##### 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, 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
    
    56-1838519(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)101 South Stratford Road
    
    27104Winston-Salem, North Carolina
    
    (Zip Code)(Address of principal executive offices)
 (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 September 30, 2007 (Unaudited) and December 31, 2006
    
    
    1Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2007 and 2006 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Nine Months Ended September 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
    
    
    36Item 4. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 6. Exhibits
    
    
    38SIGNATURE
    
    
    39EXHIBIT INDEX
    
    
    40Exhibit 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
 September 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: $701,264 and $568,992)
    
    $
    711,918
    
    
    $
    586,594Equity securities (cost: $3,494 and $9,530)
    
    
    3,483
    
    
    
    10,417Other investments
    
    
    
    
    
    
    5,000Short-term investments
    
    
    78,972
    
    
    
    5,301Total Invested assets
    
    
    794,373
    
    
    
    607,312Cash and cash equivalents
    
    
    30,617
    
    
    
    38,609Real estate acquired in claim settlement
    
    
    12,566
    
    
    
    10,170Accrued investment income
    
    
    9,373
    
    
    
    8,054Deferred policy acquisition costs
    
    
    35,574
    
    
    
    35,143Prepaid federal income taxes
    
    
    168,817
    
    
    
    166,908Property and equipment
    
    
    10,574
    
    
    
    7,678Other assets
    
    
    34,779
    
    
    
    21,757Total assets
    
    $
    1,096,673
    
    
    $
    895,631LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    200,455
    
    
    $
    84,352Unearned premiums
    
    
    15,980
    
    
    
    13,193Amounts payable to reinsurers
    
    
    6,373
    
    
    
    5,909Deferred income taxes
    
    
    170,477
    
    
    
    176,483Revolving line of credit
    
    
    80,000
    
    
    
    Long-term debt
    
    
    34,517
    
    
    
    34,510Accrued interest on debt
    
    
    1,051
    
    
    
    1,275Accrued expenses and other liabilities
    
    
    16,350
    
    
    
    9,685Total liabilities
    
    
    525,203
    
    
    
    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 14,920,269 shares at September 30,
2007 and 14,856,401 shares at December 31, 2006
    
    
    149
    
    
    
    149Additional paid-in capital
    
    
    108,654
    
    
    
    104,981Accumulated other comprehensive income, net of income tax liability
of $3,725 at September 30, 2007 and $6,471 at December 31, 2006
    
    
    12,091
    
    
    
    12,018Retained earnings
    
    
    450,576
    
    
    
    453,076Total stockholders equity
    
    
    571,470
    
    
    
    570,224Total liabilities and stockholders equity
    
    $
    1,096,673
    
    
    $
    895,631
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##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Premiums written:Direct
    
    $
    86,946
    
    
    $
    65,828
    
    
    $
    248,507
    
    
    $
    186,101Ceded
    
    
    (14,391
    )
    
    
    (11,925
    )
    
    
    (40,081
    )
    
    
    (34,498
    )Net premiums written
    
    
    72,555
    
    
    
    53,903
    
    
    
    208,426
    
    
    
    151,603Change in unearned premiums
    
    
    (465
    )
    
    
    174
    
    
    
    (2,656
    )
    
    
    1,031Earned premiums
    
    
    72,090
    
    
    
    54,077
    
    
    
    205,770
    
    
    
    152,634Net investment income
    
    
    8,370
    
    
    
    6,761
    
    
    
    23,392
    
    
    
    19,518Net realized investment gains (losses)
    
    
    85
    
    
    
    (36
    )
    
    
    (3,020
    )
    
    
    1,636Other income
    
    
    2
    
    
    
    3
    
    
    
    6
    
    
    
    680,547
    
    
    
    60,805
    
    
    
    226,148
    
    
    
    173,794Losses and expenses:Net losses and loss adjustment expenses
    
    
    106,813
    
    
    
    19,305
    
    
    
    181,287
    
    
    
    52,927Interest expense on debt
    
    
    1,161
    
    
    
    693
    
    
    
    2,548
    
    
    
    2,080Amortization of deferred policy acquisition costs
    
    
    4,567
    
    
    
    4,109
    
    
    
    13,860
    
    
    
    12,089Other operating expenses (net of acquisition
costs deferred)
    
    
    11,686
    
    
    
    9,279
    
    
    
    32,733
    
    
    
    26,288124,227
    
    
    
    33,386
    
    
    
    230,428
    
    
    
    93,384(Loss) income before income taxes (benefit)
    
    
    (43,680
    )
    
    
    27,419
    
    
    
    (4,280
    )
    
    
    80,410Income taxes (benefit):Current
    
    
    (2,057
    )
    
    
    979
    
    
    
    1,468
    
    
    
    2,930Deferred
    
    
    (9,774
    )
    
    
    7,048
    
    
    
    (3,248
    )
    
    
    19,948(11,831
    )
    
    
    8,027
    
    
    
    (1,780
    )
    
    
    22,878Net (loss) income
    
    $
    (31,849
    )
    
    $
    19,392
    
    
    $
    (2,500
    )
    
    $
    57,532(Loss) earnings per common and common equivalent
share:Basic
    
    $
    (2.15
    )
    
