##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission file number 0-22342
      Triad Guaranty Inc.
 (Exact name of registrant as
    specified in its charter)
  DELAWARE

56-1838519(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)101 South Stratford Road
    Winston-Salem, North Carolina(Address of principal
    executive offices)

27104(Zip Code)   Registrants telephone number, including area code:
 (336) 723-1282
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
  Title of Each
    Class
 Common Stock, par value $.01 per share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated
    filer o


Accelerated filer þ



Non-accelerated filer o   Rule 12b-2 o þ
  Rule 13d-3
    Portions of the following
    documents are incorporated by

Part of this
    Form 10-K
    into which the documentreference into this
    Form 10-K:

is incorporated by
    referenceTriad Guaranty Inc.
    Proxy Statement for 2006 Annual Meeting
    of Stockholders

Part III




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##### 



TABLE OF
    CONTENTS
  PagePart IItem 1.

Business

1Item 1A.

Risk Factors

22Item 1B.

Unresolved Staff
    Comments

26Item 2.

Properties

27Item 3.

Legal
    Proceedings

27Item 4.

Submission of
    Matters to a Vote of Security Holders

27Part IIItem 5.

Market for the
    Registrants Common Stock, Related Stockholder Matters and
    Issuer Purchases of Equity Securities

27Item 6.

Selected Financial
    Data

29Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations

30Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk

50Item 8.

Financial
    Statements and Supplementary Data

50Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure

51Item 9A.

Controls and
    Procedures

51Item 9B.

Other
    Information

54Part IIIItem 10.

Directors and
    Executive Officers of the Registrant

54Item 11.

Executive
    Compensation

54Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters

54Item 13.

Certain
    Relationships and Related Transactions

54Item 14.

Principal
    Accounting Fees and Services

54Part IVItem 15.

Exhibits and
    Financial Statement Schedules

54Signatures

56Index to
    Consolidated Financial Statements and Financial Statement
    Schedules

58EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  Item 1.
    Business  Overview
  and/or
      (336) 723-1282.
    Distribution
    Channels
  loan-by-loan
   1




---



##### Table of Contents



Form 10-K
  Mortgage
    Insurance Products
  Primary
    Insurance
  loan-to-value
         2




---



##### Table of Contents



Modified
    Pool Insurance
    Traditional
    Pool Insurance
  and/or
  Risk-sharing
    Products
  excess-of-loss excess-of-loss
   3




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##### Table of Contents



excess-of-loss excess-of-loss
  Cancellation
    of Insurance
        Customers
         4




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##### Table of Contents



Percent of Revenues forthe Year Ended
    December 31Customer

2005


2004Wells Fargo Home Mortgage,
    Inc.


20%



16%Countrywide Credit Industries, Inc


14%



14%     Sales and
    Marketing
        Contract
    Underwriting
  ® ® ®
  Competition
    and Market Share
   5




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##### Table of Contents



Underwriting
    Practices
    Underwriting
    Personnel
     6




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##### Table of Contents



Risk
    Management Approach
    
    Mortgage Lender.  We review each lenders
    financial statements and management experience before issuing a
    master policy. We also track the historical risk performance,
    including loan level risk characteristics, of all significant
    customers that hold a master policy. This information is
    factored into determining the loan programs we approve for
    various lenders. We assign delegated underwriting authority only
    to lenders with substantial financial resources and established
    records of originating good quality loans.
    Purpose and Type of Loan.  We analyze various
    general characteristics of a loan to evaluate its level of risk
    including: (i) LTV ratio; (ii) purpose of the loan;
    (iii) type of loan instrument; (iv) level of
    documentation; and (v) type of property. Generally, we seek
    loan types with proven track records for which an assessment of
    risk can be readily made and the premium received sufficiently
    offsets that risk. Loan types that do not have a proven track
    record are charged a higher premium, as are other loans which
    have been shown to carry higher risks, such as adjustable rate
    mortgages (ARMs), loans with limited or no
    documentation, loans on second homes and investment properties,
    and loans having higher LTV ratios. We do not actively pursue
    certain categories of loans that have a disproportionate amount
    of risk, including ARMs with scheduled negative amortization.
    Individual Loan and Borrower.  Individual
    insurance applications are evaluated based on analysis of the
    borrowers ability and willingness to repay the mortgage
    loan and the characteristics and value of the mortgaged
    property. The analysis of the borrower includes reviewing the
    borrowers housing and total debt ratios as well as the
    borrowers Fair, Isaac and Co., Inc. (FICO)
    credit score, as reported by credit rating agencies. In addition
    to the borrowers willingness and ability to repay the
    loan, we believe that mortgage default risk is affected by a
    variety of other factors, including the borrowers
    employment status. We believe insured mortgage loans made to
    self-employed borrowers have higher risk of claim, all other
    factors being equal, than loans to borrowers employed by third
    parties. Individual insurance applications are reviewed by
    Triads underwriting personnel except for loans originated
    by lenders under delegated underwriting authority or through
    automated underwriting services provided by Fannie Mae and
    Freddie Mac. In the case of delegated underwriting, we monitor
    compliance with program parameters through periodic audits of
    delegated business. Through the automated underwriting services
    provided by Fannie Mae and Freddie Mac, lenders are able to
    obtain approval for mortgage guaranty insurance with any
    participating mortgage insurer. Triad works with both
    enterprises in offering insurance services through their systems
    while monitoring the risk quality of loans insured through such
    systems.
    Geographic Selection of Risk.  We place
    significant emphasis on the condition of the regional housing
    markets in determining marketing and underwriting policies.
    Using both internal and external data, our risk management
    department continually monitors the economic conditions in our
    active and potential markets. We may choose not to insure new
    loans in geographic areas in which we have a heavy concentration
    or that we believe have a higher risk of loss.
    Risk Dispersion.  In the early years of the
    Company, only certain high quality loans with limited risk were
    accepted. As we developed expertise beyond that limited spectrum
    on the risk curve and with the advent of delegated underwriting,
    we gradually expanded the breadth of risk we view as acceptable.
    Alt-A loans
    continue to grow as a percentage of our Primary insurance in
    force. We have defined
    Alt-A as
    individual loans having FICO scores greater than 619 that have
    been underwritten with reduced or no documentation. The
    marketplace has changed and many lenders are promoting
    Alt-A loan
    programs and other programs with nonconforming loan
    characteristics. We have participated in certain of these
    programs, primarily through specific lender-paid programs,
    through the flow channel. As previously mentioned, loans such as
    these have a higher premium rate than fully documented,
    conforming loans. 7




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##### Table of Contents



Underwriting
    Process for Our Flow Distribution Channel
      debt-to-income
      Underwriting
    Process for Our Structured Bulk Distribution
    Channel
  loan-by-loan loan-to-value
 8




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##### Table of Contents



Other
    Risk Management
        Financial
    Strength Rating
         9




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##### Table of Contents



Reinsurance
    loan-to-value
      Defaults
    and Claims
  Defaults
    Claims
     10




---



##### Table of Contents



deed-in-lieu
    Loss
    Mitigation
  pre-foreclosure deeds-in-lieu
  Loss
    Reserves
   11




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##### Table of Contents



Analysis
    of Direct Risk in Force
    Lender
    and Product Characteristics
    Form 10-K,
  Risk in
    Force(1)
  December 312005


2004Direct Risk in Force(dollars in millions)Primary insurance

$
7,471


$
7,158Modified Pool insurance


545



374Total

$
8,016


$
7,532Net Risk in Force(dollars in millions)Primary insurance

$
6,767


$
6,587Modified Pool insurance


545



374Total

$
7,312


$
6,961Lender concentration (excludes
    structured bulk transactions):Top 10 lenders (by original
    applicant)


69.3
%


68.4
%LTV:95.01% and above


8.9
%


9.5
%90.01% to 95.00%


26.1
%


32.0
%90.00% and below


65.0
%


58.5
%Total


100.0
%


100.0
%Loan Type:Fixed


61.3
%


72.3
%ARM (positive amortization)(2)


36.2
%


27.7
%ARM (potential negative
    amortization)(3)


2.5
%


0.0
%ARM (scheduled negative
    amortization)(3)


0.0
%


0.0
%Other


0.0
%


0.0
%Total


100.0
%


100.0
%Mortgage Term:15 years and under


4.0
%


6.0
%Over 15 years


96.0
%


94.0
%Total


100.0
%


100.0
% 12




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##### Table of Contents



December 312005


2004Property Type:Non-condominium (principally
    single-family detached)


92.9
%


94.5
%Condominium


7.1
%


5.5
%Total


100.0
%


100.0
%Occupancy Status:Primary residence


85.2
%


88.7
%Secondary home


5.0
%


3.7
%Non-owner occupied


9.8
%


7.6
%Total


100.0
%


100.0
%Mortgage Amount:$200,000 or less


59.6
%


66.0
%Over $200,000


40.4
%


34.0
%Total


100.0
%


100.0
%     (1)
    
    Percentages represent distribution of direct risk in force on a
    per policy basis and does not account for applicable stop-loss
    amounts.(2)
    
    Refers to loans where payment adjustments are the same as
    mortgage interest rate adjustments.(3)
    
    Scheduled negative amortization is defined as the increase in
    loan balance that will occur if interest rates do not change.
    Loans with potential negative amortization will not have
    increasing principal balances unless interest rates increase.         13




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15-year 30-year 30-year
         14




---



##### Table of Contents



Cumulative LossRatios as ofDirect Risk


Percent


December 31Certificate Year

in Force


of Total


2005


2004(In millions)1995 and before

$
30.9



0.4
%1996


16.8



0.2



13.9



13.61997


29.4



0.4



9.9



9.61998


72.7



0.9



6.4



6.01999


60.4



0.8



9.0



7.82000


52.0



0.6



32.0



27.82001


289.4



3.6



23.7



15.92002


687.0



8.6



22.4



10.22003


2,111.7



26.3



7.8



1.22004


2,077.7



25.9



2.0



0.02005


2,588.3



32.3



0.0Total

$
8,016.3



100.0
%     Alt-A Alt-A. Alt-A
  2005


2004Primary insurance


9.9
%


7.3
%Modified Pool insurance


66.9
%


56.2
%Total insurance


28.6
%


17.7
%  15




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##### Table of Contents



Geographic
    Dispersion
    Top Ten States




Top Ten MSAsCalifornia


10.1
%

Chicago, IL


4.1
%Florida


9.2


Phoenix/Mesa, AZ


3.3Texas


7.6


Atlanta, GA


2.8Illinois


4.6


Los Angeles/Long Beach, CA


2.3Arizona


4.5


Houston, TX


2.1Georgia


4.4


Las Vegas, NV


2.0North Carolina


4.2


Riverside/San Bernardino, CA


1.9New Jersey


3.6


New York, NY


1.7New York


3.5


Denver, CO


1.7Colorado


3.3


Minneapolis/St. Paul, MN


1.6Total


55.0
%

Total


23.5
%     Investment
    Portfolio
    Regulation
  Direct
    Regulation
    and/or
   16




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17




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##### Table of Contents





























18



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##### Table of Contents



















Indirect
    Regulation










19



---



##### Table of Contents



Web Site
    Access to Company Reports
  Form 10-K, Form 10-Q, Form 8-K,
  Employees
   20




---



##### Table of Contents



Executive
    Officers
    Name

Position

AgeWilliam T. Ratliff, III

Chairman of the Board of the
    Company and Triad


52Mark K. Tonnesen

President, Chief Executive
    Officer, and Director of the Company and Triad


54Eric B. Dana

Senior Vice President and Chief
    Financial Officer of the Company and Triad


41Kenneth N. Lard

Executive Vice President of the
    Company and Executive Vice President, Sales and Operations of
    Triad


47Earl F. Wall

Senior Vice President, Secretary,
    and General Counsel of the Company and Triad


48Kenneth C. Foster

Senior Vice President, Risk
    Management of Triad


57   William T. Ratliff, III
  Mark K. Tonnesen
  Eric B. Dana
  Kenneth N. Lard
  Earl F. Wall
 21




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##### Table of Contents



Kenneth C. Foster
   Item 1A.Risk
    Factors    If
    deteriorating economic conditions alter the frequency and
    severity patterns utilized in our estimates for reserves for
    losses, we may be required to take additional charges to
    earnings.
    Since,
    consistent with industry practice, we generally provide reserves
    only for loans in default that have been reported to us and an
    estimate of loans in default not yet reported to us, any
    increase in the level of delinquent loans reported would require
    an increase to reserves and a charge to earnings.
    Because
    our business is concentrated among relatively few major lenders,
    our revenues and net income could decline if we lose a
    significant customer.
    If
    housing values fail to appreciate or decline significantly, we
    may incur a higher level of losses from paid claims and also be
    required to increase reserves.
   22




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##### Table of Contents



Because a
    growing portion our business is sensitive to interest rates, a
    significant increase in rates would cause higher monthly
    mortgage payments for borrowers that could lead to a greater
    number of defaults, which would adversely impact our
    business.
    The
    premiums we charge for mortgage insurance on non-prime loans,
    ARMs and Alt-A loans may not be adequate to compensate for
    future losses from these products.
    A growing
    portion of our insurance in force consists of loans with high
    loan-to-value
    ratios or loans that are non-prime or both, which could result
    in more and larger claims than loans with lower
    loan-to-value
    ratios or prime loans.
     23




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##### Table of Contents



A
    downgrade or potential downgrade of the financial strength
    ratings assigned to our primary insurance subsidiary could
    weaken its competitive position.
    Changes
    in the business practices or legislation relating to Fannie Mae
    and Freddie Mac could significantly impact our
    business.
      Legislation
    and regulatory changes, including changes impacting the GSEs,
    could significantly affect our business and could reduce demand
    for private mortgage insurance.
     24




---



##### Table of Contents



Our
    revenues and profits could decline if we lose market share as a
    result of industry competition or if our competitive position
    suffers as a result of our inability to introduce and
    successfully market new products and programs.
      If
    mortgage lenders and investors select alternatives to private
    mortgage insurance, the amount of insurance that we write could
    decline, which could reduce our revenues and profits.
    
    mortgage lenders structuring mortgage originations to avoid
    private mortgage insurance utilizing 80-10-10 structures; over
    the past several years, the volume of these loans, or variations
    of them, as alternatives to loans requiring mortgage insurance,
    has increased significantly and may continue to do so for the
    foreseeable future;
    investors using credit enhancements as a partial or complete
    substitute for private mortgage insurance;
    lenders and investors holding mortgages in their portfolios and
    self-insuring;
    member institutions providing credit enhancement on loans sold
    to a Federal Home Loan Bank, or FHLB, which do not have the
    same requirements for mortgage insurance as Fannie Mae and
    Freddie Mac.  Changes
    in regulatory requirements could impact captive mortgage
    insurance arrangements for all industry participants.
   25




---



##### Table of Contents



Since we
    generally cannot cancel mortgage insurance policies or adjust
    renewal premiums, unanticipated claims could cause our financial
    performance to suffer.
    Our loss
    experience is likely to increase as our policies continue to
    age.
    Our
    revenues and DAC amortization depend on the renewal of policies
    that may terminate or fail to renew.
    Our
    delegated underwriting program may subject our mortgage
    insurance business to unanticipated claims.
   Item 1B.  Unresolved
    Staff Comments   26




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##### Table of Contents



Item 2.
    Properties      Item 3.
    Legal
    Proceedings    Broessel v. Triad.
  Item 4.
    Submission
    of Matters to a Vote of Security Holders    PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities    ®
  2005


2004High


Low


High


LowFirst Quarter

$
59.50


$
50.20


$
55.87


$
49.50Second Quarter

$
55.04


$
49.50


$
59.37


$
52.53Third Quarter

$
53.88


$
37.74


$
59.09


$
51.01Fourth Quarter

$
45.85


$
35.75


$
60.80


$
51.55      27




---



##### Table of Contents



28




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  Year Ended
    December 312005


2004


2003


2002


2001(Dollars in thousands, except
    per share amounts)Income Statement Data(for period ended):Premiums written:Direct

$
207,260


$
176,696


$
154,046


$
124,214


$
95,551Ceded


(40,644
)


(35,365
)


(27,310
)


(18,345
)


(10,553
)$
166,616


$
141,331


$
126,736


$
105,869


$
84,998Earned premiums

$
168,997


$
140,992


$
119,732


$
105,067


$
84,356Net investment income


22,998



19,754



17,082



16,099



14,765Net realized gains (losses)


36



504



3,029



(2,519
)


297Other income


15



16



24



72



1,892Total revenues


192,046



161,266



139,867



118,719



101,310Net losses and loss adjustment
    expenses


66,855



35,864



23,833



14,063



9,019Interest expense on debt


2,773



2,772



2,772



2,771



2,771Amortization of deferred
    acquisition cost


14,902



14,256



18,112



13,742



11,712Other operating expenses (net of
    acquisition cost deferred)


29,610



26,483



22,776



22,900



18,136Income before income taxes


77,906



81,891



72,374



65,243



59,672Income taxes


21,093



23,474



21,283



20,140



18,413Net income

$
56,813


$
58,417


$
51,091


$
45,103


$
41,259Basic earnings per share

$
3.87


$
4.04


$
3.57


$
3.21


$
3.05Diluted earnings per share

$
3.84


$
3.98


$
3.52


$
3.15


$
2.95Weighted average common and common
    share equivalents outstandingBasic


14,691,478



14,458,453



14,322,216



14,060,420



13,545,725Diluted


14,808,387



14,681,228



14,509,538



14,331,581



13,977,435Balance Sheet Data(at year end):Total assets

$
767,503


$
672,035


$
575,579


$
482,886


$
396,455Total invested assets

$
547,019


$
476,913


$
399,571


$
326,537


$
263,392Losses and loss adjustment expenses

$
51,074


$
34,042


$
27,186


$
21,360


$
17,991Unearned premiums

$
13,494


$
15,942


$
15,630


$
8,539


$
7,650Long-term debt

$
34,501


$
34,493


$
34,486


$
34,479


$
34,473Stockholders equity

$
499,191


$
437,343


$
369,930


$
309,407


$
246,070Statutory
    Ratios(1):Loss ratio


39.6
%


25.4
%


19.9
%


13.4
%


10.7
%Expense ratio


25.2
%


29.4
%


33.0
%


38.0
%


39.9
%Combined ratio


64.8
%


54.8
%


52.9
%


51.4
%


50.6
%GAAP Ratios:Loss ratio


39.6
%


25.4
%


19.9
%


13.4
%


10.7
%Expense ratio


26.7
%


28.8
%


32.3
%


34.6
%


35.1
%Combined ratio


66.3
%


54.2
%


52.2
%


48.0
%


45.8
%Other Statutory Data(dollars in millions)(1):Direct insurance in force

$
44,407.0


$
36,827.0


$
31,747.8


$
25,379.1


$
21,726.0Direct risk in force (gross)

$
8,016.3


$
7,627.0


$
7,024.0


$
5,790.9


$
4,581.5Risk-to-capital


12.5:1



14.0:1



15.3:1



15.5:1



15.0:1     (1)
    
    Based on statutory accounting practices and derived from
    combined statutory financial statements of Triad. 29




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations      Critical
    Accounting Policies and Estimates
    Reserves
    for Losses and Loss Adjustment Expenses
       30




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##### Table of Contents



Investments
    other-than-temporarily other-than-temporary
  Deferred
    Policy Acquisition Costs
    Overview
  loan-by-loan
       31




---



##### Table of Contents



Consolidated
    Results of Operations
  year-to-year:
  % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003(In thousands, except
    percentages and per share information)Earned premiums

$
168,997


$
140,992


$
119,732



19.9
%


17.8
%Net losses and loss adjustment
    expenses


66,855



35,864



23,833



86.4



50.5Net income


56,813



58,417



51,091



(2.7
)


14.3Diluted earnings per share

$
3.84


$
3.98


$
3.52



(3.5
)


13.1       other-than-temporarily
    Production
    and In Force
  year-to-year
  % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003(In millions, except
    percentages)Primary insurance written

$
10,488


$
10,709


$
17,428



(2.1
)%


(38.6
)%Modified pool insurance written


10,681



6,463



3,067



65.3



110.7Total insurance written

$
21,169


$
17,172


$
20,495



23.3
%


(16.2
)%    32




---



##### Table of Contents



2005


2004


2003Flow channel


5.7
%


4.8
%


5.0
%Structured bulk channel


11.5
%


11.3
%


4.4
%Total


7.5
%


6.0
%


4.9
%     Alt-A defined Alt-A
 33




---



##### Table of Contents



Alt-A
  2005


2004


2003Prime


76.1
%


81.7
%


87.1
%Alt-A


18.3
%


13.6
%


6.9
%A Minus


4.3
%


4.0
%


4.4
%Sub Prime


1.3
%


0.7
%


1.6
%Total


100.0
%


100.0
%


100.0
%     2005


2004


2003ARMs


37.4
%


33.6
%


19.3
%LTV greater than 95%


12.4
%


12.7
%


7.5
%   Alt-A
      % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003Primary insurance

$
29,792


$
28,964


$
27,929



2.9
%


3.7
%Modified Pool insurance


14,615



7,863



3,819



85.9



105.9Total insurance

$
44,407


$
36,827


$
31,748



20.6
%


16.0
%    34




---



##### Table of Contents



2005


2004


2003Primary insurance in force


9.9%



7.3%



5.2%Modified Pool insurance in force


66.9%



56.2%



48.0%Total insurance in force


28.6%



17.7%



10.3%     2005


2004


2003Primary direct insurance in force


58.1%



55.1%



49.6%Total direct insurance in force


39.0%



43.4%



43.6%     lender-by-lender
 35




---



##### Table of Contents



Revenues
  year-to-year
  % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003(In thousands, except
    percentages)Direct premium written

$
207,260


$
176,696


$
154,046



17.3
%


14.7
%Ceded premium written


(40,644
)


(35,365
)


(27,310
)


14.9



29.5Net premium written


166,616



141,331



126,736



17.9



11.5Change in unearned premiums


2,381



(339
)


(7,004
)


802.4



95.2Earned premiums


168,997



140,992



119,732



19.9



17.8Net investment income


22,998



19,754



17,082



16.4



15.6Net realized investment gains


36



504



3,029



(92.9
)


(83.4
)Other income


15



16



24



(6.3
)


(33.3
)Total revenues

$
192,046


$
161,266


$
139,867



19.1
%


15.3
%   and/or
  Alt-A
  2005


2004


2003Credit quality:Prime


84.2
%


86.4
%


88.1
%Alt-A


10.8



8.1



5.8A Minus


4.2



4.5



4.8Sub Prime


0.8



1.0



1.3Total


100.0
%


100.0
%


100.0
%Loan type:Fixed


73.8
%


76.4
%


81.8
%ARM


26.2



23.6



18.2Total


100.0
%


100.0
%


100.0
%  36




---



##### Table of Contents



2005


2004


2003Premium cede rate (ceded premiums
    written as a percentage of direct premiums written)


19.6%



20.0%



17.7%Captive reinsurance premium cede
    rate (ceded premiums written under captive reinsurance
    arrangements as a percentage of direct premiums written)


18.1%



18.0%



15.4%Average captive premium cede rate
    (ceded premiums written under captive reinsurance arrangements
    as a percentage of direct premiums written under captive
    reinsurance arrangements)


36.7%



36.9%



35.2%     2005


2004


2003Primary insurance written


54.1%



54.4%



43.8%Total insurance written


26.8%



33.9%



37.3%           other-than-temporarily other-than-temporarily
 37




---



##### Table of Contents



Losses
    and Expenses
  year-to-year
  % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003(In thousands, except
    percentages)Net losses and loss adjustment
    expenses

$
66,855


$
35,864


$
23,833



86.4
%


50.5
%Interest expense on debt


2,773



2,772



2,772







Amortization of deferred policy
    acquisition costs


14,902



14,256



18,112



4.5



(21.3
)Other operating expenses (net of
    acquisition costs deferred)


29,610



26,483



22,776



11.8



16.3Total losses and expenses

$
114,140


$
79,375


$
67,493



43.8
%


17.6
%Loss ratio


39.6
%


25.4
%


19.9
%Expense ratio


26.7
%


28.8
%


32.3
%Combined ratio


66.3
%


54.2
%


52.2
%       % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003(In thousands, except
    percentages)Paid claims:Primary insurance

$
44,369


$
25,695


$
16,135



72.7
%


59.3
%Modified Pool insurance


4,457



2,640



1,406



68.8



87.8Total

$
48,826


$
28,335


$
17,541



72.3
%


61.5
%Average severity:Primary insurance

$
26.6


$
23.3


$
24.5Modified Pool insurance


20.5



14.2



21.6Total


25.9



22.0



24.1    38




---



##### Table of Contents



Policy year

2005


2004


20032001 and prior


6.9%



10.7%



19.7%2002


8.6%



14.0%



24.9%2003


26.6%



40.5%



55.4%2004


26.1%



34.8%



2005


31.8%







Total


100.0%



100.0%



100.0%           % Change


% Change2005


2004


2003


2005 vs. 2004


2004 vs. 2003Primary insurance:Reserves for reported defaults

$
44,198


$
28,408


$
21,933



55.6
%


29.5
%Reserves for defaults incurred but
    not reported


4,536



3,493



3,114



29.9



12.2Total Primary insurance


48,734



31,901



25,047



52.8



27.4Modified Pool insurance:Reserves for reported defaults


1,836



1,809



1,835



1.5



(1.4
)Reserves for defaults incurred but
    not reported


403



235



206



71.5



14.1Total Modified Pool insurance


2,239



2,044



2,041



9.5



0.1Reserve for loss adjustment
    expenses


101



97



98



4.1



(1.0
)Total reserves for losses and loss
    adjustment expenses

$
51,074


$
34,042


$
27,186



50.0
%


25.2
%    39




---



##### Table of Contents



2005


2004


2003Total business:Number of insured loans in force


302,488



266,574



236,234Number of loans in default


7,163



5,445



4,242With deductibles


1,090



410



17Without deductibles


6,073



5,035



4,225Percentage of loans in default
    (default rate)


2.37
%


2.04
%


1.80
%Percentage of loans in default
    excluding deductibles


2.01
%


1.89
%


1.79
%Primary insurance:Number of insured loans in force


217,397



218,011



211,805Number of loans in default


5,336



4,203



3,397Percentage of loans in default


2.45
%


1.93
%


1.60
%Modified Pool insurance:Number of insured loans in force


85,091



48,563



24,429Number of loans in default


1,827



1,242



845With deductibles


1,090



410



17Without deductibles


737



832



828Percentage of loans in default


2.15
%


2.56
%


3.46
%Percentage of loans in default
    excluding deductibles


0.87
%


1.71
%


3.39
%Primary
    Alt-A
    business:Number of insured loans in force


16,378



12,714



9,212Number of loans in default


590



442



248Percentage of loans in default


3.60
%


3.48
%


2.69
%   Alt-A
   40




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##### Table of Contents



Significant
    Customers
   41




---



##### Table of Contents



Financial
    Position
    Deferred
    Policy Acquisition Costs
        DAC Asset2005


2004


2003Balance  beginning
    of year

$
32,453


$
29,363


$
28,997Costs capitalized


16,132



17,346



18,478Amortization  normal


(13,190
)


(12,194
)


(12,569
)Amortization  dynamic
    adjustment


(1,711
)


(2,062
)


(5,543
)Total amortization


(14,901
)


(14,256
)


(18,112
)Balance  end of
    year

$
33,684


$
32,453


$
29,363Annual Persistency


68.7
%


67.6
%


50.7
%    42




---



##### Table of Contents



Prepaid
    Federal Income Taxes and Deferred Income Taxes
      Investment
    Portfolio
  Portfolio
    Description
      December 31,


December 31,2005


2004Amount


Percent


Amount


PercentFixed maturity
    securities:U.S. government obligations

$
12,124



2.2
%

$
12,728



2.7
%State and municipal bonds


500,027



91.4



415,250



87.0Corporate bonds


21,855



4.0



26,063



5.5Mortgage-backed bonds


58



0.0



80



0.0Total fixed maturities


534,064



97.6



454,121



95.2Equity securities


8,159



1.5



10,272



2.2Total
    available-for-sale
    securities


542,223



99.1



464,393



97.4Short-term
    investments


4,796



0.9



12,520



2.6$
547,019



100.0
%

$
476,913



100.0
%    43




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##### Table of Contents



Carrying


% of TotalName of Creditor

Value


Invested AssetsAtlanta, Georgia Airport

$
6,856



1.25%Federal National Mortgage
    Association


5,413



0.99%AAM/ZAZOVE Institutional Income
    Fund


5,128



0.94%Port of Seattle, Washington


4,610



0.84%Michigan State Housing Development
    Authority


4,500



0.82%Denver, Colorado City and County
    Airport


4,249



0.78%Cook County, Illinois


4,230



0.77%Charlotte, North Carolina Airport


4,179



0.76%State of Nevada Water Pollution
    Control


4,076



0.75%University of Texas


4,016



0.73%       2005


2004


2003Average investments at cost or
    amortized cost

$
493,256


$
419,467


$
347,809Pre-tax net investment income

$
22,998


$
19,754


$
17,082Effective pre-tax yield


4.7
%


4.7
%


4.9
%Tax-equivalent
    yield-to-maturity


6.8
%


7.0
%


7.1
%Pre-tax realized investment gains

$
36


$
504


$
3,029   yield-to-maturity
  Unrealized
    Gains and Losses
    Cost or


Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


ValueFixed maturity
    securities:U.S. government obligations

$
12,348


$
16


$
(240
)

$
12,124State and municipal bonds


486,014



14,993



(980
)


500,027Corporate bonds


19,719



2,211



(75
)


21,855Mortgage-backed bonds


56



2







58Subtotal, fixed maturities


518,137



17,222



(1,295
)


534,064Equity securities


7,001



1,284



(126
)


8,159Total securities

$
525,138


$
18,506


$
(1,421
)

$
542,223  44




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##### Table of Contents



Credit
    Risk
    December 31,


December 31,2005


2004Amount


Percent


Amount


PercentFixed Maturities:U.S. treasury and agency bonds

$
12,124



2.3
%

$
12,808



2.8
%AAA


420,489



78.7



332,929



73.3AA


52,812



9.9



53,285



11.7A


30,176



5.7



33,530



7.4BBB


9,780



1.8



12,680



2.8BB


781



0.1



254



0.1B






0.0



205



0.0CCC and lower






0.0



215



0.1Not rated


7,902



1.5



8,215



1.8Total fixed maturities

$
534,064



100.0
%

$
454,121



100.0
%Equities:Preferred stocks:AA

$
1,709



20.9
%

$
1,519



14.8A


1,559



19.1



2,165



21.1BBB


1,125



13.8



1,155



11.2Not rated


490



6.0



525



5.14,883



59.8



5,364



52.2Common stocks


3,276



40.2



4,908



47.8Total equities

$
8,159



100.0
%

$
10,272



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 45




---



##### Table of Contents



other-than-temporary other-than-temporary
  other-than-temporary other-than-temporary
    other-than-temporary
  Realized
    Losses and Impairments
  other-than-temporary
  
    Approximately $75,000 was a write-down on preferred stock of a
    U.S. car manufacturer for which the fair value had
    fluctuated below 80% of amortized cost and was in an unrealized
    loss position for a continuous six-month period. The issuer had
    posted weak operating results throughout 2005, lowered earnings
    projections, and had been downgraded by rating agencies. We sold
    this security following the write-down in 2005 and realized a
    small loss on the sale.
    We also owned bonds of a financing company related to this same
    U.S. car manufacturer at the time of our assessment of this
    impairment. Although the bonds had a fair value above 90% of
    amortized cost, we determined the impairment was
    other-than-temporary
    due to the circumstances surrounding the related car
    manufacturer and wrote down the bonds by approximately $60,000.
    We still hold this security at December 31, 2005, and its
    fair value approximated its amortized cost at that time. No
    other securities were impacted by the circumstances surrounding
    these impairments.    
    Approximately $192,000 was a write-down on preferred stock in an
    international airline for which the value had fluctuated below
    80% of amortized cost for over a year. The write-down resulted
    from our assessment that the security was
    other-than-temporarily
    impaired because of a reduction in credit quality by rating
    agencies. We sold this security in 2004 following the write-down
    and realized a small gain. The circumstances surrounding this
    impairment did not impact other securities in our portfolio.
    Approximately $176,000 was a write-down in the third quarter on
    common stock of a pharmaceutical company for which the value had
    fluctuated below 80% of amortized cost after the company was
    required to 46




---



##### Table of Contents



cease sales of one of its major products due to alleged health
    risks. Rating agencies then reduced the credit ratings for this
    company. We sold this security in the next quarter following the
    write-down at an amount that approximated its carrying value
    after the write-down. The circumstances surrounding this
    impairment did not impact other securities in our portfolio.    
    Approximately $216,000 was a write-down on common stock of an
    automobile manufacturer for which the value had fluctuated below
    85% of amortized cost for more than six months. Our assessment
    deemed that the security would not significantly recover in
    value over our anticipated holding period. This security was
    later sold at an amount that approximated its carrying value
    after the write-down. The circumstances surrounding this
    impairment did not impact other securities in our portfolio.
    Approximately $173,000 was a write-down on common stock of an
    energy provider for which the value had fluctuated below 85% of
    amortized cost for more than six months. Our assessment deemed
    that the security would not significantly recover in value over
    our anticipated holding period. The circumstances surrounding
    this impairment did not impact other securities in our portfolio.
    Approximately $175,000 was a write-down on a bond issue
    collateralized by high-yield securities that continued to
    experience excessive defaults on its underlying securities. The
    circumstances surrounding this impairment did not impact other
    securities in our portfolio.
    Approximately $165,000 was a write-down on common stock of a
    pharmaceutical company for which patents on various products
    were expiring. The market value of the equity had fluctuated
    below 55% of its cost. We subsequently sold these securities at
    an amount that approximated its carrying value after the
    write-down. The circumstances surrounding this impairment did
    not impact other securities in our portfolio.  Liquidity
    and Capital Resources
         47




---



##### Table of Contents



paid-in-capital
    2005


2004Statutory policyholders
    surplus

$
131.6


$
135.7Statutory contingency reserve


447.8



369.4Total

$
579.4


$
505.1     risk-to-capital 25-to-1. risk-to-capital 12.6-to-1 14.0-to-1 risk-to-capital
       48




---



##### Table of Contents



Off
    Balance Sheet Arrangements and Aggregate Contractual
    Obligations
        Payments Due By PeriodLess Than


1  3


3  5


More ThanContractual
    Obligations

Total


1 year


Years


Years


5 YearsLong-term debt

$
35,000


$



$



$



$
35,000Operating leases


8,916



1,689



2,663



2,296



2,268Other long-term liabilities
    reflected on the Registrants balance sheet under GAAP


51,074



45,967



5,107







Total

$
94,990


$
47,656


$
7,770


$
2,296


$
37,268     Market
    Risk Exposure
    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; 49




---



##### Table of Contents




    the amount of insurance written could be adversely affected by
    changes in federal housing legislation, including changes in the
    Federal Housing Administration loan limits and coverage
    requirements of Freddie Mac and Fannie Mae (Government Sponsored
    Enterprises);
    our financial condition and competitive position could be
    affected by legislation or regulation impacting the mortgage
    guaranty industry or the Government Sponsored Entities,
    specifically, and the financial services industry in general;
    rating agencies may revise methodologies for determining our
    financial strength ratings and may revise or withdraw the
    assigned ratings at any time;
    decreases in persistency, which are affected by loan
    refinancings in periods of low interest rates, may have an
    adverse effect on earnings;
    the amount of insurance written and the growth in insurance in
    force or risk in force as well as our performance may be
    adversely impacted by the competitive environment in the private
    mortgage insurance industry, including the type, structure, 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 7A.
    Qualitative
    and Quantitative Disclosures about Market Risks    Item 8.
    Financial
    Statements and Supplementary Data   50




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Conclusions
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Rules 13a-15(e) 15d-15(e)
  Form 10-K
  Changes
    in Internal Control over Financial Reporting
    Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f)
   51




---



##### Table of Contents



52




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm on Internal
    Control
    Over Financial Reporting
  The Board of Directors and Stockholders of Triad Guaranty
    Inc.
  Managements Annual Report on Internal
    Control over Financial Reporting
            
    53




---



##### Table of Contents



Item 9B.
    Other Information    PART III  Item 10.
    Directors
    and Executive Officers of the Registrant      
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services    PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules      Form 10-K
     54




---



##### Table of Contents



55




---



##### Table of Contents



SIGNATURES    By:
    /s/  Mark K. Tonnesen   President and Chief Executive Officer
    Signature

Title/s/  William T.
    Ratliff, IIIWilliam
    T. Ratliff, III

Chairman of the Board/s/  Mark K. TonnesenMark
    K. Tonnesen

President, Chief Executive
    Officer, and Director/s/  Eric B. DanaEric
    B. Dana

Senior Vice President, Chief
    Financial Officer/s/  Kenneth S. DwyerKenneth
    S. Dwyer

Vice President, and Chief
    Accounting Officer/s/  David W.
    WhitehurstDavid
    W. Whitehurst

Director/s/  Robert T. DavidRobert
    T. David

Director/s/  Michael A. F.
    RobertsMichael
    A. F. Roberts

Director/s/  Richard S.
    SwansonRichard
    S. Swanson

Director/s/  Glenn T.
    Austin, Jr.Glenn
    T. Austin, Jr.

Director  56




---



##### Table of Contents



ANNUAL REPORT ON
    FORM 10-K
  ITEM 8, ITEM 15(a)(1) and (2), (3), (c), and (d)
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
    SCHEDULES
  INDEX TO EXHIBITS
  CONSOLIDATED FINANCIAL STATEMENTS
  FINANCIAL STATEMENT SCHEDULES
  CERTAIN EXHIBITS
  YEAR ENDED DECEMBER 31, 2005
  TRIAD GUARANTY INC.
  WINSTON-SALEM, NORTH CAROLINA
  57




---



##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
    AND FINANCIAL STATEMENT SCHEDULES
    (Item 15(a) 1 and 2)
  PageConsolidated Financial
    StatementsReport of
    Independent Auditors


61Consolidated
    Balance Sheets at December 31, 2005 and 2004


62Consolidated
    Statements of Income for each of the three years in the period
    ended December 31, 2005


63Consolidated
    Statements of Changes in Stockholders Equity for each of
    the three years in the period ended December 31, 2005


64Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2005


65Notes to
    Consolidated Financial Statements


66Financial Statement
    SchedulesSchedules at and for each of the
    three years in the period ended December 31, 2005Schedule I  Summary
    of Investments  Other Than Investments in
    Related Parties


82Schedule II  Condensed
    Financial Information of Registrant


83Schedule IV  Reinsurance


88    58




---



##### Table of Contents



INDEX TO
    EXHIBITS
    (Item 15(a) 3)
  Exhibit Number

Description of Exhibit3
.1

Certificate of Incorporation of
    the Registrant, as amended (5) (Exhibit 3.1)3
.2

By-Laws of the Registrant as
    amended March 21, 2003 (10)(Exhibit 3.2(c))4
.1

Form of Common Stock
    certificate (1) (Exhibit 4(a))4
.2

Indenture Between Triad Guaranty
    Inc. and Bankers Trust Co. (6) (Exhibit 4.2)10
.1

1993 Long-Term Stock Incentive
    Plan (1) (3) (Exhibit 10(a))10
.6

Registration Agreement among the
    Registrant, Collateral Investment Corp. and Collateral Mortgage,
    Ltd. (2) (Exhibit 10.6)10
.16

Economic Value Added Incentive
    Bonus Program (Senior Management) (4) (Exhibit 10.16)10
.21

Excess of Loss Reinsurance
    Agreement between Triad Guaranty Insurance Corporation, Capital
    Mortgage Reinsurance Company, and Federal Insurance Company. (7)
    (Exhibit 10.21)10
.22

Excess of Loss Reinsurance
    Agreement between Triad Guaranty Insurance Corporation and Ace
    Capital Mortgage Reinsurance Company. (8) (Exhibit 10.22)10
.23

Employment Agreement between the
    Registrant and Earl F. Wall (3) (9)
    (Exhibit 10.23)10
.25

Employment Agreement between the
    Registrant and Kenneth N. Lard (3)(10) (Exhibit 10.25)10
.26

Employment Agreement between the
    Registrant and Kenneth C. Foster (3)(10)
    (Exhibit 10.26)10
.27

Consulting Agreement between the
    Registrant, Triad Guaranty Insurance Corporation, Triad Guaranty
    Assurance Company and Collateral Mortgage, Ltd. Providing advice
    and counsel regarding the investment strategy and tactics of
    Conning Asset Management Company, the Registrants new
    investment advisor. (11) (Exhibit 10.27)10
.28

Administrative Services Agreement
    between the Registrant, Triad Guaranty Insurance Corporation,
    Collateral Mortgage, Ltd., Collat, Inc., and New South Federal
    Savings Bank. (11) (Exhibit 10.28)10
.29

Employment Agreement between the
    Registrant and Eric B. Dana. (3)(12)(Exhibit 10.29)10
.30

Exchange Agreement by and among
    the Registrant, Collateral Investment Corp. and the Shareholders
    of Collateral Investment Corp. Listed on the Signature Pages
    Hereto.(12)(Exhibit 10.30)10
.31

Amendment to Employment Agreement
    between the Registrant and Kenneth N. Lard.
    (3)(12)(Exhibit 10.31)10
.32

Employment Agreement and Related
    Document between the Registrant and Mark K. Tonnesen.
    (3)(13)(Exhibit 10.32)10
.33

Employment Agreement between the
    Registrant and Ron D. Kessinger replacing previous
    Exhibits 10.11 and 10.20. (3) (14)(Exhibit 10.33)10
.34

Summary of plan of compensation
    for directors of the Registrant (3)(15)21
.1

Subsidiaries of the
    Registrant (7) (Exhibit 21.1)*23
.1

Consent of Ernst & Young
    LLP (Exhibit 23.1)*31
.1

Chief Executive Officer
    Sarbanes-Oxley Act Section 302 Certification dated
    March 8, 2006, for the Triad Guaranty Inc.s Annual
    report on
    Form 10-K
    for the year ended December 31, 2005*31
.2

Chief Financial Officer
    Sarbanes-Oxley Act Section 302 Certification dated
    March 8, 2006, for the Triad Guaranty Inc.s Annual
    report on
    Form 10-K
    for the year ended December 31, 2006*32
.1

Chief Executive Officer
    Sarbanes-Oxley Act Section 906 Certification dated
    March 8, 2006, for the Triad Guaranty Inc.s Annual
    report on
    Form 10-K
    for the year ended December 31, 2005*32
.2

Chief Financial Officer
    Sarbanes-Oxley Act Section 906 Certification dated
    March 8, 2006, for the Triad Guaranty Inc.s Annual
    report on
    Form 10-K
    for the year ended December 31, 2005     *
    
    Filed Herewith.(1)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the Registrants
    Registration Statement on
    Form S-1
    filed October 22, 1993 and amendments thereto. 59




---



##### Table of Contents



(2)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 1993
    Form 10-K.(3)
    
    Denotes management contract or compensatory plan of arrangement
    required to be filed as an exhibit to this report pursuant to
    Item 601 of
    Regulation S-K.(4)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 1996
    Form 10-K.(5)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the June 30, 1997
    Form 10-Q.(6)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 1997
    Form 10-K.(7)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 1999
    Form 10-K.(8)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 2000
    Form 10-K.(9)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the June 30, 2002
    Form 10-Q.(10)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 2002
    Form 10-K.(11)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the 2004
    Form 10-K.(12)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the June 30, 2005
    Form 10-Q.(13)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the September 30, 2005
    Form 10-Q.(14)
    
    Incorporated by reference to the exhibit identified in
    parentheses, filed as an exhibit in the January 11, 2006
    Form 8-K
    Current Report.(15)
    
    Incorporated by reference to the Form 8-K Current Report
    filed March 2, 2006. 60




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  The Board of Directors and Stockholders
 of Triad Guaranty Inc.
            61




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 312005


2004(In thousands, except share
    data)ASSETSInvested assets:Securities
    available-for-sale,
    at fair value:Fixed maturities (amortized cost:
    2005  $518,137; 2004  $435,432)

$
534,064


$
454,121Equity securities (cost:
    2005  $7,001; 2004  $8,626)


8,159



10,272Short-term investments


4,796



12,520547,019



476,913Cash and cash equivalents


8,934



10,440Real estate acquired in claim
    settlement


5,721



211Accrued investment income


7,237



6,229Deferred policy acquisition costs


33,684



32,453Property and equipment, at cost
    less accumulated depreciation (2005  $18,628;
    2004  $15,172)


7,827



8,945Prepaid federal income tax


139,465



119,132Income taxes recoverable


181



977Reinsurance recoverable


948



1,164Other assets


16,487



15,571Total assets

$
767,503


$
672,035LIABILITIES AND
    STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses

$
51,074


$
34,042Unearned premiums


13,494



15,942Amounts payable to reinsurer


4,810



4,467Deferred income taxes


155,189



137,925Unearned ceding commission


4



200Long-term debt


34,501



34,493Accrued interest on debt


1,275



1,275Accrued expenses and other
    liabilities


7,965



6,348Total liabilities


268,312



234,692Commitments and contingencies
    (Notes 5, 7, and 14)Stockholders 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
    14,774,153 shares at December 31, 2005, and 14,631,678
    at December 31, 2004


148



146Additional paid-in capital


103,657



94,852Accumulated other comprehensive
    income, net of income tax liability of $5,980 at
    December 31, 2005, and $7,117 at December 31, 2004


11,106



13,218Deferred compensation


(3,161
)


(1,501
)Retained earnings


387,441



330,628Total stockholders equity


499,191



437,343Total liabilities and
    stockholders equity

$
767,503


$
672,035    62




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
  Year Ended
    December 312005


2004


2003(In thousands, except share
    data)Revenue:Premiums written:Direct

$
207,260


$
176,696


$
154,046Ceded


(40,644
)


(35,365
)


(27,310
)Net premiums written


166,616



141,331



126,736Change in unearned premiums


2,381



(339
)


(7,004
)Earned premiums


168,997



140,992



119,732Net investment income


22,998



19,754



17,082Net realized investment gains


36



504



3,029Other income


15



16



24192,046



161,266



139,867Losses and expenses:Net losses and loss adjustment
    expenses


66,855



35,864



23,833Interest expense on debt


2,773



2,772



2,772Amortization of deferred policy
    acquisition costs


14,902



14,256



18,112Other operating expenses (net of
    acquisition costs deferred)


29,610



26,483



22,776114,140



79,375



67,493Income before income taxes


77,906



81,891



72,374Income taxes:Current


2,805



2,295



716Deferred


18,288



21,179



20,56721,093



23,474



21,283Net income

$
56,813


$
58,417


$
51,091Earnings per common and common
    equivalent share:Basic

$
3.87


$
4.04


$
3.57Diluted

$
3.84


$
3.98


$
3.52Shares used in computing earnings
    per common and common equivalent share:Basic


14,691,478



14,458,453



14,322,216Diluted


14,808,387



14,681,228



14,509,538    63




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
  AccumulatedAdditional


OtherPaid-In


Comprehensive


Deferred


RetainedCommon Stock


Capital


Income


Compensation


Earnings


Total(In thousands, except share
    data)Balance at December 31, 2002

$
142


$
80,169


$
8,634


$
(658
)

$
221,120


$
309,407Net income


















51,091



51,091Other comprehensive
    income  net of tax:Change in net unrealized gain










2,556











2,556Comprehensive income






















53,647Issuance of common stock under
    stock incentive plan


2



4,051















4,053Tax effect of exercise of
    non-qualified stock options






2,133















2,133Net issuance of restricted stock
    under stock incentive plan






1,160







(1,160
)






Amortization of deferred
    compensation














690







690Balance at December 31, 2003


144



87,513



11,190



(1,128
)


272,211



369,930Net income


















58,417



58,417Other comprehensive
    income  net of tax:Change in net unrealized gain










2,028











2,028Comprehensive income






















60,445Issuance of common stock under
    stock incentive plan


2



3,739















3,741Tax effect of exercise of
    non-qualified stock options






1,995















1,995Net issuance of restricted stock
    under stock incentive plan






1,605







(1,605
)






Amortization of deferred
    compensation














1,232







1,232Balance at December 31, 2004


146



94,852



13,218



(1,501
)


330,628



437,343Net income


















56,813



56,813Other comprehensive
    income  net of tax:Change in net unrealized gain










(2,112
)










(2,112
)Comprehensive income






















54,701Issuance of common stock under
    stock incentive plan


2



3,267















3,269Tax effect of exercise of
    non-qualified stock options and vesting of restricted stock






2,090















2,090Net issuance of restricted stock
    under stock incentive plan






3,448







(3,448
)






Amortization of deferred
    compensation














1,788







1,788Balance at December 31, 2005

$
148


$
103,657


$
11,106


$
(3,161
)

$
387,441


$
499,191    64




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##### Table of Contents



TRIAD
    GUARANTY INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended
    December 312005


2004


2003(In thousands)Operating activitiesNet income

$
56,813


$
58,417


$
51,091Adjustments to reconcile net
    income to net cash provided by operating activities:Losses, loss adjustment expenses
    and unearned premium reserves


14,584



7,169



12,916Accrued expenses and other
    liabilities


1,617



(1,348
)


215Current taxes payable






(6
)


(592
)Income taxes recoverable


796



(977
)


Amounts due to/from reinsurer


559



941



(743
)Accrued investment income


(1,008
)


(1,654
)


(1,487
)Policy acquisition costs deferred


(16,133
)


(17,346
)


(18,478
)Amortization of deferred policy
    acquisition costs


14,902



14,256



18,112Net realized investment gains


(36
)


(504
)


(3,029
)Provision for depreciation


3,456



3,319



2,941Accretion of discount on
    investments


(118
)


(836
)


(3,212
)Deferred income taxes


18,288



21,179



20,567Prepaid federal income taxes


(20,333
)


(21,008
)


(20,338
)Unearned ceding commission


(196
)


(469
)


(717
)Real estate acquired in claim
    settlement, net of write-downs


(5,510
)


(65
)


1,415Other assets


(916
)


3,050



(1,450
)Other operating activities


4,082



4,800



2,103Net cash provided by operating
    activities


70,847



68,918



59,314Investing activitiesSecurities
    available-for-sale:Purchases  fixed
    maturities


(130,475
)


(153,262
)


(186,509
)Sales  fixed
    maturities


35,900



57,864



101,472Maturities  fixed
    maturities


11,715



20,097



16,436Purchases  equities






(809
)


(2,044
)Sales  equities


1,853



2,674



1,525Net change in short-term
    investments


7,724



(817
)


5,555Purchases of property and equipment


(2,339
)


(2,895
)


(3,151
)Net cash used in investing
    activities


(75,622
)


(77,148
)


(66,716
)Financing activitiesProceeds from exercise of stock
    options


3,269



3,741



4,053Net cash provided by financing
    activities


3,269



3,741



4,053Net change in cash and cash
    equivalents


(1,506
)


(4,489
)


(3,349
)Cash and cash equivalents at
    beginning of year


10,440



14,929



18,278Cash and cash equivalents at end
    of year

$
8,934


$
10,440


$
14,929Supplemental schedule of cash
    flow informationCash paid during the period for:Income taxes and United States
    Mortgage Guaranty Tax and Loss Bonds

$
24,733


$
23,692


$
21,588Interest

$
2,765


$
2,765


$
2,765    65




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 December 31,
    2005
  1.
    Accounting
    Policies  Nature
    of Business
    Basis
    of Presentation
    Consolidation
    Use of
    Estimates
    Cash
    and Cash Equivalents
    Investments
  available-for-sale available-for-sale
  other-than-temporary. other-than-temporary
  Real
    Estate Acquired in Claim Settlement
   66




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Deferred
    Policy Acquisition Costs
      Property
    and Equipment
    Loss
    and Loss Adjustment Expense Reserves
    Reinsurance
    Income
    Taxes
   67




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Income
    Recognition
      Significant
    Customers
    Stock
    Options
  Accounting for Stock Issued to Employees
   68




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2005


2004


2003Net income  as
    reported

$
56,813


$
58,417


$
51,091Net income  pro
    forma

$
56,155


$
57,915


$
50,434Earnings per
    share  as reported:Basic

$
3.87


$
4.04


$
3.57Diluted

$
3.84


$
3.98


$
3.52Earnings per
    share  pro forma:Basic

$
3.82


$
4.01


$
3.52Diluted

$
3.79


$
3.94


$
3.48   Earnings
    Per Share
    Comprehensive
    Income
  available-for-sale,
  2005


2004


2003Unrealized (losses) gains arising
    during the period, before taxes

$
(3,213
)

$
3,624


$
6,964Income tax benefit (expense)


1,124



(1,268
)


(2,439
)Unrealized (losses) gains arising
    during the period, net of taxes


(2,089
)


2,356



4,525Less reclassification adjustment:Gains realized in net income


36



504



3,029Income tax expense


(13
)


(176
)


(1,060
)Reclassification adjustment for
    gains realized in net income


23



328



1,969Other comprehensive (loss) income

$
(2,112
)

$
2,028


$
2,556   Recent
    Accounting Pronouncements
  Share-Based Payment
 69




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Reclassifications
   70




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair ValueAt December 31, 2005Available-for-sale
    securities:Fixed maturity securities:U.S. Government

$
12,348


$
16


$
(240
)

$
12,124State and municipal


486,014



14,993



(980
)


500,027Corporate


19,719



2,211



(75
)


21,855Mortgage-backed


56



2







58Total fixed maturity securities


518,137



17,222



(1,295
)


534,064Equity securities


7,001



1,284



(126
)


8,159Short-term investments


4,796











4,796$
529,934


$
18,506


$
(1,421
)

$
547,019At December 31, 2004Available-for-sale
    securities:Fixed maturity securities:U.S. Government

$
12,873


$
67


$
(212
)

$
12,728State and municipal


399,329



16,157



(236
)


415,250Corporate


23,157



2,906







26,063Mortgage-backed


73



7







80Total fixed maturity securities


435,432



19,137



(448
)


454,121Equity securities


8,626



1,779



(133
)


10,272Short-term investments


12,520











12,520$
456,578


$
20,916


$
(581
)

$
476,913  71




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31, 2005Less Than 12 Months


12 Months or More


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedDescription of
    Securities

Value


Losses


Value


Losses


Value


LossesFixed maturities:U.S. Government

$
8,376


$
(123
)

$
2,883


$
(117
)

$
11,259


$
(240
)State and municipal


57,969



(718
)


9,572



(262
)


67,541



(980
)Corporate


731



(75
)










731



(75
)Subtotal


67,076



(916
)


12,455



(379
)


79,531



(1,295
)Equity securities


1,105



(19
)


1,347



(107
)


2,452



(126
)Total temporarily impaired
    securities

$
68,181


$
(935
)

$
13,802


$
(486
)

$
81,983


$
(1,421
)   December 31, 2004Less Than 12 Months


12 Months or More


TotalFair


Unrealized





Unrealized


Fair


UnrealizedDescription of
    Securities

Value


Losses


Fair Value


Losses


Value


LossesFixed maturities:U.S. Government

$
970


$
(31
)

$
2,815


$
(181
)

$
3,785


$
(212
)State and municipal


6,539



(42
)


7,858



(194
)


14,397



(236
)Subtotal


7,509



(73
)


10,673



(375
)


18,182



(448
)Equity securities


1,319



(133
)










1,319



(133
)Total temporarily impaired
    securities

$
8,828


$
(206
)

$
10,673


$
(375
)

$
19,501


$
(581
)   other-than-temporary
 72




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Available-for-SaleAmortized


FairCost


ValueMaturity:One year or less

$
13,294


$
13,616After one year through five years


106,091



110,695After five years through ten years


329,161



337,159After ten years


69,535



72,536Mortgage-backed securities


56



58Total

$
518,137


$
534,064   other-than-temporary
  Year Ended
    December 312005


2004


2003Securities
    available-for-sale:Fixed maturity securities:Gross realized gains

$
25


$
626


$
4,579Gross realized losses


(305
)


(146
)


(885
)Equity securities:Gross realized gains


396



416



101Gross realized losses


(80
)


(435
)


(742
)Covered call options:Gross realized gains






43



4Gross realized losses










(28
)Net realized gains

$
36


$
504


$
3,029       Year Ended
    December 312005


2004


2003Income:Fixed maturities

$
22,956


$
19,829


$
16,929Preferred stocks


334



385



368Common stocks


173



176



197Cash, cash equivalents and
    short-term investments


422



135



26323,885



20,525



17,757Expenses


887



771



675Net investment income

$
22,998


$
19,754


$
17,082  73




---



##### Table of Contents





TRIAD
    GUARANTY INC.




NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)










|   |                                      
|-- | -------------------------------------
|3. | Deferred
    Policy Acquisition Costs







|                                         |  |                            |        |  |      |   |        |      |  |   |        | 
|---------------------------------------- |  | -------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                         |  | Year Ended
    December 31 |       
|                                         |  | 2005                       |        |  | 2004 |   |        | 2003 | 
|                                        
|Balance at beginning of year             |  | $                          | 32,453 |  |      | $ | 29,363 |      |  | $ | 28,997 | 
|Acquisition costs deferred:              |  |                            |        |  |      |   |        |      |  |   |        | 
|Sales compensation                       |  |                            | 6,296  |  |      |   | 7,340  |      |  |   | 7,038  | 
|Underwriting and issue expenses          |  |                            | 9,837  |  |      |   | 10,006 |      |  |   | 11,440 | 
|                                         |  |                            |        |  |      |   |        |      |  |   |        | 
|                                         |  |                            | 16,133 |  |      |   | 17,346 |      |  |   | 18,478 | 
|Amortization of acquisition
    expenses |  |                            | 14,902 |  |      |   | 14,256 |      |  |   | 18,112 | 
|                                         |  |                            |        |  |      |   |        |      |  |   |        | 
|Net increase                             |  |                            | 1,231  |  |      |   | 3,090  |      |  |   | 366    | 
|                                         |  |                            |        |  |      |   |        |      |  |   |        | 
|Balance at end of year                   |  | $                          | 33,684 |  |      | $ | 32,453 |      |  | $ | 29,363 | 
|                                         |  |                            |        |  |      |   |        |      |  |   |        | 





|   |                                                    
|-- | ---------------------------------------------------
|4. | Reserve
    for Losses and Loss Adjustment Expenses







|                                                                                                                                                                    |  |      |        |  |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                    |  | 2005 |        |  | 2004 |   |        | 2003 | 
|                                                                                                                                                                   
|Reserve for losses and loss
    adjustment expenses at January 1, net of reinsurance
    recoverables                                                               |  | $    | 34,040 |  |      | $ | 27,183 |      |  | $ | 21,355 |  
|Incurred losses and loss
    adjustment expenses net of reinsurance recoveries (principally
    in respect of default notices received in):                         |  |      |        |  |      |   |        |      |  |   |        |  
|Current year                                                                                                                                                        |  |      | 43,215 |  |      |   | 25,942 |      |  |   | 24,376 |  
|Deficiency (redundancy) on prior
    years                                                                                                                          |  |      | 23,640 |  |      |   | 9,922  |      |  |   | (543   | )
|                                                                                                                                                                    |  |      |        |  |      |   |        |      |  |   |        |  
|Total incurred losses and loss
    adjustment expenses                                                                                                              |  |      | 66,855 |  |      |   | 35,864 |      |  |   | 23,833 |  
|Loss and loss adjustment expense
    payments net of reinsurance recoveries (principally in respect
    of default notices received in):                            |  |      |        |  |      |   |        |      |  |   |        |  
|Current year                                                                                                                                                        |  |      | 3,734  |  |      |   | 2,033  |      |  |   | 3,652  |  
|Prior years                                                                                                                                                         |  |      | 46,088 |  |      |   | 26,974 |      |  |   | 14,353 |  
|                                                                                                                                                                    |  |      |        |  |      |   |        |      |  |   |        |  
|Total loss and loss adjustment
    expense payments                                                                                                                 |  |      | 49,822 |  |      |   | 29,007 |      |  |   | 18,005 |  
|                                                                                                                                                                    |  |      |        |  |      |   |        |      |  |   |        |  
|Reserve for losses and loss
    adjustment expenses at December 31, net of reinsurance
    recoverables of $1, $2, and $3 in 2005, 2004, and 2003,
    respectively |  | $    | 51,073 |  |      | $ | 34,040 |      |  | $ | 27,183 |  
|                                                                                                                                                                    |  |      |        |  |      |   |        |      |  |   |        |  







74



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##### Table of Contents





TRIAD
    GUARANTY INC.




NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)








|   |            
|-- | -----------
|5. | Commitments







|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 1,689 | 
|2007       |  |   | 1,404 | 
|2008       |  |   | 1,259 | 
|2009       |  |   | 1,150 | 
|2010       |  |   | 1,146 | 
|Thereafter |  |   | 2,268 | 
|           |  |   |       | 
|           |  | $ | 8,916 | 
|           |  |   |       | 









|   |                         
|-- | ------------------------
|6. | Federal
    Income Taxes







|                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | 2005 |        |   | 2004 |   |        | 2003 | 
|                                                
|Income tax computed at statutory
    rate        |  | $    | 27,267 |   |      | $ | 28,662 |      |  | $ | 25,331 |  
|(Decrease) increase in taxes
    resulting from: |  |      |        |   |      |   |        |      |  |   |        |  
|Tax-exempt interest                              |  |      | (7,199 | ) |      |   | (6,048 | )    |  |   | (4,730 | )
|Other                                            |  |      | 1,025  |   |      |   | 860    |      |  |   | 682    |  
|                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|Income tax expense                               |  | $    | 21,093 |   |      | $ | 23,474 |      |  | $ | 21,283 |  
|                                                 |  |      |        |   |      |   |        |      |  |   |        |  



75



---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2004Deferred tax
    liabilitiesContingency loss reserve deduction

$
137,512


$
118,903Deferred policy acquisition costs


11,789



11,359Unrealized investment gain


5,980



7,117Other


2,260



3,144Total deferred tax liabilities


157,541



140,523Deferred tax assetsUnearned premiums


1,026



1,216Losses and loss adjustment expenses


1,017



820Other


309



562Total deferred tax assets


2,352



2,598Net deferred tax liability

$
155,189


$
137,925     7.
    Insurance
    in Force, Dividend Restriction, and Statutory Results    Form 10-K
  2005


2004Net risk

$
7,312,697


$
6,961,565Statutory capital and surplus

$
131,582


$
135,662Contingency reserve


447,826



369,484Total

$
579,408


$
505,146Risk-to-capital
    ratio


12.6 to 1



13.8 to 1    76




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     8.
    Related
    Party Transactions    9.
    Employee
    Benefit Plan    10.
    Reinsurance      2005


2004


2003Earned premiums:Direct

$
209,708


$
176,383


$
146,956Assumed


1



1



2Ceded


(40,712
)


(35,392
)


(27,226
)Net earned premiums

$
168,997


$
140,992


$
119,732Losses and loss adjustment
    expenses:Direct

$
66,852


$
35,876


$
23,836Assumed


4



(14
)


(2
)Ceded


(1
)


2



(1
)Net losses and loss adjustment
    expenses

$
66,855


$
35,864


$
23,833    77




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       11.
    Long-Term
    Stock Incentive Plan      Weighted-Number of


Option


AverageShares


Price


Exercise Price2003Outstanding, beginning of year


950,305


$
4.58 - 49.08


$
25.94Granted


73,500



33.18 - 47.01



34.57Exercised


244,156



5.33 - 39.49



16.60Canceled


20,939



28.00 - 39.49



33.03Outstanding, end of year


758,710



4.58 - 49.08



29.58Exercisable, end of year


657,748



4.58 - 49.08



28.442004Outstanding, beginning of year


758,710



4.58 - 49.08



29.58Granted


29,750



53.61 - 73.74



55.67Exercised


163,342



4.58 - 49.08



22.90Canceled


6,336



29.65 - 53.61



41.24Outstanding, end of year


618,782



5.96 - 73.74



32.48Exercisable, end of year


558,074



5.96 - 53.61



31.202005Outstanding, beginning of year


618,782



5.96 - 73.74



32.48Granted


128,065



41.12 - 54.11



42.29Exercised


150,882



5.96 - 47.01



21.66Canceled


7,185



30.00 - 57.30



47.34Outstanding, end of year


588,780



10.17 - 73.74



37.21Exercisable, end of year


453,568



10.17 - 73.74



35.46  78




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Outstanding


ExercisableWeighted-


Weighted-





Weighted-Average


Average





AverageNumber





Exercise


Remaining


Number of


Exercisableof Shares


Exercise Price


Price


Life


Shares


Price61,855


$
10.17 - 23.24


$
17.41



1.7



61,855


$
17.41127,066



27.95 - 33.18



29.95



4.7



127,066



29.9599,551



34.80 - 39.00



38.23



4.0



99,551



38.23186,977



39.19 - 41.12



40.49



7.5



76,752



39.59101,575



41.40 - 53.61



48.80



4.8



84,321



48.8611,756



54.11 - 73.74



58.83



8.8



4,023



58.70588,780







37.21



5.3



453,568



35.46     Accounting for Stock-Based
    Compensation,
  Weighted-Average Exercise
    Price


Weighted-Average Fair
    ValueType of Option

2005


2004


2003


2005


2004


2003Stock Price = Exercise Price

$
42.29


$
54.02


$
34.57


$
19.79


$
25.89


$
15.77Stock Price < Exercise Price

$



$
73.74


$



$



$
21.84


$
     2005


2004


2003Number of shares granted


73,195



30,100



35,160Weighted-average fair value

$
47.45


$
53.88


$
33.33     12.
    Long-term
    Debt   79




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   13.
    Fair
    Value of Financial Instruments    2005


2004Carrying


Fair


Carrying


FairValue


Value


Value


ValueFinancial AssetsFixed maturity securities
    available-for-sale

$
534,064


$
534,064


$
454,121


$
454,121Equity securities
    available-for-sale


8,159



8,159



10,272



10,272Financial LiabilitiesLong-term debt


34,501



40,514



34,493



39,315         14.
    Contingencies    15.
    Unaudited
    Quarterly Financial Data    2005 QuarterFirst


Second


Third


Fourth


YearNet premiums written

$
38,711


$
40,611


$
42,973


$
44,321


$
166,616Change in unearned premiums


66



510



1,155



650



2,381Earned premiums


38,777



41,121



44,128



44,971



168,997Net investment income


5,415



5,743



5,896



5,944



22,998Net losses incurred


10,630



17,288



16,958



21,979



66,855Underwriting and other expenses


11,567



11,405



11,902



12,411



47,285Net income


15,760



13,199



15,294



12,560



56,813Basic earnings per share


1.08



0.90



1.04



0.85



3.87Diluted earnings per share


1.07



0.89



1.03



0.85



3.84   80




---



##### Table of Contents



TRIAD
    GUARANTY INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2004 QuarterFirst


Second


Third


Fourth


YearNet premiums written

$
32,346


$
34,277


$
36,316


$
38,392


$
141,331Change in unearned premiums


1,466



(94
)


(497
)


(1,214
)


339Earned premiums


33,812



34,183



35,819



37,178



140,992Net investment income


4,586



4,598



5,255



5,315



19,754Net losses incurred


8,883



7,701



9,234



10,046



35,864Underwriting and other expenses


10,218



10,872



11,062



11,359



43,511Net income


14,044



14,375



14,796



15,202



58,417Basic earnings per share


0.97



0.99



1.02



1.05



4.04Diluted earnings per share


0.96



0.98



1.00



1.03



3.98  81




---



##### Table of Contents



SCHEDULE I
    SUMMARY OF INVESTMENTS  OTHER THAN INVESTMENTS
    IN RELATED PARTIESTRIAD GUARANTY INC.
    December 31, 2005 Cost or





Amount atAmortized


Fair


Which ShownType of Investment

Cost


Value


in Balance Sheet(In thousands)Fixed maturity securities,
    available-for-sale:Bonds:U.S. Government obligations

$
12,348


$
12,124


$
12,124Mortgage-backed securities


56



58



58State and municipal bonds


486,014



500,027



500,027Corporate bonds


19,719



21,855



21,855Total


518,137



534,064



534,064Equity securities,
    available-for-sale:Common stocks:Bank, trust, and insurance


739



1,120



1,120Public utilities


174



329



329Industrial and miscellaneous


1,279



1,826



1,826Preferred stock


4,809



4,884



4,884Total


7,001



8,159



8,159Short-term investments


4,796



4,796



4,796Total investments other than
    investments in related parties

$
529,934


$
547,019


$
547,019  82




---



##### Table of Contents



SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

TRIAD GUARANTY INC.

(Parent Company) December 312005


2004(In thousands)ASSETS:Fixed maturities,
    available-for-sale

$
32,250


$
24,069Equity securities,
    available-for-sale


252



513Notes receivable from subsidiary


25,000



25,000Investment in subsidiary


478,310



421,259Short-term investments


681



842Cash


1,996



1,736Accrued investment income


1,532



1,482Income taxes recoverable


176



1,139Other assets


95



1,251Total assets

$
540,292


$
477,291LIABILITIES AND
    STOCKHOLDERS EQUITY:Liabilities:Long-term debt

$
34,501


$
34,493Accrued interest on long-term debt


1,275



1,275Deferred income taxes


5,305



4,110Accrued expenses and other
    liabilities


20



70Total liabilities


41,101



39,948Stockholders equity:Common stock


148



146Additional paid-in capital


103,657



94,852Accumulated other comprehensive
    income


11,106



13,218Deferred compensation


(3,161
)


(1,501
)Retained earnings


387,441



330,628Total stockholders equity


499,191



437,343Total liabilities and
    stockholders equity

$
540,292


$
477,291    83




---



##### Table of Contents



SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
 CONDENSED STATEMENTS OF INCOME
 TRIAD GUARANTY INC.
 (Parent Company)
  Year Ended
    December 312005


2004


2003(In thousands)Revenues:Net investment income

$
3,510


$
3,251


$
3,120Realized investment gains (losses)


(87
)


142



4863,423



3,393



3,606Expenses:Interest on long-term debt


2,772



2,772



2,772Operating expenses


1,783



1,230



7524,555



4,002



3,524Income (loss) before federal
    income taxes and equity in undistributed income of subsidiary


(1,132
)


(609
)


82Income taxes (benefit):Current






28



Deferred


(505
)






142(505
)


28



142Loss before equity in
    undistributed income of subsidiary


(627
)


(637
)


(60
)Equity in undistributed income of
    subsidiary


57,440



59,054



51,151Net income

$
56,813


$
58,417


$
51,091    84




---



##### Table of Contents



SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
    CONDENSED STATEMENTS OF CASH FLOWS
    TRIAD GUARANTY INC.
    (Parent Company)
  
  Year Ended
    December 312005


2004


2003(In thousands)Operating Activities:Net income

$
56,813


$
58,417


$
51,091Adjustments to reconcile net
    income to net cash provided by operating activities:Equity in undistributed income of
    subsidiary


(57,440
)


(59,054
)


(51,151
)Accrued investment income


(50
)


(174
)


(14
)Other assets


1,156



(823
)


(78
)Deferred income taxes


(505
)






142Current taxes


963



(1,139
)


(52
)Accretion of discount on
    investments


2



(61
)


(91
)Amortization of deferred
    compensation


1,788



1,232



690Amortization of debt issue costs


8



7



7Realized investment (gains) losses
    on securities


87



(142
)


(486
)Other liabilities


(50
)


70



Other operating activities


2,049



3,595



(2
)Net cash provided by operating
    activities


4,821



1,928



56Investing Activities:Fixed maturities:Purchases


(8,795
)


(10,246
)


(14,468
)Sales and maturities


641



3,319



11,748Equity Securities:Purchases










Sales


163







256Change in short-term investments


161



1,722



(569
)Net cash used in investing
    activities


(7,830
)


(5,205
)


(3,033
)Financing Activities:Proceeds from exercise of stock
    options


3,269



3,741



4,053Net cash provided by financing
    activities


3,269



3,741



4,053Increase in cash


260



464



1,076Cash at beginning of year


1,736



1,272



196Cash at end of year

$
1,996


$
1,736


$
1,272    85




---



##### Table of Contents



SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
    TRIAD GUARANTY INC.
    (Parent Company)
    SUPPLEMENTARY NOTES
  1.
    Basis of
    Presentation and Significant Accounting Policies  Form 10-K.
  2.
    Nature of
    Operations    3.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


Unrealized


FairAt December 31,
    2005

Cost


Gains


Losses


ValueFixed maturity securities:Corporate

$
499


$
21


$



$
520U.S. Government


250







9



241Municipal


30,560



1,044



115



31,489Total


31,309



1,065



124



32,250Equity securities


250



2







252Total

$
31,559


$
1,067


$
124


$
32,502  86




---



##### Table of Contents



SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
    TRIAD GUARANTY INC.
    (Parent Company)
    SUPPLEMENTARY NOTES
  Cost or


Gross


GrossAmortized


Unrealized


Unrealized


FairAt December 31,
    2004

Cost


Gains


Losses


ValueFixed maturity securities:Corporate

$
1,140


$
49


$



$
1,189U.S. Government


250







13



237Municipal


21,767



885



9



22,643Total


23,157



934



22



24,069Equity securities


500



13







513Total

$
23,657


$
947


$
22


$
24,582     Year Ended
    December 312005


2004


2003Income:Fixed maturities

$
1,309


$
1,017


$
889Equity securities


32



36



36Cash and short-term investments


36



6



26Note receivable from subsidiary


2,231



2,225



2,2253,608



3,284



3,176Expenses


98



33



56Net investment income

$
3,510


$
3,251


$
3,120   4.
    Debt   87




---



##### Table of Contents



SCHEDULE IV  REINSURANCE

TRIAD GUARANTY INC.

MORTGAGE INSURANCE PREMIUM EARNED

Years Ended December 31, 2005, 2004 and 2003 Ceded to


Assumed





Percentage ofGross


Other


From Other


Net


Amount AssumedAmount


Companies


Companies


Amount


to Net(In thousands)2005

$
209,708


$
40,712


$
1


$
168,997



0.0%2004

$
176,383


$
35,392


$
1


$
140,992



0.0%2003

$
146,956


$
27,226


$
2


$
119,732



0.0%  88