980Other operating expenses (net of acquisition costs deferred)
    
    
    10,716
    
    
    
    8,496
    
    
    
    21,047
    
    
    
    17,00957,973
    
    
    
    30,579
    
    
    
    106,201
    
    
    
    59,998Income before income taxes
    
    
    15,567
    
    
    
    27,400
    
    
    
    39,400
    
    
    
    52,991Income taxes:Current
    
    
    1,766
    
    
    
    979
    
    
    
    3,525
    
    
    
    1,951Deferred
    
    
    1,775
    
    
    
    6,834
    
    
    
    6,526
    
    
    
    12,9003,541
    
    
    
    7,813
    
    
    
    10,051
    
    
    
    14,851Net income
    
    $
    12,026
    
    
    $
    19,587
    
    
    $
    29,349
    
    
    $
    38,140Earnings per common and common equivalent share:Basic
    
    $
    0.81
    
    
    $
    1.33
    
    
    $
    1.98
    
    
    $
    2.58Diluted
    
    $
    0.80
    
    
    $
    1.31
    
    
    $
    1.96
    
    
    $
    2.56Shares used in computing earnings per common and
common equivalent share:Basic
    
    
    14,834,500
    
    
    
    14,769,367
    
    
    
    14,824,460
    
    
    
    14,763,889Diluted
    
    
    14,950,721
    
    
    
    14,914,075
    
    
    
    14,946,204
    
    
    
    14,888,304
 .
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOW  (unaudited)
 Six Months EndedJune 30,(dollars in thousands)
    
    2007
    
    
    2006Operating activitiesNet income
    
    $
    29,349
    
    
    $
    38,140Adjustments to reconcile net income to net cash provided by operating
activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    39,977
    
    
    
    2,967Accrued expenses and other liabilities
    
    
    (1,503
    )
    
    
    (2,248
    )Amounts due to reinsurer
    
    
    363
    
    
    
    588Accrued investment income
    
    
    (918
    )
    
    
    (543
    )Policy acquisition costs deferred
    
    
    (9,307
    )
    
    
    (8,499
    )Amortization of deferred policy acquisition costs
    
    
    9,293
    
    
    
    7,980Net realized investment losses (gains)
    
    
    3,105
    
    
    
    (1,672
    )Provision for depreciation
    
    
    996
    
    
    
    1,231Accretion of discount on investments
    
    
    317
    
    
    
    (50
    )Deferred income taxes
    
    
    6,526
    
    
    
    12,900Prepaid federal income taxes
    
    
    (3,168
    )
    
    
    (12,443
    )Real estate acquired in claim settlement, net of write-downs
    
    
    2,247
    
    
    
    (2,893
    )Other assets
    
    
    (5,396
    )
    
    
    (442
    )Other operating activities
    
    
    1,765
    
    
    
    1,633Net cash provided by operating activities
    
    
    73,646
    
    
    
    36,649Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (128,370
    )
    
    
    (90,826
    )Sales  fixed maturities
    
    
    80,120
    
    
    
    54,081Maturities  fixed maturities
    
    
    3,391
    
    
    
    2,933Purchases  equities
    
    
    (55
    )
    
    
    (4,647
    )Sales  equities
    
    
    7,086
    
    
    
    3,001Purchases of other investments
    
    
    
    
    
    
    (5,000
    )Net change in short-term investments
    
    
    (47,083
    )
    
    
    519Purchases of property and equipment
    
    
    (3,404
    )
    
    
    (1,358
    )Net cash used in investing activities
    
    
    (88,315
    )
    
    
    (41,297
    )Financing activitiesExcess tax benefits from share-based compensation
    
    
    175
    
    
    
    280Proceeds from exercise of stock options
    
    
    616
    
    
    
    625Net cash provided by financing activities
    
    
    791
    
    
    
    905Foreign currency translation adjustment
    
    
    1,980
    
    
    
    Net change in cash and cash equivalents
    
    
    (11,898
    )
    
    
    (3,743
    )Cash and cash equivalents at beginning of period
    
    
    38,609
    
    
    
    8,934Cash and cash equivalents at end of period
    
    $
    26,711
    
    
    $
    5,191Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss Bonds
    
    $
    9,091
    
    
    $
    15,343Interest
    
    
    1,383
    
    
    
    1,383
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TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  Recent Accounting Pronouncements
    4




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Share-Based Compensation
   Foreign Currency Translation
  3. Consolidation
  4. Commitments and Contingencies
 Reinsurance
  5




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Insurance In Force, Dividend Restrictions, and Statutory Results
  June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2006Net risk
    