    $
    1.31
    
    
    $
    (0.17
    )
    
    $
    3.90Diluted
    
    $
    (2.15
    )
    
    $
    1.30
    
    
    $
    (0.17
    )
    
    $
    3.86Shares used in computing (loss) earnings per
common
and common equivalent share:Basic
    
    
    14,838,124
    
    
    
    14,774,781
    
    
    
    14,827,534
    
    
    
    14,767,556Diluted
    
    
    14,838,124
    
    
    
    14,923,102
    
    
    
    14,827,534
    
    
    
    14,899,940
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TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 (unaudited)
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2007
    
    
    2006Operating activitiesNet (loss) income
    
    $
    (2,500
    )
    
    $
    57,532Adjustments to reconcile net income to net cash provided by
operating
activities:Losses, loss
adjustment expenses and unearned premium reserves
    
    
    118,890
    
    
    
    8,012Accrued expenses and other liabilities
    
    
    6,665
    
    
    
    (150
    )Amounts due to reinsurer
    
    
    464
    
    
    
    1,028Accrued investment income
    
    
    (1,319
    )
    
    
    (458
    )Policy acquisition costs deferred
    
    
    (14,291
    )
    
    
    (13,086
    )Amortization of deferred policy acquisition costs
    
    
    13,860
    
    
    
    12,089Net realized investment losses (gains)
    
    
    3,020
    
    
    
    (1,636
    )Provision for depreciation
    
    
    1,740
    
    
    
    1,879Accretion of discount on investments
    
    
    526
    
    
    
    49Deferred income taxes
    
    
    (3,248
    )
    
    
    19,948Prepaid federal income taxes
    
    
    (1,909
    )
    
    
    (19,803
    )Real estate acquired in claim settlement, net of write-downs
    
    
    (2,396
    )
    
    
    (2,261
    )Accrued interest on debt
    
    
    (224
    )
    
    
    (691
    )Other assets
    
    
    (13,022
    )
    
    
    (2,489
    )Other operating activities
    
    
    2,904
    
    
    
    2,687Net cash provided by operating activities
    
    
    109,160
    
    
    
    62,650Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (237,994
    )
    
    
    (125,797
    )Sales  fixed maturities
    
    
    104,401
    
    
    
    69,280Maturities  fixed maturities
    
    
    1,500
    
    
    
    3,020Purchases  equities
    
    
    (55
    )
    
    
    (4,772
    )Sales  equities
    
    
    7,338
    
    
    
    3,131Purchases of other investments
    
    
    
    
    
    
    (5,000
    )Net change in short-term investments
    
    
    (73,671
    )
    
    
    (1,227
    )Purchases of property and equipment
    
    
    (4,636
    )
    
    
    (1,894
    )Net cash used in investing activities
    
    
    (203,117
    )
    
    
    (63,259
    )Financing activitiesBorrowings on revolving line of credit, net
    
    
    80,000
    
    
    
    Excess tax benefits from share-based compensation
    
    
    175
    
    
    
    280Proceeds from exercise of stock options
    
    
    616
    
    
    
    625Net cash provided by financing activities
    
    
    80,791
    
    
    
    905Foreign currency translation adjustment
    
    
    5,174
    
    
    
    Net change in cash and cash equivalents
    
    
    (7,992
    )
    
    
    296Cash and cash equivalents at beginning of period
    
    
    38,609
    
    
    
    8,934Cash and cash equivalents at end of period
    
    $
    30,617
    
    
    $
    9,230Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and
Loss Bonds
    
    $
    11,501
    
    
    $
    24,438Interest
    
    
    2,765
    
    
    
    2,765
  3




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TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2007
 1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  Income Taxes
   Share-Based Compensation
  4




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Foreign Currency Translation
  Recent Accounting Pronouncements
   3. Consolidation
  4. Commitments and Contingencies
 Reinsurance
  5




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Insurance In Force, Dividend Restrictions, and Statutory Results
  September 30,
    
    
    December 31,
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2006Net risk
    
    $
    11,741,160
    
    
    $
    8,612,912
    
    
    $
    8,065,064Statutory capital and surplus
    
    $
    33,883
    
    
    $
    168,439
    
    
    $
    157,934Statutory contingency reserve
    
    
    626,182
    
    
    
    521,836
    
    
    
    515,957Total
    
    $
    660,066
    
    
    $
    690,275
    
    
    $
    673,891Risk-to-capital ratio
    
    17.8 to 1
    
    
    12.5 to 1
    
    
    
    12.0 to 1
    Loss Reserves
  6




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##### Table of Contents



Litigation
   Credit Facility
  5. (Loss) Earnings Per Share (EPS)
  6. Comprehensive (Loss) Income
  7. Income Taxes
  8. Long-Term Stock Incentive Plan
  7




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Weighted-
    
    
    Aggregate
    
    
    Weighted-AverageNumber of
    
    
    Average
    
    
    Intrinsic
    
    
    Remaining(dollars in thousands)
    
    Shares
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual TermOutstanding, January 1, 2007
    
    
    564,712
    
    
    $
    38.36Granted
    
    
    107,190
    
    
    
    43.56Exercised
    
    
    22,937
    
    
    
