##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



TRIAD GUARANTY INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of June 30, 2008
(Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2008 and 2007
(Unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2008 and 2007 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4.
    
    Controls and Procedures
    
    
    45Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    46Item 1A.
    
    Risk Factors
    
    
    46Item 5.
    
    Other Information
    
    
    47Item 6.
    
    Exhibits
    
    
    48Signature
    
    
    
    
    49Exhibit Index
    
    
    
    
    50Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(dollars in thousands, except per share data)
    
    2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSInvested assets:Securities available-for-sale, at fair value:Fixed maturities (amortized cost: $840,320 and $710,924)
    
    $
    843,951
    
    
    $
    725,631Equity securities (cost: $2,270 and $2,520)
    
    
    1,749
    
    
    
    2,162Short-term investments
    
    
    23,322
    
    
    
    56,746Total invested assets
    
    
    869,022
    
    
    
    784,539Cash and cash equivalents
    
    
    19,669
    
    
    
    124,811Real estate acquired in claim settlement
    
    
    6,202
    
    
    
    10,860Accrued investment income
    
    
    10,820
    
    
    
    10,246Deferred policy acquisition costs
    
    
    
    
    
    
    36,243Prepaid federal income taxes
    
    
    63,183
    
    
    
    116,008Property and equipment
    
    
    10,146
    
    
    
    11,421Reinsurance recoverable, net
    
    
    55,316
    
    
    
    5,815Other assets
    
    
    29,440
    
    
    
    32,910Total assets
    
    $
    1,063,798
    
    
    $
    1,132,853LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    817,262
    
    
    $
    359,939Unearned premiums
    
    
    18,360
    
    
    
    17,793Amounts payable to reinsurers
    
    
    
    
    
    
    6,525Deferred income taxes
    
    
    30,386
    
    
    
    123,297Revolving line of credit
    
    
    
    
    
    
    80,000Long-term debt
    
    
    34,527
    
    
    
    34,519Accrued interest on debt
    
    
    1,275
    
    
    
    1,355Accrued expenses and other liabilities
    
    
    21,079
    
    
    
    10,574Total liabilities
    
    
    922,889
    
    
    
    634,002Commitments 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 15,116,259
shares at June 30,2008 and 14,920,243 shares at December
31, 2007
    
    
    151
    
    
    
    149Additional paid-in capital
    
    
    111,380
    
    
    
    109,679Accumulated other comprehensive income, net of income
tax liability of $1,392 at June 30, 2008 and $6,475 at
December 31, 2007
    
    
    2,585
    
    
    
    13,405Retained earnings
    
    
    26,793
    
    
    
    375,618Total stockholders equity
    
    
    140,909
    
    
    
    498,851Total liabilities and stockholders equity
    
    $
    1,063,798
    
    
    $
    1,132,853
  1




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##### Table of Contents



TRIAD GUARANTY INC.
CONSOLIDATED STATEMENT OF OPERATIONS  (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Premiums written:Direct
    
    $
    84,561
    
    
    $
    83,153
    
    
    $
    173,946
    
    
    $
    161,561Ceded
    
    
    (15,480
    )
    
    
    (12,988
    )
    
    
    (31,475
    )
    
    
    (25,689
    )Net premiums written
    
    
    69,081
    
    
    
    70,165
    
    
    
    142,471
    
    
    
    135,872Change in unearned premiums
    
    
    784
    
    
    
    (433
    )
    
    
    (542
    )
    
    
    (2,192
    )Earned premiums
    
    
    69,865
    
    
    
    69,732
    
    
    
    141,929
    
    
    
    133,680Net investment income
    
    
    9,175
    
    
    
    7,673
    
    
    
    18,722
    
    
    
    15,022Net realized investment losses
    
    
    (3,799
    )
    
    
    (3,867
    )
    
    
    (1,096
    )
    
    
    (3,105
    )Other income
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    475,243
    
    
    
    73,540
    
    
    
    159,559
    
    
    
    145,601Losses and expenses:Net losses and loss adjustment expenses
    
    
    292,749
    
    
    
    41,893
    
    
    
    514,008
    
    
    
    74,474Net change in premium deficiency reserve
    
    
    (15,000
    )
    
    
    
    
    
    
    
    
    
    
    Interest expense on debt
    
    
    696
    
    
    
    694
    
    
    
    2,172
    
    
    
    1,387Policy acquisition costs
    
    
    
    
    
    
    4,670
    
    
    
    39,416
    
    
    
    9,293Other operating expenses (net of acquisition
costs deferred)
    
    
    27,238
    
    
    
    10,716
    
    
    
    41,344
    
    
    
    21,047305,683
    
    
    
    57,973
    
    
    
    596,940
    
    
    
    106,201(Loss) income before income taxes (benefit)
    
    
    (230,440
    )
    
    
    15,567
    
    
    
    (437,381
    )
    
    
    39,400Income taxes (benefit):Current
    
    
    2
    
    
    
    1,766
    
    
    
    (2
    )
    
    
    3,525Deferred
    
    
    (31,631
    )
    
    
    1,775
    
    
    
    (88,554
    )
    
    
    6,526(31,629
    )
    
    
    3,541
    
    
    
    (88,556
    )
    
    
    10,051Net (loss) income
    
    $
    (198,811
    )
    
    $
    12,026
    
    
    $
    (348,825
    )
    
    $
    29,349(Loss) earnings per common and common
equivalent share:Basic
    
    $
    (13.36
    )
    
    $
    0.81
    
    
    $
    (23.45
    )
    
    $
    1.98Diluted
    
    $
    (13.36
    )
    
    $
    0.80
    
    
    $
    (23.45
    )
    
    $
    1.96Shares used in computing (loss) earnings per
common and common equivalent share:Basic
    
    
    14,878,662
    
    
    
    14,834,500
    
    
    
    14,873,636
    
    
    
    14,824,460Diluted
    
    
    14,878,662
    
    
    
    14,950,721
    
    
    
    14,873,636
    
    
    
    14,946,204
 .
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW  (unaudited)
 Six Months EndedJune 30,(dollars in thousands)
    
    2008
    
    
    2007Operating activitiesNet (loss) income
    
    $
    (348,825
    )
    
    $
    29,349Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Losses, loss adjustment expenses and unearned premium reserves
    
    
    457,890
    
    
    
    39,977Accrued expenses and other liabilities
    
    
    9,904
    
    
    
    (1,503
    )Reinsurance
    
    
    (56,026
    )
    
    
    1,202Accrued investment income
    
    
    (586
    )
    
    
    (918
    )Policy acquisition costs deferred
    
    
    (3,173
    )
    
    
    (9,307
    )Policy acquisition costs
    
    
    39,416
    
    
    
    9,293Net realized investment losses
    
    
    1,096
    
    
    
    3,105Provision for depreciation
    
    
    2,338
    
    
    
    996Accretion of discount on investments
    
    
    793
    
    
    
    317Deferred income taxes
    
    
    (88,554
    )
    
    
    6,526Prepaid federal income taxes
    
    
    52,825
    
    
    
    (3,168
    )Real estate acquired in claim settlement, net of write-downs
    
    
    4,658
    
    
    
    2,247Accrued interest on debt
    
    
    (80
    )
    
    
    Other assets
    
    
    4,104
    
    
    
    (6,235
    )Other operating activities
    
    
    2,433
    
    
    
    1,765Net cash provided by operating activities
    
    
    78,213
    
    
    
    73,646Investing activitiesSecurities available-for-sale:Purchases  fixed maturities
    
    
    (584,572
    )
    
    
    (128,370
    )Sales  fixed maturities
    
    
    430,107
    
    
    
    80,120Maturities  fixed maturities
    
    
    20,333
    
    
    
    3,391Purchases  equities
    
    
    
    
    
    
    (55
    )Sales  equities
    
    
    266
    
    
    
    7,086Net change in short-term investments
    
    
    31,655
    
    
    
    (47,083
    )Purchases of property and equipment
    
    
    (1,080
    )
    
    
    (3,404
    )Net cash used in investing activities
    
    
    (103,291
    )
    
    
    (88,315
    )Financing activitiesPayments on revolving credit facility
    
    
    (80,000
    )
    
    
    Excess tax benefits from share-based compensation
    
    
    
    
    
    
    175Proceeds from exercise of stock options
    
    
    
    
    
    
    616Net cash (used in) provided by financing activities
    
    
    (80,000
    )
    
    
    791Foreign currency translation adjustment on cash and cash equivalents
    
    
    (64
    )
    
    
    1,980Net change in cash and cash equivalents
    
    
    (105,142
    )
    
    
    (11,898
    )Cash and cash equivalents at beginning of period
    
    
    124,811
    
    
    
    38,609Cash and cash equivalents at end of period
    
    $
    19,669
    
    
    $
    26,711Supplemental schedule of cash flow informationCash (received) paid during the period for:Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds
    
    $
    (52,824
    )
    
    $
    9,091Interest
    
    $
    2,248
    
    
    $
    1,383
  3




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##### Table of Contents



TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
 1. The Company
   2. Accounting Policies and Basis of Presentation
 Basis of Presentation
  Recent Accounting Pronouncements
 Fair Value Measurements,
 4




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Fair Value Measurements at Reporting Date UsingQuotedPrices inActive
    
    
    SignificantSix Months
    
    
    Markets for
    
    
    Other
    
    
    SignificantEnded
    
    
    Identical
    
    
    Observable
    
    
    UnobservableJune 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(dollars in thousands)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsSecurities available-for-saleFixed maturities
    
    $
    843,951
    
    
    $
    
    
    
    $
    810,743
    
    
    $
    33,208Equity securities
    
    
    1,749
    
    
    
    1,749
    
    
    
    
    
    
    
    Real estate acquired in claim
settlement
    
    
    6,202
    
    
    
    
    
    
    
    6,202
    
    
    
    Total
    
    $
    851,902
    
    
    $
    1,749
    
    
    $
    816,945
    
    
    $
    33,208
  Fair Value MeasurementUsing SignificantUnobservable Inputs(Level 3)Certain Bonds in FixedMaturities AFS(dollars in thousands)
    
    PortfolioBeginning balance
    
    $
    7,402Total gains and losses (realized and unrealized):Included in operations
    
    
    (130
    )Included in other comprehensive income
    
    
    (343
    )Purchases, issuances and settlements
    
    
    25,382Transfers in and/or out of Level 3
    
    
    897Ending balance
    
    $
    33,208The amount of total gains and loss for the period included in
operations attributable to the change in unrealized gains
or
losses relating to assets still held at the reporting date.
    
    $
    (347
    )
  The Hierarchy of Generally Accepted Accounting
Principles
 5




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##### Table of Contents



The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
 Business Combinationsa replacement of FASB
Statement No. 141
 3. Consolidation
  4. Commitments and Contingencies
 Reinsurance
   6




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##### Table of Contents



Insurance In Force, Dividend Restrictions, and Statutory Results
  June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Net risk
    
    $
    11,721,202
    
    
    $
    11,967,179
    
    
    $
    11,057,092Statutory capital and surplus
    
    $
    192,096
    
    
    $
    197,713
    
    
    $
    102,942Statutory contingency reserve
    
    
    82,615
    
    
    
    387,365
    
    
    
    589,661Total
    
    $
    274,711
    
    
    $
    585,078
    
    
    $
    692,603Risk-to-capital ratio
    
    
    42.7 to 1
    
    
    
    20.5 to 1
    
    
    
    16.0 to 1
  7




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Loss Reserves
  8




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##### Table of Contents



Premium Deficiency
  Litigation
  5. Earnings (Loss) Per Share (EPS)
  9




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##### Table of Contents



6. Comprehensive Income (Loss)
  7. Income Taxes
  10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   11




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12




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Recent Developments
       13




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14




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Consolidated Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands, except per share data)
    
    2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % ChangeEarned premiums
    
    $
    69,865
    
    
    $
    69,732
    
    
    
    0
    %
    
    $
    141,929
    
    
    $
    133,680
    
    
    
    6
    %Net losses and loss adjustment expenses
    
    
    292,749
    
    
    
    41,893
    
    
    
    599
    
    
    
    514,008
    
    
    
    74,474
    
    
    
    590Net (loss) income
    
    
    (198,811
    )
    
    
    12,026
    
    
    
    (1,753
    )
    
    
    (348,825
    )
    
    
    29,349
    
    
    
    (1,289
    )Diluted (loss) earnings per share
    
    $
    (13.36
    )
    
    $
    0.80
    
    
    
    (1,761
    )
    
    $
    (23.45
    )
    
    $
    1.96
    
    
    
    (1,294
    )
   15




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##### Table of Contents



Production
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in millions)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangePrimary insurance written:Flow
    
    $
    1,148
    
    
    $
    5,089
    
    
    
    (77
    )%
    
    $
    3,061
    
    
    $
    9,461
    
    
    
    (68
    )%Structured bulk
    
    
    
    
    
    
    1,702
    
    
    
    (100
    )
    
    
    
    
    
    
    3,029
    
    
    
    (100
    )Total Primary insurance
written
    
    $
    1,148
    
    
    $
    6,791
    
    
    
    (83
    )
    
    $
    3,061
    
    
    $
    12,490
    
    
    
    (75
    )Modified Pool insurance written
    
    
    
    
    
    
    1,406
    
    
    
    (100
    )
    
    
    
    
    
    
    3,331
    
    
    
    (100
    )Total insurance written
    
    $
    1,148
    
    
    $
    8,197
    
    
    
    (86
    )%
    
    $
    3,061
    
    
    $
    15,821
    
    
    
    (81
    )%
 16




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Insurance and Risk in Force
  June 30,(dollars in millions)
    
    2008
    
    
    2007
    
    
    % ChangePrimary insurance:Flow primary insurance
    
    $
    41,646
    
    
    $
    38,591
    
    
    
    8
    %Structured bulk insurance
    
    
    4,248
    
    
    
    4,133
    
    
    
    3Total Primary insurance
    
    
    45,894
    
    
    
    42,724
    
    
    
    7Modified pool insurance
    
    
    20,439
    
    
    
    23,649
    
    
    
    (14
    )Total insurance
    
    $
    66,333
    
    
    $
    66,373
    
    
    
    
    %
   17




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
    
    The percentage of business defined as non-prime credit quality;
    
    The percentage of Alt-A business;
    
    The percentage of business with an LTV greater than 95%;
    
    The percentage of interest only loans and ARMs with potential negative amortization;
    
    The percentage of condominium property types;
    
    The percentage of non-primary residence occupancy status;
    
    The percentage of loans in excess of $250,000;
    
    The concentration of risk in distressed market states; and
    
    The presence of multiple risk factors on a single insured loan.
 18




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##### Table of Contents



(1)
 Primary
    
    
    Modified PoolJune, 30
    
    
    June, 30(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Gross Risk in Force
    
    $
    11,943
    
    
    $
    11,128
    
    
    $
    5,965
    
    
    $
    6,920Credit Quality:Prime
    
    
    75.6
    %
    
    
    73.6
    %
    
    
    27.8
    %
    
    
    29.6
    %Alt-A
    
    
    20.9
    
    
    
    22.8
    
    
    
    71.4
    
    
    
    69.6A-Minus
    
    
    3.1
    
    
    
    3.1
    
    
    
    0.7
    
    
    
    0.7Sub Prime
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %LTV:Greater than 95%
    
    
    25.1
    %
    
    
    23.2
    %
    
    
    
    %
    
    
    
    %90.01% to 95.00%
    
    
    32.5
    
    
    
    33.6
    
    
    
    0.2
    
    
    
    0.390.00% and below
    
    
    42.4
    
    
    
    43.2
    
    
    
    99.8
    
    
    
    99.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Loan Type:Fixed
    
    
    66.2
    %
    
    
    62.7
    %
    
    
    26.2
    %
    
    
    26.8
    %Interest Only
    
    
    10.4
    
    
    
    9.6
    
    
    
    23.3
    
    
    
    22.9ARM (amortizing) fixed period 5 years or
greater
    
    
    8.8
    
    
    
    11.0
    
    
    
    31.3
    
    
    
    33.7ARM (amortizing) fixed period less than 5
years
    
    
    2.2
    
    
    
    2.7
    
    
    
    5.7
    
    
    
    4.1ARM (potential negative amortization)
    
    
    12.4
    
    
    
    14.0
    
    
    
    13.5
    
    
    
    12.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Property Type:Condominium
    
    
    10.6
    %
    
    
    10.3
    %
    
    
    9.5
    %
    
    
    9.3
    %Other (principally single-family detached)
    
    
    89.4
    
    
    
    89.7
    
    
    
    90.5
    
    
    
    90.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Occupancy Status:Primary residence
    
    
    87.7
    %
    
    
    87.6
    %
    
    
    73.5
    %
    
    
    73.7
    %Secondary home
    
    
    7.9
    
    
    
    7.9
    
    
    
    6.1
    
    
    
    6.2Non-owner occupied
    
    
    4.4
    
    
    
    4.5
    
    
    
    20.4
    
    
    
    20.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Mortgage Amount:$0    $50,000
    
    
    0.8
    %
    
    
    0.9
    %
    
    
    0.5
    %
    
    
    0.5
    %$51,000    $100,000
    
    
    9.3
    
    
    
    10.4
    
    
    
    5.3
    
    
    
    5.4$100,001    $250,000
    
    
    51.8
    
    
    
    52.7
    
    
    
    45.4
    
    
    
    45.8$250,001    $500,000
    
    
    32.2
    
    
    
    29.9
    
    
    
    42.2
    
    
    
    41.8Over $500,000
    
    
    5.9
    
    
    
    6.1
    
    
    
    6.6
    
    
    
    6.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Market Status:Distressed market states (AZ, CA, FL, NV)
    
    
    27.2
    %
    
    
    26.6
    %
    
    
    48.8
    %
    
    
    47.1
    %Non-distressed market states
    
    
    72.8
    
    
    
    73.4
    
    
    
    51.2
    
    
    
    52.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Gross risk in force is on a per policy basis and does not account for risk ceded to captive reinsurers or
applicable stop-loss amounts and deductibles on Modified Pool structured bulk transactions.
Percentages represent distribution of gross risk in force.  19




---



##### Table of Contents



Primary
    
    
    Modified Pool *June 30, 2008
    
    
    June 30, 2008(dollars in millions)
    
    Direct Risk in Force
    
    
    Percent
    
    
    Direct Risk in Force
    
    
    Percent2002 and before
    
    $
    573.3
    
    
    
    4.8
    %
    
    $
    36.3
    
    
    
    4.7
    %2003
    
    
    1,051.0
    
    
    
    8.8
    
    
    
    108.1
    
    
    
    14.02004
    
    
    1,015.2
    
    
    
    8.5
    
    
    
    126.6
    
    
    
    16.42005
    
    
    1,504.8
    
    
    
    12.6
    
    
    
    212.3
    
    
    
    27.52006
    
    
    2,531.9
    
    
    
    21.2
    
    
    
    257.1
    
    
    
    33.32007
    
    
    4,645.8
    
    
    
    38.9
    
    
    
    31.7
    
    
    
    4.12008
    
    
    621.0
    
    
    
    5.2
    
    
    
    
    
    
    
    Total
    
    $
    11,943.0
    
    
    
    100.0
    %
    
    $
    772.0
    
    
    
    100.0
    %
 
 *
    
    For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss
limits and deductibles within each specific structure  20




---



##### Table of Contents



Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeDirect premium written
    
    $
    84,561
    
    
    $
    83,153
    
    
    
    2
    %
    
    $
    173,946
    
    
    $
    161,561
    
    
    
    8
    %Ceded premium written
    
    
    (15,480
    )
    
    
    (12,988
    )
    
    
    19
    
    
    
    (31,475
    )
    
    
    (25,689
    )
    
    
    23Net premium written
    
    
    69,081
    
    
    
    70,165
    
    
    
    (2
    )
    
    
    142,471
    
    
    
    135,872
    
    
    
    5Change in unearned
premiums
    
    
    784
    
    
    
    (433
    )
    
    
    (281
    )
    
    
    (542
    )
    
    
    (2,192
    )
    
    
    (75
    )Earned premiums
    
    $
    69,865
    
    
    $
    69,732
    
    
    
    0
    %
    
    $
    141,929
    
    
    $
    133,680
    
    
    
    6
    %Net investment income
    
    $
    9,175
    
    
    $
    7,673
    
    
    
    20
    %
    
    $
    18,722
    
    
    $
    15,022
    
    
    
    25
    %Total revenues
    
    $
    75,243
    
    
    $
    73,540
    
    
    
    2
    %
    
    $
    159,559
    
    
    $
    145,601
    
    
    
    10
    %
     21




---



##### Table of Contents



Losses and Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2008
    
    2007
    
    %
    
    2008
    
    2007
    
    %Net losses and loss adjustment expenses
    
    $
    292,749
    
    
    $
    41,893
    
    
    
    599
    %
    
    $
    514,008
    
    
    $
    74,474
    
    
    
    590
    %Net change in premium deficiency
    
    
    (15,000
    )
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    Policy acquisition costs
    
    
    
    
    
    
    4,670
    
    
    
    (100
    )
    
    
    39,416
    
    
    
    9,293
    
    
    
    324Other operating expenses (net of
acquisition
costs deferred)
    
    
    27,238
    
    
    
    10,716
    
    
    
    154
    
    
    
    41,344
    
    
    
    21,047
    
    
    
    96Loss ratio
    
    
    419.0
    %
    
    
    60.1
    %
    
    
    597
    
    
    
    362.2
    %
    
    
    55.7
    %
    
    
    550Expense ratio
    
    
    39.4
    %
    
    
    21.9
    %
    
    
    80
    
    
    
    32.2
    %
    
    
    22.3
    %
    
    
    44Combined ratio
    
    
    458.4
    %
    
    
    82.0
    %
    
    
    459
    
    
    
    394.4
    %
    
    
    78.0
    %
    
    
    406
  22




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangePaid claims:Primary insurance
    
    $
    48,187
    
    
    $
    16,687
    
    
    
    188.8
    %
    
    $
    77,423
    
    
    $
    33,134
    
    
    
    134
    %Modified Pool
insurance
    
    
    20,192
    
    
    
    1,386
    
    
    
    1,356.9
    
    
    
    31,044
    
    
    
    2,667
    
    
    
    1,064Total
    
    $
    68,379
    
    
    $
    18,073
    
    
    
    278.3
    %
    
    $
    108,467
    
    
    $
    35,801
    
    
    
    203
    %Number of claims paid:Primary insurance
    
    
    919
    
    
    
    540
    
    
    
    70.2
    %
    
    
    1,605
    
    
    
    1,066
    
    
    
    51
    %Modified Pool
insurance
    
    
    363
    
    
    
    52
    
    
    
    598.1
    
    
    
    530
    
    
    
    106
    
    
    
    400Total
    
    
    1,282
    
    
    
    592
    
    
    
    116.6
    %
    
    
    2,135
    
    
    
    1,172
    
    
    
    82
    %
   Primary
    
    Modified PoolAverage
    
    Average
    
    Average
    
    AverageLoan Size
    
    Insured Risk
    
    Loan Size
    
    Insured RiskVintage Year2002 and Prior
    
    $
    105,257
    
    
    $
    26,779
    
    
    $
    78,962
    
    
    $
    25,5762003
    
    
    117,560
    
    
    
    28,317
    
    
    
    144,123
    
    
    
    42,5642004
    
    
    131,417
    
    
    
    34,908
    
    
    
    148,536
    
    
    
    44,0662005
    
    
    156,526
    
    
    
    40,937
    
    
    
    177,739
    
    
    
    57,8592006
    
    
    207,866
    
    
    
    53,699
    
    
    
    262,090
    
    
    
    69,5782007
    
    
    208,179
    
    
    
    56,278
    
    
    
    272,252
    
    
    
    79,5052008
    
    
    203,033
    
    
    
    46,411
    
    
    
    
    
    
    
    Overall Average
    
    $
    171,444
    
    
    $
    44,615
    
    
    $
    208,647
    
    
    $
    60,897
  23




---



##### Table of Contents



Cumulative Paid Loss Ratios as of June 30,Certificate Year
    
    2008
    
    20071996
    
    
    14.6
    %
    
    
    14.5
    %1997
    
    
    10.3
    
    
    
    10.11998
    
    
    6.9
    
    
    
    6.71999
    
    
    9.9
    
    
    
    9.72000
    
    
    35.5
    
    
    
    35.22001
    
    
    31.9
    
    
    
    30.02002
    
    
    32.7
    
    
    
    31.02003
    
    
    18.3
    
    
    
    15.02004
    
    
    21.1
    
    
    
    14.42005
    
    
    35.2
    
    
    
    9.92006
    
    
    29.3
    
    
    
    1.82007
    
    
    5.3
    
    
    
    2008
    
    
    
    
    
    
    
  24




---



##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Primary insurance:Reserves for reported defaults
    
    $
    530,733
    
    
    $
    251,316
    
    
    $
    89,752Reserves for defaults incurred but not
reported
    
    
    62,154
    
    
    
    40,691
    
    
    
    9,382Total Primary insurance
    
    
    592,887
    
    
    
    292,007
    
    
    
    99,134Modified Pool insurance:Reserves for reported defaults
    
    
    193,506
    
    
    
    54,876
    
    
    
    20,482Reserves for defaults incurred but not
reported
    
    
    17,689
    
    
    
    8,340
    
    
    
    1,004Total Modified Pool insurance
    
    
    211,195
    
    
    
    63,216
    
    
    
    21,486Reserve for loss adjustment expenses
    
    
    13,180
    
    
    
    4,716
    
    
    
    1,441Total reserves for losses and loss adjustment
expenses
    
    $
    817,262
    
    
    $
    359,939
    
    
    $
    122,061
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % ChangeIncrease in reserve for
losses and
loss adjustment expenses
    
    $
    269,496
    
    
    $
    23,340
    
    
    
    1,055
    %
    
    $
    457,323
    
    
    $
    37,709
    
    
    
    1,113
    %
  25




---



##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Gross Risk In Force:California
    
    $
    2,629,211
    
    
    $
    2,683,853
    
    
    $
    2,644,006Florida
    
    
    2,057,036
    
    
    
    2,120,745
    
    
    
    2,084,041Arizona
    
    
    938,772
    
    
    
    978,132
    
    
    
    941,315Nevada
    
    
    536,340
    
    
    
    553,708
    
    
    
    542,787Total Distressed Market
States
    
    $
    6,161,359
    
    
    $
    6,336,439
    
    
    $
    6,212,150Total Gross Risk in Force
    
    $
    17,908,367
    
    
    $
    18,534,333
    
    
    $
    18,048,443% in Distressed Market States
    
    
    34.4
    %
    
    
    34.2
    %
    
    
    34.4
    %% of Gross Risk in Default:California
    
    
    23.3
    %
    
    
    19.1
    %
    
    
    13.2
    %Florida
    
    
    23.0
    %
    
    
    19.6
    %
    
    
    13.4
    %Arizona
    
    
    6.1
    %
    
    
    5.3
    %
    
    
    3.8
    %Nevada
    
    
    4.2
    %
    
    
    3.8
    %
    
    
    3.6
    %Total Distressed Market
States
    
    
    56.6
    %
    
    
    47.8
    %
    
    
    34.0
    %% of Gross Reserves:California
    
    
    23.3
    %
    
    
    18.3
    %
    
    
    11.3
    %Florida
    
    
    24.6
    %
    
    
    19.9
    %
    
    
    10.9
    %Arizona
    
    
    6.2
    %
    
    
    5.4
    %
    
    
    3.4
    %Nevada
    
    
    4.2
    %
    
    
    3.9
    %
    
    
    2.8
    %Total Distressed Market
States
    
    
    58.4
    %
    
    
    47.4
    %
    
    
    28.5
    %
  26




---



##### Table of Contents



June 30,
    
    December 31,
    
    June 30,(dollars in thousands)
    
    2008
    
    2007
    
    2007Gross Case Reserves as a percentage of
risk in default (1)
    
    
    45.0
    %
    
    
    36.6
    %
    
    
    26.9
    %
 
 (1)
    
    Reflects gross case reserves, which excludes IBNR and ceded reserves, as a
percent of risk in default for total primary delinquent loans and total modified
pool delinquent loans.   June 30,
    
    December 31,
    
    June 30,(dollars in thousands)
    
    2008
    
    2007
    
    2007Total business:Number of insured loans in force
    
    
    365,649
    
    
    
    378,907
    
    
    
    371,888With deductibles
    
    
    55,478
    
    
    
    59,592
    
    
    
    64,292Without deductibles
    
    
    310,171
    
    
    
    319,315
    
    
    
    307,596Number of loans in default
    
    
    26,601
    
    
    
    16,821
    
    
    
    9,853With deductibles
    
    
    6,221
    
    
    
    4,072
    
    
    
    2,508Without deductibles
    
    
    20,380
    
    
    
    12,749
    
    
    
    7,345Percentage of loans in default (default rate)
    
    
    7.28
    %
    
    
    4.44
    %
    
    
    2.65
    %Percentage of loans in default excluding
deductibles
    
    
    6.57
    %
    
    
    3.99
    %
    
    
    2.39
    %Primary insurance:Number of insured loans in force
    
    
    267,689
    
    
    
    273,798
    
    
    
    258,163Number of loans in default
    
    
    16,075
    
    
    
    10,419
    
    
    
    5,940Percentage of loans in default
    
    
    6.01
    %
    
    
    3.81
    %
    
    
    2.30
    %Modified Pool insurance:Number of insured loans in force
    
    
    97,960
    
    
    
    105,109
    
    
    
    113,725With deductibles
    
    
    55,456
    
    
    
    59,569
    
    
    
    64,267Without deductibles
    
    
    42,504
    
    
    
    45,540
    
    
    
    49,458Number of loans in default
    
    
    10,526
    
    
    
    6,402
    
    
    
    3,913With deductibles
    
    
    6,221
    
    
    
    4,072
    
    
    
    2,508Without deductibles
    
    
    4,305
    
    
    
    2,330
    
    
    
    1,405Percentage of loans in default
    
    
    10.75
    %
    
    
    6.09
    %
    
    
    3.44
    %Percentage of loans in default excluding
deductibles
    
    
    10.13
    %
    
    
    5.12
    %
    
    
    2.84
    %Primary Alt-A business (included in above):Number of insured loans in force
    
    
    33,660
    
    
    
    35,980
    
    
    
    34,955Number of loans in default
    
    
    5,861
    
    
    
    3,102
    
    
    
    1,207Percentage of loans in default
    
    
    17.41
    %
    
    
    8.62
    %
    
    
    3.45
    %
  27




---



##### Table of Contents



28




---



##### Table of Contents



Premium Deficiency
    Expenses and Taxes
   29




---



##### Table of Contents



Financial Position
   30




---



##### Table of Contents



Deferred Policy Acquisition Costs
  Prepaid Federal Income Taxes and Deferred Income Taxes
    31




---



##### Table of Contents



Premium Deficiency Reserve
    32




---



##### Table of Contents



Investment Portfolio
 Portfolio Description
    June 30, 2008
    
    
    December 31, 2007(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed maturity securities:U. S. government obligations
    
    $
    13,280
    
    
    
    1.5
    %
    
    $
    11,762
    
    
    
    1.5
    %State and municipal bonds
    
    
    381,442
    
    
    
    43.9
    %
    
    
    673,264
    
    
    
    85.8
    %Corporate bonds
    
    
    363,098
    
    
    
    41.8
    %
    
    
    40,605
    
    
    
    5.2
    %Mortgage-backed bonds
    
    
    86,131
    
    
    
    9.9
    %
    
    
    
    
    
    
    0.0
    %Total fixed maturities
    
    
    843,951
    
    
    
    97.1
    %
    
    
    725,631
    
    
    
    92.5
    %Equity securities
    
    
    1,749
    
    
    
    0.2
    %
    
    
    2,162
    
    
    
    0.3
    %Total available-for-sale securities
    
    
    845,700
    
    
    
    97.3
    %
    
    
    727,793
    
    
    
    92.8
    %Short-term investments
    
    
    23,322
    
    
    
    2.7
    %
    
    
    56,746
    
    
    
    7.2
    %$
    869,022
    
    
    
    100.0
    %
    
    $
    784,539
    
    
    
    100.0
    %
 33




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Average investments at cost or amortized cost
    
    $
    811,592
    
    
    $
    664,416
    
    
    $
    818,051
    
    
    $
    634,566Pre-tax net investment income
    
    $
    9,175
    
    
    $
    7,673
    
    
    $
    18,722
    
    
    $
    15,022Tax-equivalent yield-to-maturity
    
    
    5.6
    %
    
    
    6.6
    %
    
    
    5.6
    %
    
    
    6.6
    %Pre-tax realized investment (losses) gains
    
    $
    (3,799
    )
    
    $
    (3,867
    )
    
    $
    (1,096
    )
    
    $
    (3,105
    )
  Unrealized Gains and Losses
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturity securities:U. S. government obligations
    
    $
    13,275
    
    
    $
    116
    
    
    $
    (111
    )
    
    $
    13,280State and municipal bonds
    
    
    376,642
    
    
    
    5,014
    
    
    
    (214
    )
    
    
    381,442Corporate bonds
    
    
    364,605
    
    
    
    635
    
    
    
    (2,142
    )
    
    
    363,098Mortgage-backed bonds
    
    
    85,798
    
    
    
    430
    
    
    
    (97
    )
    
    
    86,131Subtotal, fixed maturities
    
    
    840,320
    
    
    
    6,195
    
    
    
    (2,564
    )
    
    
    843,951Equity securities
    
    
    2,270
    
    
    
    
    
    
    
    (521
    )
    
    
    1,749Short term investments
    
    
    23,322
    
    
    
    
    
    
    
    
    
    
    
    23,322Total securities
    
    $
    865,912
    
    
    $
    6,195
    
    
    $
    (3,085
    )
    
    $
    869,022
  34




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##### Table of Contents



Credit Risk
  June 30, 2008
    
    
    December 31, 2007(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed Maturities:U.S. treasury and agency bonds
    
    $
    13,280
    
    
    
    1.6
    %
    
    $
    11,762
    
    
    
    1.6
    %AAA
    
    
    255,012
    
    
    
    30.2
    
    
    
    518,769
    
    
    
    71.5AA
    
    
    283,125
    
    
    
    33.5
    
    
    
    150,820
    
    
    
    20.8A
    
    
    269,359
    
    
    
    31.9
    
    
    
    25,774
    
    
    
    3.6BBB
    
    
    11,722
    
    
    
    1.4
    
    
    
    8,738
    
    
    
    1.2BB
    
    
    1,823
    
    
    
    0.2
    
    
    
    1,072
    
    
    
    0.1CCC
    
    
    4,251
    
    
    
    0.5
    
    
    
    5,591
    
    
    
    0.8CC and lower
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.0Not rated
    
    
    5,379
    
    
    
    0.6
    
    
    
    3,103
    
    
    
    0.4Total fixed maturities
    
    $
    843,951
    
    
    
    100.0
    %
    
    $
    725,631
    
    
    
    100.0
    %Equity Securities:Preferred stocks:AA
    
    $
    705
    
    
    
    40.3
    %
    
    $
    745
    
    
    
    34.5
    %A
    
    
    509
    
    
    
    29.1
    
    
    
    883
    
    
    
    40.8BBB
    
    
    535
    
    
    
    30.6
    
    
    
    534
    
    
    
    24.71,749
    
    
    
    100.0
    
    
    
    2,162
    
    
    
    100.0Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    $
    1,749
    
    
    
    100.0
    %
    
    $
    2,162
    
    
    
    100.0
    %
  35




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Credit Quality WithoutCredit Quality With Benefit
    
    
    Benefit of Creditof Credit Enhancements
    
    
    Enhancements(dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentU.S. treasury and agency bonds
    
    $
    13,280
    
    
    
    1.6
    %
    
    $
    13,280
    
    
    
    1.6
    %AAA
    
    
    255,012
    
    
    
    30.2
    
    
    
    178,655
    
    
    
    21.2AA
    
    
    283,125
    
    
    
    33.5
    
    
    
    248,330
    
    
    
    29.4A
    
    
    269,359
    
    
    
    31.9
    
    
    
    340,009
    
    
    
    40.3BBB
    
    
    11,722
    
    
    
    1.4
    
    
    
    16,803
    
    
    
    2.0BB
    
    
    1,823
    
    
    
    0.2
    
    
    
    3,918
    
    
    
    0.5CCC
    
    
    4,251
    
    
    
    0.5
    
    
    
    
    
    
    
    CC and below
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Not rated
    
    
    5,379
    
    
    
    0.6
    
    
    
    42,956
    
    
    
    5.1Total Fixed Maturities
    
    $
    843,951
    
    
    
    100.0
    %
    
    $
    843,951
    
    
    
    100.0
    %
   Financial Guarantors
 Credit Enhanced State andMunicipal Portfolio(dollars in thousands)
    
    Amount
    
    
    PercentMBIA
    
    $
    75,970
    
    
    
    25.2
    %FSA
    
    
    46,272
    
    
    
    15.4FGIC
    
    
    62,112
    
    
    
    20.6AMBAC
    
    
    73,633
    
    
    
    24.5Others (four companies)
    
    
    42,991
    
    
    
    14.3Total
    
    $
    300,978
    
    
    
    100.0
    %
  36




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##### Table of Contents




    
    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.
     37




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Realized Gains (Losses) and Impairments
  Liquidity and Capital Resources
 
    38




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39




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June 30,
    
    
    December 31,
    
    
    June 30,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2007Statutory policyholders surplus
    
    $
    192.1
    
    
    $
    197.7
    
    
    $
    102.9Statutory contingency reserve
    
    
    82.6
    
    
    
    387.4
    
    
    
    589.7Total
    
    $
    274.7
    
    
    $
    585.1
    
    
    $
    692.6
   40




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Off Balance Sheet Arrangements and Aggregate Contractual Obligations
    Update on Critical Accounting Policies and Estimates
   41




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Premium Deficiency
     42




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Sensitivity Analysis as of June 30, 2008Effect on Pretax Income from Changesin Assumptions in the PremiumDeficiency ComputationIncrease in PaidDecrease in Paid
    
    Claims or DecreaseClaims or Increase in
    
    in PremiumPremium Resulting
    
    Resulting in ain an Increase in
    
    (Decrease) in Pretax(dollars in thousands)
    
    Pretax Income
    
    Income5% Increase (Decrease)
in the paid claims
utilized in the
computation of the
premium deficiency.
    
    $
    
    
    
    $
    (14,000
    )5% Increase (Decrease)
in the amount of
premium utilized in the
computation of the
premium deficiency.
    
    $
    
    
    
    $
    5% Increase (Decrease)
in both the amount of
paid claims and amount
of premium utilized in
the computation of the
premium deficiency.
    
    $
    
    
    
    $
    (79,000
    )
   Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  43




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##### Table of Contents




    
    if we are unable to satisfy the enhanced regulatory obligations imposed on us in
run-off, the Illinois Division of Insurance could impose penalties on us, place us
in rehabilitation and impose further restrictions on our business or appoint a
receiver to liquidate our insurance subsidiary;
    
    if the significant assumptions utilized in the corrective plan related to the
timing and amount of claims, the persistency of renewal premiums, and the expenses
related to servicing the remaining portfolio prove to be materially and adversely
inaccurate, the Illinois Division of Insurance may be forced to place Triad in
rehabilitation or appoint a receiver to liquidate our business;
    
    our ability to lower operating expenses to the most efficient level while still
providing the ability to mitigate losses effectively as we transition to run-off
status will have an impact on our financial performance in run-off;
    
    whether we ultimately prevail in arbitration with the Excess-of-Loss reinsurance
treaty will have an impact on our financial performance in run-off;
    
    if housing prices continue to fall, additional borrowers may default and claims
could be higher than anticipated;
    
    if unemployment rates continue to rise, especially in those areas that have
already experienced significant declines in home prices, defaults and claims could
be higher than anticipated;
    
    if we are unsuccessful in defending the American Home Mortgage lawsuit, our
financial performance will be adversely affected;
    
    a significant decline in interest rates coupled with an increase in available
credit could increase refinancings and decrease the persistency of renewal premiums
and the quality of our insurance in force;
    
    ongoing credit tightening in the mortgage marketplace may continue and cause an
increased number of defaults and paid claims due to the unavailability of
refinancing options;
    
    our financial condition could be affected by legislation or regulation impacting
the mortgage guaranty industry or the GSEs specifically, and the financial services
industry in general;
    
    if we have failed to properly underwrite mortgage loans under contract
underwriting service agreements, we may be required to assume the costs of
repurchasing those loans or face other remedies;
    
    our performance may be impacted by changes in the performance of the financial
markets and general economic conditions; and
    
    further economic downturns in regions where we have larger concentrations of risk
and in markets already distressed could have a particularly adverse effect on our
financial condition and loss development.
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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 a)
    
    We carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Securities Exchange Act of 1934 (Act). 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 reports under the Act. 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 control over financial reporting during the
second quarter of 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 By transitioning our business into run-off, our business is now subject to more comprehensive
regulation and oversight by the Illinois Division of Insurance, which will continue on an ongoing
basis for the foreseeable future. If we fail to satisfy applicable regulatory obligations, our
business could be adversely affected and the market value of our common stock could be reduced or
eliminated.
  
    
    If we fail to file a corrective plan that is acceptable to the Illinois Division of
Insurance or violate any orders or regulations, the Division could impose civil penalties
on us or determine that we are operating in a condition that is hazardous to our
policyholders or creditors and seek to place us in rehabilitation or appoint a receiver to
liquidate our assets, in which case it is likely that the market value of our common stock
would be reduced or eliminated and little or no funds would ever be available for
distribution to our stockholders.
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##### Table of Contents




    
    Restrictions on the movement of funds between our insurance subsidiary and the holding
company could adversely affect our ability to pay operating expenses that were previously
paid by our insurance subsidiary or to pay interest on our $35 million long-term debt. If
we cannot pay such obligations, we may be forced to seek protection from creditors under
Chapter 11 of the United States Bankruptcy Code.
 As a mortgage insurer in run-off, the future value of our company will be tied directly to the
future financial performance of our existing mortgage insurance in force, including the timing and
amount of our claims payments, the persistency of our existing insurance in force and the level of
our expenses. If our performance in the future varies significantly from the projections we use in
our corrective plan, we may become insolvent or otherwise be unable to continue operations and may
be forced into liquidation under the oversight of the Illinois courts, in which case the market
value of our common stock could be reduced or eliminated.
  
 Item 5. Other Information
  
    
    By August 15, 2008, TGIC must file a written corrective plan with the Division that
contains specified financial, business and operating information;
    
    All stockholder dividends by TGIC to its parent company are prohibited without the prior
approval of the Division;
    
    All interest and principal payments on TGICs surplus note are prohibited without the
prior approval of the Division;
    
    TGIC is prohibited from making any payments or entering into any transaction that
involves the transfer of assets to, or liabilities from, any affiliated parties without the
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prior approval of the Division;
 
    
    TGIC must obtain prior written approval from the Division before entering into certain
transactions with unaffiliated parties; and
    
    TGIC must satisfy certain financial reporting requirements.
  
 Item 6. Exhibits
  48




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SIGNATURE
  TRIAD GUARANTY INC.Date: August 11, 2008/s/ Kenneth W. JonesKenneth W. JonesSenior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer) 49




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.54
    
    Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and Mark K. Tonnesen, previously filed as
Exhibit 10.54 to the Companys Current Report on Form 8-K
filed on July 17, 2008, and incorporated herein by
reference.*10.55
    
    Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and William T. Ratliff, III, previously filed
as Exhibit 10.55 to the Companys Current Report on Form
8-K filed on July 17, 2008, and incorporated herein by
reference.*31.1
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certifications of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement. 50