Edgar Filing: TRIAD GUARANTY INC

form10q-1q2010.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

£	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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	Smaller reporting company R
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

Number of shares of common stock, par value $0.01 per share, outstanding as of May 3, 2010 was 15,258,128.

TRIAD GUARANTY INC.

INDEX

		Page
Part I. Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2010	1

	Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)	2

	Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2010 and 2009 (Unaudited)	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	43

Part II. Other Information

Item 1.	Legal Proceedings	43

Item 6.	Exhibits	44

SIGNATURE		45

EXHIBIT INDEX		46

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(dollars in thousands, except per share data)	2010			2009
	(unaudited)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $762,111 and $738,149)	$	811,040		$	784,830
Short-term investments		146,075			26,651
Total invested assets		957,115			811,481
Cash and cash equivalents		38,662			21,839
Accrued investment income		9,458			9,048
Property and equipment		3,099			3,515
Reinsurance recoverable, net		52,963			233,499
Other assets		41,849			45,444
Total assets	$	1,103,146		$	1,124,826

LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Losses and loss adjustment expenses	$	1,468,719		$	1,537,043
Unearned premiums		12,210			12,153
Long-term debt		34,543			34,540
Deferred payment obligation		229,953			168,386
Accrued interest		1,785			2,476
Accrued expenses and other liabilities		88,682			76,586
Total liabilities		1,835,892			1,831,184
Commitments and contingencies - Note 5
Stockholders' deficit:
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 15,258,128 shares		153			153
Additional paid-in capital		113,939			113,848
Accumulated other comprehensive income, net of income tax liability
of $17,292 and $16,575		32,114			30,782
Accumulated deficit		(878,952	)		(851,141	)
Deficit in assets		(732,746	)		(706,358	)
Total liabilities and stockholders' deficit	$	1,103,146		$	1,124,826

See accompanying notes.

TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three Months Ended
	March 31,
(dollars in thousands, except per share data)	2010			2009

Revenue:
Premiums written:
Direct	$	54,393		$	55,623
Ceded		(8,202	)		(11,130	)
Net premiums written		46,191			44,493
Change in unearned premiums		(303	)		(135	)
Earned premiums		45,888			44,358

Net investment income		9,873			11,192
Net realized investment losses		(242	)		(4,565	)
Other (losses) income		(8	)		2
		55,511			50,987

Losses and expenses:
Net losses and loss adjustment expenses		72,238			101,577
Interest expense		2,469			694
Other operating expenses		9,332			9,411
		84,039			111,682
Loss before income tax benefit		(28,528	)		(60,695	)
Income tax benefit:
Deferred		(717	)		(5,521	)
		(717	)		(5,521	)
Net loss	$	(27,811	)	$	(55,174	)

Loss per common and common equivalent share:
Basic and diluted	$	(1.84	)	$	(3.68	)

Shares used in computing loss per common and common equivalent share:
Basic and diluted		15,099,299			14,993,742

See accompanying notes.

TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

	Three Months Ended
	March 31,
(dollars in thousands)	2010			2009

Operating activities
Net loss	$	(27,811	)	$	(55,174	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves		(68,267	)		75,001
Accrued expenses and other liabilities		12,096			14,960
Deferred payment obligation		61,567			-
Income taxes recoverable		-			78
Reinsurance, net		180,536			(31,459	)
Accrued investment income		(410	)		(161	)
Net realized investment losses		242			4,565
Provision for depreciation		414			649
(Amortization of premium) Accretion of discount on investments		(523	)		285
Deferred income taxes		(717	)		(5,521	)
Real estate acquired in claim settlement, net of write-downs		-			187
Accrued interest		(691	)		(691	)
Other assets		728			357
Other operating activities		90			259
Net cash provided by operating activities		157,254			3,335

Investing activities
Securities available-for-sale:
Purchases – fixed maturities		(72,318	)		(88,391	)
Sales – fixed maturities		174			20,010
Maturities – fixed maturities		50,553			18,928
Sales – equities		2			4
Purchases of other investments		581			-
Net (increase) decrease in short-term investments		(119,425	)		27,566
Property and equipment		2			2
Net cash used in investing activities		(140,431	)		(21,881	)


Net change in cash and cash equivalents		16,823			(18,546	)
Cash and cash equivalents at beginning of period		21,839			39,940
Cash and cash equivalents at end of period	$	38,662		$	21,394

Supplemental schedule of cash flow information
Cash paid during the period for:
Interest	$	1,383		$	1,383

See accompanying notes.

TRIAD GUARANTY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(Unaudited)

1. The Company

Triad Guaranty Inc. (“TGI”) is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“TGIC”), historically has provided mortgage insurance coverage in the United States. Unless the context requires otherwise, references to “Triad” in this quarterly report on Form 10-Q refer to the operations of TGIC and its wholly-owned subsidiary, Triad Guaranty Assurance Corporation (“TGAC”). References to the “Company” refer collectively to the operations of TGI and Triad. Mortgage insurance allows buyers to achieve homeownership with a reduced down payment, facilitates the sale of mortgage loans in the secondary market and protects lenders from credit default-related expenses.

TGIC is an Illinois-domiciled insurance company and TGAC is an Illinois-domiciled reinsurance company. The Illinois Department of Insurance (the “Insurance Department”) is the primary regulator of both TGIC and TGAC. The Illinois Insurance Code grants broad powers to the Insurance Department and its director (collectively, the “Department”) to enforce rules or exercise discretion over almost all significant aspects of our insurance business. Triad ceased issuing new commitments for mortgage guaranty insurance coverage on July 15, 2008 and is operating its business in run-off under two Corrective Orders issued by the Department. The first Corrective Order was issued in August 2008. The second Corrective Order was issued in March 2009 and subsequently amended in May 2009. As used in these financial statements, the term "run-off" means writing no new mortgage insurance policies, but continuing to service existing policies. Servicing existing policies includes: receiving premiums on policies that remain in force; cancelling coverage at the insured’s request; terminating policies for non-payment of premium; working with borrowers in default to remedy the default and/or mitigate our loss; reviewing policies for the existence of misrepresentation, fraud or non-compliance with stated programs; and settling all legitimate filed claims per the provisions of the two Corrective Orders issued by the Department. The term “settled,” as used in these financial statements in the context of the payment of a claim, refers to the satisfaction of Triad’s obligations following the submission of valid claims by our policyholders. Prior to June 1, 2009, valid claims were settled solely by a cash payment. Effective on and after June 1, 2009, valid claims are settled by a combination of 60% in cash and 40% in the form of a deferred payment obligation (“DPO”). The Corrective Orders, among other things, allow management to continue to operate Triad under the close supervision of the Department, include restrictions on the distribution of dividends or interest on notes payable to TGI by Triad, and include restrictions on the payment of claims.