    26.87Cancelled
    
    
    3,768
    
    
    
    45.06Outstanding, September 30, 2007
    
    
    645,197
    
    
    
    39.60
    
    
    $
    15
    
    
    
    4.8 yearsExercisable, September 30, 2007
    
    
    465,855
    
    
    
    38.20
    
    
    $
    15
    
    
    
    3.3 years
  September 30,
    
    September 30,2007
    
    2006Expected volatility
    
    
    31.7
    %
    
    
    34.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    
    5.0
    years
    
    
    5.0
    yearsRisk-free rate
    
    
    4.5
    %
    
    
    4.5
    %
  8




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##### Table of Contents



Weighted-Number of
    
    Average Grant-Shares
    
    Date Fair ValueOutstanding, January 1, 2007
    
    
    113,941
    
    
    $
    46.41Granted
    
    
    49,202
    
    
    
    43.72Exercised
    
    
    37,151
    
    
    
    50.31Cancelled
    
    
    8,271
    
    
    
    47.32Outstanding, September 30, 2007
    
    
    117,721
    
    
    
    43.99
    9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
     10




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Update on Critical Accounting Policies and Estimates
    11




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Consolidated Results of Operations
  Three Months Ended
    
    Nine Months Ended(dollars in thousands, except
    
    September 30,
    
    September 30,per share data)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeEarned premiums
    
    $
    72,090
    
    
    $
    54,077
    
    
    
    33
    %
    
    $
    205,770
    
    
    $
    152,634
    
    
    
    35
    %Net losses and loss adjustment
expenses
    
    
    106,813
    
    
    
    19,305
    
    
    
    453
    
    
    
    181,287
    
    
    
    52,927
    
    
    
    243Net (loss) income
    
    
    (31,849
    )
    
    
    19,392
    
    
    
    (264
    )
    
    
    (2,500
    )
    
    
    57,532
    
    
    
    (104
    )Diluted (loss) earnings per share
    
    $
    (2.15
    )
    
    $
    1.30
    
    
    
    (265
    )
    
    $
    (0.17
    )
    
    $
    3.86
    
    
    
    (104
    )
      12




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Production
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangePrimary insurance written:Flow
    
    $
    3,720
    
    
    $
    2,844
    
    
    
    31
    %
    
    $
    13,181
    
    
    $
    7,350
    
    
    
    79
    %Structured bulk
    
    
    694
    
    
    
    436
    
    
    
    59
    
    
    
    3,723
    
    
    
    822
    
    
    
    353Total Primary insurance written
    
    $
    4,414
    
    
    $
    3,280
    
    
    
    35
    
    
    $
    16,904
    
    
    $
    8,172
    
    
    
    107Modified Pool insurance written
    
    
    
    
    
    
    2,956
    
    
    
    (100
    )
    
    
    3,331
    
    
    
    10,542
    
    
    
    (68
    )Total insurance written
    
    $
    4,414
    
    
    $
    6,236
    
    
    
    (29
    )%
    
    $
    20,235
    
    
    $
    18,714
    
    
    
    8
    %
    
    
    American Home Mortgage Corp. (AHM) was our single
largest customer for the first six months of 2007, comprising 34% of our
Primary flow production and contributing 26% of Primary NIW and 15% of
Modified Pool NIW. AHM filed for protection under Chapter 11 of the U.S.
Bankruptcy Code during the third quarter and, as a result, we
received extremely limited production from AHM during the third
quarter of 2007 and anticipate no further business from AHM.
The AHM
 13




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bankruptcy, coupled with contractions in personnel and
a reduction in estimated production for the reminder of 2007 by
two of our other large lender customers due to the unsettled
nature of the mortgage marketplace, negatively impacted
production for the third quarter of 2007. We expect that we
will see further reductions in production in the fourth quarter
of 2007 and likely into 2008.
 
    
    We discontinued a special lender-paid program at the end
of the second quarter that had been responsible for approximately $600
million of NIW per quarter for each of the first two quarters of 2007 and
the last quarter of 2006.
    
    For the three month and nine month periods ended September
30, 2007, our exposure to loans with LTV of greater than 95% represented
37.4% and 33.1%, respectively, of Primary NIW. As noted above, we are
reducing the risk in our portfolio through tightened underwriting
guidelines and are limiting our exposure to loans with LTV of greater
than 95%. Our renewed focus on quality through tightened underwriting
guidelines has resulted, and we expect will continue to result, in the
elimination of certain mortgage lenders with which we had historically
done business.
    
