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)

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			Page
Part I.  Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011		1
	Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended June 30, 2012 and 2011 (Unaudited)		2
	Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2012 and 2011 (Unaudited)		3
	Notes to Consolidated Financial Statements		4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		45
Item 4.	Controls and Procedures		45
Part II.  Other Information
Item 1.	Legal Proceedings		46
Item 6.	Exhibits		47
SIGNATURE			48
EXHIBIT INDEX			49

TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
		June 30,				December 31,
(dollars in thousands, except per share data)		2012				2011
		(unaudited)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost:  $678,878 and $721,168)		$	705,250			$	746,238
Short-term investments			34,014				30,102
Total invested assets			739,264				776,340
Cash and cash equivalents			36,037				40,590
Accrued investment income			6,318				6,680
Property and equipment			721				1,140
Reinsurance recoverable, net			19,372				22,988
Other assets			46,312				48,489
Total assets		$	848,024			$	896,227
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Losses and loss adjustment expenses		$	779,179			$	854,188
Unearned premiums			7,116				6,871
Deferred payment obligation, including interest			723,551				629,700
Accrued expenses and other liabilities			109,576				109,042
Total liabilities			1,619,422				1,599,801
Commitments and contingencies - Note 4
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 15,368,128 and 15,328,128 shares			154				153
Additional paid-in capital			114,117				114,111
Accumulated other comprehensive income, net of income tax liability of $16,575			10,175				8,977
Accumulated deficit			(895,844	)			(826,815	)
Deficit in assets			(771,398	)			(703,574	)
Total liabilities and stockholders' deficit		$	848,024			$	896,227

TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands, except per share data)		2012				2011				2012				2011
Revenue:
Premiums written:
Direct		$	37,948			$	35,982			$	74,097			$	75,336
Ceded			(1,244	)			(1,157	)			(2,554	)			(3,216	)
Net premiums written			36,704				34,825				71,543				72,120
Change in unearned premiums			56				569				(246	)			402
Earned premiums			36,760				35,394				71,297				72,522
Net investment income			5,874				8,126				11,983				16,617
Net realized investment gains			807				3,000				980				2,564
Other income			2,513				29				2,516				56
			45,954				46,549				86,776				91,759
Losses and expenses:
Net losses and loss adjustment expenses			68,184				41,300				136,166				83,005
Interest expense on the deferred payment obligation			4,938				4,469				9,919				8,447
Other operating expenses			4,136				5,178				9,720				9,615
			77,258				50,947				155,805				101,067
Loss before income taxes			(31,304	)			(4,398	)			(69,029	)			(9,308	)
Income taxes			-				-				-				-
Net loss		$	(31,304	)		$	(4,398	)		$	(69,029	)		$	(9,308	)
Other comprehensive income (loss), net of tax:
Change in unrealized gains on investments		$	(2,317	)		$	4,807			$	1,198			$	2,160
Comprehensive income (loss)		$	(33,621	)		$	409			$	(67,831	)		$	(7,148	)
Loss per common and common equivalent share:
Diluted loss per share		$	(2.05	)		$	(0.29	)		$	(4.52	)		$	(0.61	)
Shares used in computing loss per common and common equivalent share:
Diluted			15,292,743				15,258,128				15,275,436				15,241,498

TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
		Six Months Ended
		June 30,
(dollars in thousands)		2012				2011
Operating activities
Net loss		$	(69,029	)		$	(9,308	)
Adjustments to reconcile net loss to net cash used in operating activities:
Losses, loss adjustment expenses and unearned premium reserves			(74,764	)			(149,921	)
Accrued expenses and other liabilities			534				4,554
Deferred payment obligation, including accrued interest			93,851				101,536
Income taxes recoverable			-				11,707
Reinsurance, net			3,616				9,576
Accrued investment income			362				674
Net realized investment gains			(980	)			(2,564	)
Provision for depreciation			419				533
Discount accretion on investments			2,018				923
Other assets			1,930				1,179
Other operating activities			6				19
Net cash used in operating activities			(42,037	)			(31,092	)
Investing activities
Securities available-for-sale:
Purchases - fixed maturities			(30,782	)			(35,338	)
Sales - fixed maturities			19,380				39,216
Maturities - fixed maturities			52,372				55,156
Sales - equities			5				-
Other investment activity			418				(94	)
Purchases of short-term investments			(3,909	)			(26,333	)
Net cash provided by investing activities			37,484				32,607
Net change in cash and cash equivalents			(4,553	)			1,515
Cash and cash equivalents at beginning of period			40,590				38,762
Cash and cash equivalents at end of period		$	36,037			$	40,277
Supplemental schedule of cash flow information
Cash received during the period for:
Income taxes		$	-			$	(11,707	)