2. Going Concern

The Company prepares its financial statements presented in this quarterly report on Form 10-Q in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The financial statements for Triad that are provided to the Department and that form the basis for our corrective plan required by the Corrective Orders were prepared in accordance with Statutory Accounting Principles (“SAP”) as set forth in the Illinois Insurance Code or prescribed by the Department. The primary differences between GAAP and SAP for Triad at March 31, 2010 were the methodology utilized for the establishment of reserves and the reporting requirements relating to the DPO stipulated in the second Corrective Order. A deficit in assets occurs when recorded liabilities exceed recorded assets in financial statements prepared under GAAP. A deficiency in policyholders’ surplus occurs when recorded liabilities exceed recorded assets in financial statements prepared under SAP. A deficit in assets is not necessarily a measure of insolvency. However, the Company believes that if Triad were to report an other-than-temporary deficiency in policyholders’ surplus under SAP, Illinois law may require the Department to seek receivership of Triad, which could lead TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws. The second Corrective Order attempts to mitigate the possibility of a

deficiency in policyholders’ surplus by providing for the settlement of claims 60% in cash and 40% in the form of a DPO, which is accounted for as a component of policyholders’ surplus under SAP.

The Company has prepared its financial statements on a going concern basis under GAAP, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, there is substantial doubt as to the Company's ability to continue as a going concern. This uncertainty is based on, among other things, the possible inability of Triad to comply with the provisions of the Corrective Orders, the Company's recurring losses from operations and the Company’s $732.7 million deficit in assets. The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.

The Company incurred significant operating losses beginning in 2007, and continuing through the first quarter of 2010, which has resulted in a deficit in assets of $732.7 million at March 31, 2010. The ongoing operating losses and the deficit in assets are primarily the result of the large amount of settled claims, a large number of insured policies in default, and the related loss reserves established. Contributing to the defaults and claims have been declines in U.S home prices, particularly in certain distressed markets, tightened credit markets, rising unemployment, and the overall effects of the economic recession in the United States. Additionally, the Company is unable to offset these operating losses with revenue from new, potentially more profitable, business as Triad is operating in run-off under the two Corrective Orders issued by the Department and can no longer issue commitments for new insurance.

As noted above, effective on and after June 1, 2009, valid claims are settled by a combination of 60% in cash and 40% in the form of a DPO. Absent the accounting treatment required by the recording of the DPO, Triad would have reported a deficiency in policyholders’ surplus of $687.3 million at March 31, 2010 under SAP. Payment of the carrying charges and the DPO will be subject to Triad’s future financial performance and will require approval of the Department. Failure to comply with the provisions of the Corrective Orders could result in the imposition of fines or penalties or subject Triad to further legal proceedings, including receivership proceedings for the conservation, rehabilitation or liquidation of Triad. Any actions like this would likely lead TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws. The ability to successfully comply with the Corrective Orders and maintain statutory solvency by management is unknown at this time and is dependent upon many factors, including improved macroeconomic conditions in the United States.

3. Accounting Policies and Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or subsequent quarterly periods. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Consolidation

The consolidated financial statements include the accounts of TGI and its wholly owned subsidiary, TGIC, including TGIC’s wholly-owned subsidiary, TGAC. All significant intercompany accounts and transactions have been eliminated.

Corrective Orders, Dividend Restrictions, and Statutory Results

Triad has entered into two Corrective Orders with the Department. The first Corrective Order was entered into on August 5, 2008 and remains in effect. Among other things, that Corrective Order:

Required Triad to submit a corrective plan to the Department;

Prohibits all stockholder dividends from Triad to TGI without the prior approval of the Department;

Prohibits interest and principal payments on Triad’s surplus note to TGI without the prior approval of the Department;

Restricts Triad from making any payments or entering into any transaction that involves the transfer of assets to, or liabilities from, any affiliated parties without the prior approval of the Department;

Requires Triad to obtain prior written approval from the Department before entering into certain transactions with unaffiliated parties;

Requires Triad to meet with the Department in person or via teleconference as necessary; and

Requires Triad to furnish to the Department certain reports, agreements, actuarial opinions and information on an ongoing basis at specified times.

The Department issued the second Corrective Order effective on March 31, 2009, as amended on May 26, 2009. The second Corrective Order stipulates or prescribes:

Effective June 1, 2009, all valid claims under Triad’s mortgage guaranty insurance policies are settled 60% in cash and 40% by recording a DPO;

At March 31, 2009, Triad was required to adjust surplus and reserves reflecting the impact of the second Corrective Order on future settled claims;

The DPO requires that Triad accrue a carrying charge based on the investment yield earned by Triad’s investment portfolio;

Triad will establish an escrow account at least equal to the DPO balance and any associated carrying charges;

Triad will require that any risk or obligation of any captive reinsurer must be paid in full, and will deposit any excess reinsurance recovery above the 60% cash payment into an escrow account;

Payment of the DPO and the carrying charge is subject to Triad’s future financial performance and requires the approval of the Department;

Procedures to account for the impact of the second Corrective Order in the financial statements prepared in accordance with SAP;

Upon payment of a claim under these provisions, Triad is deemed to have fully satisfied its obligations under the respective insurance policy;

Other restrictions and requirements affecting the payment and transferability of the DPOs and associated carrying charge; and

Certain reporting requirements.