    At September 30, 2007, our risk to capital ratio stood at
17.8-to-1 compared to 12.5-to-1 at December 31, 2006. The maximum risk
to capital ratio permitted by most states is 25.0-to-1. In addition, we
are subject to a maximum risk to capital ratio of 22.1-to-1 under our $80
million credit facility. Our risk to capital ratio has been increasing
over the last several quarters, partially as the result of operating
losses during the third quarter of 2007. In order to manage our risk to
capital ratio in this environment, we are carefully monitoring the
writing of new business and allocating our capital against what we
believe to be the most promising opportunities. This allocation is
expected to further limit the amount of future production.
   14




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Market Share by Channel
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Flow channel
    
    
    4.5
    %
    
    
    6.0
    %
    
    
    6.5
    %
    
    
    5.7
    %Structured bulk channel
    
    
    4.9
    %
    
    
    17.5
    %
    
    
    10.9
    %
    
    
    16.5
    %Total
    
    
    4.6
    %
    
    
    9.4
    %
    
    
    7.5
    %
    
    
    9.4
    %
    Credit Quality of Primary NIW
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Prime
    
    
    75.3
    %
    
    
    66.5
    %
    
    
    63.7
    %
    
    
    68.2
    %Alt-A
    
    
    20.4
    %
    
    
    31.2
    %
    
    
    33.0
    %
    
    
    29.6
    %A-Minus
    
    
    3.8
    %
    
    
    2.0
    %
    
    
    2.9
    %
    
    
    2.0
    %Sub Prime
    
    
    0.5
    %
    
    
    0.3
    %
    
    
    0.4
    %
    
    
    0.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  15




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##### Table of Contents



Loan Type of Primary NIW
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Fixed
    
    
    77.9
    %
    
    
    54.0
    %
    
    
    60.9
    %
    
    
    57.2
    %ARM (positive amortization)
    
    
    17.1
    %
    
    
    19.1
    %
    
    
    21.2
    %
    
    
    15.8
    %ARM (potential negative
amortization)
    
    
    5.0
    %
    
    
    26.9
    %
    
    
    17.9
    %
    
    
    27.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Loan to Value of Primary NIW
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Greater than 95%
    
    
    37.4
    %
    
    
    20.7
    %
    
    
    40.4
    %
    
    
    15.1
    %90.01% to 95.00%
    
    
    23.1
    %
    
    
    23.3
    %
    
    
    28.7
    %
    
    
    23.3
    %90.00% and below
    
    
    39.5
    %
    
    
    56.0
    %
    
    
    30.9
    %
    
    
    61.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   16




---



##### Table of Contents



Insurance and Risk in Force
  Direct Insurance in Force
 September 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    % ChangePrimary insurance:Flow primary insurance
    
    $
    40,610
    
    
    $
    31,012
    
    
    
    31
    %Structured bulk insurance
    
    
    4,700
    
    
    
    1,094
    
    
    
    330Total Primary insurance
    
    
    45,310
    
    
    
    32,106
    
    
    
    41Modified pool insurance
    
    
    22,737
    
    
    
    21,779
    
    
    
    4Total insurance
    
    $
    68,047
    
    
    $
    53,885
    
    
    
    26
    %
   
    
    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 PNAM loan types;
    
    An increase in condominium property types;
    
    A decline in Primary residence occupancy status; and
    
    A growing percentage of loans in excess of $500,000.
 17




---



##### Table of Contents



Risk
in Force(1)
 Primary
    
    
    Modified PoolSeptember 30,
    
    
    September 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Direct Risk in Force
    
    $
    11,871
    
    
    $
    8,128
    
    
    $
    922
    
    
    $
    837Net Risk In Force
    
    
    10,933
    
    
    
    7,321
    
    
    
    807
    
    
    
    743Credit Quality:Prime
    
    
    73.5
    %
    
    
    81.2
    %
    
    
    27.8
    %
    
    
    30.8
    %Alt-A
    
    
    22.8
    
    
    
    14.5
    
    
    
    71.4
    
    
    
    68.1A-Minus
    
    
    3.2
    
    
    
    3.6
    
    
    
    0.7
    
    
    
    0.9Sub Prime
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %LTV:Greater than 95%
    
    
    25.2
    %
    
    
    16.1
    %
    
    
    
    %
    
    
    
    %90.01% to 95.00%
    
    
    69.2
    
    
    
    77.4
    
    
    
    0.9
    
    
    
    0.990.00% and below
    
    
    5.6
    
    
    
    6.5
    
    
    
    99.1
    
    
    
    99.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    66.8
    %
    
    
    71.0
    %
    
    
    26.7
    %
    
    
    32.1
    %ARM (positive amortization)
    
    
    19.9
    
    
    
    19.4
    
    
    
    60.1
    
    
    
    56.1ARM (potential negative amortization)
    
    
    13.3
    
    
    
    9.6
    
    
    
    13.2
    
    
    
    11.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    10.4
    %
    
    
    9.2
    %
    
    
    9.3
    %
    
    
    7.3
    %Other (principally single-family detached)
    
    
    89.6
    
    
    
    90.8
    
    
    
    90.7
    
    
    
    92.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    87.6
    %
    
    
    89.7
    %
    
    
    73.6
    %
    
    
    73.7
    %Secondary home
    
    
    7.9
    
    
    
    7.0
    
    
    
    6.2
    
    
    
    6.0Non-owner occupied
    
    
    4.5
    
    
    
    3.3
    
    
    
    20.2
    
    
    
    20.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$0 - $50,000
    
    
    1.1
    %
    
    
    1.4
    %
    
    
    0.3
    %
    
    
    0.5
    %$51,000 - $100,000
    
    
    11.2
    
    
    
    14.6
    
    
    
    3.5
    
    
    
    4.4$100,001 - $250,000
    
    
    54.9
    
    
    
    60.0
    
    
    
    39.6
    
    
    
    43.6$250,001 - $500,000
    
    
    28.4
    
    
    
    21.7
    
    
    
    42.7
    
    
    
    40.8Over $500,000
    
    
    4.4
    
    
    
    2.3
    
    
    
    13.9
    
    
    
    10.7Total
    
    
    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 *September 30, 2007
    
    
    September 30, 2007Direct Risk in
    
    
    
    
    
    
    Direct Risk in(dollars in millions)
    
    Force
    
    
    Percent
    
    
    Force
    
    
    Percent2002 and before
    
    $
    712.2
    
    
    
    6.0
    %
    
    $
    44.4
    
    
    
    5.5
    %2003
    
    
    1,222.7
    
    
    
    10.3
    
    
    
    117.0
    
    
    
    14.52004
    
    
    1,187.1
    
    
    
    10.0
    
    
    
    130.7
    
    
    
    16.22005
    
    
    1,709.4
    
    
    
    14.4
    
    
    
    231.6
    
    
    
    28.72006
    
    
    2,789.6
    
    
    
    23.5
    
    
    
    253.4
    
    
    
    31.42007
    
    
    4,249.7
    
    
    
    35.8
    
    
    
    29.9
    
    
    
    3.7Total
    
    $
    11,870.8
    
    
    
    100.0
    %
    
    $
    807.0
    
    
    
    100.0
    %
 
 *
    
    For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss limits and
deductibles within each specific structure    19




---



##### Table of Contents



Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeDirect premium written
    
    $
    86,946
    
    
    $
    65,828
    
    
    
    32
    %
    
    $
    248,507
    
    
    $
    186,101
    
    
    
    34
    %Ceded premium written
    
    
    (14,391
    )
    
    
    (11,925
    )
    
    
    21
    
    
    
    (40,081
    )
    
    
    (34,498
    )
    
    
    16Net premium written
    
    
    72,555
    
    
    
    53,903
    
    
    
    35
    
    
    
    208,426
    
    
    
    151,603
    
    
    
    37Change in unearned premiums
    
    
    (465
    )
    
    
    174
    
    
    
    (367
    )
    
    
    (2,656
    )
    
    
    1,031
    
    
    
    (358
    )Earned premiums
    
    $
    72,090
    
    
    $
    54,077
    
    
    
    33
    %
    
    $
    205,770
    
    
    $
    152,634
    
    
    
    35
    %Net investment income
    
    $
    8,370
    
    
    $
    6,761
    
    
    
    24
    %
    
    $
    23,392
    
    
    $
    19,518
    
    
    
    20
    %Total revenues
    
    $
    80,547
    
    
    $
    60,805
    
    
    
    32
    %
    
    $
    226,148
    
    
    $
    173,794
    
    
    
    30
    %
    20




---



##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(dollars in thousands)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNet losses and loss adjustment expenses
    
    $
    106,813
    
    
    $
    19,305
    
    
    
    453
    %
    
    $
    181,287
    
    
    $
    52,927
    
    
    
    243
    %Amortization of deferred policy acquisition costs
    
    
    4,567
    
    
    
    4,109
    
    
    
    11
    
    
    
    13,860
    
    
    
    12,089
    
    
    
    15Other operating expenses (net of acquisition
costs deferred)
    
    
    11,686
    
    
    
    9,279
    
    
    
    26
    
    
    
    32,733
    
    
    
    26,288
    
    
    
    25Loss ratio
    
    
    148.2
    %
    
    
    35.7
    %
    
    
    315
    
    
    
    88.1
    %
    
    
    34.7
    %
    
    
    154Expense ratio
    
    
    22.4
    %
    
    
    24.8
    %
    
    
    (10
    )
    
    
    22.4
    %
    
    
    25.3
    %
    
    
    (11
    )Combined ratio
    
    
    170.6
    %
    
    
    60.5
    %
    
    
    182
    
    
    
    110.5
    %
    
    
    60.0
    %
    
    
    84
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangePaid claims:Primary insurance
    
    $
    23,058
    
    
    $
    13,016
    
    
    
    77
    %
    
    $
    56,192
    
    
    $
    39,823
    
    
    
    41
    %Modified Pool insurance
    
    
    5,413
    
    
    
    603
    
    
    
    798
    
    
    
    8,080
    
    
    
    2,611
    
    
    
    209Total
    
    $
    28,471
    
    
    $
    13,619
    
    
    
    
    
    
    $
    64,272
    
    
    $
    42,434Number of claims paid:Primary insurance
    
    
    625
    
    
    
    506
    
    
    
    24
    %
    
    
    1,691
    
    
    
    1,535
    
    
    
    10
    %Modified Pool insurance
    
    
    131
    
    
    
    32
    
    
    
    309
    
    
    
    237
    
    
    
    147
    
    
    
    61Total
    
    
    756
    
    
    
    538
    
    
    
    41
    %
    
    
    1,928
    
    
    
    1,682
    
    
    
    15
    %
   21




---



##### Table of Contents



Primary
    
    Modified PoolAverage
    
    Average
    
    Average
    
    AverageLoan Size
    
    Insured Risk
    
    Loan Size
    
    Insured RiskVintage Year2002 and Prior
    
    $
    106,770
    
    
    $
    26,934
    
    
    $
    81,265
    
    
    $
    26,3752003
    
    
    120,197
    
    
    