		As of June 30, 2012
(dollars in thousands)		Cost or Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Fixed maturity securities:
U. S. government and agency securities		$	10,940			$	190			$	-			$	11,130
Foreign government securities			9,587				494				-				10,081
Corporate debt			493,339				19,049				-				512,388
Residential mortgage-backed			15,509				1,152				-				16,661
Commercial mortgage-backed			28,443				525				-				28,968
Asset-backed			69,478				305				-				69,783
State and municipal bonds			51,582				4,657				-				56,239
Total fixed maturities			678,878				26,372				-				705,250
Short-term investments			34,008				6				-				34,014
Total securities		$	712,886			$	26,378			$	-			$	739,264

		As of December 31, 2011
(dollars in thousands)		Cost or Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Fixed maturity securities:
U. S. government and agency securities		$	13,662			$	341			$	-			$	14,003
Foreign government securities			9,585				439				-				10,024
Corporate debt			498,919				16,708				-				515,627
Residential mortgage-backed			28,036				1,280				-				29,316
Commercial mortgage-backed			31,184				374				-				31,558
Asset-backed			76,006				730				-				76,736
State and municipal bonds			63,776				5,198				-				68,974
Total fixed maturities			721,168				25,070				-				746,238
Short-term investments			30,099				3				-				30,102
Total securities		$	751,267			$	25,073			$	-			$	776,340

		Available-for-Sale
(dollars in thousands)		Amortized Cost				Fair Value
Maturity:
One year or less		$	135,385			$	137,518
After one year through five years			385,084				400,915
After five years through ten years			26,264				29,276
After ten years			18,715				22,129
			565,448				589,838
Assets with periodic principal payments:
Asset-backed securities			69,478				69,783
Commercial mortgage-backed securities			28,443				28,968
Residential mortgage-backed securities			15,509				16,661
Total		$	678,878			$	705,250

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands)		2012				2011				2012				2011
Securities available-for-sale:
Fixed maturity securities:
Gross realized gains		$	808			$	3,214			$	1,030			$	3,643
Gross realized losses			(6	)			(215	)			(55	)			(1,081	)
Equity securities:
Gross realized gains			5				1				5				2
Net realized gains (losses)		$	807			$	3,000			$	980			$	2,564

		June 30, 2012								December 31, 2011
(dollars in thousands)		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial Assets
Fixed maturity securities available-for-sale		$	705,250			$	705,250			$	746,238			$	746,238
Short-term investments			34,014				34,014				30,102				30,102

						Fair Value at Reporting Date Using
(dollars in thousands)		June 30, 2012				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		$	11,130			$	-			$	11,130			$	-
Foreign government securities			10,081				-				10,081				-
Corporate debt			512,388				-				512,388				-
Residential mortgage-backed			16,661				-				16,661				-
Commercial mortgage-backed			28,968				-				28,968				-
Asset-backed			69,783				-				69,183				600
State and municipal bonds			56,239				-				56,239				-
Total fixed maturities			705,250				-				704,650				600
Short-term investments:
Money market instruments			19,772				19,772				-				-
Other			14,242				-				14,242				-
Total		$	739,264			$	19,772			$	718,892			$	600

						Fair Value at Reporting Date Using
(dollars in thousands)		December 31, 2011				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		$	14,003			$	-			$	14,003			$	-
Foreign government securities			10,024				-				10,024				-
Corporate debt			515,627				-				515,627				-
Residential mortgage-backed			29,316				-				29,316				-
Commercial mortgage-backed			31,558				-				31,558				-
Asset-backed			76,736				-				75,736				1,000
State and municipal bonds			68,974				-				68,974				-
Total fixed maturities			746,238				-				745,238				1,000
Short-term investments:
Money market instruments			4,575				4,575				-				-
Other			25,527				-				25,527				-
Total		$	776,340			$	4,575			$	770,765			$	1,000

Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands)			2012				2011				2012				2011
Securities available-for-sale:
Asset-backed bonds:
Beginning balance		$	367			$	1,628			$	1,000			$	1,591
Transfers into Level 3			-				-				-				-
Transfers out of Level 3			-				-				-				-
Total gains and losses (realized and unrealized):
Included in operations			354				87				480				52
Included in other comprehensive income			(367	)			65				(438	)			85
Purchases, issuances, sales, and settlements:
Purchases			695				3				695				55
Issuances			-				-				-				-
Sales			(449	)			(719	)			(1,137	)			(719	)
Settlements			-				-				-				-
Ending balance		$	600			$	1,064			$	600			$	1,064
The amount of total gains and losses for the period included in operations attributable to realized gains and losses and the change in unrealized gains and losses relating to assets still held at the reporting date.		$	(13	)		$	152			$	42			$	137

- 19 -

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 and six month periods ended June 30, 2012 and 2011.  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, 2011, 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 we do not operate our business in accordance with the revised financial and operating plan and the Corrective Orders, or for other reasons, 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; legal and other proceedings regarding modifications and refinancing of mortgages and/or foreclosure proceedings; the possibility that there will not be adequate interest in our common stock to ensure efficient pricing; and the relevant factors described in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and in the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 section below, as well as in other reports and statements that we file with the Securities and Exchange Commission (the "SEC").  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. Any forward-looking statements that are made are current only as of the date on which we filed this report.