    $
    11,057,092
    
    
    $
    8,612,912
    
    
    $
    7,640,954Statutory capital and surplus
    
    $
    102,942
    
    
    $
    168,439
    
    
    $
    154,695Statutory contingency reserve
    
    
    589,661
    
    
    
    521,836
    
    
    
    492,013Total
    
    $
    692,603
    
    
    $
    690,275
    
    
    $
    646,708Risk-to-capital ratio
    
    16.0 to 1
    
    
    12.5 to 1
    
    
    
    11.8 to 1
    Loss Reserves
  6




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##### Table of Contents



Litigation
  Credit Facility
  5. Earnings Per Share
  6. Comprehensive Income
  7. Income Taxes
  8. Long-Term Stock Incentive Plan
  7




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Weighted-Weighted-
    
    
    Aggregate
    
    
    AverageNumber of
    
    
    Average
    
    
    Intrinsic
    
    
    Remaining(dollars in thousands)
    
    Shares
    
    
    Exercise Price
    
    
    Value
    
    
    ContractualOutstanding, January 1, 2007
    
    
    564,712
    
    
    $
    38.36Granted
    
    
    107,190
    
    
    
    43.56Exercised
    
    
    22,937
    
    
    
    26.87Cancelled
    
    
    3,768
    
    
    
    45.06Outstanding, June 30, 2007
    
    
    645,197
    
    
    
    39.60
    
    
    $
    1,866
    
    
    5.1 yearsExercisable, June 30, 2007
    
    
    410,076
    
    
    
    37.78
    
    
    $
    1,866
    
    
    2.9 years
  June 30,
    
    June 30,2007
    
    2006Expected Volatility
    
    
    31.9
    %
    
    
    34.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    5.0 years
    
    
    5.0 yearsRisk-free rate
    
    
    4.6
    %
    
    
    4.5
    %
  8




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##### Table of Contents



Weighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueOutstanding, January 1, 2007
    
    
    113,941
    
    
    $
    46.41Granted
    
    
    47,219
    
    
    
    44.61Exercised
    
    
    36,584
    
    
    
    50.29Cancelled
    
    
    6,449
    
    
    
    45.89Outstanding, June 30, 2007
    
    
    118,127
    
    
    
    44.52
    9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Update on Critical Accounting Policies and Estimates
    Overview
  10




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11




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Consolidated Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands, exceptper share data)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeEarned premiums
    
    $
    69,732
    
    
    $
    50,667
    
    
    
    38
    %
    
    $
    133,680
    
    
    $
    98,557
    
    
    
    36
    %Net losses and loss adjustment expenses
    
    
    41,893
    
    
    
    17,271
    
    
    
    143
    
    
    
    74,474
    
    
    
    33,622
    
    
    
    122Net income
    
    
    12,026
    
    
    
    19,587
    
    
    
    (39
    )
    
    
    29,349
    
    
    
    38,140
    
    
    
    (23
    )Diluted earnings per share
    
    $
    0.80
    
    
    $
    1.31
    
    
    
    (39
    )
    
    $
    1.96
    
    
    $
    2.56
    
    
    
    (23
    )
       12




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Production and In Force
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangePrimary insurance written:Flow
    
    $
    5,089
    
    
    $
    2,559
    
    
    
    99
    %
    
    $
    9,461
    
    
    $
    4,506
    
    
    
    110
    %Structured bulk
    
    
    1,702
    
    
    
    385
    
    
    
    342
    
    
    
    3,029
    
    
    
    386
    
    
    
    685Total Primary insurance written
    
    $
    6,791
    
    
    $
    2,944
    
    
    
    131
    
    
    $
    12,490
    
    
    $
    4,892
    
    
    
    155Modified pool insurance written
    
    
    1,405
    
    
    
    2,980
    
    
    
    (53
    )
    
    
    3,330
    
    
    
    7,585
    
    
    
    (56
    )Total insurance written
    
    $
    8,196
    
    
    $
    5,924
    
    
    
    38
    %
    
    $
    15,820
    
    
    $
    12,477
    
    
    
    27
    %
   
    
    Our largest lender in terms of production of NIW through the flow
channel was American Home Mortgage, Inc. (AHM), which comprised 30% and 34%
of our flow production for the second quarter and first six months of 2007,
respectively. On August 6, 2007, AHM formally announced that it was seeking
protection under Chapter 11 of the U.S. bankruptcy code. See Significant
Customers below. We currently expect that the loss of production from AHM will
have a significant impact on our NIW during the remainder of 2007.
    
    During the second quarter of 2007, we discontinued a specific
lender-paid program which was a significant contributor to NIW in the second
half of 2006.
    