    28,799
    
    
    
    146,529
    
    
    
    43,1812004
    
    
    133,189
    
    
    
    35,117
    
    
    
    151,475
    
    
    
    44,8912005
    
    
    157,210
    
    
    
    40,757
    
    
    
    179,041
    
    
    
    58,1982006
    
    
    207,291
    
    
    
    53,468
    
    
    
    260,263
    
    
    
    69,2582007
    
    
    212,090
    
    
    
    58,261
    
    
    
    270,853
    
    
    
    79,024Overall Average
    
    $
    168,012
    
    
    $
    44,018
    
    
    $
    208,343
    
    
    $
    60,874
  Primary
    
    Modified Pool(dollars in thousands)
    
    Insurance
    
    Insurance
    
    TotalThree Months Ended:March 31, 2006
    
    $
    26.3
    
    
    $
    16.1
    
    
    $
    25.1June 30, 2006
    
    
    25.8
    
    
    
    19.4
    
    
    
    25.3September 30, 2006
    
    
    25.7
    
    
    
    18.8
    
    
    
    25.3December 31, 2006
    
    
    28.1
    
    
    
    26.2
    
    
    
    27.9March 31, 2007
    
    
    31.3
    
    
    
    23.7
    
    
    
    30.6June 30, 2007
    
    
    30.9
    
    
    
    26.6
    
    
    
    30.5September 30, 2007
    
    
    36.9
    
    
    
    41.3
    
    
    
    37.7
   22




---



##### Table of Contents



September 30,
    
    
    December 31,
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2006Primary insurance:Reserves for reported defaults
    
    $
    144,189
    
    
    $
    65,417
    
    
    $
    50,237Reserves for defaults incurred but not reported
    
    
    19,765
    
    
    
    5,676
    
    
    
    5,240Total Primary insurance
    
    
    163,954
    
    
    
    71,093
    
    
    
    55,477Modified Pool insurance:Reserves for reported defaults
    
    
    31,164
    
    
    
    11,477
    
    
    
    3,683Reserves for defaults incurred but not reported
    
    
    2,619
    
    
    
    773
    
    
    
    858Total Modified Pool insurance
    
    
    33,783
    
    
    
    12,250
    
    
    
    4,541Reserve for loss adjustment expenses
    
    
    2,718
    
    
    
    1,009
    
    
    
    105Total reserves for losses and loss adjustment
expenses
    
    $
    200,455
    
    
    $
    84,352
    
    
    $
    60,123
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(dollars in thousands)
    
    2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNet increase in reserve for losses
and loss adjustment expenses
    
    $
    78,394
    
    
    $
    5,218
    
    
    
    1,402
    %
    
    $
    116,103
    
    
    $
    9,049
    
    
    
    1,183
    %
   23




---



##### Table of Contents



September 30,
    
    December 31,
    
    September 30,(dollars in thousands)
    
    2007
    
    2006
    
    2006Risk In Force:California
    
    
    1,945,450
    
    
    
    1,469,876
    
    
    
    1,339,079Florida
    
    
    1,681,709
    
    
    
    1,300,897
    
    
    
    1,207,988Arizona
    
    
    760,582
    
    
    
    577,950
    
    
    
    561,767Nevada
    
    
    409,983
    
    
    
    299,130
    
    
    
    285,002Total Soft Market States
    
    
    4,797,724
    
    
    
    3,647,853
    
    
    
    3,393,836Total Risk in Force
    
    
    14,887,069
    
    
    
    11,890,841
    
    
    
    11,361,394% of Soft Market States
    
    
    32.2
    %
    
    
    30.7
    %
    
    
    29.9
    %Risk in Default:California
    
    
    69,754
    
    
    
    17,975
    
    
    
    8,434Florida
    
    
    77,809
    
    
    
    17,097
    
    
    
    9,257Arizona
    
    
    22,799
    
    
    
    6,213
    
    
    
    2,291Nevada
    
    
    20,274
    
    
    
    5,573
    
    
    
    2,674Total Soft Market States
    
    
    190,636
    
    
    
    46,858
    
    
    
    22,656Total Risk in Default
    
    
    479,407
    
    
    
    258,422
    
    
    
    203,543% of Soft Market States
    
    
    39.8
    %
    
    
    18.1
    %
    
    
    11.1
    %Reserves:California
    
    
    28,392
    
    
    
    4,379
    
    
    
    1,769Florida
    
    
    32,116
    
    
    
    4,218
    
    
    
    2,007Arizona
    
    
    9,071
    
    
    
    1,363
    
    
    
    477Nevada
    
    
    7,568
    
    
    
    1,509
    
    
    
    493Total Soft Market States
    
    
    77,147
    
    
    
    11,469
    
    
    
    4,746Total Reserves
    
    
    200,455
    
    
    
    84,352
    
    
    
    60,123% of Soft Market States
    
    
    38.5
    %
    
    
    13.6
    %
    
    
    7.9
    %
  24




---



##### Table of Contents



September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006Risk on loans in default excluding loans
subject to deductibles (in thousands of
dollars)
    
