UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Triad Guaranty Inc.

DELAWARE		56-1838519
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
101 South Stratford Road
Winston-Salem, North Carolina		27104
(Address of principal executive offices)		(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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

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

     Number of shares of Common Stock, par value $0.01 per share, outstanding as of November 3, 2006, was 14,889,059.

 

 

TRIAD GUARANTY INC.

INDEX

				Page
Part I. Financial Information
Item 1.		Financial Statements
		Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005			1
		Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2006 and 2005 (Unaudited)			2
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)			3
		Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			38
Item 4.		Controls and Procedures			38
Part II. Other Information
Item 1.		Legal Proceedings			39
Item 1A.		Risk Factors			39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3.		Defaults Upon Senior Securities			39
Item 4.		Submission of Matters to a Vote of Security Holders			39
Item 5.		Other Information			39
Item 6.		Exhibits			39
Signature					40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

		(Unaudited)
		September 30				December 31
		2006				2005
		(In thousands, except share data)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $572,341 and $518,137)		$	590,040			$	534,064
Equity securities (cost: $9,602 and $7,001)			10,113				8,159
Other investments			5,000				—
Short-term investments			6,023				4,796
			611,176				547,019
Cash and cash equivalents			9,230				8,934
Real estate acquired in claim settlement			7,982				5,721
Accrued investment income			7,695				7,237
Deferred policy acquisition costs			34,681				33,684
Prepaid federal income taxes			159,268				139,465
Property and equipment			7,842				7,827
Income taxes recoverable			200				181
Reinsurance recoverable			1				948
Other assets			19,904				16,487
Total assets		$	857,979			$	767,503
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	60,123			$	51,074
Unearned premiums			12,457				13,494
Amounts payable to reinsurers			5,838				4,810
Deferred income taxes			175,728				155,189
Long-term debt			34,508				34,501
Accrued interest on debt			584				1,275
Accrued expenses and other liabilities			7,819				7,969
Total liabilities			297,057				268,312
Commitments and contingencies — Note 4
Stockholders’ equity:
Preferred stock, par value $0.01 per share — authorized 1,000,000 shares; no shares issued and outstanding			—				—
Common stock, par value $0.01 per share — authorized 33,091,400 shares; issued and outstanding 14,887,889 shares at September 30, 2006 and 14,774,153 shares at December 31, 2005			149				148
Additional paid-in capital			103,964				103,657
Accumulated other comprehensive income, net of income tax liability of $6,373 at September 30, 2006 and $5,980 at December 31, 2005			11,836				11,106
Deferred compensation			—				(3,161	)
Retained earnings			444,973				387,441
Total stockholders’ equity			560,922				499,191
Total liabilities and stockholders’ equity		$	857,979			$	767,503

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
		(In thousands, except share data)
Revenue:
Premiums written:
Direct		$	65,828			$	53,272			$	186,101			$	152,158
Ceded			(11,925	)			(10,299	)			(34,498	)			(29,863	)
Net premiums written			53,903				42,973				151,603				122,295
Change in unearned premiums			174				1,155				1,031				1,731
Earned premiums			54,077				44,128				152,634				124,026
Net investment income			6,761				5,896				19,518				17,054
Net realized investment (losses) gains			(36	)			(170	)			1,636				(124	)
Other income			3				2				6				13
			60,805				49,856				173,794				140,969
Losses and expenses:
Net losses and loss adjustment expenses			19,305				16,958				52,927				44,876
Interest expense on debt			693				694				2,080				2,080
Amortization of deferred policy acquisition costs			4,109				3,714				12,089				11,066
Other operating expenses (net of acquisition costs deferred)			9,279				7,494				26,288				21,728
			33,386				28,860				93,384				79,750
Income before income taxes			27,419				20,996				80,410				61,219
Income taxes:
Current			979				706				2,930				2,107
Deferred			7,048				4,996				19,948				14,859
			8,027				5,702				22,878				16,966
Net income		$	19,392			$	15,294			$	57,532			$	44,253
Earnings per common and common equivalent share:
Basic		$	1.31			$	1.04			$	3.90			$	3.01
Diluted		$	1.30			$	1.03			$	3.86			$	2.99
Shares used in computing earnings per common and common equivalent share:
Basic			14,774,781				14,753,673				14,767,556				14,680,355
Diluted			14,923,102				14,837,017				14,899,940				14,809,568

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

		Nine Months Ended
		September 30
		2006				2005
		(In thousands)
Operating activities
Net income		$	57,532			$	44,253
Adjustments to reconcile net income to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			8,012				5,987
Accrued expenses and other liabilities			(150	)			153
Current taxes payable			—				576
Income taxes recoverable			(19	)			(162	)
Amounts due to/from reinsurers			1,975				362
Accrued investment income			(458	)			(326	)
Policy acquisition costs deferred			(13,086	)			(11,945	)
Amortization of deferred policy acquisition costs			12,089				11,066
Net realized investment (gains) losses			(1,636	)			124
Provision for depreciation			1,879				2,575
Accretion of discount on investments			49				(251	)
Deferred income taxes			19,948				14,859
Prepaid federal income taxes			(19,803	)			(13,815	)
Real estate acquired in claim settlement, net of write-downs			(2,261	)			(2,473	)
Accrued interest on debt			(691	)			(691	)
Other assets			(3,417	)			(1,149	)
Other operating activities			2,687				3,001
Net cash provided by operating activities			62,650				52,144
Investing activities
Securities available-for-sale:
Purchases — fixed maturities			(125,797	)			(93,536	)
Sales — fixed maturities			69,280				25,614
Maturities — fixed maturities			3,020				8,250
Purchases — equities			(4,772	)			—
Sales — equities			3,131				512
Purchases of other investments			(5,000	)			—
Net change in short-term investments			(1,227	)			7,710
Purchases of property and equipment			(1,894	)			(1,787	)
Net cash used in investing activities			(63,259	)			(53,237	)
Financing activities
Excess tax benefits from share-based compensation			280				—
Proceeds from exercise of stock options			625				3,261
Net cash provided by financing activities			905				3,261
Net change in cash and cash equivalents			296				2,168
Cash and cash equivalents at beginning of period			8,934				10,440
Cash and cash equivalents at end of period		$	9,230			$	12,608
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	24,438			$	16,246
Interest			2,765				2,765

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

1. The Company

     Triad Guaranty Inc. is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”), provides mortgage insurance coverage in the United States. This 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. Triad Guaranty Inc. and its subsidiaries are collectively referred to as the “Company”.

2. Accounting Policies And Basis Of Presentation

  Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 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 (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Triad Guaranty Inc. annual report on Form 10-K for the year ended December 31, 2005.

  Other Investments

     Other investments represent investments in equity securities for which there is no readily determinable market value and are stated at fair value. Other investments are reviewed regularly to determine if there are declines in value that are other than temporary. When an impairment is determined to be other than temporary, the impairment loss is recognized as a realized investment loss.

  Share-Based Compensation

     Prior to January 1, 2006, the Company accounted for stock option grants and grants of restricted stock under its 1993 Long-Term Stock Incentive Plan (the “Plan”), which is more fully described in Note 8, using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as permitted by Statement of Financial Accounting Standards No. 123 (“SFAS 123”). In accordance with APB 25, compensation expense was recognized for grants of restricted stock, but not for grants of stock options. In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) requires

compensation expense relating to share-based payment transactions to be recognized in financial statements. The Company adopted SFAS 123(R) effective January 1, 2006, utilizing the modified prospective application as defined in that statement. Under that transition method, compensation expense recognized in the third quarter of 2006 and the nine months ended September 30, 2006 includes: a) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006 based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and b) compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

     The following table shows the effect of adopting SFAS 123(R) in the Company’s financial statements:

		Three Months Ended				Nine Months Ended
		September 30, 2006				September 30, 2006
		(In thousands, except per share information)
Income before income taxes		$	(306	)		$	(899	)
Net income		$	(198	)		$	(584	)
Earnings per share — basic		$	(0.01	)		$	(0.04	)
Earnings per share — diluted		$	(0.01	)		$	(0.04	)

     Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from share-based compensation as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits of tax deductions in excess of the compensation expense recognized for those share-based payments to be classified as financing cash flows. This amount was $280,000 for the nine months ended September 30, 2006.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized to expense over the options’ vesting periods:

		Three Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2005
		(In thousands, except earnings per share information)
Net income — as reported		$	15,294			$	44,253
Net income — pro forma		$	15,143			$	43,822
Earnings per share — as reported:
Basic		$	1.04			$	3.01
Diluted		$	1.03			$	2.99
Earnings per share — pro forma:
Basic		$	1.03			$	2.99
Diluted		$	1.02			$	2.96

  Recent Accounting Pronouncements

     In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for the Company beginning January 1, 2007 and is not expected to have a material impact on the Company’s financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company beginning January 1, 2008 and is not expected to have a material impact on the Company’s financial position or results of operations.

     In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB 108”), which provides guidance on the consideration of the financial statement impacts of uncorrected prior year misstatements when quantifying a current year misstatement. SAB 108 is effective for the Company’s 2006 financial statements and is not expected to have a material impact on the Company’s financial position or results of operations.

3. Consolidation

     The consolidated financial statements include the accounts of Triad Guaranty Inc. and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

4. Commitments And Contingencies

  Reinsurance

     Premiums are ceded and risks transferred to other insurance companies under various reinsurance agreements, the majority of which are captive reinsurance agreements with affiliates of certain customers. Reinsurance contracts do not relieve Triad from its obligations to policyholders. Failure of the reinsurer to honor its obligation could result in losses to Triad; consequently, allowances are established for any amounts that are deemed uncollectible. Triad evaluates the financial condition of its reinsurers and monitors credit risk arising from similar geographic regions, activities, or economic characteristics of its reinsurers to minimize its exposure to significant losses from reinsurer insolvency.

  Insurance In Force, Dividend Restrictions, and Statutory Results

     Insurance regulations generally limit the writing of mortgage guaranty insurance to an aggregate amount of insured risk no greater than 25 times the total of statutory capital and surplus and the statutory contingency reserve. The amount of net risk for insurance in force at September 30, 2006 and December 31, 2005, as presented below, was computed by applying the various percentage settlement options to the insurance in force amounts, adjusted by risk ceded under reinsurance agreements, any applicable stop-loss limits and deductibles. Triad’s ratio is as follows:

		September 30, 2006				December 31, 2005
		(Dollars in thousands)
Net risk		$	8,065,064			$	7,312,697
Statutory capital and surplus		$	157,934			$	131,582
Statutory contingency reserve			515,957				447,826
Total		$	673,891			$	579,408
Risk-to-capital ratio			12.0 to 1				12.6 to 1

     Triad and its wholly-owned subsidiaries are each required under their respective domiciliary states’ insurance code to maintain a minimum level of statutory capital and surplus. Triad, an Illinois domiciled insurer, is required under the Illinois Insurance Code (the “Code”) to maintain minimum statutory capital and surplus of $5 million. The Code permits dividends to be paid only out of earned surplus and requires prior approval of extraordinary dividends. An extraordinary dividend is any dividend or distribution of cash or other property, the fair value of which, together with that of other dividends or distributions made within a period of twelve consecutive months, exceeds the greater of (a) ten percent of statutory surplus as regards policyholders, or (b) statutory net income for the calendar year preceding the date of the dividend.

     Net income as determined in accordance with statutory accounting practices was $79.5 million and $61.2 million for the nine months ended September 30, 2006 and 2005, respectively, and $77.1 million for the year ended December 31, 2005.

     At September 30, 2006 and December 31, 2005, the amount of Triad’s equity that could be paid out in dividends to Triad Guaranty Inc. was $74.7 million and $47.9 million, respectively, which was the earned surplus of Triad on a statutory basis on those dates.

  Loss Reserves

     The Company establishes loss reserves to provide for the estimated costs of settling claims on both loans reported in default and 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. Amounts recoverable from the sale of properties acquired in lieu of foreclosure are considered in the determination of the reserve estimates. 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 age, policy year, geography, chronic late payment characteristics, the number of months the loans have been in default, as well as whether the loans in default were underwritten through the flow channel or as part of a structured bulk transaction. The estimates are continually reviewed, and as adjustments to these liabilities become necessary, such adjustments are reflected in the financial statements in the periods in which the adjustments are made.

  Litigation

     A lawsuit was filed against the Company in January 2004 in the ordinary course of the Company’s business alleging violations of the Fair Credit Reporting Act. The Company is vigorously defending the lawsuit. In the opinion of management, the ultimate resolution of this pending litigation will not have a material adverse effect on the financial position or results of operations of the Company.

5. Earnings Per Share

     Basic and diluted earnings per share are based on the weighted-average daily number of shares outstanding. For diluted earnings per share, the denominator includes the dilutive effects of stock options and unvested restricted stock on the weighted-average shares outstanding. There are no other reconciling items between the denominators used in basic earnings per share and diluted earnings per share. The numerator used in basic earnings per share and diluted earnings per share is the same for all periods presented.

6. Comprehensive Income

     Comprehensive income consists of net income and other comprehensive income. For the Company, other comprehensive income is composed of unrealized gains or losses on available-for-sale securities, net of income tax. For the three months ended September 30, 2006 and 2005, the Company’s comprehensive income was $28.9 million and $11.1 million, respectively. For the nine months ended September 30, 2006 and 2005, the Company’s comprehensive income was $58.3 million and $43.3 million, respectively.

7. Income Taxes

     Income tax expense differs from the amounts computed by applying the Federal statutory income tax rate to income before income taxes primarily due to tax-exempt interest that the Company earns from its investments in municipal bonds.

8. Long-Term Stock Incentive Plan

     In May 2006, the Company’s shareholders approved the 2006 Long-Term Stock Incentive Plan (the “Plan”). Under the Plan, certain directors, officers, and key employees are eligible to receive various share-based compensation awards. Stock options and restricted stock may be awarded under the Plan for a fixed number of shares with a requirement for stock options granted to have an exercise price equal to or greater than the fair value of the shares at the date of grant. Generally, both the stock options and restricted stock awards vest over three years. Options granted under the Plan expire no later than ten years following the date of grant. In May 2006, the Company’s shareholders also approved the termination as to future awards of the 1993 Long-Term Stock Incentive Plan, which was structured similar to the 2006 Long-Term Stock Incentive Plan. Upon termination, 86,024 shares available for issuance under the 1993 Long-Term Stock Incentive Plan were merged into the Plan. The number of shares authorized to be granted or issued through equity awards under the Plan is 1,091,400. As of September 30, 2006, 1,654,224 shares were reserved (including 657,883 shares granted as part of the 1993 Long-Term Stock Incentive Plan that have not been exercised or vested) and 1,087,925 shares were available for issuance under the Plan. The following table shows amounts recognized in the financial statements related to share-based compensation:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
						(In thousands)
Gross compensation expense		$	908			$	438			$	2,604			$	1,249
Tax benefit			317				153				911				437
Compensation expense capitalized as part of deferred acquisition costs			144				180				421				180

     A summary of option activity under the Plan for the nine months ended September 30, 2006 is presented below:

														Weighted-
						Weighted-				Aggregate				Average
		Number				Average				Intrinsic				Remaining
		of Shares				Exercise Price				Value				Contractual Term
		(In thousands)
Outstanding, January 1, 2006			588,780			$	37.21
Granted			13,594				43.00
Exercised			31,555				19.80
Cancelled			4,520				43.25
Outstanding, September 30, 2006			566,299				38.27			$	7,445			4.9 years
Exercisable, September 30, 2006			421,196				36.68			$	6,168			3.5 years

     The fair value of stock options is estimated on the date of grant using a Black-Scholes pricing model. The weighted-average assumptions used for options granted during the nine months ended September 30, 2006 and 2005 are noted in the following table. The expected volatilities are based on volatility of the Company’s stock over the most recent historical period corresponding to the expected term of the options. The Company also uses historical data to estimate option exercise and employee terminations within the model; separate groups of employees with similar historical exercise and termination histories are considered separately for valuation purposes. The risk-free rates for the periods corresponding to the expected terms of the options are based on U.S. Treasury rates in effect on the dates of grant.

		2006				2005
Expected volatility			34.0	%			46.0	%
Expected dividend yield			0.0	%			0.0	%
Expected term		5.0 years				7.7 years
Risk-free rate			4.5	%			4.1	%

     The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 and 2005 was $16.28 and $23.32, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was approximately $839,000 and $5.0 million, respectively.

     A summary of restricted stock activity under the Plan for the nine months ended September 30, 2006 is presented below:

						Weighted-
						Average
		Number of				Grant-Date
		Shares				Fair Value
Nonvested, January 1, 2006			101,415			$	46.93
Granted			46,950				45.50
Vested			34,097				47.05
Cancelled			1,160				44.14
Nonvested, September 30, 2006			113,108				46.33

     The fair value of restricted stock is determined based on the closing price of the Company’s shares on the grant date. The weighted-average grant-date fair value of restricted stock granted during the nine months ended September 30, 2006 and 2005 was $45.50 and $47.52, respectively.

     As of September 30, 2006, there was $5.5 million of unrecognized compensation expense related to nonvested stock options and restricted stock granted under the Plan. That expense is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of stock options and restricted stock vested during the nine months ended September 30, 2006 and 2005 was $1.7 million and $2.1 million, respectively.

     The Company issues new shares upon exercise of stock options.

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 the consolidated financial condition, changes in financial position, and results of operations for the three months and nine months ended September 30, 2006 and 2005, of the Company. This discussion supplements Management’s Discussion and Analysis in our annual report on Form 10-K for the year ended December 31, 2005, and should be read in conjunction with the interim financial statements and notes contained herein.

     Certain of the statements contained herein, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive, and legislative developments. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our 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 certain factors, including the possibility of general economic and business conditions that are different than anticipated, legislative developments, changes in interest rates or the stock markets, stronger than anticipated competitive activity, as well as the risk factors described in Item 1A of our annual report on Form 10-K for the year ended December 31, 2005 and the “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” section below with respect to forward-looking statements contained herein.

Update on Critical Accounting Policies and Estimates

     Our annual report on Form 10-K for the year ended December 31, 2005 describes the accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. These critical accounting policies relate to the assumptions and judgments utilized in establishing the reserve for losses and loss adjustment expenses, determining if declines in fair values of investments are other than temporary, and establishing appropriate initial amortization schedules for deferred policy acquisition costs (“DAC”) and subsequent adjustments to that amortization.

     We believe that these continue to be the critical accounting policies applicable to the Company and that these policies were applied in a consistent manner during the first nine months of 2006.

Overview

     Through our subsidiaries, we provide Primary and Modified Pool mortgage guaranty insurance coverage to residential mortgage lenders and investors as a credit-enhancement vehicle. We classify insurance as Primary when we are in the first loss position and the loan-to-value ratio (“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 is delivered through the flow

channel, which is defined as loans originated by lenders and submitted to us on a loan-by-loan basis. We also provide 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. These transactions are referred to as our structured bulk channel business. All of our Modified Pool insurance is delivered through the structured bulk channel.

     Our revenues principally consist of a) initial and renewal earned premiums from flow business (net of reinsurance premiums ceded as part of our risk management strategies), b) initial and renewal earned premiums from structured bulk transactions, and c) investment income on invested assets. We also realize investment gains, net of investment losses, periodically as a source of revenue when the opportunity presents itself within the context of our overall investment strategy.

     Our expenses consist of a) amounts paid on claims submitted, b) changes in reserves for estimated future claim payments on loans that are currently in default, c) general and administrative costs of acquiring new business and servicing existing policies, d) other general business expenses, and e) income taxes.

     Our profitability depends largely on a) the volume of business insured combined with the adequacy of our product pricing and underwriting discipline relative to the risks insured, b) persistency levels, c) operating efficiencies, and d) the level of investment yield, including realized gains and losses, on our investment portfolio. We define persistency as the percentage of insurance in force remaining from twelve months prior. Cancellations of policies originated during the past twelve months are not considered in our calculation of persistency. This method of calculating persistency may vary from that of other mortgage insurers. We believe that our calculation presents an accurate measure of the percentage of insurance in force remaining from twelve months prior. Cancellations result primarily from the borrower refinancing or selling insured mortgaged residential properties and, to a lesser degree, from the borrower achieving prescribed equity levels at which the lender no longer requires mortgage guaranty insurance.

     For a more detailed description of our industry and operations, refer to the “Business” section of our annual report on Form 10-K for the year ended December 31, 2005.

Consolidated Results of Operations

     Following is selected financial information for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended												Nine Months Ended
		September 30												September 30
										%												%
		2006				2005				Change				2006				2005				Change
		(In thousands, except percentages and per share information)
Earned premiums		$	54,077			$	44,128				22.5	%		$	152,634			$	124,026				23.1	%
Net losses and loss adjustment expenses			19,305				16,958				13.8				52,927				44,876				17.9
Other operating expenses			9,279				7,494				23.8				26,288				21,728				21.0
Net income			19,392				15,294				26.8				57,532				44,253				30.0
Diluted earnings per share		$	1.30			$	1.03				26.2	%		$	3.86			$	2.99				29.1	%

     The increase in net income for the third quarter of 2006 over the third quarter of 2005 was a result of strong growth in earned premiums that exceeded growth of operating expenses and net losses and loss adjustment expenses. Earned premiums have increased driven by growth of our insurance in force coupled with an increase in basis points on Primary business. The increase in basis points was due to growth in production of new insurance with risk-adjusted rates such as Alt-A loans and adjustable rate mortgages (“ARMs”), including potential negative amortization loans. These same factors were also responsible for the increase in net income for the first nine months of 2006 over that for the same period of 2005.

     Growth of our insurance in force combined with seasoning of our portfolio caused net losses and loss adjustment expenses for the third quarter of 2006 to increase over the third quarter of 2005. Direct paid losses remained increased slightly to $13.6 million for the third quarter of 2006 over $13.5 million for the same quarter of 2005. For the first nine months of 2006, paid claims were $42.4 million compared to $36.4 million for the first nine months of 2005. The actual number of claims paid for the third quarter and first nine months of 2006 increased 2.7% and 20.2% over the respective periods of 2005 due to growth in our number of insured loans and a greater percentage of loans entering the peak claim paying period. In addition to paid claims, net losses and loss adjustment expenses also includes the change in reserves. We increased reserves $5.2 million and $9.0 million for the third quarter and first nine months of 2006, respectively, compared to increases of $3.2 million and $7.8 million in the third quarter and first nine months of 2005.

     Diluted earnings per share for the third quarter and first nine months of 2006 increased over the same periods of 2005 consistent with the increases in net income. Realized investment losses, net of taxes, had no impact on diluted earnings per share for the third quarter of 2006. For the first nine months of 2006, we had realized investment gains, which increased diluted earnings per share by $0.07 for this period. For the third quarter and the first nine months of 2005, we had realized investment losses that reduced diluted earnings per share by $0.01 for both periods. The impact of realized investment gains and losses on diluted earnings per share is a non-GAAP measure. We believe this is relevant and useful information to investors because,

except for write-downs on other-than-temporarily impaired securities, it shows the effect that our discretionary sales of investments had on earnings. See the further discussion of impairment write-downs in the “Realized Losses and Impairments” section below.

     In July 2006, we announced our intention to submit an application to incorporate a Canadian subsidiary to begin operations in Canada. The Canadian company will be a monoline provider of mortgage guaranty insurance and, pending regulatory approvals, could start operations sometime in 2007. We incurred approximately $480,000 of expenses in the first nine months of 2006 relating to legal fees, personnel and application fees in connection with this process. We expect these expenses to increase during the fourth quarter of 2006 as we continue to put the necessary personnel and infrastructure into place in anticipation of the commencement of business in 2007.

     We describe our results in greater detail in the discussions that follow. The information is presented in three categories: Production and In Force, Revenues, and Losses and Expenses.

  Production and In Force

     A summary of new production for the three months and nine months ended September 30, 2006 and 2005 broken out between Primary and Modified Pool follows:

		Three Months Ended												Nine Months Ended
		September 30												September 30
										%												%
		2006				2005				Change				2006				2005				Change
						(In millions, except percentages)
Primary insurance written		$	3,280			$	3,093				6.0	%		$	8,172			$	8,225				(0.6	)%
Modified pool insurance written			2,956				4,526				(34.7	)			10,542				8,427				25.1
Total insurance written		$	6,236			$	7,619				(18.2	)%		$	18,714			$	16,652				12.4	%

     Net new primary insurance written increased primarily due to increased production of products with risk-adjusted pricing such as potential negative amortizing loans. Potential negative amortizing loans include pay option ARMs. We define pay option ARMs as those that provide a fixed period of time for which the borrower has the option to pay monthly payments that are less than the interest accrued for those months. If the borrower elects this option, the LTV increases on the loan. Because the LTV can increase on a pay option ARM, these types of loans may present more risk to a mortgage insurer than traditional amortizing loans. We define ARMs with positive amortization as those that have scheduled loan principal amortization and those for which monthly payments are interest only for a fixed period of time and then convert to scheduled loan principal amortization. We classify all loans with adjustable interest rates as ARMs, including those for which the interest rate is fixed for a certain period of time.

     Net new primary insurance written using the industry trade association (Mortgage Insurance Companies of America, or “MICA”) definitions, for the entire industry declined approximately 9% for the third quarter and approximately 7% for the first nine months of 2006 from the corresponding periods of 2005 based on information available from MICA and other

public sources. This decline, although largely mitigated by our increased production of products with risk-adjusted pricing, led to the slight decline in Primary new insurance written for the first nine months of 2006 from the same period of 2005. We believe that the overall mortgage loan origination market will be smaller for all of 2006 than 2005, which will continue to reduce our Primary new insurance written for the year. However, we believe that alternative credit enhancements such as 80-10-10’s, which can limit the need for mortgage insurance, have become less attractive to borrowers as short-term interest rates have risen. If interest rates remain at current levels or continue to rise, the erosion of mortgage insurance written caused by these arrangements may soften, which could partially mitigate the overall reduction of Primary insurance written.

     We write Modified Pool insurance only through our structured bulk channel. Our Modified Pool insurance written declined in the third quarter of 2006 from the third quarter of 2005 but increased for the first nine months of 2006 over the same period of 2005. Structured bulk transactions for the entire industry declined approximately 21% for the third quarter of 2006 from that for 2005 but increased approximately 13% for the first nine months of 2006 over the same period of 2005, according to information available from MICA and other publicly available data. Our Modified Pool insurance written is likely to vary significantly from period to period due to: a) the limited number of transactions (but with larger size) occurring in this market, b) the level of competition from other mortgage insurers, c) the relative attractiveness in the marketplace of mortgage insurance versus other forms of credit enhancement, and d) the changing loan composition and underwriting criteria of the market. We believe there will continue to be opportunities throughout the remainder of 2006 in the structured bulk transaction market that meet our loan quality and pricing objectives.

     The following table provides estimates of our national market share of net new insurance written, using MICA definitions, through our flow and structured bulk channels based on information available from MICA and other public sources for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
Flow channel			6.0	%			6.0	%			5.7	%			5.9	%
Structured bulk channel			17.8	%			17.1	%			16.6	%			12.9	%
Total			9.4	%			9.5	%			9.4	%			8.0	%

     Our total market share remained relatively flat for the third quarter of 2006 compared to the third quarter of 2005. For the nine months ended September 30, 2006 our total market share increased over the same period of 2005 due to strong production through our structured bulk channel combined with the increase of structured bulk transactions as a percentage of the total mortgage insurance written for the industry. As mentioned earlier, our structured bulk channel market share will vary from period to period since this market has fewer but significantly larger transactions. Further, our share of this market is dependent on the availability of transactions that meet our credit quality and pricing benchmarks and on our ability to bid successfully to provide insurance on these transactions.

     We continue to increase our participation in the Alt-A marketplace. We have defined Alt-A loans as individual loans having FICO credit scores greater than 619 that have been underwritten with reduced or no documentation. The following table summarizes the credit quality characteristics of our Primary new insurance written during the three months and nine months ended September 30, 2006 and 2005 and reflects the growth in our Alt-A production. We have defined A Minus loans as those having FICO credit scores greater than 574, but less than 620. We have defined Sub Prime loans as those with credit scores less than 575.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
Prime			66.5	%			77.1	%			68.2	%			76.1	%
Alt-A			31.2				18.9				29.6				17.7
A Minus			2.0				3.1				2.0				4.8
Sub Prime			0.3				0.9				0.2				1.4
Total			100.0	%			100.0	%			100.0	%			100.0	%

     The majority of our Modified Pool production has been in the Alt-A marketplace over the last two years.

     Risk characteristics that we consider in our underwriting discipline also include, among other factors, the LTV of the loan. The following table summarizes the percentage of our Primary production by LTV for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
LTV ratio:
Greater than 95%			20.7	%			13.8	%			15.1	%			12.8	%
90.01% to 95.00%			23.3				43.3				23.3				35.4
90.00% and below			56.0				42.9				61.6				51.8
Total			100.0	%			100.0	%			100.0	%			100.0	%

     LTVs on policies originated in the structured bulk channel are generally lower than those on policies we receive via the flow channel. Those policies may also have other Primary coverage in front of our risk.

     Periodically we enter into structured bulk transactions involving loans that have insurance effective dates within the current reporting period but for which detailed loan information regarding the insured loans is not provided by the issuer of the transaction until later. When this situation occurs, we accrue premiums that are due but not yet paid based upon the estimated commitment amount of the transaction in the reporting period with respect to each loan’s insurance effective date. However, these policies are not reflected in our insurance in

force, new insurance written, or related industry data totals until we verify the loan level detail. At September 30, 2006, we had no structured bulk transactions with effective dates within the third quarter for which loan level detail had not been received. At September 30, 2005 we had $0.6 billion of structured bulk transactions with effective dates within the third quarter of 2005 for which loan level detail had not been received.

     The following table provides detail on our insurance in force at September 30, 2006 and 2005:

										%
		2006				2005				Change
		(In millions, except percentages)
Primary insurance		$	32,106			$	29,820				7.7	%
Modified Pool insurance			21,779				13,406				62.5
Total insurance		$	53,885			$	43,226				24.7	%

     Our Primary insurance in force at September 30, 2006 grew as compared to September 30, 2005 as a result of production during that period and improving persistency rates. Primary insurance annual persistency improved to 75.3% at September 30, 2006 compared to 69.7% at September 30, 2005. If interest rates remain near current levels, we anticipate that persistency rates will also continue near current levels in the fourth quarter of 2006. However, persistency may be adversely affected if interest rates decline significantly from the levels experienced during the first nine months of 2006.

     Our Modified Pool insurance in force at September 30, 2006 grew significantly during the past year primarily due to our strong production in the structured bulk channel. Approximately 19% and 32% of our insurance written through our structured bulk channel during the three months and nine months ended September 30, 2006, respectively, was structured with deductibles that put us in the second loss position compared to 19% and 43% for the three months and nine months ended September 30, 2005. The decline in Modified Pool insurance written with deductibles in the first nine months of 2006 from that of 2005 was the result of increased business with entities that do not utilize deductibles in their structures, although the use of deductibles remains an effective part of our Modified Pool risk management strategy.

     Similar to the trend in new insurance written discussed above, Alt-A continues to grow as a percentage of our insurance in force. The following table shows the percentage of our insurance in force that we have classified as Alt-A at September 30, 2006 and 2005:

		2006				2005
Primary insurance in force			13.7	%			9.2	%
Modified Pool insurance in force			70.1	%			66.5	%
Total insurance in force			36.5	%			27.0	%

     The following table provides information on direct risk in force at September 30, 2006 and 2005:

		Primary								Modified Pool
		2006				2005				2006				2005
Credit quality:
Prime			81.2	%			84.7	%			30.8	%			33.2	%
Alt-A			14.5				10.1				68.1				65.4
A Minus			3.6				4.3				0.9				1.2
Sub Prime			0.7				0.9				0.2				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan type:
Fixed			71.0	%			73.6	%			32.1	%			43.2	%
ARM (positive amortization)			19.4				23.1				56.1				56.8
ARM (potential negative amortization)			9.6				3.3				11.8				0.0
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property type:
Condominium			9.2	%			7.5	%			7.3	%			4.8	%
Other (principally single-family detached)			90.8				92.5				92.7				95.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy status:
Primary residence			89.7	%			92.7	%			73.7	%			74.7	%
Second home			7.0				3.9				6.0				5.7
Non-owner occupied			3.3				3.4				20.3				19.6
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage amount:
$200,000 or less			61.3	%			68.5	%			39.6	%			46.3	%
Greater than $200,000			38.7				31.5				60.4				53.7
Total			100.0	%			100.0	%			100.0	%			100.0	%

     We offer mortgage insurance structures designed to allow lenders to share in the risks of mortgage insurance. One such structure is our captive reinsurance program under which reinsurance companies that are affiliates of the lenders assume a portion of the risk associated with the lender’s insured book of business in exchange for a percentage of the premium. The following table shows the percentage of our Primary flow channel insurance in force as well as the percentage of our total insurance in force that was subject to captive reinsurance arrangements at September 30, 2006 and 2005.

		2006				2005
Primary flow channel insurance in force			63.0	%			58.3	%
Total insurance in force			36.2	%			39.5	%

     The growth of the Primary flow channel insurance in force that was subject to captive

reinsurance arrangements at September 30, 2006 over September 30, 2005 was the result of increased production from lenders that participate in those arrangements. Additionally, one large lender entered into a captive agreement that had not previously participated. The decline in the total insurance in force subject to captive reinsurance at September 30, 2006 from September 30, 2005 reflects the fact that a greater portion of our insurance in force consists of Modified Pool insurance in force, which is written through the structured bulk channel and is not subject to captive reinsurance arrangements.

     We believe captive reinsurance arrangements are an effective risk management tool as selected lenders share in the risk under these arrangements. Additionally, captive reinsurance arrangements are structured so that we receive credit against the capital required in certain risk-based capital models utilized by rating agencies. We remain committed to structuring captive reinsurance arrangements, including deep ceded arrangements where the net premium cede rate is greater than 25%, on a lender-by-lender basis as we deem it to be prudent depending on a number of considerations including competition, market share and lender quality. We will continue to be an active participant with our lender partners in captive reinsurance arrangements.

  Revenues

     A summary of the significant individual components of our revenue for the three months and nine months ended September 30, 2006 and 2005 follows:

		Three Months Ended												Nine Months Ended
		September 30												September 30
										%												%
		2006				2005				Change				2006				2005				Change
						(In thousands, except percentages)
Direct premium written		$	65,828			$	53,272				23.6	%		$	186,101			$	152,158				22.3	%
Ceded premium written			(11,925	)			(10,299	)			15.8				(34,498	)			(29,863	)			15.5
Net premium written			53,903				42,973				25.4				151,603				122,295				24.0
Change in unearned premiums			174				1,155				(84.9	)			1,031				1,731				(40.4	)
Earned premiums		$	54,077			$	44,128				22.5	%		$	152,634			$	124,026				23.1	%
Net investment income		$	6,761			$	5,896				14.7	%		$	19,518			$	17,054				14.4	%
Total revenues		$	60,805			$	49,856				22.0	%		$	173,794			$	140,969				23.3	%

     We were able to grow direct premium written for the third quarter and first nine months of 2006 over that of the same periods of 2005 as a result of increased insurance in force through the strong production of Primary insurance products with risk-based pricing, as well as growth in our Modified Pool insurance written as discussed above. Favorable persistency levels increased renewal premium, which is included in direct premium written, for the third quarter of 2006 by $12.0 million or 24.0% over the third quarter of 2005 and for the first nine months of 2006 by $38.0 million or 27.2% over the first nine months of 2005. Annual persistency was 75.1% at September 30, 2006 compared to 68.4% at September 30, 2005. Additionally, due to the increased production of insurance products with risk-based pricing, the net basis points on our

average Primary insurance in force for the third quarter of 2006 has risen 5% over that for the third quarter of 2005. The basis points on our average Modified Pool insurance in force have declined 9% from that for the third quarter of 2005, reflecting changes in the deductibles and stop loss limits used in the structure of the transactions.

     Ceded premium written is comprised of premiums written under excess of loss reinsurance treaties with captive as well as non-captive reinsurance companies. The growth in ceded premium written in the third quarter of 2006 and the first nine months of 2006 over the same periods of 2005 was not as large as the growth in direct premium written as a result of a larger percentage of direct premium written not being subject to captive reinsurance arrangements. The following table provides further data on ceded premiums for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
Premium cede rate (ceded premiums written as a percentage of direct premiums written)			18.1	%			19.3	%			18.5	%			19.6	%
Captive reinsurance premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written)			17.0	%			17.8	%			17.4	%			18.1	%
Average captive premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written under captive reinsurance arrangements)			36.5	%			37.1	%			36.8	%			36.6	%

     The table below provides data on insurance written that was subject to captive reinsurance arrangements for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2006				2005				2006				2005
Primary flow insurance written			61.5	%			58.1	%			59.7	%			53.8	%
Total insurance written			28.1	%			23.6	%			23.5	%			26.6	%

     The increase in the percentage of Primary flow insurance written subject to captive reinsurance arrangements for the third quarter of 2006 over the third quarter of 2005 was due to increased production in the third quarter of 2006 of programs that are subject to captive reinsurance arrangements. None of our Modified Pool insurance written in 2006 or 2005 was subject to captive reinsurance arrangements. Because a lower portion of our total production in the third quarter of 2006 came from Modified Pool insurance, the percentage of total insurance written subject to captive reinsurance for the third quarter increased from the corresponding period of 2005. However, for the nine months ended September 30, 2006, Modified Pool

insurance production was a larger portion of total production than for the corresponding period of 2005. This led to the decline in the percentage of total insurance written subject to captive reinsurance for the first nine months of 2006 from the same period of 2005.

     The difference between net written premiums and earned premiums is the change in the unearned premium reserve, which is established primarily on premiums received on annual products. Our unearned premium liability decreased $0.2 million in the third quarter of 2006 and $1.0 million for the nine months ended September 30, 2006 compared to decreases of $1.2 million in the third quarter of 2005 and $1.7 million for the nine months ended September 30, 2005. The decline in the decreases of the unearned premium liability was due to increases in annual premium business in the third quarter and first nine months of 2006.

     Assuming no significant decline in interest rates, we anticipate our persistency will remain near current levels during the remainder of 2006. We anticipate that this will continue to have a positive effect on renewal earned premiums and total earned premiums.

     Net investment income for the third quarter and the first nine months of 2006 increased over that for the same periods of 2005 due to growth in average invested assets, partially offset by declines in portfolio yields. Average invested assets at cost or amortized cost for the third quarter and first nine months of 2006 grew by 16.8% and 16.4% over the third quarter and first nine months of 2005 as a result of the investment of cash flows from operations. Our investment portfolio tax-equivalent yield was 6.69% at September 30, 2006 compared to 6.81% at September 30, 2005. We anticipate a continuing decline in the overall portfolio tax-equivalent yield as current interest rates are still below our average portfolio rate. See the further discussion in the “Investment Portfolio” section below.

  Losses and Expenses

     A summary of the individual components of losses and expenses for the three months and nine months ended September 30, 2006 and 2005 follows:

		Three Months Ended												Nine Months Ended
		September 30												September 30
										%												%
		2006				2005				Change				2006				2005				Change
						(In thousands, except percentages)
Net losses and loss adjustment expenses		$	19,305			$	16,958				13.8	%		$	52,927			$	44,876				17.9	%
Amortization of deferred policy acquisition costs		$	4,109			$	3,714				10.6			$	12,089			$	11,066				9.2
Other operating expenses (net of acquisition costs deferred)		$	9,279			$	7,494				23.8			$	26,288			$	21,728				21.0
Loss ratio			35.7	%			38.4	%							34.7	%			36.2	%
Expense ratio			24.8	%			26.1	%							25.3	%			26.8	%
Combined ratio			60.5	%			64.5	%							60.0	%			63.0	%

     Net losses and loss adjustment expenses (LAE) for the third quarter and first nine months of 2006 increased over the same periods of 2005 due to growth of our insurance in force and the seasoning of our portfolio. Amortization of deferred policy acquisition costs and other operating expenses both increased in the third quarter and first nine months of 2006 over the third quarter and first nine months of 2005, also reflecting the growth of our insurance in force as well as several key initiatives that have taken place in 2006. The discussion below provides more detail on both losses and expenses.

     The following table provides detail on paid claims and the average severity for our Primary and Modified Pool insurance for the three months and nine months ended September 30, 2006 and 2005:

		Three Months Ended												Nine Months Ended
		September 30												September 30
										%												%
		2006				2005				Change				2006				2005				Change
		(Dollars in thousands)
Paid claims:
Primary insurance		$	13,038			$	11,982				8.8	%		$	39,823			$	32,810				21.4	%
Modified Pool insurance			581				1,473				(60.6	)			2,611				3,593				(27.3	)
Total		$	13,619			$	13,455				1.2	%		$	42,434			$	36,403				16.6	%
Number of claims paid:
Primary insurance			506				457				10.7	%			1,535				1,230				24.8	%
Modified Pool insurance			32				67				(52.2	)			147				169				(13.0	)
Total			538				524				2.7	%			1,682				1,399				20.2	%
Average severity:
Primary insurance		$	25.8			$	26.2							$	25.9			$	26.7
Modified Pool insurance		$	18.2			$	22.0							$	17.8			$	21.3
Total		$	25.3			$	25.7							$	25.2			$	26.0

     Total paid claims for the third quarter of 2006 were relatively flat compared to the third quarter of 2005 as a decline in Modified Pool insurance paid claims largely offset an increase in Primary insurance paid claims. Total paid claims for the first nine months of 2006 increased over the first nine months of 2005 primarily due to overall growth in the insurance portfolio as well as the seasoning of our portfolio as a larger percentage of our insurance in force reaches its anticipated highest claim frequency period in years two to five from loan origination. The decline in both the amount as well as the number of paid claims for Modified Pool insurance is due to the seasoning of the business that was structured with deductibles. More of the Modified Pool defaults filed in 2006 were part of transactions structured with deductibles than those defaults filed in 2005.

     The decline in total average severity shown above for the third quarter and nine months ended September 30, 2006 from that for the same periods of 2005 is reflective of abnormally

high severity experienced in the first nine months of 2005. This unfavorable severity was driven by an unusually high amount of large claims paid during that period and the fact that one of our larger servicers expedited its claims processing procedures, which hindered our loss mitigation efforts. One of the loss mitigation techniques that we utilize in an attempt to lower claim severity is the purchase and subsequent sale of properties in lieu of foreclosure. We expanded the use of this technique in the second half of 2005 and are continuing to utilize this strategy in 2006. Through the use of this strategy and updated claims administration software that provides enhanced analysis capabilities, we are experiencing success in limiting the growth of claims severity. Alt-A and Modified Pool loans are growing as a percentage of both our insurance and risk in force, and these types of loans generally have a larger average loan balance than the remainder of our portfolio. We expect the average severity will trend upward as the newer policy years develop and the average loan amounts rise due to these factors.

     Net losses and loss adjustment expenses also include the change in reserves for losses and loss adjustment expenses. The following table provides further information about our loss reserves at September 30, 2006 and 2005:

										%
		2006				2005				Change
		(In thousands, except percentages)
Primary insurance:
Reserves for reported defaults		$	50,237			$	35,206				42.7	%
Reserves for defaults incurred but not reported			5,240				4,646				12.8
Total Primary insurance			55,477				39,852				39.2
Modified Pool insurance:
Reserves for reported defaults			3,683				1,305				182.2
Reserves for defaults incurred but not reported			858				563				52.4
Total Modified Pool insurance			4,541				1,868				143.1
Reserve for loss adjustment expenses			105				103				1.9
Total reserves for losses and loss adjustment expenses		$	60,123			$	41,823				43.8	%

     The reserve for losses and loss adjustment expenses at September 30, 2006 increased significantly from September 30, 2005 primarily due to an increase in the number of defaults and an increase in the frequency and severity factors utilized in our reserving methodology. As discussed above, Alt-A loans and ARMs continue to comprise a greater portion of our total loan portfolio. These products lack long-term historical performance data, which could increase the volatility of the results in our reserve model.

     We believe that it is prudent to increase our reserve factors to recognize the uncertainties in the macro economic environment as we monitor the impact of higher interest rates as well as a moderation of house price appreciation in certain markets.

     The following table shows default statistics at September 30, 2006 and 2005. The number of loans in default includes all reported delinquencies that are in excess of two payments in arrears at the reporting date and all reported delinquencies that were previously in excess of two payments in arrears and have not been brought current.

		2006				2005
Total business:
Number of insured loans in force			329,937				297,400
Number of loans in default			6,939				5,653
With deductibles			1,230				709
Without deductibles			5,709				4,944
Percentage of loans in default (default rate)			2.10	%			1.90	%
Percentage of loans in default excluding deductibles*			2.11	%			1.99	%
Primary insurance:
Number of insured loans in force			219,287				219,159
Number of loans in default			4,972				4,312
Percentage of loans in default			2.27	%			1.97	%
Modified Pool insurance:
Number of insured loans in force			110,650				78,241
Number of loans in default			1,967				1,341
With deductibles			1,230				709
Without deductibles			737				632
Percentage of loans in default			1.78	%			1.71	%
Percentage of loans in default excluding deductibles*			1.44	%			2.17	%
Primary Alt-A business**:
Number of insured loans in force			20,186				15,554
Number of loans in default			674				500
Percentage of loans in default			3.34	%			3.21	%