    We are concerned with the increased risk involved with insuring loans
with higher LTV ratios such as 100% loans. We intend to monitor this activity
carefully and will continue to place emphasis on the credit quality of our
insurance written.
  13




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Market Share by Channel
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Flow channel
    
    
    6.9
    %
    
    
    5.7
    %
    
    
    7.8
    %
    
    
    5.5
    %Structured bulk channel
    
    
    12.3
    %
    
    
    15.3
    %
    
    
    12.7
    %
    
    
    16.1
    %Total
    
    
    8.3
    %
    
    
    8.8
    %
    
    
    9.2
    %
    
    
    9.4
    %
  14




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Credit Quality of Primary NIW
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Prime
    
    
    62.0
    %
    
    
    65.5
    %
    
    
    59.6
    %
    
    
    69.3
    %Alt-A
    
    
    34.2
    
    
    
    32.3
    
    
    
    37.5
    
    
    
    28.5A-Minus
    
    
    3.4
    
    
    
    1.9
    
    
    
    2.6
    
    
    
    1.9Sub Prime
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Loan Type of Primary NIW
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Fixed
    
    
    61.9
    %
    
    
    54.1
    %
    
    
    55.0
    %
    
    
    59.4
    %ARM (positive amortization)
    
    
    21.3
    
    
    
    11.9
    
    
    
    22.6
    
    
    
    13.6ARM (potential negative amortization)
    
    
    16.8
    
    
    
    34.0
    
    
    
    22.4
    
    
    
    27.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  15




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Loan to Value of Primary NIW
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Greater than 95%
    
    
    36.1
    %
    
    
    12.2
    %
    
    
    31.6
    %
    
    
    11.4
    %90.01% to 95.00%
    
    
    23.3
    
    
    
    22.0
    
    
    
    23.5
    
    
    
    23.290.00% and below
    
    
    40.6
    
    
    
    65.8
    
    
    
    44.9
    
    
    
    65.4Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    June 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    % ChangePrimary insurance
    
    $
    42,724
    
    
    $
    30,783
    
    
    
    39
    %Modified pool insurance
    
    
    23,649
    
    
    
    20,022
    
    
    
    18Total insurance
    
    $
    66,373
    
    
    $
    50,805
    
    
    
    31
    %
  16




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##### Table of Contents



June 30,2007
    
    2006Primary insurance in force
    
    
    21.5
    %
    
    
    12.3
    %Modified Pool insurance in force
    
    
    71.5
    %
    
    
    68.0
    %Total insurance in force
    
    
    39.3
    %
    
    
    34.3
    %
  
    
    A decline in the percentage of business with prime credit quality
    
    An increase in the percentage of Alt-A business
    
    An increase in Primary LTV greater than 95%
    
    An increase in potential negative amortization loan types
    
    An increase in condominium property types
    
    A decline in Primary residence occupancy status
    
    A growing percentage of loans in excess of $250,000
 17




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Risk in Force(1)
 Primary
    
    
    Modified PoolJune 30,
    
    
    June 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Direct Risk in Force
    
    $
    11,128
    
    
    $
    7,741
    
    
    $
    935
    
    
    $
    764Net Risk In Force
    
    
    10,239
    
    
    
    6,966
    
    
    
    818
    
    
    
    674Credit Quality:Prime
    
    
    73.6
    %
    
    
    82.6
    %
    
    
    29.6
    %
    
    
    32.1
    %Alt-A
    
    
    22.8
    
    
    
    12.8
    
    
    
    69.6
    
    
    
    66.7A-Minus
    
    
    3.1
    
    
    
    3.9
    
    
    
    0.7
    
    
    
    1.0Sub Prime
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %LTV:Greater than 95%
    
    
    23.2
    %
    
    
    14.7
    %
    
    
    
    %
    
    
    
    %90.01% to 95.00%
    
    
    70.8
    
    
    
    78.8
    
    
    
    0.9
    
    
    
    1.190.00% and below
    
    
    6.0
    
    
    
    6.5
    
    
    
    99.1
    
    
    
    98.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    65.4
    %
    
    
    72.6
    %
    
    
    26.8
    %
    
    
    35.5
    %ARM (positive amortization)
    
    
    20.3
    
    
    
    19.8
    
    
    
    60.2
    
    
    
    58.7ARM (potential negative amortization)
    
    
    14.3
    
    
    
    7.6
    
    
    
    13.0
    
    
    
    5.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    10.3
    %
    
    
    8.7
    %
    
    
    9.3
    %
    
    
    7.2
    %Other (principally single-family detached)
    
    
    89.7
    
    
    
    91.3
    
    
    
    90.7
    
    
    
    92.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    87.6
    %
    
    
    90.3
    %
    
    
    73.7
    %
    
    
    73.9
    %Secondary home
    
    
    7.9
    
    
    
    6.2
    
    
    
    6.2
    
    
    
    5.9Non-owner occupied
    
    
    4.5
    
    
    
    3.5
    
    
    
    20.1
    
    
    
    20.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$0 - $50,000
    
    
    0.9
    %
    
    
    1.3
    %
    
    
    0.5
    %
    
    
    0.5
    %$51,000 - $100,000
    
    
    10.4
    
    
    
    15.0
    
    
    
    5.4
    
    
    
    6.8$100,001 - $250,000
    
    
    52.7
    
    
    
    61.0
    
    
    
    45.8
    
    
    
    51.1$250,001 - $500,000
    
    
    29.9
    
    
    
    20.5
    
    
    
    41.8
    
    
    
    39.0Over $500,000
    
    
    6.1
    
    
    
    2.2
    
    
    
    6.5
    
    
    
    2.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Percentages represent distribution of direct risk in force on a per policy basis and
do not account for applicable stop-loss amounts or deductibles on Modified Pool.  18




---



##### Table of Contents



Primary
    
    
    Modified Pool *June 30, 2007
    
    
    June 30, 2007Direct Risk
    
    
    
    
    
    
    Direct Risk(dollars in millions)
    
    in Force
    
    
    Percent
    
    
    in Force
    
    
    Percent2002 and before
    
    $
    756.6
    
    
    
    6.8
    %
    
    $
    46.6
    
    
    
    5.7
    %2003
    
    
    1,302.0
    
    
    
    11.7
    
    
    
    113.7
    
    
    
    13.92004
    
    
    1,257.5
    
    
    
    11.3
    
    
    
    139.1
    
    
    
    17.02005
    
    
    1,802.8
    
    
    
    16.2
    
    
    
    229.9
    
    
    
    28.12006
    
    
    2,893.3
    
    
    
    26.0
    
    
    
    260.1
    
    
    
    31.82007
    
    
    3,115.9
    
    
    
    28.0
    
    
    
    28.6
    
    
    
    3.5Total
    
    $
    11,128.1
    
    
    
    100.0
    %
    
    $
    818.0
    
    
    
    100.0
    %
 
 *
    
    For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss
limits and deductibles within each specific structure  June 30,2007
    
    2006Primary flow insurance in force
    
    
    51.4
    %
    
    
    62.7
    %Total insurance in force
    
    
    33.0
    %
    
    
    37.1
    %
   19




---



##### Table of Contents



Revenues
  Three Months Ended
    

    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    % Change
    
    2007
    
    
    2006
    
    
    % ChangeDirect premium written
    
    $
    83,153
    
    
    $
    60,961
    
    
    
    36
    %
    
    
    $
    161,561
    
    
    $
    120,273
    
    
    
    34
    %Ceded premium written
    
    
    (12,988
    )
    
    
    (11,603
    )
    
    
    12
    
    
    
    
    (25,689
    )
    
    
    (22,573
    )
    
    
    14Net premium written
    
    
    70,165
    
    
    
    49,358
    
    
    
    42
    
    
    
    
    135,872
    
    
    
    97,700
    
    
    
    39Change in unearned premiums
    
    
    (433
    )
    
    
    1,309
    
    
    
    (133
    )
    
    
    
    (2,192
    )
    
    
    857
    
    
    
    (356
    )Earned premiums
    
    $
    69,732
    
    
    $
    50,667
    
    
    
    38
    %
    
    
    $
    133,680
    
    
    $
    98,557
    
    
    
    36
    %Net investment income
    
    $
    7,673
    
    
    $
    6,535
    
    
    
    17
    %
    
    
    $
    15,022
    
    
    $
    12,757
    
    
    
    18
    %Total revenues
    
    $
    73,540
    
    
    $
    57,979
    
    
    
    27
    %
    
    
    $
    145,601
    
    
    $
    112,989
    
    
    
    29
    %
  20




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Premium cede rate (ceded premiums written as a
percentage of direct premiums written)
    
    
    15.6
    %
    
    
    19.0
    %
    
    
    15.9
    %
    
    
    18.8
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    15.0
    %
    
    
    17.8
    %
    
    
    15.3
    %
    
    
    17.5
    %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
    %
    
    
    36.2
    %
    
    
    36.9
    %
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Primary insurance in force
    
    
    34.3
    %
    
    
    53.2
    %
    
    
    31.4
    %
    
    
    54.0
    %Total insurance in force
    
    
    21.3
    %
    
    
    26.5
    %
    
    
    18.8
    %
    
    
    21.2
    %
    21




---



##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNet losses and loss adjustment expenses
    
    $
    41,893
    
    
    $
    17,271
    
    
    
    143
    %
    
    $
    74,474
    
    
    $
    33,622
    
    
    
    122
    %Amortization of deferred policy acquisition costs
    
    $
    4,670
    
    
    $
    4,118
    
    
    
    13
    
    
    $
    9,293
    
    
    $
    7,980
    
    
    
    16Other operating expenses (net of acquisition
costs deferred)
    
    $
    10,716
    
    
    $
    8,496
    
    
    
    26
    
    
    $
    21,047
    
    
    $
    17,009
    
    
    
    24Loss ratio
    
    
    60.1
    
    
    
    34.1
    %
    
    
    76
    
    
    
    55.7
    
    
    
    34.1
    %
    
    
    63Expense ratio
    
    
    21.9
    
    
    
    25.6
    %
    
    
    (14
    )
    
    
    22.3
    
    
    
    25.6
    %
    
    
    (13
    )Combined ratio
    
    
    82.0
    
    
    
    59.7
    %
    
    
    37
    
    
    
    78.0
    
    
    
    59.7
    %
    
    
    31
   Three Months Ended
    
    
    
    Six Months EndedJune 30,
    
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    % Change
    
    2007
    
    
    2006
    
    
    % ChangePaid claims:Primary insurance
    
    $
    16,687
    
    
    $
    13,501
    
    
    
    24
    %
    
    
    $
    33,134
    
    
    $
    26,806
    
    
    
    24
    %Modified Pool insurance
    
    
    1,386
    
    
    
    930
    
    
    
    49
    
    
    
    
    2,667
    
    
    
    2,008
    
    
    
    33Total
    
    $
    18,073
    
    
    $
    14,431
    
    
    
    
    
    
    
    $
    35,801
    
    
    $
    28,814Number of claims paid:Primary insurance
    
    
    540
    
    
    
    523
    
    
    
    3
    
    
    
    
    1,066
    
    
    
    1,029
    
    
    
    4Modified Pool insurance
    
    
    52
    
    
    
    48
    
    
    
    8
    
    
    
    
    106
    
    
    
    115
    
    
    
    (8
    )Total
    
    
    592
    
    
    
    571
    
    
    
    4
    
    
    
    
    1,172
    
    
    
    1,144
    
    
    
    2
  22




---



##### Table of Contents



Three Months EndedJune 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,(dollars in thousands)
    
    2007
    
    2007
    
    2006
    
    2006
    
    2006
    
    2006Average severity:Primary insurance
    
    $
    30.9
    
    
    $
    31.3
    
    
    $
    28.1
    
    
    $
    25.7
    
    
    $
    25.8
    
    
    $
    26.3Modified Pool insurance
    
    
    26.6
    
    
    
    23.7
    
    
    
    26.2
    
    
    
    18.8
    
    
    
    19.4
    
    
    
    16.1Total
    
    
    30.5
    
    
    
    30.6
    
    
    
    27.9
    
    
    
    25.3
    
    
    
    25.3
    
    
    
    25.1
   Primary
    
    Modified PoolAverage
    
    Average
    
    Average
    
    AverageLoan Size
    
    Insured Risk
    
    Loan Size
    
    Insured RiskVintage Year2002 and Prior
    
    $
    107,236
    
    
    $
    27,004
    
    
    $
    81,506
    
    
    $
    26,4812003
    
    
    121,206
    
    
    
    28,990
    
    
    
    147,545
    
    
    
    43,4772004
    
    
    133,841
    
    
    
    35,197
    
    
    
    152,566
    
    
    
    45,2602005
    
    
    157,866
    
    
    
    40,798
    
    
    
    179,369
    
    
    
    58,2632006
    
    
    207,779
    
    
    
    53,623
    
    
    
    259,136
    
    
    
    69,1562007
    
    
    219,833
    
    
    
    60,581
    
    
    
    270,177
    
    
    
    78,889Overall Average
    
    $
    165,491
    
    
    $
    43,105
    
    
    $
    207,951
    
    
    $
    60,851
   23




---



##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2006Primary insurance:Reserves for reported defaults
    
    $
    89,752
    
    
    $
    65,417
    
    
    $
    46,560Reserves for defaults incurred but not reported
    
    
    9,382
    
    
    
    5,676
    
    
    
    4,362Total Primary insurance
    
    
    99,134
    
    
    
    71,093
    
    
    
    50,922Modified Pool insurance:Reserves for reported defaults
    
    
    20,482
    
    
    
    11,477
    
    
    
    3,193Reserves for defaults incurred but not reported
    
    
    1,004
    
    
    
    773
    
    
    
    685Total Modified Pool insurance
    
    
    21,486
    
    
    
    12,250
    
    
    
    3,878Reserve for loss adjustment expenses
    
    
    1,441
    
    
    
    1,009
    
    
    
    105Total reserves for losses and loss adjustment expenses
    
    $
    122,061
    
    
    $
    84,352
    
    
    $
    54,905
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNet increase in reserve for
losses and loss adjustment
expenses
    
    $
    23,340
    
    
    $
    2,291
    
    
    
    919
    %
    
    $
    37,709
    
    
    $
    3,831
    
    
    
    884
    %
  24




---



##### Table of Contents



June 30,
    
    December 31,
    
    June 30,2007
    
    2006
    
    2006Risk on loans in default excluding loans subject
to deductibles (in thousands of dollars)
    
    $
    345,252
    
    
    $
    258,422
    
    
    $
    197,014Reserves as a percentage of risk at default
    
    
    35.4
    %
    
    
    32.6
    %
    
    
    27.9
    %
    25




---



##### Table of Contents



June 30,
    
    December 31,
    
    June 30,(dollars in thousands)
    
    2007
    
    2006
    
    2006Total business:Number of insured loans in force
    
    
    371,888
    
    
    
    338,086
    
    
    
    324,111With deductibles
    
    
    64,292
    
    
    
    61,483
    
    
    
    60,373Without deductibles
    
    
    307,596
    
    
    
    276,603
    
    
    
    263,738Number of loans in default
    
    
    9,853
    
    
    
    8,566
    
    
    
    6,945With deductibles
    
    
    2,508
    
    
    
    1,898
    
    
    
    1,331Without deductibles
    
    
    7,345
    
    
    
    6,668
    
    
    
    5,614Percentage of loans in default (default rate)
    
    
    2.65
    %
    
    
    2.53
    %
    
    
    2.14
    %Percentage of loans in default excluding deductibles
    
    
    2.39
    %
    
    
    2.41
    %
    
    
    2.13
    %Primary insurance:Number of insured loans in force
    
    
    258,163
    
    
    
    225,531
    
    
    
    216,458Number of loans in default
    
    
    5,940
    
    
    
    5,565
    
    
    
    5,001Percentage of loans in default
    
    
    2.30
    %
    
    
    2.47
    %
    
    
    2.31
    %Modified Pool insurance:Number of insured loans in force
    
    
    113,725
    
    
    
    112,555
    
    
    
    107,653With deductibles
    
    
    64,267
    
    
    
    61,456
    
    
    
    60,342Without deductibles
    
    
    49,458
    
    
    
    51,099
    
    
    
    47,311Number of loans in default
    
    
    3,913
    
    
    
    3,001
    
    
    
    1,944With deductibles
    
    
    2,508
    
    
    
    1,897
    
    
    
    1,330Without deductibles
    
    
    1,405
    
    
    
    1,104
    
    
    
    614Percentage of loans in default
    
    
    3.44
    %
    
    
    2.67
    %
    
    
    1.81
    %Percentage of loans in default excluding deductibles
    
    
    2.84
    %
    
    
    2.16
    %
    
    
    1.30
    %Primary Alt-A business (included in above):Number of insured loans in force
    
    
    34,955
    
    
    
    22,385
    
    
    
    18,581Number of loans in default
    
    
    1,207
    
    
    
    814
    
    
    
    628Percentage of loans in default
    
    
    3.45
    %
    
    
    3.64
    %
    
    
    3.38
    %
   26




---



##### Table of Contents



Significant Customers
    27




---



##### Table of Contents



Financial Position
  Deferred Policy Acquisition Costs
   28




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Balance  beginning of period
    
    $
    35,035
    
    
    $
    33,904
    
    
    $
    35,143
    
    
    $
    33,684Costs capitalized
    
    
    4,792
    
    
    
    4,417
    
    
    
    9,307
    
    
    
    8,499Amortization  normal
    
    
    (4,542
    )
    
    
    (3,988
    )
    
    
    (9,036
    )
    
    
    (7,837
    )Amortization  dynamic adjustment
    
    
    (128
    )
    
    
    (130
    )
    
    
    (257
    )
    
    
    (143
    )Total amortization
    
    $
    (4,670
    )
    
    $
    (4,118
    )
    
    $
    (9,293
    )
    
    $
    (7,980
    )Balance  end of quarter
    
    $
    35,157
    
    
    $
    34,203
    
    
    $
    35,157
    
    
    $
    34,203Annual Persistency
    
    
    
    
    
    
    
    
    
    
    78.2
    %
    
    
    72.1
    %
  Prepaid Federal Income Taxes and Deferred Income Taxes
   29




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
   June 30, 2007
    
    
    December 31, 2006(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    11,779
    
    
    
    1.8
    %
    
    $
    11,842
    
    
    
    1.9
    %State and municipal bonds
    
    
    592,103
    
    
    
    87.8
    %
    
    
    558,131
    
    
    
    91.9
    %Corporate bonds
    
    
    14,152
    
    
    
    2.1
    %
    
    
    16,572
    
    
    
    2.7
    %Mortgage-backed bonds
    
    
    
    
    
    
    0.0
    %
    
    
    49
    
    
    
    0.0
    %Total fixed maturities
    
    
    618,034
    
    
    
    91.7
    %
    
    
    586,594
    
    
    
    96.6
    %Equity securities
    
    
    3,781
    
    
    
    0.6
    %
    
    
    10,417
    
    
    
    1.7
    %Total available-for-sale securities
    
    
    621,815
    
    
    
    92.3
    %
    
    
    597,011
    
    
    
    98.3
    %Other investments
    
    
    
    
    
    
    0.0
    %
    
    
    5,000
    
    
    
    0.8
    %Short-term investments
    
    
    52,384
    
    
    
    7.7
    %
    
    
    5,301
    
    
    
    0.9
    %$
    674,199
    
    
    
    100.0
    %
    
    $
    607,312
    
    
    
    100.0
    %
  30




---



##### Table of Contents



June 30, 2007Carrying
    
    
    % of Total(dollars in thousands)
    
    Value
    
    Invested AssetsName of Creditor / IssuerCity of Atlanta, Georgia Airport
    
    $
    6,664
    
    
    
    0.99
    %Commonwealth of Massachusetts
    
    
    6,488
    
    
    
    0.96
    %State of Connecticut
    
    
    6,422
    
    
    
    0.95
    %Commonwealth of Pennsylvania
    
    
    6,068
    
    
    
    0.90
    %Clark County School District
    
    
    5,446
    
    
    
    0.81
    %Colorado Housing Authority
    
    
    5,400
    
    
    
    0.80
    %State of Hawaii
    
    
    5,352
    
    
    
    0.79
    %Indiana State Finance Authority
    
    
    5,225
    
    
    
    0.77
    %Utah Transit Authority
    
    
    5,066
    
    
    
    0.75
    %Ohio Housing Finance Authority
    
    
    5,000
    
    
    
    0.74
    %
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Average investments at cost or amortized cost
    
    $
    664,416
    
    
    $
    561,456
    
    
    $
    634,566
    
    
    $
    553,304Pre-tax net investment income
    
    $
    7,673
    
    
    $
    6,535
    
    
    $
    15,022
    
    
    $
    12,757Pre-tax yield
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.6
    %Tax-equivalent yield-to-maturity
    
    
    6.6
    %
    
    
    6.7
    %
    
    
    6.6
    %
    
    
    6.7
    %Pre-tax realized investment (losses) gains
    
    $
    (3,867
    )
    
    $
    772
    
    
    $
    (3,105
    )
    
    $
    1,672
  31




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Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturity securities:U. S. government obligations
    
    $
    12,130
    
    
    $
    3
    
    
    $
    (354
    )
    
    $
    11,779State and municipal bonds
    
    
    588,668
    
    
    
    8,154
    
    
    
    (4,719
    )
    
    
    592,103Corporate bonds
    
    
    13,384
    
    
    
    778
    
    
    
    (10
    )
    
    
    14,152Mortgage-backed bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal, fixed maturities
    
    
    614,182
    
    
    
    8,935
    
    
    
    (5,083
    )
    
    
    618,034Equity securities
    
    
    3,744
    
    
    
    70
    
    
    
    (33
    )
    
    
    3,781Total securities
    
    $
    617,926
    
    
    $
    9,005
    
    
    $
    (5,116
    )
    
    $
    621,815
  32




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##### Table of Contents



Credit Risk
  June 30, 2007
    
    
    December 31, 2006(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    11,779
    
    
    
    1.9
    %
    
    $
    11,842
    
    
    
    2.0
    %AAA
    
    
    508,981
    
    
    
    82.4
    
    
    
    464,042
    
    
    
    79.1AA
    
    
    62,518
    
    
    
    10.1
    
    
    
    72,051
    
    
    
    12.3A
    
    
    22,742
    
    
    
    3.7
    
    
    
    25,054
    
    
    
    4.3BBB
    
    
    8,835
    
    
    
    1.4
    
    
    
    10,782
    
    
    
    1.8BB
    
    
    50
    
    
    
    0.0
    
    
    
    50
    
    
    
    0.0CC and lower
    
    
    55
    
    
    
    0.0
    
    
    
    279
    
    
    
    0.0Not rated
    
    
    3,074
    
    
    
    0.5
    
    
    
    2,494
    
    
    
    0.4Total fixed maturities
    
    $
    618,034
    
    
    
    100.0
    %
    
    $
    586,594
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    913
    
    
    
    24.2
    %
    
    $
    1,708
    
    
    
    16.4
    %A
    
    
    2,240
    
    
    
    59.2
    
    
    
    2,035
    
    
    
    19.5BBB
    
    
    628
    
    
    
    16.6
    
    
    
    1,132
    
    
    
    10.93,781
    
    
    
    100.0
    
    
    
    4,875
    
    
    
    46.8Common stocks
    
    
    
    
    
    
    
    
    
    
    5,542
    
    
    
    53.2Total equities
    
    $
    3,781
    
    
    
    100.0
    %
    
    $
    10,417
    
    
    
    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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Realized Gains (Losses) and Impairments
    34




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##### Table of Contents



Liquidity and Capital Resources
         June 30,
    
    
    December 31,
    
    
    June 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2006Statutory policyholders surplus
    
    $
    102.9
    
    
    $
    168.5
    
    
    $
    154.7Statutory contingency reserve
    
    
    589.7
    
    
    
    521.8
    
    
    
    492.0Total
    
    $
    692.6
    
    
    $
    690.3
    
    
    $
    646.7
  35




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36




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##### Table of Contents



Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  §
    
    interest rates may increase or decrease from their current levels;§
    
    housing prices may increase or decrease from their current levels;§
    
    housing transactions requiring mortgage insurance may decrease for many reasons
including changes in interest rates or economic conditions or alternative credit
enhancement products;§
    
    our market share may change as a result of changes in underwriting criteria or
competitive products or rates;§
    
    the amount of insurance written could be adversely affected by changes in federal
housing legislation, including changes in the Federal Housing 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
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;
 37




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##### Table of Contents



§
    
    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.§
    
    the performance of our international subsidiary, including changes in the
economic, political, legal, regulatory and competitive environments and fluctuations
in foreign currency exchange rates could impact our earnings.
  38




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), of the effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our
management, including our CEO and CFO, concluded, as of the end of the period covered by
this report, that our disclosure controls and procedures were effective. Disclosure
controls and procedures include controls and procedures designed to ensure that management,
including our CEO and CFO, is alerted to material information required to be disclosed in
our filings under the Act so as to allow timely decisions regarding our disclosures. In
designing and evaluating disclosure controls and procedures, we recognized that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to
do.b)
    
    There have been no changes in internal controls over financial reporting during the
second quarter or first half of 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
 39




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 Item 1A. Risk Factors
  Illiquidity in the mortgage funding marketplace could have an adverse impact on borrowers ability
to purchase or sell an existing home or to refinance an existing mortgage, which in turn could have
a negative impact on new mortgage originations as well as our ability to mitigate claims leading to
increased reserves, claims and ultimately to decreased earnings.
  A decline in new insurance written in a year following higher volume years may result in reduced
earnings.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3. Defaults Upon Senior Securities 
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Item 4. Submission of Matters to a Vote of Security Holders
   Voted in
    
    SharesElection of Directors
    
    Favor
    
    WithheldGlenn T. Austin, Jr.
    
    
    13,178,074
    
    
    
    304,570Robert T. David
    
    
    12,919,754
    
    
    
    592,890H. Lee Durham, Jr.
    
    
    12,747,479
    
    
    
    735,165William T. Ratliff, III
    
    
    13,007,183
    
    
    
    475,461Michael A. F. Roberts
    
    
    13,039,641
    
    
    
    443,003Richard S. Swanson
    
    
    13,176,878
    
    
    
    305,766Mark K. Tonnesen
    
    
    13,005,768
    
    
    
    476,876David W. Whitehurst
    
    
    13,006,734
    
    
    
    475,910Henry G. Williamson, Jr.
    
    
    12,743,959
    
    
    
    738,685
  Voted
    
    Voted
    
    SharesOther Proposals
    
    in Favor
    
    Against
    
    WithheldRatification of the selection
of Ernst & Young LLP as the
independent registered public
accounting firm for Triad
Guaranty Inc. for 2007.
    
    
    13,362,344
    
    
    
    117,125
    
    
    
    3,175Approval of the proposal to
adopt the Triad Guaranty
Inc. 2007 Key Executive
Incentive Compensation Plan
    
    
    11,679,816
    
    
    
    868,829
    
    
    
    933,999
 41




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##### Table of Contents



Item 5. Other Information
   
 Item 6. Exhibits 
 42




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##### Table of Contents



SIGNATURE
  TRIAD GUARANTY INC.Date:  May 9, 2007
    /s/ Kenneth W. JonesKenneth W. JonesSenior Vice President and Chief Financial Officer 
 43




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.47
    
    Credit Agreement dated June 28, 200731.1
    
    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
    
    Certifications 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
    
    Certifications 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.
 44