    $
    479,407
    
    
    $
    258,422
    
    
    $
    220,204Reserves as a percentage of risk at default
    
    
    41.8
    %
    
    
    32.6
    %
    
    
    27.3
    %
   September 30,
    
    December 31,
    
    September 30,(dollars in thousands)
    
    2007
    
    2006
    
    2006Total business:Number of insured loans in force
    
    
    378,814
    
    
    
    338,086
    
    
    
    329,937With deductibles
    
    
    61,634
    
    
    
    61,483
    
    
    
    59,503Without deductibles
    
    
    317,180
    
    
    
    276,603
    
    
    
    270,434Number of loans in default
    
    
    12,367
    
    
    
    8,566
    
    
    
    7,588With deductibles
    
    
    3,104
    
    
    
    1,898
    
    
    
    1,579Without deductibles
    
    
    9,263
    
    
    
    6,668
    
    
    
    6,009Percentage of loans in default (default rate)
    
    
    3.26
    %
    
    
    2.53
    %
    
    
    2.30
    %Percentage of loans in default excluding deductibles
    
    
    2.92
    %
    
    
    2.41
    %
    
    
    2.22
    %Primary insurance:Number of insured loans in force
    
    
    269,681
    
    
    
    225,531
    
    
    
    219,287Number of loans in default
    
    
    7,541
    
    
    
    5,565
    
    
    
    4,972Percentage of loans in default
    
    
    2.80
    %
    
    
    2.47
    %
    
    
    2.27
    %Modified Pool insurance:Number of insured loans in force
    
    
    109,133
    
    
    
    112,555
    
    
    
    110,650With deductibles
    
    
    61,611
    
    
    
    61,456
    
    
    
    59,472Without deductibles
    
    
    47,522
    
    
    
    51,099
    
    
    
    51,178Number of loans in default
    
    
    4,826
    
    
    
    3,001
    
    
    
    2,387With deductibles
    
    
    3,104
    
    
    
    1,897
    
    
    
    1,578Without deductibles
    
    
    1,722
    
    
    
    1,104
    
    
    
    809Percentage of loans in default
    
    
    4.42
    %
    
    
    2.67
    %
    
    
    2.16
    %Percentage of loans in default excluding deductibles
    
    
    3.62
    %
    
    
    2.16
    %
    
    
    1.58
    %Primary Alt-A business (included in above):Number of insured loans in force
    
    
    36,867
    
    
    
    22,385
    
    
    
    20,186Number of loans in default
    
    
    1,857
    
    
    
    814
    
    
    
    674Percentage of loans in default
    
    
    5.04
    %
    
    
    3.64
    %
    
    
    3.34
    %
  25




---



##### Table of Contents



26




---



##### Table of Contents



Significant Customers
    Financial Position
  Deferred Policy Acquisition Costs
  27




---



##### Table of Contents



Prepaid Federal Income Taxes and Deferred Income Taxes
   28




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
   September 30, 2007
    
    
    December 31, 2006(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    11,562
    
    
    
    1.5
    %
    
    $
    11,842
    
    
    
    2.0
    %State and municipal bonds
    
    
    646,784
    
    
    
    81.4
    %
    
    
    558,131
    
    
    
    91.9
    %Corporate bonds
    
    
    53,572
    
    
    
    6.7
    %
    
    
    16,572
    
    
    
    2.7
    %Mortgage-backed bonds
    
    
    
    
    
    
    0.0
    %
    
    
    49
    
    
    
    0.0
    %Total fixed maturities
    
    
    711,918
    
    
    
    89.6
    %
    
    
    586,594
    
    
    
    96.6
    %Equity securities
    
    
    3,483
    
    
    
    0.4
    %
    
    
    10,417
    
    
    
    1.7
    %Total available-for-sale securities
    
    
    715,401
    
    
    
    90.0
    %
    
    
    597,011
    
    
    
    98.3
    %Other investments
    
    
    
    
    
    
    0.0
    %
    
    
    5,000
    
    
    
    0.8
    %Short-term investments
    
    
    78,972
    
    
    
    10.0
    %
    
    
    5,301
    
    
    
    0.9
    %$
    794,373
    
    
    
    100.0
    %
    
    $
    607,312
    
    
    
    100.0
    %
  29




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September 30, 2007Carrying
    
    % of Total Invested(dollars in thousands)
    
    Value
    
    AssetsName of Creditor / IssuerCity of Atlanta, Georgia Airport
    
    $
    6,650
    
    
    
    0.84
    %Commonwealth of Massachusetts
    
    
    6,480
    
    
    
    0.82
    %State of Connecticut
    
    
    6,414
    
    
    
    0.81
    %Commonwealth of Pennsylvania
    
    
    6,051
    
    
    
    0.76
    %Clark County School District
    
    
    5,437
    
    
    
    0.68
    %State of Hawaii
    
    
    5,343
    
    
    
    0.67
    %Indiana State Finance Authority
    
    
    5,218
    
    
    
    0.66
    %Utah Transit Authority
    
    
    5,063
    
    
    
    0.64
    %Port of Seattle
    
    
    4,481
    
    
    
    0.56
    %Chicago Board of Education
    
    
    4,361
    
    
    
    0.55
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Average investments at cost or amortized cost
    
    $
    729,519
    
    
    $
    587,320
    
    
    $
    688,776
    
    
    $
    563,950Pre-tax net investment income
    
    $
    8,370
    
    
    $
    6,761
    
    
    $
    23,392
    
    
    $
    19,518Pre-tax yield
    
    
    4.6
    %
    
    
    4.6
    %
    
    
    4.5
    %
    
    
    4.6
    %Pre-tax realized investment (losses) gains
    
    $
    85
    
    
    $
    (36
    )
    
    $
    (3,020
    )
    
    $
    1,636
  30




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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
    
    $
    11,636
    
    
    $
    51
    
    
    $
    (125
    )
    
    $
    11,562State and municipal bonds
    
    
    636,763
    
    
    
    12,346
    
    
    
    (2,325
    )
    
    
    646,784Corporate bonds
    
    
    52,865
    
    
    
    749
    
    
    
    (42
    )
    
    
    53,572Mortgage-backed bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal, fixed maturities
    
    
    701,264
    
    
    
    13,146
    
    
    
    (2,492
    )
    
    
    711,918Equity securities
    
    
    3,494
    
    
    
    58
    
    
    
    (69
    )
    
    
    3,483Short term investments
    
    
    78,972
    
    
    
    
    
    
    
    
    
    
    
    78,972Total securities
    
    $
    783,730
    
    
    $
    13,204
    
    
    $
    (2,561
    )
    
    $
    794,373
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Credit Risk
  September 30, 2007
    
    
    December 31, 2006(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    11,562
    
    
    
    1.6
    %
    
    $
    11,842
    
    
    
    2.0
    %AAA
    
    
    562,602
    
    
    
    79.0
    
    
    
    464,042
    
    
    
    79.1AA
    
    
    92,296
    
    
    
    13.0
    
    
    
    72,051
    
    
    
    12.3A
    
    
    33,522
    
    
    
    4.7
    
    
    
    25,054
    
    
    
    4.3BBB
    
    
    8,252
    
    
    
    1.2
    
    
    
    10,782
    
    
    
    1.9BB
    
    
    588
    
    
    
    0.1
    
    
    
    50
    
    
    
    0.0CC and lower
    
    
    17
    
    
    
    0.0
    
    
    
    279
    
    
    
    0.0Not rated
    
    
    3,079
    
    
    
    0.4
    
    
    
    2,494
    
    
    
    0.4Total fixed maturities
    
    $
    711,918
    
    
    
    100.0
    %
    
    $
    586,594
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,885
    
    
    
    54.1
    %
    
    $
    1,708
    
    
    
    16.4
    %A
    
    
    1,100
    
    
    
    31.6
    
    
    
    2,035
    
    
    
    19.5BBB
    
    
    498
    
    
    
    14.3
    
    
    
    1,132
    
    
    
    10.93,483
    
    
    
    100.0
    
    
    
    4,875
    
    
    
    46.8Common stocks
    
    
    
    
    
    
    
    
    
    
    5,542
    
    
    
    53.2Total equities
    
    $
    3,483
    
    
    
    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; and§
    
    Deterioration of the overall financial condition of the specific issuer.
   32




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Liquidity and Capital Resources
       33




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##### Table of Contents



September 30,
    
    
    December 31,
    
    
    September 30,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2006Statutory policyholders surplus
    
    $
    33.9
    
    
    $
    168.5
    
    
    $
    157.9Statutory contingency reserve
    
    
    626.2
    
    
    
    521.8
    
    
    
    516.0Total
    
    $
    660.1
    
    
    $
    690.3
    
    
    $
    673.9
     34




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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;§
    
    ongoing credit problems in the mortgage marketplace may continue and cause an
increased number of defaults and paid claims;§
    
    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 further revise or withdraw the assigned ratings at any time;
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##### Table of Contents



§
    
    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;§
    
    our risk-to-capital ratio may continue to grow at the rate experienced during the
third quarter of 2007, which could cause us to face regulatory action, rating agency
action or both;§
    
    further 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; and§
    
    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.
  
 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 the
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 to enable us to
record, process, summarize and report in a timely manner the information that we are
required to disclose in our Act reports. In designing and evaluating disclosure controls
and procedures, we
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##### Table of Contents



recognize 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 control over financial reporting during the
third quarter of 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  If the pace of declining home prices and ongoing credit problems in the mortgage marketplace
continues or remains unsettled, we anticipate an increased number of defaults and paid claims,
which would have a negative impact on our earnings.
  37




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If our risk-to-capital ratio continues to grow at the rate experienced during the second and third
quarters of
2007, we could face regulatory action, rating agency action or both, which could impact our ability
to write new business.
  If further rating agency actions result in our inability to qualify as a Tier 1 insurer under
existing and proposed Fannie Mae and Freddie Mac guidelines, our ability to write a meaningful
amount of new business could be limited.
  
 Item 6. Exhibits 
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##### Table of Contents



SIGNATURE
  TRIAD GUARANTY INC.Date: November 9, 2007/s/ Kenneth W. Jones

Kenneth W. JonesSenior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 39




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    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.
 40