The DPO recording requirements of the second Corrective Order became effective on June 1, 2009. At March 31, 2010, the recorded DPO, including a carrying charge of $3.8 million, amounted to $230.0 million. The recording of a DPO does not impact reported settled losses as the Company continues to report the entire amount of a claim in its statement of operations. The accounting for the DPO on a SAP basis is similar to a surplus note which is reported as a component of statutory surplus; accordingly, any repayment of the DPO or the associated carrying charge requires approval of the Department. However, in the Company’s financial statements prepared in accordance with GAAP included in this report, the DPO is reported as a liability. At March 31, 2010, the cumulative effect of this requirement on statutory policyholders’ surplus was to increase statutory policyholders’ surplus by $778.4 million over the amount that would have been reported absent the second Corrective Order. There was no such impact to loss reserves or stockholders’ equity calculated on a GAAP basis.

Insurance regulations generally limit the writing of mortgage guaranty insurance to an aggregate amount of insured risk no greater than twenty-five times the total of statutory capital, which is defined as the statutory surplus plus the statutory contingency reserve. The Corrective Orders under which Triad is currently operating specifically prohibit the writing of new insurance by Triad. The Risk-to-Capital ratio of Triad is substantially greater than the 25:1 regulatory guideline. Even if Triad’s risk-to-capital ratio were to be reduced to 25-to-1 or lower as a result of the second Corrective Order, we would continue to be prohibited by the Department from issuing new commitments for insurance.

Under the Corrective Orders issued by the Department, Triad is currently prohibited, and expects to be prohibited for the foreseeable future, from paying any dividends to TGI. Triad also has a $25 million outstanding surplus note held by TGI. Under the terms of the Corrective Orders, Triad is also prohibited from paying interest on the surplus note and expects to be prohibited for the foreseeable future.

Reinsurance

Prior to entering into run-off, Triad entered into various captive reinsurance agreements that were designed to allow lenders to share in the risks of mortgage insurance. Under the typical captive reinsurance agreement, a captive reinsurer, generally an affiliate of the lender, assumed a portion of the risk associated with the lender’s book of business insured by Triad in exchange for a percentage of the premiums that Triad collected. All of Triad’s captive reinsurance agreements include, among other things, minimum capital requirements and excess-of-loss provisions that provide for defined aggregate layers of coverage and a maximum exposure limit for the captive reinsurer. In accordance with the excess-of-loss provisions, Triad retains the first loss position on the first aggregate layer of risk and reinsures a second defined aggregate layer with the captive reinsurer. Triad generally retains the remaining risk above the defined aggregate layer reinsured with the captive reinsurer.

Although a percentage of premiums and certain reserves and losses are ceded to the captive reinsurer under the captive reinsurance agreements, these agreements do not relieve Triad from its obligations to policyholders. Failure of the captive reinsurer to honor its obligations under the captive reinsurance agreement could result in losses to Triad; consequently, Triad establishes allowances for amounts deemed uncollectible from the captive reinsurer.

Triad requires each captive reinsurer to establish a trust to partially support its obligations under the captive reinsurance agreement. The captive reinsurer is the grantor of the trust and Triad is the beneficiary of the trust. The trust agreement that governs each trust requires the captive reinsurer to comply with covenants regarding minimum and ongoing capitalization requirements, required reserves, authorized investments and asset withdrawals. The trust is funded by ceded premiums from Triad and investment earnings on trust assets, as well as capital contributions by the captive reinsurer. If certain capitalization requirements of the trust are not maintained, Triad retains the right to terminate the captive reinsurance agreement. The termination of the captive reinsurance agreement is commonly referred to as a “commutation.” Upon commutation, Triad receives all remaining trust assets, reduces the reinsurance recoverable for amounts due from the captive reinsurer, and ceases ceding premium to the captive reinsurer.

During the first quarter of 2010, Triad determined that Triad’s two largest captive reinsurers had not maintained the required capitalization in their trusts. As a result, and with the mutual agreement of each of the captive reinsurers, Triad commuted both of these captive reinsurance agreements during the first quarter and received approximately $188.7 million of aggregate trust assets from the two captive reinsurers. These two commutations resulted in an increase in the Company’s invested assets and a corresponding decrease in reinsurance recoverable during the quarter ended March 31, 2010. The commutations had no impact on results of operations or financial condition for the quarter, as the amount recorded as reinsurance recoverable under the captive reinsurance agreements was limited to the captive reinsurers’ accumulated trust balances (see Note 3 to the consolidated financial statements). The Company’s receipt of the $188.7 million of trust assets, however, positively impacted its cash flows in the 2010 first quarter.

At March 31, 2010, Triad had approximately $76.9 million in captive reinsurance trust balances supporting the risk transferred to the captive reinsurers. As Triad cannot force capital contributions by captive reinsurers, the Company limits the amount of benefit recognized on reserves ceded to captives to the trust balance. As of March 31, 2010, there were certain captive reinsurance agreements where the potential reserves that could be ceded based upon the terms of the captive reinsurance agreements, combined with any unpaid ceded claims, had exceeded the trust balance and the actual reserves ceded were limited to the trust balances.

Loss Reserves

The Company establishes loss reserves to provide for the estimated costs of settling claims on loans reported in default and estimates on loans in default that are in the process of being reported to the Company as of the date of the financial statements. Consistent with industry accounting practices, the Company does not establish loss reserves for future claims on insured loans that are not currently in default. Loss reserves are established by management using historical experience and by making various assumptions and judgments about claim rates (frequency) and claim amounts (severity) to estimate ultimate losses to be paid on loans in default. The Company’s reserving methodology gives effect to current economic conditions and profiles delinquencies by such factors as, among others, default status, policy year, and the number of months the policy has been in default, as well as the combined loan-to-value (“LTV”) ratio. The Company also incorporates in the calculation of loss reserves the probability that a policy may be rescinded for underwriting violations.

A number of factors can impact the actual frequency and severity realized during the year compared to those utilized in the reserve assumptions at the beginning of the year including: changes in home prices at a faster rate than anticipated; the impact of a higher or lower unemployment rate than anticipated; an unanticipated slowdown or acceleration of the overall economy; or social and cultural changes that are more accepting of mortgage defaults even when the borrower has the ability to pay. The assumptions utilized in the calculation of the loss reserve estimate are continually reviewed and adjusted as necessary. Such adjustments are reflected in the financial statements in the periods in which the adjustments are made.

Recent Accounting Pronouncements

Effective March 31, 2010, the Company adopted Accounting Standards Update (“ASU”) No. 2009-17, Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 codifies Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R), and amends the consolidation guidance related to a variable interest entity (“VIE”). Primarily, the current quantitative analysis used under Accounting Standards Codification (“ASC”) Topic 810, Consolidations, will be eliminated and replaced with a qualitative approach that is focused on identifying the variable interest that has the power to direct the activities that most significantly impact the performance of the VIE and absorb losses or receive returns that could potentially be significant to the VIE. In addition, this new accounting standard will require an ongoing reassessment of the primary beneficiary of the VIE, rather than reassessing the primary beneficiary only upon the occurrence of certain pre-defined events. ASU 2009-17 was to be effective as of the beginning of the annual reporting period that begins after November 15, 2009, and required the reconsideration of all VIEs for consolidation in which an entity has a variable interest upon the effective date of these amendments. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated financial condition and results of operations.

ASU No. 2010-10, Consolidations (Topic 810) - Amendments for Certain Investment Funds (“ASU 2010-10”) defers the effective date of the amendments to the consolidation requirements made by ASU 2009-17 with respect to a company’s interest in an entity (i) that has all of the attributes of an investment company, as specified under ASC Topic 946, Financial Services - Investment Companies (“ASU 946”) or (ii) for which it is industry practice to apply measurement principles of financial reporting that are consistent with those in ASC 946. As a result of the deferral, a company will not be required to apply the ASU 2009-17 amendments to the Subtopic 810-

10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest held by a related party should be treated as though it is an entity’s own interest when evaluating the criteria for determining whether such interest represents a variable interest. In addition, ASU 2010-10 clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The provisions of ASU 2010-10 became effective for the Corporation as of January 1, 2010 and did not have a significant impact on the Company’s consolidated financial condition and results of operations.

Effective March 31, 2010, the Company adopted ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 to now require that (1) a reporting entity must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements and (3) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has included the disclosures required by ASU 2010-06 in the notes to its consolidated financial statements effective January 1, 2010, except for the disclosures related to Level 3 fair value measurements, which it plans to include in the notes to its consolidated financial statements effective January 1, 2011.

Effective March 31, 2010, the Company adopted ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU 2009-16 formally codifies SFAS 166, Accounting for Transfers of Financial Assets. ASU 2009-16 eliminates the concept of a qualifying special-purpose entity (“SPE”) and removes the scope exception for a qualifying SPE from ASC 810, Consolidations. As a result, previously unconsolidated qualifying SPEs must be re-evaluated for consolidation by the sponsor or transferor. In addition, this accounting update amends the accounting guidance related to transfers of financial assets in order to address practice issues that have been highlighted by the events of the recent economic decline. ASU 2009-16 was effective as of the beginning of the annual reporting period that begins after November 15, 2009. The recognition and measurement provisions are applied to transfers that occur on or after the effective date and all qualifying SPEs that exist on and after the effective date must be evaluated for consolidation. The adoption of ASU 2009-16 did not have a material impact on the Company’s consolidated financial condition and results of operations.

4. Litigation

The Company is involved in litigation and other legal proceedings in the ordinary course of business as well as the matters identified below.

On February 6, 2009, James L. Phillips served a complaint against Triad Guaranty Inc., Mark K. Tonnesen and Kenneth W. Jones in the United States District Court, Middle District of North Carolina. The plaintiff purports to represent a class of persons who purchased or otherwise acquired the common stock of the Company between October 26, 2006 and April 1, 2008 and the complaint alleges violations of federal securities laws by the Company and two of its present or former officers. The court appointed lead counsel for the plaintiff and an amended complaint was filed on June 22, 2009. TGI filed its motion to dismiss the amended complaint on August 21, 2009 and the plaintiff filed its opposition to the motion to dismiss on October 20, 2009. TGI’s reply was filed on November 19, 2009. Oral arguments on the motion are scheduled for August 30, 2010.

On September 4, 2009, Triad filed a complaint against American Home Mortgage (“AHM”) in the United States Bankruptcy Court for the District of Delaware seeking rescission of multiple master mortgage guaranty insurance policies (“master policies”) and declaratory relief. The complaint seeks relief from AHM as well as all owners of loans insured under the master policies by way of a defendant class action. Triad alleged that AHM failed to follow the delegated insurance underwriting guidelines approved by Triad, that this failure breached the master policies as well as the implied covenants of good faith and fair dealing, and that these breaches were so substantial and fundamental that the intent of the master policies could not be fulfilled and Triad should be excused from its obligations under the master policies. The total amount of risk originated under the AHM master policies, accounting for any applicable stop loss limits associated with Modified Pool contracts and less risk originated on policies which have been subsequently rescinded, was $1.5 billion, of which $1.0 billion remains in force at March 31, 2010. Triad continues to accept premiums and process claims under the master policies but, as a result of this action, Triad ceased remitting claim payments to companies servicing loans originated by AHM. Both premiums and claim payments subsequent to the filing of the complaint have been segregated pending resolution of this action. Triad has not recognized any benefit in its financial statements pending the outcome of the litigation.

On November 4, 2009, AHM filed an action in the Bankruptcy Court seeking to recover $7.6 million of alleged preferential payments made to Triad. AHM alleges that such payments constitute a preference and are subject to recovery by the bankrupt estate. The time period in which to respond to this request has been tolled pending settlement discussions in the above referenced AHM matter. In the event a settlement is not successfully concluded, Triad intends to vigorously defend this matter.

On December 11, 2009, American Home Mortgage Servicing, Inc. filed a complaint against Triad for damages, declaratory relief, and injunction in the United States District Court, Northern District of Texas. The complaint alleges that Triad denied payment on legitimate claims on 15 mortgage insurance loans and seeks damages, a declaration that our mortgage insurance policies prohibit denial of claim without evidence of harm, and an injunction against future like denials. Triad intends to vigorously defend this matter.

On March 5, 2010, Countrywide Home Loans, Inc. filed a lawsuit in the Los Angeles County Superior Court of the State of California alleging breach of contract and seeking a declaratory judgment that bulk rescissions of flow loans is improper and that Triad is improperly rescinding loans under the terms of its master policies. Triad intends to vigorously defend this matter.

5. Investments

All fixed maturity and equity securities are classified as “available-for-sale” and are carried at fair value. Unrealized gains on available-for-sale securities, net of tax, are reported as a separate component of accumulated other comprehensive income. Effective on and subsequent to December 31, 2008, the Company has recognized an impairment loss on all securities for which the fair value was less than the amortized cost at the balance sheet date because the Company is no longer in a position to retain a security until it recovers value due to the ongoing losses and the regulatory oversight.

Pursuant to ASC 820, we have categorized available-for-sale securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described herein in Note 6, “Fair Value Measurement”, which also includes additional disclosures regarding our fair value measurements required by ASC 820.

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities as of March 31, 2010 and December 31, 2009 were as follows:

	As of March 31, 2010
(dollars in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Fixed maturity securities:
U. S. government and agency securities	$	53,804	$	388	$	-	$	54,192
Foreign government securities		9,993		308		-		10,301
Corporate debt		450,850		33,910		-		484,760
Residential mortgage-backed		110,524		5,231		-		115,755
Commercial mortgage-backed		1,365		-		-		1,365
Asset-backed bonds		27,243		2,333		-		29,576
State and municipal bonds		108,332		6,759		-		115,091
Subtotal, fixed maturities		762,111		48,929		-		811,040
Short term investments		146,075		-		-		146,075
Total securities	$	908,186	$	48,929	$	-	$	957,115

	As of December 31, 2009
(dollars in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Fixed maturity securities:
U. S. government and agency securities	$	24,957	$	303	$	-	$	25,260
Foreign government securities		9,991		311		-		10,302
Corporate debt		468,998		32,001		-		500,999
Residential mortgage-backed		102,392		5,014		-		107,406
Asset-backed bonds		36,844		2,548		-		39,392
State and municipal bonds		94,967		6,504		-		101,471
Subtotal, fixed maturities		738,149		46,681		-		784,830
Short term investments		26,650		1		-		26,651
Total securities	$	764,799	$	46,682	$	-	$	811,481

The unrealized gains are partly due to the recovery in value of previous impairments of our fixed income securities. These unrealized gains do not necessarily represent future gains that the Company will realize. Changing conditions related to specific securities, overall market interest rates, or credit spreads, as well as our decisions concerning the timing of a sale, may impact values the Company ultimately realizes. Taxable securities typically exhibit greater volatility in value than tax-preferred securities and thus we expect greater volatility in unrealized gains and realized losses going forward. Volatility may increase in periods of uncertain market or economic conditions.

The amortized cost and estimated fair value of fixed maturity available-for-sale securities, at March 31, 2010, are summarized by stated maturity as follows:

	Available-for-Sale
(dollars in thousands)	Amortized Cost		Fair Value

Maturity:
One year or less	$	115,877	$	118,252
After one year through five years		413,408		442,246
After five years through ten years		87,124		94,523
After ten years		145,702		156,019
Total	$	762,111	$	811,040

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

Realized Gains (Losses) Related to Investments

The details of net realized investment gains (losses) are as follows:

	Three Months Ended
	March 31,
(dollars in thousands)	2010			2009

Securities available-for-sale:
Fixed maturity securities:
Gross realized gains	$	12		$	991
Gross realized losses		(255	)		(5,456	)
Equity securities:
Gross realized gains		4			4
Gross realized losses		-			(83	)
Foreign currency gross realized losses		-			(21	)
Other investment gains		(3	)		-
Net realized losses	$	(242	)	$	(4,565	)

6. Fair Value Measurement

Fair Value of Financial Instruments

The carrying values and fair values of financial instruments as of March 31, 2010 and December 31, 2009 are summarized below:

	March 31, 2010				December 31, 2009
(dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value

Financial Assets
Fixed maturity securities available-for-sale	$	811,040	$	811,040	$	784,830	$	784,830
Short-term investments		146,075		146,075		26,651		26,651
Cash and cash equivalents		38,662		38,662		21,839		21,839
Financial Liabilities
Long-term debt		34,543		5,801		34,540		7,268

Valuation Methodologies and Associated Inputs

The Company utilizes the provisions of ASC 820 in its estimation and disclosures about fair value. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. ASC 820 applies to other accounting pronouncements that require or permit fair value measurements. The Company adopted ASC 820 effective for its fiscal year beginning January 1, 2008. Effective for its fiscal year beginning January 1, 2010, the Company adopted the provisions of ASU 2010-06, which amended ASC 820 to require a number of additional disclosures regarding fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or a liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. An asset’s or liability’s level within the fair value hierarchy is determined at the end of the reporting period. At March 31, 2010, approximately 0.2% of our invested assets were Level 3 securities.

Investments carried at fair value are measured based on assumptions used by market participants in pricing the security. The Company relies primarily on a third-party pricing service to determine the fair value of its investments. Prices received from third parties are not adjusted; however, the third-party pricing services’ valuation methodologies and related inputs are analyzed and additional evaluations are performed to determine the appropriate level within the fair value hierarchy. Fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. In addition to the third-party pricing service, sources of inputs to the market approach may include independent broker quotations or pricing matrices.

Observable and unobservable inputs are used in the valuation methodologies and these are based on a set of standard inputs that are generally used to evaluate all of our available-for-sale securities. The standard inputs used in order of priority are benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all available-for-sale securities on any given day. In addition, market indicators, industry and economic events are monitored and further market data

is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable.

For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. For those securities trading in less liquid or illiquid markets with limited or no pricing information, unobservable inputs are used in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity.

The following is a description of the valuation methodologies used in determining the fair value of our assets and liabilities.

Fixed maturities

U.S. Government and agency securities – U.S. Government and agency securities include U.S. Treasury securities, agency/GSE issues, and corporate government-backed obligations issued under the Temporary Liquidity Guarantee Program. The fair value for U.S. Treasury securities is based on regularly updated quotes from active market makers and brokers. The fair value for agency and other government-backed obligations is based on regularly updated dealer quotes, secondary trading levels, and the new issue market. U.S Government and agency securities are categorized as Level 2.

Foreign Government securities – The fair value of Foreign Government securities is based on discounted cash flow models incorporating observable option-adjusted spread features where necessary. Foreign Government securities are generally categorized as Level 2.

Corporate debt – The fair value for corporate debt is based on regularly updated dealer quotes, secondary trading, and the new issue market incorporating observable option-adjusted spread features where necessary. Corporate debt is generally categorized as Level 2.

Residential mortgage-backed securities – Residential mortgage-backed securities include securities issued by the GSEs, the Government National Mortgage Association (GNMA), as well as private-label securities. The fair value of residential mortgage-backed securities is based on prices of similar securities and discounted cash flow analysis incorporating prepayment and default assumptions. Residential mortgage-backed securities are generally categorized as Level 2.

Commercial mortgage-backed securities – The fair value of commercial mortgage-backed securities is based on prices of similar securities and discounted cash flow analysis incorporating prepayment and default assumptions. Commercial mortgage-backed securities are generally categorized as Level 2.

Asset-backed bonds – The fair value of asset-backed bonds is based on prices of similar securities and discounted cash flow analysis incorporating prepayment and default assumptions. Asset-backed bonds are generally categorized as Level 2. For certain securities, if cash flow or other security structure or market information is not available, the fair value may be based on broker quotes or benchmarked to an index. In such instances, these asset-backed bonds are generally categorized as Level 3.

State and municipal bonds – The fair value for state and municipal bonds is based on regularly updated trades, bid-wanted lists, and offerings from active market makers and brokers. Evaluations incorporate current market conditions, trading spreads, spread relationships and the slope of the yield curve, among others. Information is applied to bond sectors and individual bond evaluations are extrapolated. Evaluation for distressed or non-performing bonds may be based on liquidation value or restructuring value. State and municipal bonds are generally categorized as Level 2.

Short-term investments

Money market instruments – The fair value is based on unadjusted quoted prices that are readily and regularly available in active markets. Money market instruments are categorized as Level 1.

Other short-term instruments – Other short-term instruments primarily include discounted and coupon bearing commercial paper. The fair value is based on a matrix-based approach incorporating days to maturity, current rates from market makers, as well as the coupon rate where appropriate. Other short-term instruments are generally categorized as Level 2.

Long-Term Debt

The $35 million outstanding long-term debt is the obligation of TGI and not of Triad. Debt service amounts to $2.8 million per year and is paid by TGI. Given the limited sources of funds available to service the long-term debt and the continued deterioration in the Company’s financial condition, the fair value of the Company’s long-term debt at March 31, 2010 and December 31, 2009 was calculated using a discounted cash flow methodology, giving effect only to the anticipated interest payments based upon available funds at March 31, 2010.

Fair Value of Investments

The Company did not have any material assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2010 or at December 31, 2009. During the first quarter of 2010, there were no transfers of securities within the fair value hierarchy. The following table summarizes the assets measured at fair value on a recurring basis and the source of the inputs in the determination of fair value as of March 31, 2010 and December 31, 2009:

	Fair Value at Reporting Date Using
(dollars in thousands)	March 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Assets
Securities available-for-sale
Fixed maturities:
U. S. government and agency securities	$	54,192	$	-	$	54,192	$	-
Foreign government securities		10,301		-		10,301		-
Corporate debt		484,760		-		484,760		-
Residential mortgage-backed		115,755		-		115,755		-
Commercial mortgage-backed		1,365		-		1,365		-
Asset-backed bonds		29,576		-		27,594		1,982
State and municipal bonds		115,091		-		115,091		-
Total fixed maturities		811,040		-		809,058		1,982
Short-term investments
Money market instruments		52,035		52,035		-		-
Commercial paper		94,040		-		94,040		-
Total	$	957,115	$	52,035	$	903,098	$	1,982

	Fair Value at Reporting Date Using
(dollars in thousands)	December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Assets
Securities available-for-sale
Fixed maturities:
U. S. government and agency securities	$	25,260	$	-	$	25,260	$	-
Foreign government securities		10,302		-		10,302		-
Corporate debt		500,999		-		500,999		-
Residential mortgage-backed		107,406		-		107,406		-
Asset-backed bonds		39,392		-		37,398		1,994
State and municipal bonds		101,471		-		101,471		-
Total fixed maturities		784,830		-		782,836		1,994
Short-term investments
Money market instruments		25,889		25,889		-		-
Commercial paper		762		-		762		-
Total	$	811,481	$	25,889	$	783,598	$	1,994

Significant unobservable inputs (Level 3) were used in determining the fair value on certain bonds in the fixed maturities portfolio during this period. The following table provides a reconciliation of the beginning and ending balances of these Level 3 bonds and the related gains and losses related to these assets during the first three months of 2010, respectively.

Fair Value Measurement Using Significant Unobservable Inputs (Level 3)

	Three Months Ended
	March 31,
(dollars in thousands)	2010			2009

Securities available-for-sale
Asset-backed bonds:
Beginning balance	$	1,994		$	2,535
Transfers into Level 3		-			-
Transfers out of Level 3		-			-
Total gains and losses (realized and unrealized):
Included in operations		(121	)		(288	)
Included in other comprehensive income		17			(83	)
Purchases, issuances and settlements
Purchases		93			-
Issuances		-			-
Sales		(1	)		(407	)
Settlements		-			-
Ending balance	$	1,982		$	1,757

The amount of total gains and losses for the period included in operations attributable to realized losses and the change in unrealized gains or losses relating to assets still held at the reporting date.	$	(104	)	$	(371	)

7. Earnings (Loss) Per Share ("EPS")

Basic and diluted EPS are based on the weighted-average daily number of shares outstanding. In computing diluted EPS, only potential common shares that are dilutive – those that reduce EPS or increase loss per share – are included. Exercise of options and unvested restricted stock are not assumed if the result would be antidilutive, such as when a loss from operations is reported. For the three months ended March 31, 2010 and 2009, the basic and diluted EPS denominators are the same weighted-average daily number of shares outstanding. The numerator used in both the basic EPS and diluted EPS calculation is the loss reported for the period represented. For the three months ended March 31, 2010, options to purchase approximately 13,304 shares of the Company’s common stock were excluded from the calculation of EPS because they were antidilutive.

8. Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). For the Company, other comprehensive income (loss) is composed of unrealized gains or losses on available-for-sale securities, net of income taxes. Effective with the issuance of the first Corrective Order, the Company no longer has the ability to hold securities in an unrealized loss position until such time that the securities recover in value or mature due to the possibility that Illinois law may require the Department to seek receivership if the corrective plan were deemed ineffective. Thus, any security with a fair value less than the book value at the balance sheet date is considered to be other-than-temporarily impaired and the loss is recognized as a realized loss in the Statements of Operations. For the three months ended March 31, 2010 and March 31, 2009, the Company’s other comprehensive income was $1.3 million and $10.3 million, respectively and the Company’s comprehensive loss was $26.5 million and $44.9 million, respectively.

9. Income Taxes

The income tax benefit for the three months ended March 31, 2010 and March 31, 2009 differs substantially from that which is computed by applying the Federal statutory income tax rate of 35% to the loss before income taxes. This difference is primarily due to the Company’s inability to recognize a benefit for expected tax loss carry forwards through the recording of a valuation allowance against all of the Company’s deferred tax assets.

10. Exit Costs

In June 2008, the Company recorded an accrual for certain exit costs in connection with the transition of its business into run-off. As part of the transition to run-off, Triad implemented a reduction in workforce by terminating approximately 100 employees based primarily in the sales, marketing, technology and underwriting functions. The remaining workforce of approximately 100 full-time employees is focused on the payment of legitimate claims and servicing the insurance portfolio during the run-off period.

As a result of the transition into run-off, the Company recorded an estimated pre-tax charge of approximately $8.3 million in other operating costs on the Statements of Operations for the quarter ended June 30, 2008. These charges included approximately $7.1 million in severance and related personnel costs, approximately $1.0 million related primarily to the abandonment of a portion of Triad’s main office lease that is expected to continue through 2012, and approximately $0.2 million related to the termination of certain other leases, including those related to underwriting offices, equipment and automobiles. At March 31, 2010, there remained approximately $0.6 million of accrued severance and related personnel costs and approximately $0.1 million of lease abandonment costs. There have been no significant changes to the estimates established at June 30, 2008.

In the quarter ended March 31, 2010, the Company accrued an additional $1.1 million of severance-related expenses attributable to the Company’s continuing run-off. Most of these severance expenses are now paid in the

first payroll following the termination, so the Company expects only slight changes in the amounts accrued and eventually paid.

11. Subsequent Events

Management has evaluated subsequent events to determine if events or transactions occurring through the filing date of this Form 10-Q require potential adjustment or disclosure in the financial statements. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes our consolidated financial condition, changes in financial position, and results of operations for the three months ended March 31, 2010 and 2009. This discussion supplements Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009, and should be read in conjunction with the interim financial statements and notes contained herein.

Certain of the statements contained in this quarterly report on Form 10-Q are "forward-looking statements" and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include estimates and assumptions related to economic, competitive, regulatory, operational and legislative developments and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are subject to change, uncertainty and circumstances that are, in many instances, beyond our control and they have been made based upon our current expectations and beliefs concerning future developments and their potential effect on us. Actual developments and their results could differ materially from those expected by us, depending on the outcome of a number of factors, including: the possibility that the Illinois Department of Insurance may take various actions regarding Triad if it does not operate its business in accordance with its revised financial and operating plan and the Corrective Orders, including seeking receivership proceedings; our ability to operate our business in run-off and maintain a solvent run-off; our ability to continue as a going concern; the possibility of general economic and business conditions that are different than anticipated; legislative, regulatory, and other similar developments; changes in interest rates, employment rates, the housing market, the mortgage industry and the stock market; the possibility that there will not be adequate interest in the Company’s common stock to ensure efficient pricing; and the relevant factors described in this report under the headings “Risk Factors” and "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995," in our Annual Report on Form 10-K for the year ended December 31, 2009, as well as in other reports and statements that we file with the Securities and Exchange Commission. Forward-looking statements are based upon our current expectations and beliefs concerning future events and we undertake no obligation to update or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made, except as required by the federal securities laws.

Overview

Triad Guaranty Inc. (“TGI”) is a holding company that historically provided private mortgage insurance coverage in the United States through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“TGIC”). Unless the context requires otherwise, references to “Triad” in this quarterly report on Form 10-Q refer to the operations of TGIC and its wholly-owned subsidiary, Triad Guaranty Assurance Corporation (“TGAC”). References to “we,” “us,” “our,” and the “Company” refer collectively to the operations of TGI and Triad. TGIC is an Illinois-domiciled insurance company and TGAC is an Illinois-domiciled reinsurance company. The Illinois Department of Insurance (the “Insurance Department”) is the primary regulator of both TGIC and TGAC. The Illinois Insurance Code grants broad powers to the Insurance Department and its director (collectively, the “Department”) to enforce rules or exercise discretion over almost all significant aspects of our insurance business. Triad ceased issuing new commitments for mortgage guaranty insurance coverage on July 15, 2008 and is operating

its remaining business in run-off. As used in this quarterly report on Form 10-Q, the term "run-off" means writing no new mortgage insurance policies and continuing to service existing policies. Servicing includes: receiving premiums on policies that remain in force; cancelling coverage at the insured’s request; terminating policies for non-payment of premium; working with borrowers in default to remedy the default and/or mitigate our loss; reviewing policies for the existence of misrepresentation, fraud or non-compliance with stated programs; and settling all legitimate filed claims per the provisions of the two Corrective Orders issued by the Department. The term “settled,” as used in these financial statements in the context of the payment of a claim, refers to the satisfaction of Triad’s obligations following the submission of valid claims by our policyholders. Prior to June 1, 2009, valid claims were settled solely by a cash payment. Effective on and after June 1, 2009, valid claims are settled by a combination of 60% in cash and 40% in the form of a deferred payment obligation (“DPO”). The first Corrective Order was issued in August 2008. The second Corrective Order was issued in March 2009 and subsequently amended in May 2009. These Corrective Orders, among other things, include restrictions on the distribution of dividends or interest on notes payable to TGI by Triad, allow management to continue to operate Triad under close supervision, and include restrictions on the payment of claims. Failure to comply with the provisions of the Corrective Orders may result in the imposition of fines or penalties or subject Triad to further legal proceedings, including receivership proceedings for the conservation, rehabilitation or liquidation of Triad.

We have historically provided Primary and Modified Pool mortgage guaranty insurance coverage on U.S. residential mortgage loans. We classify insurance as Primary when we are in the first loss position and the loan-to-value amount, or LTV, is 80% or greater when the loan is first insured. We classify all other insurance as Modified Pool. The majority of our Primary insurance has been delivered through the flow channel, which is defined as loans originated by lenders and submitted to us on a loan-by-loan basis. We have also historically provided mortgage insurance to lenders and investors who seek additional default protection (typically secondary coverage or on loans for which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement on groups of loans that are sold in the secondary market. Insurance provided on these individual transactions was provided through the structured bulk channel. Those individual loans in the structured bulk channel in which we are in the first loss position and the LTV ratio is greater than 80% are classified as Primary. All of our Modified Pool insurance has been delivered through the structured bulk channel. Our insurance remains effective until one of the following events occurs: the policy is cancelled at the insured’s request; coverage is cancelled due to pre-determined aggregate stop loss limits being met for certain Modified Pool transactions; we terminate the policy for non-payment of premium; the policy defaults and we satisfy our obligations under the insurance contract; or we rescind or deny the policy for violations of provisions of a master policy.

In run-off, our revenues principally consist of:

earned renewal premiums from the remaining insurance in force, net of:

reinsurance premiums ceded, primarily for captive reinsurance, and

refunds paid or accrued resulting from the cancellation of insurance in force or for coverage rescinded or anticipated to be rescinded due to violations of certain provisions of a master policy;

investment income; and

proceeds from the sale of assets other than the sale of securities.

We also realize investment gains and investment losses on the sale and impairment of securities, with the net gain or loss reported as a component of revenue.

In run-off, our expenses consist primarily of:

settled claims net of any losses ceded to captive reinsurers;

changes in reserves for estimated future claim payments on loans that are currently in default net of any reserves ceded to captive reinsurers;

general and administrative costs of servicing existing policies;

other general business expenses; and

interest expense.

Our results of operations in run-off depend largely on:

the conditions of the housing, mortgage and capital markets that have a direct impact on default rates, mitigation efforts, cure rates and ultimately the amount of claims settled;

the overall general state of the economy and job market;

persistency levels on our remaining insurance in force;

operating efficiencies; and

the level of investment yield, including realized gains and losses, on our investment portfolio.

Our results of operations in run-off could also be impacted significantly by recent federal government and private initiatives to stabilize the housing and financial markets. See the discussion below for further details on these initiatives.

Corrective Orders

Triad has entered into two Corrective Orders with the Department. The first Corrective Order was entered into on August 5, 2008 and remains in effect. This Corrective Order was implemented as a result of our decision to cease writing new mortgage guaranty insurance and to commence a run-off of our existing insurance in force as of July 15, 2008. Among other things, that Corrective Order:

Required Triad to submit a corrective plan to the Department;

Prohibits all stockholder dividends from Triad to TGI without the prior approval of the Department;

Prohibits interest and principal payments on Triad’s surplus note to TGI without the prior approval of the Department;

Requires Triad to obtain prior written approval from the Department before entering into certain transactions with unaffiliated parties;

Requires Triad to meet with the Department in person or via teleconference as necessary; and

Requires Triad to furnish to the Department certain reports, agreements, actuarial opinions and information on an ongoing basis at specified times.

After the submission and approval of the Department of the initial corrective plan in 2008, we have made several subsequent revisions to the plan -- particularly to the five-year statutory financial projections based upon our actual experience and the changes in the economy. In the first quarter of 2009 we revised the assumptions as a result of continued deteriorating economic conditions impacting our financial condition, results of operations and future prospects. The revised assumptions produced a range of potential ultimate outcomes for our run-off, but included projections showing that absent additional action by the Department or favorable changes in our business, we would have reported a deficiency in policyholders’ surplus as calculated in accordance with SAP as early as March 31, 2009. If this statutory insolvency had occurred, the Department likely would have instituted a receivership proceeding against Triad, which in turn would likely have led to the institution of bankruptcy proceedings by TGI. In an effort to protect existing policyholders, the Department issued the second Corrective Order effective on March 31, 2009, as amended on May 26, 2009. The second Corrective Order stipulates or prescribes: