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 March 31, 2007

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

(336) 723-1282
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 May 4, 2007, was 14,908,523.

 

 

TRIAD GUARANTY INC.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006			1
Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006 (Unaudited)			2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (Unaudited)			3
Notes to Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			40
Part II. Other Information
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			40
Item 6. Exhibits			40
Signature			41
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.

		(Unaudited)
		March 31				December 31
		2007				2006
		(In thousands, except share data)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $594,228 and $568,992)		$	608,945			$	586,594
Equity securities (cost: $9,012 and $9,530)			9,921				10,417
Other investments			5,000				5,000
Short-term investments			45,294				5,301
			669,160				607,312
Cash and cash equivalents			10,429				38,609
Real estate acquired in claim settlement			9,764				10,170
Accrued investment income			7,875				8,054
Deferred policy acquisition costs			35,035				35,143
Prepaid federal income taxes			166,693				166,908
Property and equipment			8,690				7,678
Income taxes recoverable			—				51
Reinsurance recoverable			211				841
Other assets			23,658				20,865
Total assets		$	931,515			$	895,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	98,721			$	84,352
Unearned premiums			15,022				13,193
Amounts payable to reinsurers			6,094				5,909
Deferred income taxes			180,232				176,483
Long-term debt			34,512				34,510
Accrued interest on debt			584				1,275
Current taxes payable			1,606				—
Accrued expenses and other liabilities			7,592				9,685
Total liabilities			344,363				325,407
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 32,000,000 shares; issued and outstanding 14,908,523 shares at March 31, 2007 and 14,856,401 shares at December 31, 2006			150				149
Additional paid-in capital			106,447				104,981
Accumulated other comprehensive income, net of income tax liability of $5,469 at March 31, 2007 and $6,471 at December 31, 2006			10,157				12,018
Retained earnings			470,398				453,076
Total stockholders’ equity			587,152				570,224
Total liabilities and stockholders’ equity		$	931,515			$	895,631

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

		Three Months Ended
		March 31
		2007				2006
		(In thousands, except share data)
Revenue:
Premiums written:
Direct		$	78,408			$	59,312
Ceded			(12,701	)			(10,970	)
Net premiums written			65,707				48,342
Change in unearned premiums			(1,758	)			(452	)
Earned premiums			63,949				47,890
Net investment income			7,349				6,222
Net realized investment gains			761				900
Other income (losses)			2				(2	)
			72,061				55,010
Losses and expenses:
Net losses and loss adjustment expenses			32,581				16,351
Interest expense on debt			694				693
Amortization of deferred policy acquisition costs			4,624				3,862
Other operating expenses (net of acquisition costs deferred)			10,330				8,513
			48,229				29,419
Income before income taxes			23,832				25,591
Income taxes:
Current			1,759				972
Deferred			4,751				6,066
			6,510				7,038
Net income		$	17,322			$	18,553
Earnings per common and common equivalent share:
Basic		$	1.17			$	1.26
Diluted		$	1.16			$	1.25
Shares used in computing earnings per common and common equivalent share:
Basic			14,818,900				14,758,349
Diluted			14,946,166				14,862,471

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

		Three Months Ended
		March 31
		2007				2006
		(In thousands)
Operating activities
Net income		$	17,322			$	18,553
Adjustments to reconcile net income to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			16,198				1,990
Accrued expenses and other liabilities			(2,093	)			(2,865	)
Current taxes payable			1,606				563
Income taxes recoverable			51				181
Amounts due to/from reinsurer			815				416
Accrued investment income			179				225
Policy acquisition costs deferred			(4,515	)			(4,082	)
Amortization of deferred policy acquisition costs			4,623				3,862
Net realized investment gains			(761	)			(900	)
Provision for depreciation			532				615
Accretion of discount on investments			129				(35	)
Deferred income taxes			4,751				6,066
Prepaid federal income taxes			215				—
Real estate acquired in claim settlement, net of write-downs			406				(4,477	)
Accrued interest on debt			(691	)			(691	)
Other assets			(2,793	)			(1,122	)
Other operating activities			681				709
Net cash provided by operating activities			36,655				19,008
Investing activities
Securities available-for-sale:
Purchases — fixed maturities			(62,304	)			(22,616	)
Sales — fixed maturities			35,296				8,000
Maturities — fixed maturities			2,287				2,160
Purchases — equities			(38	)			(4,622	)
Sales — equities			672				2,946
Net change in short-term investments			(39,993	)			(257	)
Purchases of property and equipment			(1,544	)			(401	)
Net cash used in investing activities			(65,624	)			(14,790	)
Financing activities
Excess tax benefits from share-based compensation			173				270
Proceeds from exercise of stock options			616				321
Net cash provided by financing activities			789				591
Net change in cash and cash equivalents			(28,180	)			4,809
Cash and cash equivalents at beginning of period			38,609				8,934
Cash and cash equivalents at end of period		$	10,429			$	13,743
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	—			$	—
Interest			1,383				1,383

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 ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006.

Recent Accounting Pronouncements

          In July 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 and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in its filed income tax returns. The only periods subject to examination for the Company’s federal returns are the 2003 through 2006 tax years. In January 2007, the Company received a final notice from the Internal Revenue Service stating that the examination of its 2004 tax return was completed and no changes were made to the Company’s reported tax. The Company believes that its income and deduction filing positions in the remaining open tax years would be sustained if subject to audit and does not anticipate any adjustments that will result in a material change in its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.

In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

          The Company’s policy for recording interest and penalties, if any, associated with audits is to record such items as a component of income before taxes. Penalties would be recorded in “other operating expenses” and interest paid or received would be recorded as interest expense or interest income, respectively, in the statement of income.

          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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” — Including an Amendment of FASB Statement No. 115. (“SFAS 159”), which allows companies to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 159.

  Share-Based Compensation

          On January 1, 2006, the Company adopted the provisions of SFAS 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

          The Company chose the modified-prospective transition alternative in adopting SFAS 123(R). Under the modified-prospective transition method, compensation cost is recognized in financial statements issued subsequent to the date of adoption for all stock-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption.