Overview

Triad Guaranty Inc. ("TGI") is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("TGIC"), is a nationwide mortgage guaranty insurer pursuing a run-off of its existing in-force book of business.  The term "run-off" means continuing to service existing mortgage guaranty insurance policies but not writing any new policies.  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.

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TGIC is an Illinois-domiciled mortgage guaranty insurance company and TGAC is an Illinois-domiciled mortgage guaranty 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. We ceased issuing new commitments for mortgage guaranty insurance coverage in 2008 and are operating our business in run-off under two Corrective Orders issued by the Department.  As noted above and throughout this report, the term "run-off" means continuing to service existing policies, but writing no new mortgage guaranty insurance policies.  Servicing existing policies during run-off includes:

·	billing and collecting premiums on policies that remain in force;

·	working with borrowers in default to remedy or cure 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 policies and the two Corrective Orders issued by the Department.

The term "settled," as used in this report 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. As required by the second Corrective Order, 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 surplus notes payable to TGI by Triad, and include restrictions on the payment of claims.

TGI is the public company whose stock is traded on the OTC Markets Group's OTCQB tier ("Pink Sheets") under the symbol "TGIC".  TGI owns TGIC, which is its only operating subsidiary. Aside from its ownership of TGIC, TGI's assets amount to approximately $1.3 million, which consist primarily of cash holdings. The remainder of the $848.0 million of assets reported on the Consolidated Balance Sheets presented in this Form 10-Q are the assets of Triad. Triad is prohibited from paying dividends or distributing assets to TGI without the approval of the Department. We believe that, absent significant positive changes in the economy and the residential real estate market, the existing assets combined with the future premiums of Triad likely will not be sufficient to meet Triad's current and future policyholder obligations and, therefore, none of Triad's assets would be available to TGI and its stockholders other than to reimburse certain TGI expenses incurred on behalf of TGIC.  Therefore, the ultimate value of TGI could be considered its cash holdings less any future expenses not reimbursed by Triad (see "Liquidity and Capital Resources" for more information).  TGI is exploring strategies to acquire profitable, growing businesses and leverage its insurance industry knowledge, management expertise, and Net Operating Loss ("NOL") carryforwards that were generated on a consolidated basis with Triad in order to increase its future value for the benefit of its stockholders. No assurance can be given that TGI will be able to successfully implement such a strategy, or, if implemented, to increase its stockholder value.

We have historically provided Primary and Modified Pool mortgage guaranty insurance coverage on U.S. residential mortgage loans.  We classify a policy as Primary insurance when the policy is not part of a structured bulk transaction that includes an aggregate stop-loss limit applied to the entire group of loans.  We classify all other insurance as Modified Pool insurance. Policies insured as part of a Modified Pool transaction have individual coverage but there is an aggregate stop-loss limit applied to the entire group of insured loans.

---

Our insurance remains effective until one of the following events occurs:  the policy is cancelled at the insured's request; 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 coverage under the policy for violations of provisions of a master policy. Additionally, coverage may be cancelled on certain Modified Pool transactions if pre-determined aggregate stop loss limits are met, or if coverage is reduced to a de minimus amount of the initial amount insured or, for some contracts, ten years from the date of the contract.

Persistency, which measures the percentage of insurance in force remaining from one-year prior, is an important metric in understanding our future premium revenue. The longer a policy remains on our books, or "persists", the greater the amount of total premium revenue we will earn from the policy.

In run-off, our revenues principally consist of earned renewal premiums, which are reported net of reinsurance premiums ceded to captive reinsurers and premium refunds paid or accrued related primarily to rescissions, and investment income. 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 (including loss adjustment expenses) net of any losses ceded to captive reinsurers; changes in reserves for estimated future claim payments on loans that are currently in default (including new defaults that are reported during the period) net of any reserves ceded to captive reinsurers; general and administrative costs of servicing existing policies; other general business expenses; and interest expense on the DPO.

As we are operating in run-off and are issuing no new insurance commitments, our future results of operations largely depend on the amount of future premium that we earn less the amount of losses that we incur each period on the new defaults reported to us. In addition, our results may be significantly impacted by the favorable or adverse development of our loss reserves. Our results from operations will benefit if we are able to settle our loss reserves at a lesser amount than that reported on our balance sheet through loss mitigation, litigation and settlements with servicers. Conversely, our results from operations will be negatively impacted if the settled losses are greater than the loss reserves provided.  Our results of operations also depend on a number of other factors, many of which are not under our control. These factors include:

·	the conditions of the housing, mortgage and capital markets that have a direct impact on default rates, loss 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; and

·	operating efficiencies.

Our results of operations in run-off could also be impacted significantly by Federal government and private initiatives to limit foreclosures through loan modifications, refinancing mortgages at lower interest rates, or debt forgiveness.  See the discussion below for further details on these initiatives. Lastly, our results of operations in run-off could be materially affected by our ability to recognize benefits from our NOL carryforwards.

Accounting Principles

To better comprehend our financial position and results of operations, it is important to understand the difference between accounting principles generally accepted in the United States of America ("GAAP") and statutory accounting principles ("SAP") applicable to insurance companies and how we use these accounting principles.

---

As an insurance company, Triad is required to file financial statements prepared in accordance with SAP with the Department as well as the insurance departments of the states in which it conducts business. 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 are prepared in accordance with SAP as set forth in the Illinois Insurance Code or prescribed by the Department.  However, the Company prepares its financial statements presented in this Quarterly Report on Form 10-Q and in our other SEC filings in conformity with GAAP.  The primary difference between GAAP and SAP for Triad at June 30, 2012 was the reporting requirements relating to the establishment of the DPO stipulated in the second Corrective Order, which is described below.

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 at any particular point in time under GAAP is not necessarily a measure of insolvency. However, we believe that if Triad were to report a deficiency in policyholders' surplus under SAP for an extended period of time, Illinois law may require the Department to seek receivership of Triad, which could compel TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws, or otherwise consider dissolution of the Company. The second Corrective Order was designed in part to help Triad maintain its policyholders' surplus.

Corrective Orders

Triad has entered into two Corrective Orders with the Department as detailed below and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Among other things, the Corrective Orders:

·	Require oversight by the Department on substantially all operating matters;

·	Prohibit stockholder dividends from Triad to TGI without the prior approval of the Department;

·	Prohibit the accrual of interest and the payment of interest and principal on Triad's surplus note to TGI without the prior approval of the Department;

·	Restrict 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;

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

·	Require that all valid claims under Triad's mortgage guaranty insurance policies are settled 60% in cash and 40% by recording a DPO;

·	Require the accrual of simple interest on the DPO at the same average net rate earned by Triad's investment portfolio; and

·	Require that loss reserves in financial statements prepared in accordance with SAP be established to reflect the cash portion of the estimated claim settlement but not the DPO.

The DPO is an interest bearing subordinated obligation of Triad with no stated repayment terms.  The second Corrective Order requires that Triad hold assets to support the DPO liability in a separate account pursuant to a custodial arrangement. At June 30, 2012, the recorded DPO, including accrued interest of $40.5 million, amounted to $723.6 million or 98% of total invested assets compared to $629.7 million or 81% of total invested assets at December 31, 2011.  We are currently in discussions with the Department regarding a possible amendment to the second Corrective Order that would require the escrow of DPOs and accrued carrying charges only if requested by the Director and would limit the amount of carrying charges credited to the DPO holders to the amount of net investment income earned by Triad.

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 The recording of a DPO does not impact reported settled losses as we continue to report the entire amount of a claim in our statements of comprehensive loss under both bases of accounting.  The accounting treatment for the recording of DPOs on our balance sheet on a SAP basis is similar to a surplus note that is reported as a component of statutory surplus, which serves to increase reported statutory surplus.  However, in our financial statements prepared in accordance with GAAP included in this report, the DPOs and related accrued interest are reported as a liability.  At June 30, 2012, the cumulative effect of the DPO requirement on statutory policyholders' surplus, including the impact of establishing loss reserves at anticipated cash payment rather than the estimated full claim amount, was to increase statutory policyholders' surplus by $1.0 billion over the amount that would have been reported absent the second Corrective Order.  The cumulative increase to statutory policyholders' surplus of the DPO requirement was $967.5 million at December 31, 2011.  There was no such impact to loss reserves or stockholders' deficit calculated on a GAAP basis and is the primary reason for the reported deficit in assets.  Any repayment of the DPO or the associated accrued interest is dependent on the financial condition and future prospects of Triad and is subject to the approval of the Department.

The second Corrective Order provides financial thresholds, specifically regarding the statutory risk-to-capital ratio and the level of statutory policyholders' surplus that, if met, may indicate that the Department should reduce the DPO percentage and/or require distributions to DPO holders.  In January 2012, the Department notified Triad that as of December 31, 2011, based upon Triad's surplus position, risk-to-capital ratio and the continued economic uncertainty, the Department had determined that no change to the DPO percentage was in order nor would it be appropriate for Triad to make a distribution to the DPO holders.

Failure to comply with the provisions of the Corrective Orders or any other violation of the Illinois Insurance Code may result in the imposition of fines or penalties or subject Triad to further legal proceedings, including the institution by the Department of receivership proceedings for the conservation, rehabilitation, or liquidation of Triad.  Any such actions would likely lead TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws, or otherwise consider dissolution of the Company.  See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information.

Triad is also subject to comprehensive regulation by the insurance departments of the various other states in which it is licensed to transact business.  Currently, the insurance departments of the other states have been working with the Department in the administration and oversight of the Corrective Orders.

Going Concern

Our ability to continue as a going concern is dependent on the Department's ongoing review of our operating results compared to updated forecasts and our ability to reverse a large deficit in assets through possible future earnings.

Prior to the issuance of the second Corrective Order, our recurring losses from operations and resulting decline in policyholders' surplus as calculated in accordance with SAP increased the likelihood that Triad would be placed into receivership and raised substantial doubt about our ability to continue as a going concern.  The positive impact on surplus resulting from the second Corrective Order has resulted in Triad reporting a policyholders' surplus in its SAP financial statements of $230.3 million at June 30, 2012, as opposed to what would have been a deficiency in policyholders' surplus of $801.5 million on the same date had the second Corrective Order not been implemented.  Furthermore, we continued to report a deficit in assets under GAAP of $771.4 million at June 30, 2012. While implementation of the second Corrective Order has deferred the institution of an involuntary receivership proceeding, no assurance can be given that the Department will not seek receivership of Triad in the future and there continues to be substantial doubt about our ability to continue as a going concern.  The Department may seek receivership of Triad based on its determination that Triad will ultimately become insolvent, if Triad fails to comply with provisions of the Corrective Orders, or for other reasons including those stated above.  If the Department were to seek receivership of Triad, TGI could be compelled to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws or otherwise consider dissolution of the Company.  Our consolidated financial statements that are presented in this report do not include any accounting adjustments that reflect the financial risks of Triad entering receivership proceedings or otherwise not continuing as a going concern.

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Foreclosure Prevention Initiatives and Moratoriums

Several programs have been initiated by the federal government, the GSEs, and certain lenders that are, in general, designed to prevent foreclosures and provide relief to homeowners. These programs may involve modifications to the original terms of existing mortgages or their complete refinancing.  These programs seek to provide borrowers a more affordable mortgage by modifying the interest rate, extending the term of the mortgage or, in limited cases, reducing the principal amount of the mortgage. We are active participants in many of these programs, including government-initiated programs such as the Home Affordable Modification Program ("HAMP") and the Home Affordable Refinance Program ("HARP").

HAMP provides incentives to borrowers, servicers, and lenders to modify loans that are currently in default. HAMP and other such programs have been responsible for a large percentage of our cures since 2009. The number of policies cured under these programs declined in 2011 from levels experienced in 2010; however, recent changes to these programs have proven beneficial.  In January 2012, the U.S. government announced that it was revising HAMP by expanding eligibility requirements and increasing the incentive it pays servicers/lenders for principal forgiveness.  For the first time, beginning in the second quarter of 2012, the U.S. government will also pay Fannie Mae and Freddie Mac an incentive fee for principal forgiveness.  HAMP was scheduled to expire at the end of 2012, but the U.S. government has extended the program until December 2013.

A number of the borrowers that have completed the trial modification period have subsequently re-defaulted and we believe the number of borrowers that re-default will increase in the future, especially if the economic recovery stalls or moves slowly.  This could be exacerbated by additional deterioration in the housing market or economy in general.  The ultimate impact of HAMP and other modification programs is dependent on the number of borrowers that successfully modify their loans and do not re-default. Currently, we are unable to estimate with any degree of precision the number of policies that will ultimately cure and not re-default and are, therefore, unable to estimate the ultimate impact of these programs on our results of operations and financial condition.  If HAMP or similar programs prove to be effective in preventing ultimate foreclosure, future settled claim activity could be reduced.

If a loan is modified as part of one of these programs, the previously reported default would be cured, but we would maintain insurance on the loan and would be subject to the same ongoing risk if the policy were to re-default.  Policies that re-default under these programs may ultimately result in losses that are greater than the loss that would have occurred if the policy were never modified.  However, we do not provide loss reserves to account for the potential for re-default.  These programs could adversely affect us to the degree that borrowers who otherwise could make their mortgage payment choose to default in an attempt to become eligible for modification.

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HARP was launched in 2009 and revised in the third quarter of 2011.  This program is designed to provide a borrower who is current on all mortgage payments with the opportunity to take advantage of existing lower interest rates through a refinancing that would make the loan more affordable.  Under the original HARP program, only fixed-rate loans with a maximum current loan-to-value ("LTV") ratio of 125% were eligible, although this restriction was later removed.  The LTV limit for ARMs continues to be 105% of the current value.  We do not expect the revised HARP program will have a significant impact on our short-term results because: (i) these loans must not be in default to qualify; and (ii) we would continue to provide mortgage insurance on the refinanced loan.

Foreclosure moratoriums typically serve to temporarily reduce our claims settled because the completion of a valid foreclosure is a requirement for the filing of a claim for loss. However, such programs may lead to greater ultimate claim costs due to the accrual of interest and other expenses. While moratoriums have delayed our claims settled in recent years and increased the time a policy remains in our default inventory and may continue to do so, we do not expect a significant direct impact on our results of operations or financial condition from foreclosure moratoriums.

In February 2012, the federal government and state attorneys general reached a $25 billion settlement agreement with five of the nation's largest banks regarding claims that alleged, among other things, improper foreclosure practices.  The funds generally will be used for principal reductions, refinancing underwater mortgages, forbearance and short sales, and foreclosure prevention programs.  The banks have three years to implement the settlement agreement.  A great deal of uncertainty currently remains over how the program will be implemented as well as borrower eligibility, but currently we do not believe the settlement will have a meaningful impact on our future results of operations or financial condition.

See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information on the risks and uncertainties associated with foreclosure moratoriums.

Consolidated Results of Operations

Following is selected financial information for the three months and six months ended June 30, 2012 and 2011:

The financial results for the three months and six months ended June 30, 2012 as compared to the same period of 2011 were affected by the following:

·

A slight increase in earned premium for the second quarter of 2012 compared to the second quarter of 2011.  The increase was due to lower premium refunds in the second quarter of 2012, offset somewhat by a 23% decline in average insurance in force from the comparable three month period.  The decrease in earned premium during the six month period ended June 30, 2012 compared to the same period of 2011 was primarily due to the decline in insurance in force although partially mitigated by a lower level of premium refunds.

 

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·	A decline in investment income for both comparable periods due to declines in average invested assets and lower realized yields.

·	An increase in other income in the second quarter of 2012, which primarily represents a payment received from Essent Guaranty Inc. ("Essent") on the contingent purchase price for the 2009 sale of our policy administration system.

·

An increase in net losses and loss adjustment expenses ("LAE") during the second quarter and the first six months of 2012 compared to the comparable periods of 2011, primarily due to the increase in reserve factors adopted in the 2011 fourth quarter and the resulting impact on loss reserves provided for new defaults.  Additionally, during the second quarter of 2012, we decreased our expected rescission factors which had the effect of increasing the loss reserves established at June 30, 2012.

·	An increase in interest expense during the three months and six months ended June 30, 2012, which was due to the continued growth in accrued carrying charges related to the DPO liability.

·

A decrease in other operating expenses in the second quarter of 2012 due to declines in personnel costs and lower expenses related to our legacy contract underwriting activities.  The increase in other operating expenses for the six month period ended June 30, 2012 was primarily due to an increase during the first quarter of 2012 in the reserve for expected contract underwriting remedies.

We describe our results of operations in greater detail in the discussion that follows.  The information is presented in four sub-headings:  Production; Insurance and Risk in Force; Revenues; and Losses and Expenses.

Production

 

On July 15, 2008, we ceased issuing commitments for mortgage insurance, only issuing coverage to borrowers for which we had made a commitment as of that date.  We have had no material production since 2008.

Insurance and Risk in Force

The term "Insurance in force" is described as the total principal balance of our insured loans. Net risk in force is computed by applying the various percentage settlement options to the insurance in force amounts, adjusted by risk ceded under reinsurance agreements on Primary coverage and applicable stop-loss limits and deductibles on Modified Pool coverage, but before accounting for carried loss reserves.   The following table provides detail on our direct insurance in force at June 30, 2012 and 2011:

The decline in Primary insurance in force over the twelve month period ended June 30, 2012 is due to cancellation of insurance coverage, including cancellations resulting from claim settlement and rescission activity.  The decline in Modified Pool insurance in force for the same period was also affected by the termination of a number of Modified Pool transactions where pre-determined aggregate stop loss limits in the contracts were met on a settled basis.

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Primary insurance persistency increased to 83.1% at June 30, 2012 compared to 81.5% at June 30, 2011. Modified Pool insurance persistency decreased to 57.8% at June 30, 2012 compared to 78.4% at June 30, 2011. The large variance in Modified Pool persistency between the two periods is primarily due to cancellations of Modified Pool transactions that reached their pre-determined aggregate stop loss limits on a settled basis.  We believe our persistency has benefited from the temporary delays in foreclosures as well as the inability of many borrowers on loans that we have insured to sell or refinance existing homes due to the decline in home prices and stricter underwriting standards.

A portion of our Modified Pool contracts contain provisions that terminate both the coverage and the contract when cumulative settled losses reach the stop loss limit.  No future premium is received following the termination of these Modified Pool contracts.  During the first six months of 2012, approximately $36 million of Modified Pool insurance in force under this type of contract was terminated compared to approximately $343 million during the same period of 2011.

The majority of our Modified Pool contracts do not terminate when settled losses reach the stop loss limit and premiums will continue to be collected until such time that the remaining insurance in force is reduced to a de minimus amount or, in some cases, ten years from the date of the contract.  For these types of contracts, we recognize the net present value of the estimated future premium in the period during which our settled losses reach the stop loss limit.  During the first six months of 2012, approximately $398 million of Modified Pool insurance in force under this type of contract was terminated compared to approximately $291 million during the same period of 2011.  For both types of Modified Pool contracts, affected policies are excluded from in force statistics once the contractual stop loss limit is met on a settled basis.  We expect that other Modified Pool transactions will reach their contractual stop loss limits on a settled basis and terminate in the remainder of 2012, which will further accelerate the decline of our Modified Pool insurance in force.

Approximately 64% of our Modified Pool insurance in force was originated from 2005 through 2007.  Given the adverse development of our Modified Pool insurance originated in these years, the majority of these transactions have already reached the stop loss limit on an incurred basis.  As the following table indicates, under our Modified Pool contracts, we have limited loss exposure for future defaults, or changes in loss reserves on existing defaults, from contracts originated from 2005 through 2007.  The majority of our exposure on Modified Pool insurance is with transactions originated in 2004 and prior years and, given the performance to date for these policy years, we expect losses from Modified Pool insurance to have significantly less bearing on our future results compared to our Primary business.

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Net risk in force was $6.0 billion at June 30, 2012 compared to $7.2 billion at June 30, 2011.  Primary insurance accounted for approximately 95% of our net risk in force at June 30, 2012 compared to 94% at June 30, 2011.  The following table provides detail on our Primary risk in force, net of risk ceded to captives.

The percentage of our Primary insurance in force subject to captive reinsurance arrangements decreased slightly to 9.9% at June 30, 2012 from 10.2% at June 30, 2011.  Assets held in trusts supporting the reinsured risk also declined to $36.2 million at June 30, 2012 compared to $44.6 million at June 30, 2011.  Certain remaining captive reinsurance agreements have trust balances below the reserves ceded under the contracts.  In those cases, the net reserve credit that we recognize in our financial statements is limited to the trust balance.  Given this limitation, as well as the decline in insurance in force subject to captive reinsurance, we expect to only receive limited benefits in future periods from these agreements.

At June 30, 2012, approximately 17% of our gross Primary risk in force was comprised of coverage on loans with the potential for negative amortization ("pay-option ARM") and interest only loans.  An inherent risk in these types of loan products is the impact of the scheduled milestone in which the borrower must begin making amortizing payments, which can be substantially greater than the minimum payments required before the milestone is met.  An additional risk to a pay-option ARM loan is that the payment being made may be less than the amount of interest accruing, creating negative amortization on the outstanding principal of the loan.  The majority of our pay-option ARM loan portfolio has accumulated negative amortization and we believe these pay-option ARM loans have been or will be subject to significant payment shock, which increases our risk of loss.

At June 30, 2012, approximately 15% of our gross Primary risk in force is comprised of coverage on "Alt-A" loans.  We define Alt-A loans as loans that have been underwritten with reduced or no documentation verifying the borrower's income, assets, or employment and where the borrower has a FICO score greater than 619.  Due in part to depressed conditions in the housing markets, the Alt-A loans, pay-option ARM loans, and interest-only loans have, as a group, performed significantly worse than the remaining prime fixed rate loans.

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Business originated in 2005, 2006, and 2007 comprise the majority of our risk in force. In general, policies originated during these years have exhibited higher default rates and claim rates than preceding vintage years. In addition, these policy years have significantly higher amounts of average risk per policy than policies originated prior to 2005.  For additional information regarding these vintage years, see "Losses and Expenses," below.

Revenues

A summary of the individual components of our revenue for the second quarter and first six months of 2012 and 2011 follows:

The decrease in direct premium written before the impact of refunds was primarily due to the decline in insurance in force over the previous twelve months.  The accrual for Modified Pool transactions that exceeded their respective contractual stop loss limits did not have a significant impact on premium earned during all periods presented.

Premium refunds, primarily related to rescission activity, include cash premium refunded as well as the change in the accrual for expected premium refunds.  Cash premiums refunded is dependent on the number of policies rescinded and the amount previously collected while the accrual for expected premium refunds is dependent on our future expectations for these items. Premium refund activity had a smaller negative impact in the second quarter and first six months of 2012 compared to the respective periods of 2011.  This was due to a larger decrease in the accrual for expected premium refunds to reflect our expectations for lower future rescission activity.  While cash premium refund activity has moderated in 2012 compared to 2011 due to reduced rescission activity, the impact remains significant. The accrual we have established for expected premium refunds, which is reported in "Accrued expenses and other liabilities" on our Consolidated Balance Sheets, was $19.5 million at June 30, 2012, down from $26.5 million at March 31, 2012 and $30.7 million at June 30, 2011. The impact of premium refunds on our financial statements going forward will be determined primarily by our expectations for future cash premium refunds and the number of policies for which we retain the right to rescind coverage. We expect actual rescissions and cash premium refunds to decline in the remainder of 2012 compared to the volume we experienced in 2011 and in the first half of 2012.

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Ceded premium written is comprised of premiums written under excess of loss reinsurance treaties with captive reinsurers. Ceded premium in the second quarter of 2012 increased slightly over the second quarter of 2011 primarily due to the impact of increasing the accrual for expected refunds of ceded premium in the second quarter of 2011. We expect ceded premium generally to decline in the future as the amount of insurance in force subject to captive reinsurance declines.

Net investment income declined in the second quarter and first six months of 2012 compared to the respective periods in 2011 primarily due to a decline in invested assets as well as a decline in investment yield.  We expect invested assets to continue to decline for the foreseeable future as we anticipate funding our deficit in operating cash flow with the proceeds from the maturity and sale of these assets.  For further discussion, see "Investment Portfolio."

Losses and Expenses

A summary of the significant individual components of losses and expenses for the three month and six month periods ended June 30, 2012 and 2011 follows:

Net losses and LAE are comprised of settled claims, LAE, and the change in the loss and LAE reserve during the period. The increase in net losses and LAE in the second quarter and the first six months of 2012 compared to respective periods of 2011 was primarily due to differences in the loss reserves established for new defaults. Another contributing factor to the increases in net losses and LAE in 2012 was a decrease in our expected rescission factor which indirectly increased the frequency factor.  The decrease in the expected rescission factor was brought about by a downward trend in the number of policies being investigated for possible underwriting violations that are rescinded.

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The following table presents a roll-forward of our Primary risk in default for the three month and six month periods ended June 30, 2012 and 2011.  Risk in default includes the risk in force for all reported delinquencies that are in excess of two payments in arrears at the reporting date and the risk in force for all reported delinquencies that were previously in excess of two payments in arrears that have not been brought current.  New Primary risk in default and the rate of new risk in default (new risk in default as a percentage of performing risk in force) in the second quarter and first six months of 2012 declined compared to the one-year prior periods. However, net losses and LAE increased in both periods of 2012 compared to 2011 as reserve factor changes adopted during the fourth quarter of 2011 had the effect of increasing the level of reserves established for new defaults.

The cure rate (cured risk in default as a percentage of beginning risk in default) for Primary risk in default  declined to 7.1% for the second quarter of 2012 compared to 7.9% in the first quarter of 2012 and 8.2% in the second quarter of 2011. Cures are most likely to occur while the default is in its early stage.  In general, our expectation for a cure decreases significantly as the underlying mortgage becomes further delinquent until the borrower has missed ten payments.  Given the delays in foreclosure and other factors slowing settled claim activity, the average age of the total default inventory has increased slightly over the past year. At June 30, 2012, 56% of Primary risk in default has missed more than 12 payments compared to 54% at June 30, 2011.  The following table presents the distribution of primary risk in default by the number of payments for which the borrower is in default.  The most significant increase has been with policies that have missed more than 30 payments.

HAMP and other lender loan modification programs have contributed to cure activity, including cures on policies that have been in default for more than 12 months.  However, the benefit we have received from these programs has generally declined as the number of policies eligible for the programs has declined.

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Rescission activity continues to mitigate our level of loss reserves and settled losses, although the impact is down considerably compared to 2011.  We rescinded coverage on Primary policies with $51.4 million of risk in force during the second quarter of 2012 compared to $81.8 million in the second quarter of 2011.  While we expect rescission activity to continue to have a significant impact on settled claim activity and our results of operations, we expect rescission activity to decline going forward.  Rescission activity remains concentrated on policies originated by certain originators and on those originated in 2006 and 2007.  We believe the majority of the rescinded risk in default would have ultimately resulted in settled claims.  See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for risks and uncertainties associated with rescission activity.

The following table details the amount of Primary risk in default and the Primary reserve balance as a percentage of risk in default at June 30, 2012 and 2011.  The table also provides the impact of the rescission factor, which is a component of the frequency factor utilized in the reserve model, on gross case reserves at the respective period end.  Due to the changes in the assumptions utilized in our reserve methodology, including decreases to the expected rescission factor,  that were adopted in the previous twelve months, the gross case reserves, net of expected rescissions, expressed as a percentage of gross risk in default has increased to 65% at June 30, 2012 compared to 56% one-year prior.

The following table provides details on both the dollar amount and number of settled claims of both Primary and Modified Pool insurance for the periods ended June 30, 2012 and 2011: