##### 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 March 31, 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 March 31, 2007
(Unaudited) and December 31, 2006
    
    
    1Consolidated Statements of Income for the Three Months
Ended March 31, 2007 and 2006 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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
    
    
    40Part 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
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40Signature
    
    
    41Exhibit 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
 (Unaudited)March 31
    
    
    December 312007
    
    
    2006(In thousands, except share data)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $594,228 and $568,992)
    
    $
    608,945
    
    
    $
    586,594Equity securities (cost: $9,012 and $9,530)
    
    
    9,921
    
    
    
    10,417Other investments
    
    
    5,000
    
    
    
    5,000Short-term investments
    
    
    45,294
    
    
    
    5,301669,160
    
    
    
    607,312Cash and cash equivalents
    
    
    10,429
    
    
    
    38,609Real estate acquired in claim settlement
    
    
    9,764
    
    
    
    10,170Accrued investment income
    
    
    7,875
    
    
    
    8,054Deferred policy acquisition costs
    
    
    35,035
    
    
    
    35,143Prepaid federal income taxes
    
    
    166,693
    
    
    
    166,908Property and equipment
    
    
    8,690
    
    
    
    7,678Income taxes recoverable
    
    
    
    
    
    
    51Reinsurance recoverable
    
    
    211
    
    
    
    841Other assets
    
    
    23,658
    
    
    
    20,865Total assets
    
    $
    931,515
    
    
    $
    895,631LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    98,721
    
    
    $
    84,352Unearned premiums
    
    
    15,022
    
    
    
    13,193Amounts payable to reinsurers
    
    
    6,094
    
    
    
    5,909Deferred income taxes
    
    
    180,232
    
    
    
    176,483Long-term debt
    
    
    34,512
    
    
    
    34,510Accrued interest on debt
    
    
    584
    
    
    
    1,275Current taxes payable
    
    
    1,606
    
    
    
    Accrued expenses and other liabilities
    
    
    7,592
    
    
    
    9,685Total liabilities
    
    
    344,363
    
    
    
    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 14,908,523 shares
at March 31, 2007 and 14,856,401 shares at December 31, 2006
    
    
    150
    
    
    
    149Additional paid-in capital
    
    
    106,447
    
    
    
    104,981Accumulated other comprehensive income, net of income tax
liability of $5,469 at March 31, 2007 and $6,471 at
December 31, 2006
    
    
    10,157
    
    
    
    12,018Retained earnings
    
    
    470,398
    
    
    
    453,076Total stockholders equity
    
    
    587,152
    
    
    
    570,224Total liabilities and stockholders equity
    
    $
    931,515
    
    
    $
    895,631
  1




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##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
  Three Months EndedMarch 312007
    
    
    2006(In thousands, except share data)Revenue:Premiums written:Direct
    
    $
    78,408
    
    
    $
    59,312Ceded
    
    
    (12,701
    )
    
    
    (10,970
    )Net premiums written
    
    
    65,707
    
    
    
    48,342Change in unearned premiums
    
    
    (1,758
    )
    
    
    (452
    )Earned premiums
    
    
    63,949
    
    
    
    47,890Net investment income
    
    
    7,349
    
    
    
    6,222Net realized investment gains
    
    
    761
    
    
    
    900Other income (losses)
    
    
    2
    
    
    
    (2
    )72,061
    
    
    
    55,010Losses and expenses:Net losses and loss adjustment expenses
    
    
    32,581
    
    
    
    16,351Interest expense on debt
    
    
    694
    
    
    
    693Amortization of deferred policy acquisition costs
    
    
    4,624
    
    
    
    3,862Other operating expenses (net of acquisition costs deferred)
    
    
    10,330
    
    
    
    8,51348,229
    
    
    
    29,419Income before income taxes
    
    
    23,832
    
    
    
    25,591Income taxes:Current
    
    
    1,759
    
    
    
    972Deferred
    
    
    4,751
    
    
    
    6,0666,510
    
    
    
    7,038Net income
    
    $
    17,322
    
    
    $
    18,553Earnings per common and common equivalent share:Basic
    
    $
    1.17
    
    
    $
    1.26Diluted
    
    $
    1.16
    
    
    $
    1.25Shares used in computing earnings per common and common
equivalent share:Basic
    
    
    14,818,900
    
    
    
    14,758,349Diluted
    
    
    14,946,166
    
    
    
    14,862,471
 .
 2




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##### Table of Contents



TRIAD GUARANTY INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months EndedMarch 312007
    
    
    2006(In thousands)Operating activitiesNet income
    
    $
    17,322
    
    
    $
    18,553Adjustments to reconcile net income to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    16,198
    
    
    
    1,990Accrued expenses and other liabilities
    
    
    (2,093
    )
    
    
    (2,865
    )Current taxes payable
    
    
    1,606
    
    
    
    563Income taxes recoverable
    
    
    51
    
    
    
    181Amounts due to/from reinsurer
    
    
    815
    
    
    
    416Accrued investment income
    
    
    179
    
    
    
    225Policy acquisition costs deferred
    
    
    (4,515
    )
    
    
    (4,082
    )Amortization of deferred policy acquisition costs
    
    
    4,623
    
    
    
    3,862Net realized investment gains
    
    
    (761
    )
    
    
    (900
    )Provision for depreciation
    
    
    532
    
    
    
    615Accretion of discount on investments
    
    
    129
    
    
    
    (35
    )Deferred income taxes
    
    
    4,751
    
    
    
    6,066Prepaid federal income taxes
    
    
    215
    
    
    
    Real estate acquired in claim settlement, net of write-downs
    
    
    406
    
    
    
    (4,477
    )Accrued interest on debt
    
    
    (691
    )
    
    
    (691
    )Other assets
    
    
    (2,793
    )
    
    
    (1,122
    )Other operating activities
    
    
    681
    
    
    
    709Net cash provided by operating activities
    
    
    36,655
    
    
    
    19,008Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (62,304
    )
    
    
    (22,616
    )Sales  fixed maturities
    
    
    35,296
    
    
    
    8,000Maturities  fixed maturities
    
    
    2,287
    
    
    
    2,160Purchases  equities
    
    
    (38
    )
    
    
    (4,622
    )Sales  equities
    
    
    672
    
    
    
    2,946Net change in short-term investments
    
    
    (39,993
    )
    
    
    (257
    )Purchases of property and equipment
    
    
    (1,544
    )
    
    
    (401
    )Net cash used in investing activities
    
    
    (65,624
    )
    
    
    (14,790
    )Financing activitiesExcess tax benefits from share-based compensation
    
    
    173
    
    
    
    270Proceeds from exercise of stock options
    
    
    616
    
    
    
    321Net cash provided by financing activities
    
    
    789
    
    
    
    591Net change in cash and cash equivalents
    
    
    (28,180
    )
    
    
    4,809Cash and cash equivalents at beginning of period
    
    
    38,609
    
    
    
    8,934Cash and cash equivalents at end of period
    
    $
    10,429
    
    
    $
    13,743Supplemental schedule of cash flow informationCash paid during the period for:Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
    
    $
    
    
    
    $
    Interest
    
    
    1,383
    
    
    
    1,383
  3




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##### Table of Contents



TRIAD GUARANTY INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2007
  1. The Company
  2. Accounting Policies And Basis Of Presentation
 Basis of Presentation
  Recent Accounting Pronouncements
  4




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##### Table of Contents



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




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##### Table of Contents



Insurance In Force, Dividend Restrictions, and Statutory Results
  March 31, 2007
    
    
    December 31, 2006Net risk
    
    $
    9,757,134
    
    
    $
    8,612,912Statutory capital and surplus
    
    $
    152,396
    
    
    $
    168,439Statutory contingency reserve
    
    
    554,462
    
    
    
    521,836Total
    
    $
    706,858
    
    
    $
    690,275Risk-to-capital ratio
    
    13.8 to 1
    
    
    
    12.5 to 1
    6




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##### Table of Contents



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




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##### Table of Contents



7. Income Taxes
  8. Long-Term Stock Incentive Plan
   Weighted-Weighted-
    
    
    Aggregate
    
    
    AverageNumber
    
    
    Average
    
    
    Intrinsic
    
    
    Remainingof Shares
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual Term(in thousands)Outstanding, January 1, 2007
    
    
    564,712
    
    
    $
    38.36Granted
    
    
    77,190
    
    
    
    43.35Exercised
    
    
    22,937
    
    
    
    26.87Cancelled
    
    
    
    
    
    
    Outstanding, March 31, 2007
    
    
    618,965
    
    
    
    39.41
    
    
    $
    2,355
    
    
    5.1 yearsExercisable, March 31, 2007
    
    
    410,998
    
    
    
    37.79
    
    
    $
    2,323
    
    
    3.2 years
  8




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##### Table of Contents



2007
    
    2006Expected volatility
    
    
    31.6
    %
    
    
    34.2
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected term
    
    5.0 years
    
    5.0 yearsRisk-free rate
    
    
    4.4
    %
    
    
    4.5
    %
   Weighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueNonvested, January 1, 2007
    
    
    113,941
    
    
    $
    46.41Granted
    
    
    34,351
    
    
    
    44.79Vested
    
    
    29,531
    
    
    
    49.37Cancelled
    
    
    5,166
    
    
    
    45.36Nonvested, March 31, 2007
    
    
    113,595
    
    
    
    45.20
    9




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##### Table of Contents



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




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##### Table of Contents



Overview
      11




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##### Table of Contents



Consolidated Results of Operations
  %Change20072007
    
    2006
    
    vs. 2006(In thousands, except percentages and per share information)Earned premiums
    
    $
    63,949
    
    
    $
    47,890
    
    
    
    33.5
    %Net losses and loss adjustment expenses
    
    
    32,581
    
    
    
    16,351
    
    
    
    99.3Net income
    
    
    17,322
    
    
    
    18,553
    
    
    
    (6.6
    )Diluted earnings per share
    
    $
    1.16
    
    
    $
    1.25
    
    
    
    (7.2
    )
     12




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##### Table of Contents



Production and In Force
  % Change2007
    
    
    2006
    
    
    2007 vs. 2006(In millions, except percentages)Primary insurance written:Flow
    
    $
    4,372
    
    
    $
    1,947
    
    
    
    124.5
    %Structured bulk
    
    
    1,327
    
    
    
    1
    
    
    
    1,326.0Total Primary insurance written
    
    $
    5,699
    
    
    $
    1,948
    
    
    
    192.6Modified pool insurance written
    
    
    1,925
    
    
    
    4,606
    
    
    
    (58.2
    )Total insurance written
    
    $
    7,624
    
    
    $
    6,554
    
    
    
    16.3
    %
    13




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##### Table of Contents



Market Share by ChannelThree months ended March 31,2007
    
    2006Flow channel
    
    
    9.0
    %
    
    
    5.3
    %Structured bulk channel
    
    
    13.0
    %
    
    
    16.7
    %Total
    
    
    10.3
    %
    
    
    10.1
    %
   Credit Quality of Primary NIWThree months Ended March 31,2007
    
    
    2006Prime
    
    
    78.1
    %
    
    
    74.9
    %Alt-A
    
    
    14.2
    
    
    
    22.8A Minus
    
    
    6.1
    
    
    
    2.0Sub Prime
    
    
    1.6
    
    
    
    0.3Total
    
    
    100.0
    %
    
    
    100.0
    %
 14




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##### Table of Contents



Loan Type of Primary NIWThree months Ended March 31,2007
    
    2006Fixed
    
    
    56.5
    %
    
    
    67.6
    %ARM (positive amortization)
    
    
    8.2
    
    
    
    16.1ARM (potential negative
amortization)
    
    
    35.3
    
    
    
    16.3Total
    
    
    100.0
    %
    
    
    100.0
    %
   Loan to Value of Primary NIWThree months Ended March 31,2007
    
    2006LTV ratio:Greater than 95%
    
    
    26.2
    %
    
    
    10.1
    %90.01% to 95.00%
    
    
    23.8
    
    
    
    25.090.00% and below
    
    
    50.0
    
    
    
    64.9Total
    
    
    100.0
    %
    
    
    100.0
    %
 15




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##### Table of Contents



%Change2007 vs.2007
    
    
    2006
    
    
    2006(In millions, except percentages)Primary insurance
    
    $
    37,982
    
    
    $
    29,891
    
    
    
    27.1
    %Modified Pool insurance
    
    
    23,507
    
    
    
    18,309
    
    
    
    28.4Total insurance
    
    $
    61,489
    
    
    $
    48,200
    
    
    
    27.6
    %
  16




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##### Table of Contents



2007
    
    2006Primary insurance in force
    
    
    19.1
    %
    
    
    10.4
    %Modified Pool insurance in force
    
    
    71.1
    %
    
    
    68.4
    %Total insurance in force
    
    
    39.0
    %
    
    
    32.0
    %
  
    
    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 $200,000
 Risk in Force (1)
 Primary
    
    Modified PoolMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Direct Risk in Force
    
    $
    9,781
    
    
    $
    7,512
    
    
    $
    769
    
    
    $
    668Net Risk in Force
    
    $
    8,937
    
    
    $
    6,779
    
    
    $
    933
    
    
    $
    751Credit quality:Prime
    
    
    76.3
    %
    
    
    83.9
    %
    
    
    29.9
    %
    
    
    32.4
    %Alt-A
    
    
    20.0
    
    
    
    11.2
    
    
    
    69.2
    
    
    
    66.4A Minus
    
    
    3.2
    
    
    
    4.1
    
    
    
    0.8
    
    
    
    1.0Sub Prime
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 17




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##### Table of Contents



(Continued)
 Primary
    
    Modified PoolMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006LTV:95.01% and above
    
    
    19.4
    %
    
    
    14.4
    %
    
    
    0.0
    %
    
    
    0.0
    %90.01% to 95.00%
    
    
    74.4
    
    
    
    79.7
    
    
    
    1.0
    
    
    
    1.390.00% and below
    
    
    6.2
    
    
    
    5.9
    
    
    
    99.0
    
    
    
    98.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    66.2
    %
    
    
    73.8
    %
    
    
    28.2
    %
    
    
    32.5
    %ARM (positive amortization)
    
    
    19.9
    
    
    
    21.3
    
    
    
    59.4
    
    
    
    65.8ARM (potential negative amortization)
    
    
    13.9
    
    
    
    4.9
    
    
    
    12.4
    
    
    
    1.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Term:15 years and under
    
    
    2.2
    %
    
    
    3.9
    %
    
    
    2.0
    %
    
    
    2.9
    %Over 15 years
    
    
    97.8
    
    
    
    96.1
    
    
    
    98.0
    
    
    
    97.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    10.1
    %
    
    
    8.3
    %
    
    
    8.9
    %
    
    
    6.7
    %Other (principally single-family
detached)
    
    
    89.9
    
    
    
    91.7
    
    
    
    91.1
    
    
    
    93.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    88.1
    %
    
    
    91.3
    %
    
    
    73.8
    %
    
    
    74.2
    %Secondary home
    
    
    7.7
    
    
    
    5.3
    
    
    
    6.1
    
    
    
    5.9Non-owner occupied
    
    
    4.2
    
    
    
    3.4
    
    
    
    20.1
    
    
    
    19.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$200,000 or less
    
    
    53.9
    %
    
    
    66.7
    %
    
    
    37.1
    %
    
    
    42.9
    %Over $200,000
    
    
    46.1
    
    
    
    33.3
    
    
    
    62.9
    
    
    
    57.1Total
    
    
    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




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##### Table of Contents



Primary
    
    
    Modified Pool *March 31, 2007
    
    
    March 31, 2007Direct Risk
    
    
    
    
    
    
    Direct Risk inCertificate Year
    
    in Force
    
    
    Percent
    
    
    Force
    
    
    Percent2001 and before
    
    $
    352.1
    
    
    
    3.6
    %
    
    $
    21.5
    
    
    
    2.8
    %2002
    
    
    449.9
    
    
    
    4.6
    
    
    
    26.1
    
    
    
    3.42003
    
    
    1,398.7
    
    
    
    14.3
    
    
    
    113.0
    
    
    
    14.72004
    
    
    1,359.5
    
    
    
    13.9
    
    
    
    123.0
    
    
    
    16.02005
    
    
    1,917.0
    
    
    
    19.6
    
    
    
    224.5
    
    
    
    29.22006
    
    
    2,983.2
    
    
    
    30.5
    
    
    
    229.9
    
    
    
    29.92007
    
    
    1,320.4
    
    
    
    13.5
    
    
    
    30.8
    
    
    
    4.0Total
    
    $
    9,780.8
    
    
    
    100.0
    %
    
    $
    768.8
    
    
    
    100.0
    %
 
 *
    
    For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss limits and
deductibles within each specific structure.  Percentage Subject toCaptive Arrangements2007
    
    2006Primary flow insurance in force
    
    
    53.9
    %
    
    
    59.9
    %Total insurance in force
    
    
    33.3
    %
    
    
    36.7
    %
  19




---



##### Table of Contents



Revenues
  % Change2007
    
    
    2006
    
    
    2007 vs. 2006(In thousands, except percentages)Direct premium written
    
    $
    78,408
    
    
    $
    59,312
    
    
    
    32.2
    %Ceded premium written
    
    
    (12,701
    )
    
    
    (10,970
    )
    
    
    15.8Net premium written
    
    
    65,707
    
    
    
    48,342
    
    
    
    35.9Change in unearned premiums
    
    
    (1,758
    )
    
    
    (452
    )
    
    
    288.9Earned premiums
    
    $
    63,949
    
    
    $
    47,890
    
    
    
    33.5Net investment income
    
    $
    7,349
    
    
    $
    6,222
    
    
    
    18.1Total revenues
    
    $
    72,061
    
    
    $
    55,010
    
    
    
    31.0
   20




---



##### Table of Contents



2007
    
    2006Premium cede rate (ceded premiums written as a percentage
of direct premiums written)
    
    
    16.2
    %
    
    
    18.5
    %Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written)
    
    
    15.5
    %
    
    
    17.3
    %Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements)
    
    
    36.3
    %
    
    
    37.2
    %
  Percentage Subjectto CaptiveArrangements2007
    
    2006Primary insurance written
    
    
    28.1
    %
    
    
    55.1
    %Total insurance written
    
    
    16.1
    %
    
    
    16.4
    %
    21




---



##### Table of Contents



Losses and Expenses
  %Change2007 vs.2007
    
    2006
    
    2006(In thousands, except percentages)Net losses and loss adjustment expenses
    
    $
    32,581
    
    
    $
    16,351
    
    
    
    99.3
    %Amortization of deferred policy acquisition costs
    
    
    4,624
    
    
    
    3,862
    
    
    
    19.7Other operating expenses (net of acquisition
costs deferred)
    
    
    10,330
    
    
    
    8,513
    
    
    
    21.3Loss ratio
    
    
    50.9
    %
    
    
    34.1
    %Expense ratio
    
    
    22.8
    %
    
    
    25.6
    %Combined ratio
    
    
    73.7
    %
    
    
    59.7
    %
   %Change2007 vs.2007
    
    
    2006
    
    
    2006(In thousands, except percentages)Paid claims:Primary insurance
    
    $
    16,447
    
    
    $
    13,305
    
    
    
    23.6
    %Modified Pool insurance
    
    
    1,281
    
    
    
    1,078
    
    
    
    18.8Total
    
    $
    17,728
    
    
    $
    14,383
    
    
    
    23.3
    %Number of claims paid:Primary insurance
    
    
    526
    
    
    
    506
    
    
    
    4.0
    %Modified Pool insurance
    
    
    54
    
    
    
    67
    
    
    
    (19.4
    )Total
    
    
    580
    
    
    
    573
    
    
    
    1.2
    %
 22




---



##### Table of Contents



Three Months EndedMarch 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,2007
    
    2006
    
    2006
    
    2006
    
    2006(In thousands)Average severity:Primary insurance
    
    $
    31.3
    
    
    $
    28.1
    
    
    $
    25.7
    
    
    $
    25.8
    
    
    $
    26.3Modified Pool insurance
    
    
    23.7
    
    
    
    26.2
    
    
    
    18.8
    
    
    
    19.4
    
    
    
    16.1Total
    
    
    30.6
    
    
    
    27.9
    
    
    
    25.3
    
    
    
    25.3
    
    
    
    25.1
   23




---



##### Table of Contents



Average Loan Size of In force  PrimaryBook Year
    
    March 31, 2007
    
    December 31, 2006
    
    December 31, 20052000 and Prior
    
    $
    95,615
    
    
    $
    95,666
    
    
    $
    95,5362001
    
    
    103,148
    
    
    
    103,698
    
    
    
    106,5032002
    
    
    115,538
    
    
    
    116,191
    
    
    
    118,4582003
    
    
    122,422
    
    
    
    123,208
    
    
    
    127,6192004
    
    
    134,947
    
    
    
    136,148
    
    
    
    141,2932005
    
    
    158,787
    
    
    
    159,931
    
    
    
    163,7932006
    
    
    208,403
    
    
    
    206,723
    
    
    
    2007
    
    
    224,820
    
    
    
    
    
    
    
    Overall Average
    
    $
    158,702
    
    
    $
    151,239
    
    
    $
    136,873
 Average Loan Size of In force  Modified PoolBook Year
    
    March 31, 2007
    
    December 31, 2006
    
    December 31, 20052000 and Prior
    
    $
    
    
    
    $
    
    
    
    $
    2001
    
    
    72,442
    
    
    
    73,641
    
    
    
    76,1382002
    
    
    93,265
    
    
    
    94,513
    
    
    
    97,5402003
    
    
    148,565
    
    
    
    148,820
    
    
    
    154,7752004
    
    
    153,736
    
    
    
    155,140
    
    
    
    161,0652005
    
    
    179,953
    
    
    
    180,979
    
    
    
    184,8822006
    
    
    259,913
    
    
    
    260,067
    
    
    
    2007
    
    
    256,881
    
    
    
    
    
    
    
    Overall Average
    
    $
    204,927
    
    
    $
    201,852
    
    
    $
    171,747
  24




---



##### Table of Contents



%Change2007 vs.2007
    
    
    2006
    
    
    2006(In thousands, except percentages)Primary insurance:Reserves for reported defaults
    
    $
    75,395
    
    
    $
    44,399
    
    
    
    69.8
    %Reserves for defaults incurred but not reported
    
    
    6,521
    
    
    
    3,686
    
    
    
    76.9Total Primary insurance
    
    
    81,916
    
    
    
    48,085
    
    
    
    70.4Modified Pool insurance:Reserves for reported defaults
    
    
    14,898
    
    
    
    3,960
    
    
    
    276.2Reserves for defaults incurred but not reported
    
    
    753
    
    
    
    465
    
    
    
    61.9Total Modified Pool insurance
    
    
    15,651
    
    
    
    4,425
    
    
    
    253.7Reserve for loss adjustment expenses
    
    
    1,154
    
    
    
    104
    
    
    
    1,009.6Total reserves for losses and loss adjustment
expenses
    
    $
    98,721
    
    
    $
    52,614
    
    
    
    87.6Net increase in reserve for losses and loss
adjustment expenses
    
    $
    14,369
    
    
    $
    1,540
    
    
    
    833.1
   25




---



##### Table of Contents



March 31,
    
    December 31,
    
    March 31,2007
    
    2006
    
    2006Risk on loans in default excluding loans
subject to deductibles (in thousands of
dollars)
    
    $
    292,434
    
    
    $
    265,415
    
    
    $
    204,934Reserves as a percentage of risk at default
    
    
    33.8
    %
    
    
    31.8
    %
    
    
    25.7
    %
     26




---



##### Table of Contents



2007
    
    2006Total business:Number of insured loans in force
    
    
    354,037
    
    
    
    317,670Number of loans in default
    
    
    8,998
    
    
    
    7,357With deductibles
    
    
    2,176
    
    
    
    1,384Without deductibles
    
    
    6,822
    
    
    
    5,973Percentage of loans in default (default rate)
    
    
    2.54
    %
    
    
    2.32
    %Percentage of loans in default excluding
deductibles
    
    
    1.93
    %
    
    
    1.88
    %Primary insurance:Number of insured loans in force
    
    
    239,326
    
    
    
    215,736Number of loans in default
    
    
    5,632
    
    
    
    5,302Percentage of loans in default
    
    
    2.35
    %
    
    
    2.46
    %Modified Pool insurance:Number of insured loans in force
    
    
    114,711
    
    
    
    101,934Number of loans in default
    
    
    3,366
    
    
    
    2,055With deductibles
    
    
    2,176
    
    
    
    1,383Without deductibles
    
    
    1,190
    
    
    
    672Percentage of loans in default
    
    
    2.93
    %
    
    
    2.51
    %Percentage of loans in default excluding
deductibles
    
    
    1.04
    %
    
    
    0.88
    %Primary Alt-A business:Number of insured loans in force
    
    
    28,774
    
    
    
    16,838Number of loans in default
    
    
    919
    
    
    
    634Percentage of loans in default
    
    
    3.19
    %
    
    
    3.77
    %
   27




---



##### Table of Contents



Significant Customers
  28




---



##### Table of Contents



Financial Position
  Deferred Policy Acquisition Costs
  29




---



##### Table of Contents



2007
    
    
    2006(In thousands, except percentages)Balance  beginning of quarter
    
    $
    35,143
    
    
    $
    33,684Costs capitalized
    
    
    4,516
    
    
    
    4,082Amortization  normal
    
    
    (4,496
    )
    
    
    (3,849
    )Amortization  dynamic adjustment
    
    
    (128
    )
    
    
    (13
    )Total amortization
    
    
    (4,624
    )
    
    
    (3,862
    )Balance  end of quarter
    
    $
    35,035
    
    
    $
    33,904Annual Persistency
    
    
    77.5
    %
    
    
    70.2
    %
  Prepaid Federal Income Taxes and Deferred Income Taxes
   30




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
   March 31, 2007
    
    
    December 31, 2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed maturity securities:U. S. government obligations
    
    $
    11,933
    
    
    
    1.8
    %
    
    $
    11,842
    
    
    
    2.0
    %State and municipal bonds
    
    
    581,281
    
    
    
    86.9
    
    
    
    558,131
    
    
    
    91.9Corporate bonds
    
    
    15,731
    
    
    
    2.3
    
    
    
    16,572
    
    
    
    2.7Mortgage-backed bonds
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    Total fixed maturities
    
    
    608,945
    
    
    
    91.0
    
    
    
    586,594
    
    
    
    96.6Equity securities
    
    
    9,921
    
    
    
    1.5
    
    
    
    10,417
    
    
    
    1.7Total available-for-sale
securities
    
    
    618,866
    
    
    
    92.5
    
    
    
    597,011
    
    
    
    98.3Other investments
    
    
    5,000
    
    
    
    0.7
    
    
    
    5,000
    
    
    
    0.8Short-term investments
    
    
    45,294
    
    
    
    6.8
    
    
    
    5,301
    
    
    
    0.9$
    669,160
    
    
    
    100.0
    %
    
    $
    607,312
    
    
    
    100.0
    %
  31




---



##### Table of Contents



Carrying
    
    % of TotalName of Creditor
    
    Value
    
    Invested Assets(In thousands, except percentages)City of Atlanta, Georgia Airport
    
    $
    6,677
    
    
    
    0.89
    %State of Connecticut
    
    
    6,430
    
    
    
    0.85
    %Commonwealth of Pennsylvania
    
    
    6,085
    
    
    
    0.81
    %Clark County School District
    
    
    5,455
    
    
    
    0.72
    %State of Hawaii
    
    
    5,361
    
    
    
    0.71
    %Indiana State Finance Authority
    
    
    5,232
    
    
    
    0.69
    %Utah Transit Authority
    
    
    5,069
    
    
    
    0.67
    %Port of Seattle, Washington
    
    
    4,498
    
    
    
    0.60
    %Chicago, Illinois Board of Education
    
    
    4,354
    
    
    
    0.58
    %Denver, Colorado Airport
    
    
    4,075
    
    
    
    0.54
    %
   2007
    
    2006(In thousands, except percentages)Average investments at cost
or amortized cost
    
    $
    596,031
    
    
    $
    537,631Pre-tax net investment income
    
    $
    7,349
    
    
    $
    6,222Pre-tax yield
    
    
    4.9
    %
    
    
    4.6
    %Tax-equivalent yield-to-maturity
    
    
    6.6
    %
    
    
    6.7
    %Pre-tax realized investment gains
    
    $
    761
    
    
    $
    900
  32




---



##### Table of Contents



Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturity securities:U. S. government obligations
    
    $
    12,125
    
    
    $
    4
    
    
    $
    (196
    )
    
    $
    11,933State and municipal bonds
    
    
    567,384
    
    
    
    14,774
    
    
    
    (877
    )
    
    
    581,281Corporate bonds
    
    
    14,719
    
    
    
    1,015
    
    
    
    (3
    )
    
    
    15,731Mortgage-backed bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal, fixed maturities
    
    
    594,228
    
    
    
    15,793
    
    
    
    (1,076
    )
    
    
    608,945Equity securities
    
    
    9,012
    
    
    
    998
    
    
    
    (89
    )
    
    
    9,921Total securities
    
    $
    603,240
    
    
    $
    16,791
    
    
    $
    (1,165
    )
    
    $
    618,866
  33




---



##### Table of Contents



Credit Risk
  March 31, 2007
    
    
    December 31, 2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(In thousands, except percentages)Fixed Maturities:U.S. treasury and agency bonds
    
    $
    11,933
    
    
    
    2.0
    %
    
    $
    11,842
    
    
    
    2.0
    %AAA
    
    
    486,998
    
    
    
    80.0
    
    
    
    464,042
    
    
    
    79.1AA
    
    
    73,810
    
    
    
    12.1
    
    
    
    72,051
    
    
    
    12.3A
    
    
    23,737
    
    
    
    3.9
    
    
    
    25,054
    
    
    
    4.3BBB
    
    
    9,703
    
    
    
    1.6
    
    
    
    10,782
    
    
    
    1.9BB
    
    
    50
    
    
    
    0.0
    
    
    
    50
    
    
    
    CC and lower
    
    
    96
    
    
    
    0.0
    
    
    
    279
    
    
    
    Not rated
    
    
    2,618
    
    
    
    0.4
    
    
    
    2,494
    
    
    
    0.4Total fixed maturities
    
    $
    608,945
    
    
    
    100.0
    %
    
    $
    586,594
    
    
    
    100.0
    %Equities:Preferred stocks:AA
    
    $
    1,235
    
    
    
    12.4
    %
    
    $
    1,708
    
    
    
    16.4
    %A
    
    
    2,015
    
    
    
    20.3
    
    
    
    2,035
    
    
    
    19.5BBB
    
    
    1,147
    
    
    
    11.6
    
    
    
    1,132
    
    
    
    10.94,397
    
    
    
    44.3
    
    
    
    4,875
    
    
    
    46.8Common stocks
    
    
    5,524
    
    
    
    55.7
    
    
    
    5,542
    
    
    
    53.2Total equities
    
    $
    9,921
    
    
    
    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
 34




---



##### Table of Contents



Realized Gains (Losses) and Impairments
   35




---



##### Table of Contents



Liquidity and Capital Resources
       36




---



##### Table of Contents



March 31, 2007
    
    
    December 31, 2006Statutory policyholders surplus
    
    $
    152.4
    
    
    $
    168.5Statutory contingency reserve
    
    
    554.5
    
    
    
    521.8Total
    
    $
    706.9
    
    
    $
    690.3
      37




---



##### 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;
 38




---



##### Table of Contents



§
    
    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;§
    
    changes in the eligibility guidelines of Fannie Mae or Freddie Mac could have an
adverse effect on the Company;§
    
    proposed regulation by the Department of Housing and Urban Development to exclude
packages of real estate settlement services, which may include any required mortgage
insurance premium paid at closing, from the anti-referral provisions of the Real
Estate Settlement Procedures Act could adversely affect our earnings;§
    
    our financial and competitive position could be affected by regulatory activity
requiring changes to mortgage industry business practices, such as captive
reinsurance.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  39




---



##### Table of Contents



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
first quarter of 2007 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
 Item 3. Defaults Upon Senior Securities 
 
 Item 4. Submission of Matters to a Vote of Security Holders 
 
 Item 5. Other Information 
 
 Item 6. Exhibits 
 40




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##### Table of Contents



SIGNATURE
  Date: May 9, 2007
    TRIAD GUARANTY INC./s/ Kenneth W. JonesKenneth W. JonesSenior Vice President and Chief Financial Officer 41




---



##### 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.
 42