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

          Certain premiums and losses are ceded 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 amounts 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 March 31, 2007 and December 31, 2006, 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 (dollars in thousands):

		March 31, 2007				December 31, 2006
Net risk		$	9,757,134			$	8,612,912
Statutory capital and surplus		$	152,396			$	168,439
Statutory contingency reserve			554,462				521,836
Total		$	706,858			$	690,275
Risk-to-capital ratio		13.8 to 1					12.5 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 also 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 $22.6 million and $25.6 million for the three months ended March 31, 2007 and 2006, respectively, and $88.3 million for the year ended December 31, 2006.

          At March 31, 2007 and December 31, 2006, the amount of Triad’s equity that could be paid out in dividends to stockholders was $68.7 million and $84.7 million, respectively, which was the earned surplus of Triad on a statutory basis on those dates. On April 13, 2007, Triad paid a dividend of $30 million to its parent, Triad Guaranty Inc.

  Loss Reserves

          The Company establishes loss reserves to provide for the estimated costs of settling claims on loans reported in default and estimates of 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 default status, policy year, specific lenders, the number of months the policy has been in default, as well as whether the policies in default were underwritten through the flow channel or as part of a structured bulk transaction. The assumptions utilized in the calculation of the loss reserve estimate are continually reviewed, and as adjustments to the reserve 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 March 31, 2007 and 2006, the Company’s comprehensive income was $15.5 million and $14.7 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, restricted stock and phantom stock rights 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, most awards vest over three years. Options granted under the Plan expire no later than ten years following the date of grant. As of March 31, 2007, 1,597,515 shares were reserved and 978,550 shares were available for issuance under the Plan. Gross compensation expense of approximately $688,000 along with the related tax benefit of approximately $241,000 was recognized in the financial statements for the three months ended March 31, 2007. Gross compensation expense of approximately $800,000 along with the related tax benefit of approximately $280,000 was recognized in the financial statements for the three months ended March 31, 2006. For the three months ended March 31, 2007 and 2006, approximately $71,000 and $125,000, respectively, of share-based compensation was capitalized as part of deferred acquisition costs.

          A summary of option activity under the Plan for the three months ended March 31, 2007 is presented below:

														Weighted-
						Weighted-				Aggregate				Average
		Number				Average				Intrinsic				Remaining
		of Shares				Exercise Price				Value				Contractual Term
		(in thousands)
Outstanding, January 1, 2007			564,712			$	38.36
Granted			77,190				43.35
Exercised			22,937				26.87
Cancelled			—				—
Outstanding, March 31, 2007			618,965				39.41			$	2,355			5.1 years
Exercisable, March 31, 2007			410,998				37.79			$	2,323			3.2 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 three months ended March 31, 2007 and 2006 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.

		2007				2006
Expected volatility			31.6	%			34.2	%
Expected dividend yield			0.0	%			0.0	%
Expected term		5.0 years				5.0 years
Risk-free rate			4.4	%			4.5	%

          The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007 and 2006 was $15.59 and $15.92, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was approximately $470,000 and $738,000, respectively.

          A summary of restricted stock activity under the Plan for the three months ended March 31, 2007 is presented below:

						Weighted-
						Average
		Number of				Grant-Date
		Shares				Fair Value
Nonvested, January 1, 2007			113,941			$	46.41
Granted			34,351				44.79
Vested			29,531				49.37
Cancelled			5,166				45.36
Nonvested, March 31, 2007			113,595				45.20

          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 three months ended March 31, 2007 and 2006 was $44.79 and $42.00, respectively.

          As of March 31, 2007, there was $6.4 million of total 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 2.1 years. The total fair value of stock options and restricted stock vested during the three months ended March 31, 2007 and 2006 was $1.5 million and $1.4 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 ended March 31, 2007 and 2006, of the Company. This discussion supplements Management’s Discussion and Analysis in Form 10-K for the year ended December 31, 2006, 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 Form 10-K for the year ended December 31, 2006 and the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 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, 2006 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 three months of 2007. The sensitivity analysis provided in Form 10-K provided the impact on pre-tax income as a result of a 10% increase or decrease in the frequency or severity factors utilized in the reserve model. During the first quarter of 2007 we raised the frequency factor by approximately 5% and made a small upward adjustment to the severity factor as a result of recent conditions in the housing market.

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 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. Those individual loans in the structured bulk channel in which we are in the first loss position and the LTV ratio is greater than 80% are classified as Primary. All of our Modified Pool insurance 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 essentially 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) the conditions of the housing market that have a direct impact on mitigation efforts, cure rates and ultimately the amount of claims paid, c) persistency levels, d) operating efficiencies, and e) 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 point 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 Form 10-K.

Consolidated Results of Operations

          Following is selected financial information for the three months ended March 31, 2007 and 2006:

										%
										Change
										2007
		2007				2006				vs. 2006
		(In thousands, except percentages and per share information)
Earned premiums		$	63,949			$	47,890				33.5	%
Net losses and loss adjustment expenses			32,581				16,351				99.3
Net income			17,322				18,553				(6.6	)
Diluted earnings per share		$	1.16			$	1.25				(7.2	)

          Earned premiums for the first quarter of 2007 grew significantly when compared to the first quarter of 2006, but were more than offset by the growth in net losses and loss adjustment expenses, primarily due to a $14 million increase in reserves. Based on information available from the industry association and other public sources, our estimated market share of net new insurance written including flow and bulk channels, using industry definitions, was 10.3% for the first quarter of 2007 compared to 10.1% for the first quarter of 2006.

          The growth of our insurance in force, the continued seasoning of our portfolio and an increase in average severity in paid claims ultimately impacting the factors utilized in the reserve methodology were the primary factors causing the significant increase in net losses and loss adjustment expenses in the first three months of 2007 over that of 2006. The actual number of claims paid increased in the first quarter of 2007 as a greater percentage of insurance in force reached the peak claim paying period. Our average severity of paid claims was $30,600 for the first quarter of 2007 compared to $25,100 for the first quarter of 2006 reflecting both an increase in the size of the loans insured during recent years as well as the lack of mitigation opportunities on defaulted loans in the current housing market.

          The decrease in diluted earnings per share in the first quarter of 2007 from that of 2006 was consistent with the decrease in net income. Realized investment gains, net of taxes, increased diluted earnings per share in the first quarter of 2007 by $0.03 and $0.04 in the first quarter of 2006. Realized investment gains and losses per diluted 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 further discussion of impairment write-downs in the Realized Losses and Impairments section below.

          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 Insurance Written (NIW) or production for the first quarter of 2007 and 2006 broken out between Primary and Modified Pool follows:

										% Change
		2007				2006				2007 vs. 2006
		(In millions, except percentages)
Primary insurance written:
Flow		$	4,372			$	1,947				124.5	%
Structured bulk			1,327				1				1,326.0
Total Primary insurance written		$	5,699			$	1,948				192.6
Modified pool insurance written			1,925				4,606				(58.2	)
Total insurance written		$	7,624			$	6,554				16.3	%

          According to estimates published by Fannie Mae, the overall mortgage loan origination market declined approximately 12% from the first quarter of 2006. The housing market slowed significantly during 2006 continuing into the first quarter of 2007, as evidenced by reduced sales of new and existing homes. Although the overall loan origination market slowed during the quarter, there was an increase in the market penetration of mortgage insurance products as “piggyback” loan arrangements such as the 80-10-10’s have lost favor from a lender’s perspective as short term interest rates rose and the second lien product has become less marketable in the secondary market. Evidence of this turnaround is the fact that new Primary insurance written using the industry trade association (Mortgage Insurance Companies of America, or “MICA”) definitions, for the entire industry increased approximately 33% for the first quarter of 2007 as compared to the same period in 2006 based on information received from MICA and other public sources, despite the decline in the overall loan origination market.

          The significant increase in Primary NIW in the first quarter of 2007 is partially reflective of the general increase in mortgage insurance penetration in the flow channel noted above. Additionally, we experienced a $2.4 billion increase in NIW in the flow channel as a result of specific lender-paid programs with two lenders that met specific risk characteristics and other parameters that were not in place during the first quarter of 2006. The $1.3 billion of structured bulk transactions noted above met our definition as Primary (LTV greater than 80% and first loss position).

          We write Modified Pool insurance only through our structured bulk channel. Structured bulk transactions for the entire industry declined approximately 7% during the first quarter of 2007 according to information available from MICA and other publicly available data. As noted above, approximately $1.3 billion of structured bulk transactions during the first quarter of 2007 were classified as Primary. 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 2007 in the structured bulk transaction market that meet our loan quality and pricing objectives. Approximately 51% of our insurance written attributable to our structured bulk channel during the first three months of 2007 was structured with deductibles that put us in the second loss position compared to 36% for the first three months of 2006.

          The following table provides estimates of our national market share of net new insurance written, using industry definitions, through our flow and structured bulk channels based on information available from MICA and other public sources for the three months ended March 31, 2007 and 2006:

		Market Share by Channel
		Three months ended March 31,
		2007				2006
Flow channel			9.0	%			5.3	%
Structured bulk channel			13.0	%			16.7	%
Total			10.3	%			10.1	%

          Total market share increased in the first quarter of 2007 due to the strong production through our flow channel, which included two specific lender-paid programs. One of the lender-paid programs had been originated and reported through the structured bulk channel during the first quarter of 2006. Absent the inclusion of these two lender-paid programs, our first quarter 2007 flow market share would have equaled approximately 6.5%. These lender-paid programs usually extend for periods of three to six months. As mentioned earlier, our structured bulk market share will vary from period to period since this market can have significantly larger transactions and 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.

          One of the risk characteristics that we pay particular attention to is credit quality. We have defined Alt-A as individual loans having FICO scores greater than 619 and that have been underwritten with reduced or no documentation. We have defined A Minus loans as those having FICO scores greater than 574, but less than 620. We have defined Sub Prime loans as those with credit scores less than 575. The following table summarizes the credit quality characteristics of our Primary new insurance written during the first quarter of 2007 and 2006:

		Credit Quality of Primary NIW
		Three months Ended March 31,
		2007				2006
Prime			78.1	%			74.9	%
Alt-A			14.2				22.8
A Minus			6.1				2.0
Sub Prime			1.6				0.3
Total			100.0	%			100.0	%

          The increase in the percentage of Prime credit quality in 2007 can be attributed to the credit characteristics of one of the specific lender paid programs as well as an overall tightening of underwriting standards by many lenders. The increase in the percentage of A minus and Sub Prime credit quality in the first quarter of 2007 reflected the structured bulk transactions that were classified as Primary.

          Another significant trend in our Primary production was the increase in ARMs, especially those loans subject to potential negative amortization. The following table summarizes the loan type characteristics of our Primary new insurance written during the first quarter of 2007 and 2006 and reflects the growth in ARMs, especially the loans subject to potential negative amortization:

		Loan Type of Primary NIW
		Three months Ended March 31,
		2007				2006
Fixed			56.5	%			67.6	%
ARM (positive amortization)			8.2				16.1
ARM (potential negative amortization)			35.3				16.3
Total			100.0	%			100.0	%

          The increase in the potential negative amortization ARMs in the first quarter of 2007 partially reflects a trend in the marketplace. Our production, which represents a greater percentage of potential negative amortization ARMs than exists in the marketplace has been limited to a few lenders where we have a good understanding of both their product and their underwriting guidelines. The large majority of the potential negative amortization ARMs that we have insured are still in the period that the borrower can elect to make minimum payments. An inherent risk in a product such as this is the scheduled milestone in which the borrower must begin making amortizing payments, which can be substantially greater than the minimum payments required. The ability of those borrowers to ultimately make the positive amortizing payments when required or to refinance the original loan adds uncertainty to this product. However, we are aware of the risks of concentration in this or any specific product and we have limits on the amount of potential negative amortization ARMs that we will accept.

          Another risk characteristic that we consider in our underwriting guidelines is the LTV of the loan. The following table summarizes the percentage of our Primary production by LTV during the first quarter of 2007 and 2006:

		Loan to Value of Primary NIW
		Three months Ended March 31,
		2007				2006
LTV ratio:
Greater than 95%			26.2	%			10.1	%
90.01% to 95.00%			23.8				25.0
90.00% and below			50.0				64.9
Total			100.0	%			100.0	%

          The above table indicates an increase in the Primary production of NIW on loans greater than 95% LTV. The majority of this increase resulted from one structured bulk transaction in the amount of $800 million with average LTVs near 100% and is classified as Primary.

          The majority of our Modified Pool production has been in the Alt-A marketplace over the last two years. LTVs on policies originated in the structured bulk channel are generally lower than those on policies we receive via the flow channel. Those policies usually have other Primary coverage in front of our risk or are below 80% LTV. The percentages of potential negative amortization ARMs included in our Modified Pool production approximated those included in our Primary production during the first quarter of 2006. However, during the first quarter of 2007, the Modified Pool production of potential negative amortization ARMs was reduced.

          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 March 31, 2007, we had approximately $1.9 billion of structured transactions with effective dates within the first quarter for which loan level detail had not been received and, therefore, are not included in our own data or industry totals. These amounts will be reported as new production and insurance in force totals in the second quarter of 2007, when the issuer of the transactions provides accurate loan level detail to us. We have included in premium written and premium earned the respective estimated amounts due and earned during the first quarter of 2007 related to this insurance. At March 31, 2006 we had $1.5 billion of structured transactions with effective dates within the first quarter of 2006 for which loan level detail had not been received.

          The following table provides detail on our direct insurance in force at March 31, 2007 and 2006:

										%
										Change
										2007 vs.
		2007				2006				2006
		(In millions, except percentages)
Primary insurance		$	37,982			$	29,891				27.1	%
Modified Pool insurance			23,507				18,309				28.4
Total insurance		$	61,489			$	48,200				27.6	%

          Our Primary insurance in force at March 31, 2007 grew from March 31, 2006 as a result of increased production and improving persistency rates. Primary insurance persistency improved to 77.0% at March 31, 2007 compared to 71.1% at March 31, 2006. We anticipate that persistency rates will continue near current levels or increase moderately throughout the

remainder of 2007 due to current housing market weakness and relative flatness of yield curve. However, persistency may be adversely affected if interest rates decline significantly from the levels experienced during the first quarter of 2007. We have experienced a significant amount of growth in both Primary and Modified Pool direct insurance in force. Of the $37.9 billion of Primary insurance in force at March 31, 2007, approximately $2.6 billion is attributable to structured bulk transactions.

          Similar to the trend in NIW discussed above, Alt-A continues to grow as a percentage of our Primary insurance in force and continues to comprise the majority of our Modified Pool insurance in force. The following table shows the percentage of our insurance in force that we have classified as Alt-A at March 31, 2007 and 2006:

		2007				2006
Primary insurance in force			19.1	%			10.4	%
Modified Pool insurance in force			71.1	%			68.4	%
Total insurance in force			39.0	%			32.0	%

          The following table provides information on risk in force at March 31, 2007 and 2006. Indicators of possible increased risk would include the following:

	•		A decline in the percentage of business with prime credit quality
	•		An increase in the percentage of Alt-A business
	•		An increase in Primary LTV greater than 95%
	•		An increase in potential negative amortization loan types
	•		An increase in condominium property types
	•		A decline in Primary residence occupancy status
	•		A growing percentage of loans in excess of $200,000

Risk in Force⁽¹⁾

		Primary								Modified Pool
		March 31,								March 31,
		2007				2006				2007				2006
Direct Risk in Force		$	9,781			$	7,512			$	769			$	668
Net Risk in Force		$	8,937			$	6,779			$	933			$	751
Credit quality:
Prime			76.3	%			83.9	%			29.9	%			32.4	%
Alt-A			20.0				11.2				69.2				66.4
A Minus			3.2				4.1				0.8				1.0
Sub Prime			0.5				0.8				0.1				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%

(Continued)

		Primary								Modified Pool
		March 31,								March 31,
		2007				2006				2007				2006
LTV:
95.01% and above			19.4	%			14.4	%			0.0	%			0.0	%
90.01% to 95.00%			74.4				79.7				1.0				1.3
90.00% and below			6.2				5.9				99.0				98.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan Type:
Fixed			66.2	%			73.8	%			28.2	%			32.5	%
ARM (positive amortization)			19.9				21.3				59.4				65.8
ARM (potential negative amortization)			13.9				4.9				12.4				1.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Term:
15 years and under			2.2	%			3.9	%			2.0	%			2.9	%
Over 15 years			97.8				96.1				98.0				97.1
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property Type:
Condominium			10.1	%			8.3	%			8.9	%			6.7	%
Other (principally single-family detached)			89.9				91.7				91.1				93.3
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy Status:
Primary residence			88.1	%			91.3	%			73.8	%			74.2	%
Secondary home			7.7				5.3				6.1				5.9
Non-owner occupied			4.2				3.4				20.1				19.9
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Amount:
$200,000 or less			53.9	%			66.7	%			37.1	%			42.9	%
Over $200,000			46.1				33.3				62.9				57.1
Total			100.0	%			100.0	%			100.0	%			100.0	%

     The above table indicates that non-traditional mortgages continue to grow as a percentage of our risk in force. This is somewhat indicative of the move by the overall mortgage industry toward these products. While we have generally stayed away from certain sectors in the marketplace such as Sub Prime and second mortgages, our portfolio contains an increased exposure to Alt A loans as well as ARMs subject to potential negative amortization which carry

an increased amount of risk for which we believe we have priced accordingly compared to the more traditional loans.

     Due to the recent significant growth in our production and the amount of refinancing that took place in 2002 through 2005 causing much of our earlier books to lapse, our insurance portfolio is relatively unseasoned, having a weighted average life of 2.25 years at March 31, 2007 compared to 2.3 years at December 31, 2006 and 2.4 years at December 31, 2005. The following table shows direct risk in force as of March 31, 2007 by year of loan origination.

		Primary								Modified Pool *
		March 31, 2007								March 31, 2007
		Direct Risk								Direct Risk in
Certificate Year		in Force				Percent				Force				Percent
2001 and before		$	352.1				3.6	%		$	21.5				2.8	%
2002			449.9				4.6				26.1				3.4
2003			1,398.7				14.3				113.0				14.7
2004			1,359.5				13.9				123.0				16.0
2005			1,917.0				19.6				224.5				29.2
2006			2,983.2				30.5				229.9				29.9
2007			1,320.4				13.5				30.8				4.0
Total		$	9,780.8				100.0	%		$	768.8				100.0	%

          We also offer mortgage insurance structures designed to allow lenders to share in the risks of such 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 March 31, 2007 and 2006.

		Percentage Subject to
		Captive Arrangements
		2007				2006
Primary flow insurance in force			53.9	%			59.9	%
Total insurance in force			33.3	%			36.7	%

          The decline of the Primary flow insurance in force that was subject to captive reinsurance arrangements at March 31, 2007 over March 31, 2006 was the result of a switch by some of our larger lender partners to lender paid products that do not qualify for captive participation. The decline in the total direct insurance in force subject to captive reinsurance at March 31, 2007 from March 31, 2006 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 Triad receives 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. 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 first quarter of 2007 and 2006 follows:

										% Change
		2007				2006				2007 vs. 2006
		(In thousands, except percentages)
Direct premium written		$	78,408			$	59,312				32.2	%
Ceded premium written			(12,701	)			(10,970	)			15.8
Net premium written			65,707				48,342				35.9
Change in unearned premiums			(1,758	)			(452	)			288.9
Earned premiums		$	63,949			$	47,890				33.5
Net investment income		$	7,349			$	6,222				18.1
Total revenues		$	72,061			$	55,010				31.0

          Our direct premium written for the first quarter of 2007 grew substantially over that of 2006 as a result of increased insurance in force over the past year and the strong growth in our new insurance written during the first quarter of 2007 discussed above. Additionally, the average basis points earned on insurance in force has grown due to the change in the risk characteristics of our portfolio as discussed earlier. Total overall annual persistency was 77.5% at March 31, 2007 compared to 70.2% at March 31, 2006.

          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 first quarter of 2007 over the first quarter of 2006 was not as large as the growth in direct premium written as a result of a larger percentage of direct premium written not subject to captive reinsurance arrangements. The following table provides further data on ceded premiums for the three months ended March 31, 2007 and 2006:

		2007				2006
Premium cede rate (ceded premiums written as a percentage of direct premiums written)			16.2	%			18.5	%
Captive reinsurance premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written)			15.5	%			17.3	%
Average captive premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written under captive reinsurance arrangements)			36.3	%			37.2	%

          The table below provides data on insurance written that was subject to captive reinsurance arrangements for the three months ended March 31, 2007 and 2006:

		Percentage Subject
		to Captive
		Arrangements
		2007				2006
Primary insurance written			28.1	%			55.1	%
Total insurance written			16.1	%			16.4	%

          The percentage of Primary insurance written subject to captive reinsurance arrangements for the first quarter of 2007 decreased from the first quarter of 2006 due primarily to changes by two of our larger lenders to a lender paid product rather than a borrower paid product. Generally, the lender paid product is not captive eligible. None of our Modified Pool insurance written in 2007 and 2006 was subject to captive reinsurance arrangements.

          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. One of the most actively utilized lender paid programs during the first quarter of 2007 included annual premiums, which was responsible for most of the increase in unearned premium during the first quarter of 2007. Our unearned premium liability increased $1.8 million from December 31, 2006 to March 31, 2007 compared to an increase of $0.5 million from December 31, 2005 to March 31, 2006.

          Net investment income for the first quarter of 2007 increased over that for the first quarter of 2006 due primarily to growth in invested assets, partially offset by declines in portfolio yields. Average invested assets at cost or amortized cost for the first quarter of 2007 grew by 10.9% over the first quarter of 2006 as a result of the investment of cash flows from operations for the past year. Our investment portfolio tax-equivalent yield was 6.61% at March 31, 2007 compared to 6.74% at March 31, 2006. We anticipate a continuing decline in the overall portfolio tax-equivalent yield as current interest rates are still below our average portfolio rate. See further discussion of the Investment Portfolio section of this document.

     Losses and Expenses

          A summary of the individual components of losses and expenses for the three months ended March 31, 2007 and 2006 follows:

										%
										Change
										2007 vs.
		2007				2006				2006
		(In thousands, except percentages)
Net losses and loss adjustment expenses		$	32,581			$	16,351				99.3	%
Amortization of deferred policy acquisition costs			4,624				3,862				19.7
Other operating expenses (net of acquisition costs deferred)			10,330				8,513				21.3
Loss ratio			50.9	%			34.1	%
Expense ratio			22.8	%			25.6	%
Combined ratio			73.7	%			59.7	%

          Net losses and loss adjustment expenses (LAE) are comprised of both paid losses and LAE and the change in the loss and LAE reserve during the period. Net losses and LAE for the first quarter of 2007 increased significantly over the first quarter of 2006 primarily due to an increase in reserves. The reserve increase reflected both an increase in the number of loans in default as well as an increase in the size of the loans that are in default at March 31, 2007. The growth in reserves is a result of the continued seasoning of our portfolio and includes an increase in the severity and frequency factors utilized in the reserve calculation. We will focus separately on paid claims and the increase in reserves.

          The following table provides detail on paid claims and the average severity for our Primary and Modified Pool insurance for the three months ended March 31, 2007 and 2006:

										%
										Change
										2007 vs.
		2007				2006				2006
		(In thousands, except percentages)
Paid claims:
Primary insurance		$	16,447			$	13,305				23.6	%
Modified Pool insurance			1,281				1,078				18.8
Total		$	17,728			$	14,383				23.3	%
Number of claims paid:
Primary insurance			526				506				4.0	%
Modified Pool insurance			54				67				(19.4	)
Total			580				573				1.2	%

          Average severity remained relatively flat during the first three quarters of 2006, but increased significantly in the fourth quarter of 2006. The progression continued in the first quarter of 2007, primarily the result of growth in the amount of risk in force on paid claims arising from increased loan size. Additionally, as first noted during the fourth quarter of 2006, we continued to experience a lack of mitigation opportunities existing in the marketplace. The following table shows the average quarterly severity of paid claims during 2006:

		Three Months Ended
		March 31,				December 31,				September 30,				June 30,				March 31,
		2007				2006				2006				2006				2006
		(In thousands)
Average severity:
Primary insurance		$	31.3			$	28.1			$	25.7			$	25.8			$	26.3
Modified Pool insurance			23.7				26.2				18.8				19.4				16.1
Total			30.6				27.9				25.3				25.3				25.1

          The increase in average severity in the first quarter of 2007 was primarily the result of larger loan sizes on the claims paid. Additionally, during the first three quarters of 2006, the average severity remained relatively flat. This was partially the result of the loss mitigation processes implemented during 2005. During the fourth quarter of 2006, we experienced a significant reduction in our ability to reduce claims through our traditional mitigation processes, which we believe was related to weakness in the housing market. In many cases, properties on which loans have defaulted are sold during the foreclosure process, which generally reduces our loss. When the property does not sell prior to foreclosure, or after foreclosure but prior to when the claim is paid, we often pay the full amount of our coverage, which we call a full option settlement. In the fourth quarter of 2006 and continuing into the first quarter of 2007, full option settlements represented a greater percentage of our paid claims than in the prior sequential quarters. The lack of mitigation opportunities contributed to the increase in severity for the fourth quarter and this continues to be problematic in the first quarter of 2007. The percentage paid on claims relative to the covered risk remained relatively constant compared to the fourth quarter of 2006 but had risen substantially from first quarter of 2006. The average severity on Modified Pool claims tends to fluctuate more than the Primary claims due to the smaller volume of paid claims.

          As shown in the “Production and In Force” section above, we are insuring a larger percentage of mortgages in excess of $200,000. Claim payments on defaults of these larger mortgages are greater even if coverage percentages remain constant. Claim payments on these larger mortgages also increased severity in the first quarter of 2007. To illustrate the impact of increasing loan size on the seasoning in both paid claims and the average severity utilized in our loss models, we have provided the following tables that detail the in force by year the loans were insured. As each of the more recent vintage years season and enter the period of peak defaults, the amount of risk per default and, ultimately, the amount of paid claim will continue to rise.

Average Loan Size of In force – Primary
Book Year		March 31, 2007				December 31, 2006				December 31, 2005
2000 and Prior		$	95,615			$	95,666			$	95,536
2001			103,148				103,698				106,503
2002			115,538				116,191				118,458
2003			122,422				123,208				127,619
2004			134,947				136,148				141,293
2005			158,787				159,931				163,793
2006			208,403				206,723				—
2007			224,820				—				—
Overall Average		$	158,702			$	151,239			$	136,873

Average Loan Size of In force – Modified Pool
Book Year		March 31, 2007				December 31, 2006				December 31, 2005
2000 and Prior		$	—			$	—			$	—
2001			72,442				73,641				76,138
2002			93,265				94,513				97,540
2003			148,565				148,820				154,775
2004			153,736				155,140				161,065
2005			179,953				180,979				184,882
2006			259,913				260,067				—
2007			256,881				—				—
Overall Average		$	204,927			$	201,852			$	171,747

          We expect that average severity will continue to trend upward as the average loan amounts in our portfolio continue to rise and as the housing market continues to experience a general deterioration, which reduces our loss mitigation opportunities. The increase in severity and the further seasoning of the insurance portfolio indicate that paid losses should continue to trend upward in the remainder of 2007.

          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 March 31, 2007 and 2006:

										%
										Change
										2007 vs.
		2007				2006				2006
		(In thousands, except percentages)
Primary insurance:
Reserves for reported defaults		$	75,395			$	44,399				69.8	%
Reserves for defaults incurred but not reported			6,521				3,686				76.9
Total Primary insurance			81,916				48,085				70.4
Modified Pool insurance:
Reserves for reported defaults			14,898				3,960				276.2
Reserves for defaults incurred but not reported			753				465				61.9
Total Modified Pool insurance			15,651				4,425				253.7
Reserve for loss adjustment expenses			1,154				104				1,009.6
Total reserves for losses and loss adjustment expenses		$	98,721			$	52,614				87.6
Net increase in reserve for losses and loss adjustment expenses		$	14,369			$	1,540				833.1

          We have increased our reserves significantly over the past year reflecting a growing number of loans in default as well as increased severity and frequency factors utilized in the calculation of the reserves. The increases in severity factors were driven by slowing house price appreciation, and in some markets, actual depreciation. Additionally, during the first quarter of 2007, we noted a decline in our cure rates on reported defaults, which could impact the ultimate number of claims eventually paid on existing defaults. In response to this short-term trend and seeing nothing on the housing market horizon that would alter this view on a longer term basis, we increased the frequency factor utilized in the calculation of the reserves during the first quarter of 2007.

          The reserve for losses and loss adjustment expenses increased significantly in the first quarter of 2007 primarily due to refinements in the frequency and severity factors utilized in our reserving methodology based upon the development of claims paid in 2006 and 2007. Reacting to the recent decline in the housing markets and the changing mix in the composition of our defaults, we have increased reserves by 88% from a year ago. To illustrate the impact of the changes in the frequency and severity factors utilized in the reserve model, the following table details the amount of risk in default and the reserve balance as a percentage of risk at March 31, 2007, December 31, 2006 and March 31, 2006.

		March 31,				December 31,				March 31,
		2007				2006				2006
Risk on loans in default excluding loans subject to deductibles (in thousands of dollars)		$	292,434			$	265,415			$	204,934
Reserves as a percentage of risk at default			33.8	%			31.8	%			25.7	%

          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.

          We continually monitor our reserves and claim development. As new data emerges, we consider its impact on our reserve calculation, and when necessary, refine our estimates. In the fourth quarter of 2006 and continuing in the first quarter of 2007, we experienced a significant increase in our paid loss severity due to the deteriorating developments in the housing market as well as changes in our insured portfolio. We determined that it was prudent to increase the severity and frequency factors utilized in our reserving methodology to reflect trends in the housing markets that will reduce our opportunity for loss mitigation.

          Hurricanes Katrina and Rita had a significant impact on reported delinquencies at December 31, 2005. In the FEMA-designated areas affected by these hurricanes, we reported 891 defaults at December 31, 2005 and had established reserves of $4.5 million utilizing our normal reserving methodology. We believe that many borrowers living in these areas did not make scheduled mortgage payments due to forbearance granted by Fannie Mae, Freddie Mac and lenders, even though the individual borrower’s financial condition was not significantly impacted. As of March 31, 2007, there remained 194 defaults of the 891 existing at December 31, 2005 with a reserve of $1.5 million. Most of the defaults existing at December 31, 2005, were brought current through payments for the three months for which forbearance had been granted. This significant increase in defaults and the subsequent cures of most of these FEMA-designated had the impact of temporarily inflating the overall cure rate which has since returned to a normalized trend.

          The terms of our coverage exclude any cost or expense related to the repair or remedy of any physical damage to the property collateralizing an insured mortgage loan. We have not obtained detailed property assessments for the defaults in the FEMA-designated areas. Our exposure could be limited if such assessments demonstrate that there is significant un-repaired physical damage to properties securing loans for which we have provided mortgage insurance. We will continue to monitor this situation as the longer-term impacts develop.

The following table shows default statistics as of March 31, 2007 and 2006:

		2007				2006
Total business:
Number of insured loans in force			354,037				317,670
Number of loans in default			8,998				7,357
With deductibles			2,176				1,384
Without deductibles			6,822				5,973
Percentage of loans in default (default rate)			2.54	%			2.32	%
Percentage of loans in default excluding deductibles			1.93	%			1.88	%
Primary insurance:
Number of insured loans in force			239,326				215,736
Number of loans in default			5,632				5,302
Percentage of loans in default			2.35	%			2.46	%
Modified Pool insurance:
Number of insured loans in force			114,711				101,934
Number of loans in default			3,366				2,055
With deductibles			2,176				1,383
Without deductibles			1,190				672
Percentage of loans in default			2.93	%			2.51	%
Percentage of loans in default excluding deductibles			1.04	%			0.88	%
Primary Alt-A business:
Number of insured loans in force			28,774				16,838
Number of loans in default			919				634
Percentage of loans in default			3.19	%			3.77	%

          As shown in the above table, the number of Modified Pool defaults subject to deductibles and those without deductibles increased at March 31, 2007 from March 31, 2006. This is reflective of the strong growth in the Modified Pool insurance portfolio over the past three years. As these specific parts of our portfolio age, we expect to receive the largest number of defaults in years two through four and that is being reflected in these default statistics. At March 31, 2007, no individual structured bulk transaction with deductibles as part of the structure had incurred total losses that were nearing these individual deductible amounts. We do not provide reserves on Modified Pool defaults with deductibles until the incurred losses for that specific structured bulk transaction reach a pre-established threshold and we expect that we will eventually pay claims.

          Given the growth of our insurance in force, we anticipate that our number of loans in default for both Primary and Modified Pool insurance will continue to increase as our insurance in force reaches its peak claim paying period. We also expect default rates to increase in the non-traditional business, such as Alt-A loans, higher LTV loans, and potential negative amortization ARMs. We expect the overall default rate to increase as non-traditional business

becomes a larger percentage of our insurance in force. We expect reserves will increase as our business continues to grow and season.

          The housing market continues to be sluggish in most parts of the country as inventories have increased and prices remain flat to declining. The most recent statistics show the supply of homes on the market up 25% from a year ago and home prices, as measured by Case-Schiller, have declined in 17 of the 20 cities comprising the index. These recent events have forced us to make changes to the assumptions utilized in our loss reserve model. Our reserving model incorporates management’s judgments and assumptions regarding these factors; however, due to the uncertainty of future economic conditions surrounding the housing market, it is difficult to predict the total impact on future earnings.

          Amortization of DAC for the first quarter of 2007 increased moderately over that for the same period in 2006, reflecting growth in the asset balance and, in some part, changes in the assumptions in the DAC amortization models that lowered the expected life of the policy years 2006 and thereon from seven to five years. This was partially offset by improved persistency. A full discussion of the impact of persistency on DAC amortization is included in the Deferred Policy Acquisition Costs section below.

          Other operating expenses for the first three months of 2007 increased over the first three months of 2007 due to expenses incurred in connection with the organizational changes and the costs associated with our Canada expansion. Direct expenses relating to the Canadian expansion amounted to approximately $500,000 during the first quarter of 2007 compared to none in the first quarter of 2006. Because the growth in net premiums written was greater than the growth in expenses, the expense ratio (ratio of the amortization of deferred policy acquisition costs and other operating expenses to net premiums written) for the first quarter of 2007 was 22.8% compared to 25.6% for the first quarter of 2006. Given our expectations for premium and expenses growth, we anticipate the expense ratio for the remainder of 2007 will be similar to the first quarter of 2007.

          Our effective tax rate was 27.3% for the first three months of 2007 compared to 27.5% for the first three months of 2006. The decline in the effective tax rate was due primarily to an increase in tax-exempt interest resulting from growth of investments in tax-preferred municipal securities. We expect our effective tax rate to remain near current levels or increase slightly as we expect total pre tax earnings to grow faster than tax-preferred income.

Significant Customers

          Our objective is controlled, profitable growth in both Primary and Modified Pool business while adhering to our risk management strategies. Our strategy is to continue our focus on national lenders while maintaining the productive relationships that we have built with regional lenders. Competition within the mortgage insurance industry continues to increase as many large mortgage lenders have limited the number of mortgage insurers with whom they do business. At the same time, consolidation among national lenders has increased the share of the mortgage origination market controlled by the largest lenders and that has led to further concentrations of business with a relatively small number of lenders. Many of the national lenders allocate Primary business to several different mortgage insurers. These allocations can

vary over time. Our ten largest customers were responsible for 84.6% of Primary insurance written during the first quarter of 2007 compared to 78% for the first quarter of 2006. Our two largest customers were responsible for 64.1% of Primary insurance written during the first quarter of 2007 compared to 42% for the first quarter of 2006. Through actively seeking business with other lenders that meet our criteria, we are broadening our customer base in order to limit our concentration with these two largest lenders. The loss of, a considerable reduction in business from, or a decline in the quality of business from one or more of these significant customers without a corresponding increase from other lenders would have an adverse effect on our business.

Financial Position

          Total assets increased to $932 million at March 31, 2007, an annualized growth rate of 16% over December 31, 2006, with most of the growth in invested assets. Total liabilities increased moderately to $344 million at March 31, 2007 from $325 million at December 31, 2006, primarily driven by the increase in reserves. This section identifies several items on our balance sheet that are important in the overall understanding of our financial position. These items include deferred policy acquisition costs, prepaid federal income tax and related deferred income taxes. The majority of our assets are in our investment portfolio. A separate Investment Portfolio section follows the Financial Position section and reviews our investment portfolio, key portfolio management strategies, and methodologies by which we manage credit risk.

     Deferred Policy Acquisition Costs

          Costs expended to acquire new business are capitalized as DAC and recognized as expense over the anticipated premium paying life of the policy in a manner that approximates the estimated gross profits. We employ a dynamic model that calculates amortization of DAC separately for each year of policy origination. The model relies on assumptions that we make based upon historical industry experience and our own unique experience regarding the annual persistency development of each year of policy origination. The base persistency assumption is the most important factor utilized in determining the timing of reported amortization expense reflected in the income statement and the carrying value of DAC on the balance sheet. A change in the assumed base persistency will impact the current and future amortization expense as well as the carrying value on the balance sheet. During 2006, based upon a study performed on the entire mortgage industry and specifically on our own experience, we altered our base persistency assumption on that origination year and all future years going forward to recognize a shorter expected life due to the amount of the refinancing over the past several years. Our model accelerates DAC amortization through a dynamic adjustment when actual persistency for a particular year of policy origination is lower than the estimated base persistency utilized in the model. This dynamic adjustment is capped at the levels assumed in the models, and we do not decrease DAC amortization below the levels assumed in the model when persistency increases above those levels. When actual persistency is lower than that assumed in our models, the dynamic adjustment effectively adjusts the estimated policy life utilized in the model to a policy life based upon the current actual persistency. Due to the increase in actual persistency over the past several quarters, the dynamic adjustment has not been a significant factor in the quarterly DAC amortization as it was during periods of high refinancing and low persistency.

          Our DAC models separate the costs capitalized and the amortization streams between transactions arising from structured bulk and flow delivery channels. Generally, structured bulk transactions have significantly lower acquisition costs associated with the production of the business and they also have a shorter original estimated policy life. We apply the dynamic adjustment to the structured bulk DAC models utilizing the same methodology. At March 31, 2007 and December 31, 2006, net unamortized DAC relating to structured bulk transactions amounted to 7.4% of the total DAC on the balance sheet.

          The following table shows the DAC asset for the three months ended March 31, 2007 and 2006 and the effect of persistency on amortization:

		2007				2006
		(In thousands, except percentages)
Balance — beginning of quarter		$	35,143			$	33,684
Costs capitalized			4,516				4,082
Amortization — normal			(4,496	)			(3,849	)
Amortization — dynamic adjustment			(128	)			(13	)
Total amortization			(4,624	)			(3,862	)
Balance — end of quarter		$	35,035			$	33,904
Annual Persistency			77.5	%			70.2	%

          The growth in the normal DAC amortization is due to the growth in the DAC asset and a decrease in the base assumption of the expected life of the flow and bulk portfolios. Assuming no significant declines in interest rates, we expect persistency to remain at the current rates or improve moderately throughout the remainder of 2007.

     Prepaid Federal Income Taxes and Deferred Income Taxes

          We purchase ten-year non-interest bearing United States Mortgage Guaranty Tax and Loss Bonds (“Tax and Loss Bonds”) to take advantage of a special contingency reserve deduction specific to mortgage guaranty companies. We record these bonds on our balance sheet as prepaid federal income taxes. Purchases of Tax and Loss Bonds are essentially a prepayment of federal income taxes that generally will become due in ten years when the contingency reserve is released, and the Tax and Loss Bonds mature. The proceeds from the maturity of the Tax and Loss Bonds are used to fund the income tax payments. Prepaid income taxes were approximately $167 million at March 31, 2007 and December 31, 2006, as no purchases of Tax and Loss Bonds were required in the first quarter of 2007.

          Deferred income taxes are provided for the differences in reporting taxable income in the financial statements and on the tax return. The largest cumulative difference is the special contingency reserve deduction for mortgage insurers mentioned above. The remainder of the deferred tax liability has primarily arisen from book and tax reporting differences related to DAC and unrealized investment gains.

Investment Portfolio

     Portfolio Description

          Our strategy for managing our investment portfolio is to optimize investment returns while preserving capital and liquidity and adhering to regulatory and rating agency requirements. We invest for the long term, and most of our investments are held until they mature. Our investment portfolio includes primarily fixed income securities, and the majority of these are tax-preferred state and municipal bonds. We have established a formal investment policy that describes our overall quality and diversification objectives and limits. Our investment policy and strategies are subject to change depending upon regulatory, economic, and market conditions as well as our existing financial condition and operating requirements, including our tax position. While we invest for the long term and most of our investments are held until they mature, we classify our entire investment portfolio as available for sale. This classification allows us the flexibility to dispose of securities in order to meet our investment strategies and operating requirements. All investments are carried on our balance sheet at fair value.

          The following table shows the growth and diversification of our investment portfolio:

		March 31, 2007								December 31, 2006
		Amount				Percent				Amount				Percent
		(In thousands, except percentages)
Fixed maturity securities:
U. S. government obligations		$	11,933				1.8	%		$	11,842				2.0	%
State and municipal bonds			581,281				86.9				558,131				91.9
Corporate bonds			15,731				2.3				16,572				2.7
Mortgage-backed bonds			—				—				49				—
Total fixed maturities			608,945				91.0				586,594				96.6
Equity securities			9,921				1.5				10,417				1.7
Total available-for-sale securities			618,866				92.5				597,011				98.3
Other investments			5,000				0.7				5,000				0.8
Short-term investments			45,294				6.8				5,301				0.9
		$	669,160				100.0	%		$	607,312				100.0	%