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 June 30, 2008

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

For the transition period from                      to                     

Commission file number: 0-22342

Triad Guaranty Inc.

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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Number of shares of common stock, par value $0.01 per share, outstanding as of August 1, 2008, was 15,116,259.

 

 

TRIAD GUARANTY INC.

INDEX

				Page
Part I. Financial Information
Item 1.		Financial Statements
		Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007			1
		Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007 (Unaudited)			2
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (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			45
Item 4.		Controls and Procedures			45
Part II. Other Information
Item 1.		Legal Proceedings			46
Item 1A.		Risk Factors			46
Item 5.		Other Information			47
Item 6.		Exhibits			48
Signature					49
Exhibit Index					50
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(dollars in thousands, except per share data)		2008				2007
		(unaudited)				(audited)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $840,320 and $710,924)		$	843,951			$	725,631
Equity securities (cost: $2,270 and $2,520)			1,749				2,162
Short-term investments			23,322				56,746
Total invested assets			869,022				784,539
Cash and cash equivalents			19,669				124,811
Real estate acquired in claim settlement			6,202				10,860
Accrued investment income			10,820				10,246
Deferred policy acquisition costs			—				36,243
Prepaid federal income taxes			63,183				116,008
Property and equipment			10,146				11,421
Reinsurance recoverable, net			55,316				5,815
Other assets			29,440				32,910
Total assets		$	1,063,798			$	1,132,853
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	817,262			$	359,939
Unearned premiums			18,360				17,793
Amounts payable to reinsurers			—				6,525
Deferred income taxes			30,386				123,297
Revolving line of credit			—				80,000
Long-term debt			34,527				34,519
Accrued interest on debt			1,275				1,355
Accrued expenses and other liabilities			21,079				10,574
Total liabilities			922,889				634,002
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 15,116,259 shares at June 30,2008 and 14,920,243 shares at December 31, 2007			151				149
Additional paid-in capital			111,380				109,679
Accumulated other comprehensive income, net of income tax liability of $1,392 at June 30, 2008 and $6,475 at December 31, 2007			2,585				13,405
Retained earnings			26,793				375,618
Total stockholders’ equity			140,909				498,851
Total liabilities and stockholders’ equity		$	1,063,798			$	1,132,853

See accompanying notes.

TRIAD GUARANTY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands, except per share data)		2008				2007				2008				2007
Revenue:
Premiums written:
Direct		$	84,561			$	83,153			$	173,946			$	161,561
Ceded			(15,480	)			(12,988	)			(31,475	)			(25,689	)
Net premiums written			69,081				70,165				142,471				135,872
Change in unearned premiums			784				(433	)			(542	)			(2,192	)
Earned premiums			69,865				69,732				141,929				133,680
Net investment income			9,175				7,673				18,722				15,022
Net realized investment losses			(3,799	)			(3,867	)			(1,096	)			(3,105	)
Other income			2				2				4				4
			75,243				73,540				159,559				145,601
Losses and expenses:
Net losses and loss adjustment expenses			292,749				41,893				514,008				74,474
Net change in premium deficiency reserve			(15,000	)			—				—				—
Interest expense on debt			696				694				2,172				1,387
Policy acquisition costs			—				4,670				39,416				9,293
Other operating expenses (net of acquisition costs deferred)			27,238				10,716				41,344				21,047
			305,683				57,973				596,940				106,201
(Loss) income before income taxes (benefit)			(230,440	)			15,567				(437,381	)			39,400
Income taxes (benefit):
Current			2				1,766				(2	)			3,525
Deferred			(31,631	)			1,775				(88,554	)			6,526
			(31,629	)			3,541				(88,556	)			10,051
Net (loss) income		$	(198,811	)		$	12,026			$	(348,825	)		$	29,349
(Loss) earnings per common and common equivalent share:
Basic		$	(13.36	)		$	0.81			$	(23.45	)		$	1.98
Diluted		$	(13.36	)		$	0.80			$	(23.45	)		$	1.96
Shares used in computing (loss) earnings per common and common equivalent share:
Basic			14,878,662				14,834,500				14,873,636				14,824,460
Diluted			14,878,662				14,950,721				14,873,636				14,946,204

See accompanying notes.

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

		Six Months Ended
		June 30,
(dollars in thousands)		2008				2007
Operating activities
Net (loss) income		$	(348,825	)		$	29,349
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			457,890				39,977
Accrued expenses and other liabilities			9,904				(1,503	)
Reinsurance			(56,026	)			1,202
Accrued investment income			(586	)			(918	)
Policy acquisition costs deferred			(3,173	)			(9,307	)
Policy acquisition costs			39,416				9,293
Net realized investment losses			1,096				3,105
Provision for depreciation			2,338				996
Accretion of discount on investments			793				317
Deferred income taxes			(88,554	)			6,526
Prepaid federal income taxes			52,825				(3,168	)
Real estate acquired in claim settlement, net of write-downs			4,658				2,247
Accrued interest on debt			(80	)			—
Other assets			4,104				(6,235	)
Other operating activities			2,433				1,765
Net cash provided by operating activities			78,213				73,646
Investing activities
Securities available-for-sale:
Purchases — fixed maturities			(584,572	)			(128,370	)
Sales — fixed maturities			430,107				80,120
Maturities — fixed maturities			20,333				3,391
Purchases — equities			—				(55	)
Sales — equities			266				7,086
Net change in short-term investments			31,655				(47,083	)
Purchases of property and equipment			(1,080	)			(3,404	)
Net cash used in investing activities			(103,291	)			(88,315	)
Financing activities
Payments on revolving credit facility			(80,000	)			—
Excess tax benefits from share-based compensation			—				175
Proceeds from exercise of stock options			—				616
Net cash (used in) provided by financing activities			(80,000	)			791
Foreign currency translation adjustment on cash and cash equivalents			(64	)			1,980
Net change in cash and cash equivalents			(105,142	)			(11,898	)
Cash and cash equivalents at beginning of period			124,811				38,609
Cash and cash equivalents at end of period		$	19,669			$	26,711
Supplemental schedule of cash flow information
Cash (received) paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	(52,824	)		$	9,091
Interest		$	2,248			$	1,383

See accompanying notes.

TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)

1. The Company

     Triad Guaranty Inc. (the “Company”) is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”), provides mortgage insurance coverage in the United States. Triad ceased issuing new commitments for mortgage insurance coverage on July 15, 2008 and is in the process of transitioning the business to run-off. In run-off, the Company intends to continue to service its remaining insurance in force, including collecting renewal premiums on the business in force and paying claims resulting from loans currently in default or loans that may go into default in the future.

     Another wholly-owned subsidiary, Triad Guaranty Insurance Corporation Canada (“TGICC”), was formed in 2007 for the purpose of exploring opportunities for providing mortgage insurance in Canada. TGICC did not write any business and only incurred start-up expenses since its formation. In the first quarter of 2008, the Company discontinued its Canadian efforts. The Canadian subsidiary is no longer a licensed insurance company. Effective June 30, 2008, there are no Canadian employees and the subsidiary is in the process of being liquidated.

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 (GAAP) 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 six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007.

     Recent Accounting Pronouncements

     Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, which establishes a framework for measuring fair value under GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of the fair value measurements. In accordance with SFAS 157, the Company adopted the fair value measurement on a prospective basis and accordingly has provided the required disclosures only for the most

recent interim reporting date. The following table summarizes the assets measured at fair value and the source of the inputs in the determination of fair value:

		Fair Value Measurements at Reporting Date Using
						Quoted
						Prices in
						Active				Significant
		Six Months				Markets for				Other				Significant
		Ended				Identical				Observable				Unobservable
		June 30,				Assets				Inputs				Inputs
(dollars in thousands)		2008				(Level 1)				(Level 2)				(Level 3)
Assets
Securities available-for-sale
Fixed maturities		$	843,951			$	—			$	810,743			$	33,208
Equity securities			1,749				1,749				—				—
Real estate acquired in claim settlement			6,202				—				6,202				—
Total		$	851,902			$	1,749			$	816,945			$	33,208

     We utilized significant unobservable inputs (Level 3) in determining the fair value on certain bonds in our fixed maturities portfolio during this period. The following table provides a reconciliation of the beginning and ending balances during the second quarter of 2008 of these Level 3 bonds and the related gains and losses related to these assets.

		Fair Value Measurement
		Using Significant
		Unobservable Inputs
		(Level 3)
		Certain Bonds in Fixed
		Maturities AFS
(dollars in thousands)		Portfolio
Beginning balance		$	7,402
Total gains and losses (realized and unrealized):
Included in operations			(130	)
Included in other comprehensive income			(343	)
Purchases, issuances and settlements			25,382
Transfers in and/or out of Level 3			897
Ending balance		$	33,208
The amount of total gains and loss for the period included in operations attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.		$	(347	)

     Gains and losses (realized and unrealized) included in operations or other comprehensive income for the period ended June 30, 2008 are reported as net realized investment gains as a gain of $20,000 and an unrealized loss through other comprehensive income of $347,000.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with US GAAP. SFAS

162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not anticipate that SFAS 162 will have a material impact on the Company’s financial position or results of operations.

     In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”). This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning January 1, 2009. The Company does not anticipate SFAS 160 will have a material impact on the Company’s financial position or results of operations.

     In December 2007, the FASB issued SFAS 141(R), Business Combinations—a replacement of FASB Statement No. 141 (“SFAS 141(R)”), which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning January 1, 2009. The Company does not anticipate that SFAS 141(R) will 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

     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.

     The Company maintains a $95 million Excess-of-Loss reinsurance treaty that provides a benefit when Triad’s risk-to-capital ratio exceeds 25-to-1 and the combined ratio exceeds 100%

(the “attachment point”). Once the attachment point has been reached, the treaty terminates and converts to run-off coverage for a ten year period (the “run-off period”). During the run-off period, following a one-time deductible of $25 million, the carrier is responsible for the reimbursement of all paid losses in each quarter that the attachment point is breached up to the one-time $95 million policy limit. Additionally, terms of the treaty require the Company to continue the payment of premiums to the reinsurer amounting to approximately $2 million per year for the entire ten year run-off period.

     Under the terms specified above, the reinsurance treaty reached the attachment point at the end of the first quarter of 2008 and the Company notified the reinsurance carrier that the treaty would convert to run-off coverage beginning in the second quarter of 2008. However, in April 2008, the reinsurance carrier informed the Company that, in its opinion, the Company had not complied with unspecified covenants in the reinsurance agreement and provided notice of termination of the agreement. The Company has notified the reinsurance carrier that it disputes the carrier’s claim, including the carrier’s alleged termination of the reinsurance agreement, and has demanded arbitration as provided under the agreement. The Company believes that the reinsurance carrier’s claims are without merit and the Company plans to contest such claims vigorously. As the matter is in dispute, the Company has not recorded any ceded reserves or any recoverable from the reinsurance carrier under the agreement in its financial statements prepared under generally accepted accounting principles.

     Insurance In Force, Dividend Restrictions, and Statutory Results

     Historically, insurance regulators and rating agencies utilized the risk-to-capital ratio as a general guideline to limit the risk a mortgage insurer could write with a 25-to-1 risk-to-capital ratio as the maximum allowed. Capital for purposes of this computation includes the statutory capital and surplus as well as the statutory contingency reserve. The amount of net risk for insurance in force at June 30, 2008, December 31, 2007 and June 30, 2007, 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):

		June 30,				December 31,				June 30,
(dollars in thousands)		2008				2007				2007
Net risk		$	11,721,202			$	11,967,179			$	11,057,092
Statutory capital and surplus		$	192,096			$	197,713			$	102,942
Statutory contingency reserve			82,615				387,365				589,661
Total		$	274,711			$	585,078			$	692,603
Risk-to-capital ratio			42.7 to 1				20.5 to 1				16.0 to 1

     In run-off, Triad will not be issuing any new commitments for insurance and any new insurance written will come only from commitments issued up to July 15, 2008. The amount of new risk written after June 30, 2008 is expected to be less than $100 million.

     Triad and its wholly-owned U.S. 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.

     As determined in accordance with statutory accounting practices, Triad experienced a net loss of $320.0 million for the six months ended June 30, 2008, compared to net income of $41.7 million for the six months ended June 30, 2007 and a net loss of $121.3 million for the year ended December 31, 2007.

     At June 30, 2008, there was no surplus available to be paid out in dividends to stockholders. At December 31, 2007, the amount of Triad’s equity that could be paid out in dividends to stockholders was $4.8 million, which was the excess of the earned surplus of Triad on a statutory basis above the minimum required by the Illinois Insurance Code. Under a corrective order issued by the Illinois Division of Insurance, Triad is currently prohibited, and expects to be prohibited for the foreseeable future, from paying any dividends to the Company. Triad also has a $25 million outstanding surplus note held by the Company. Under the terms of the corrective order Triad is also currently prohibited from paying interest on the surplus note. See Part II, Item 5 — “Other Information” in this report for additional information concerning the corrective order.

     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, and 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. Furthermore, based on recent experience, the Company believes a considerable amount of misrepresentation and/or fraud may exist on insured policies originated by certain lenders and thus the reserving methodology also accounts for expected rescissions. 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.

     Premium Deficiency

     A premium deficiency is required to be recorded if the present value of expected future cash outflows (consisting of projected paid claims, maintenance expenses and loss adjustment expenses) net of the present value of expected cash inflows (consisting of renewal premiums) exceeds the recorded reserves net of any unamortized deferred acquisition costs, or DAC, balance. This computation is prepared on a gross basis, without consideration of reinsurance (either claim recoveries or ceded premium), and a determination is made if a premium deficiency exists. If a premium deficiency exists, a premium deficiency reserve is established. A receivable is then recorded for the amounts that would be recoverable from reinsurers based upon the existing trust balances of the lender captive reinsurers. After the initial establishment of a premium deficiency reserve, the initial amounts can be adjusted based upon updated data relating to the assumptions utilized in the calculation of expected future cash outflows and inflows as well as the actual reserves recorded as of the date of the premium deficiency calculation.

     Litigation

     On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. filed a complaint against Triad in the U.S. Bankruptcy Court for the District of Delaware. The plaintiffs are debtors and debtors in possession in Chapter 11 cases pending in the U.S. Bankruptcy Court. The lawsuit is an action for breach of contract and declaratory judgment. The basis for the complaint’s breach of contract action is the cancellation by Triad of its certification of American Home Mortgage’s coverage on 14 loans due to irregularities that Triad uncovered following the submission of claims for payment and that existed when American Home Mortgage originated the loans. The complaint alleges that these actions caused American Home Mortgage to suffer a combined net loss of not less than $1,132,105.51 and seeks monetary damages and a declaratory judgment. Since the initial filing, Triad has answered the complaint and filed a counterclaim that denied all liability for the claims of American Home Mortgage. During the quarter ended June 30, 2008, Triad filed a motion to amend its counterclaim to include 28 more loans for which Triad seeks to rescind or deny coverage. Triad expects to continue to rescind or deny coverage for additional loans originated by American Home Mortgage and intends to contest the lawsuit vigorously.

5. Earnings (Loss) Per Share (“EPS”)

     Basic and diluted EPS are based on the weighted-average daily number of shares outstanding. For the three months and six months ended June 30, 2008, the basic and diluted EPS denominators are the same weighted-average daily number of shares outstanding. In computing diluted EPS, only potential common shares that are dilutive — those that reduce EPS or increase loss per share — are included. Exercise of options and unvested restricted stock are not assumed if the result would be antidilutive, such as when a loss from operations is reported. For the three months and six months ended June 30, 2007, the denominator includes the dilutive effect of stock options and unvested restricted stock on the weighted-average shares outstanding. The numerator used in basic EPS and diluted EPS is the same for all periods presented. For the

three months and six months ended June 30, 2008, options to purchase approximately 46,089 and 71,624, respectively, of the Company’s stock were excluded from the calculation of EPS because they were antidilutive.

6. Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income or (loss) and other comprehensive income. For the Company, other comprehensive income is composed of unrealized gains or losses on available-for-sale securities and foreign currency exchange, net of income tax. For the three months and six months ended June 30, 2008, the Company’s comprehensive net loss was $198.6 million and $359.6 million, respectively, while the comprehensive net income for the three months and six months ended June 30, 2007 was $6.4 million and $21.8 million, respectively.

7. Income Taxes

     Income tax expense (benefit) 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. The intra-period tax rate utilized in the six months of 2008 also reflects the Company’s inability to record a benefit for expected tax loss carry forwards. The effective tax rate for the second quarter of 2008 is lower than that utilized in the first quarter of 2008 due to a change in the estimated tax rate for the full 2008 year.

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

     Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes our consolidated financial condition, changes in financial position, and results of operations for the three months and six months ended June 30, 2008 and 2007. This discussion supplements Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2007, and should be read in conjunction with the interim financial statements and notes contained herein.

     Certain of the statements contained in this release are “forward-looking statements” and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include estimates and assumptions related to economic, competitive, regulatory, operational and legislative developments. These forward-looking statements are subject to change, uncertainty and circumstances that are, in many instances, beyond our control and they have been made based upon our current expectations and beliefs concerning future developments and their potential effect on us. Actual developments and their results could differ materially from those expected by us, depending on the outcome of a number of factors, including our ability to transition our business into run-off, the possibility of general economic and business conditions that are different than anticipated, legislative, regulatory, and other similar developments, changes in interest rates, the housing market, the mortgage industry and the stock market, as well as the relevant factors described under “Risk Factors” and under “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” in our Annual Report on Form 10-K for the year ended December 31, 2007 and in this report and other reports and statements that we file with the Securities and Exchange Commission. Forward-looking statements are based upon our current expectations and beliefs concerning future events and we undertake no obligation to update or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made.

Overview

     Through our U.S. subsidiaries, we have historically provided Primary and Modified Pool mortgage guaranty insurance coverage on U.S. residential mortgage loans. We classify insurance as Primary when we are in the first loss position and the loan-to-value amount, or LTV, is 80% or greater when the loan is first insured. We classify all other insurance as Modified Pool. The majority of our Primary insurance has been delivered through the flow channel, which is defined as loans originated by lenders and submitted to us on a loan-by-loan basis. We have also historically provided mortgage insurance to lenders and investors who seek additional default protection (typically secondary coverage or on loans for which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement on groups of loans that are sold in the secondary market. 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 has been delivered through the structured bulk channel.

     Triad ceased issuing new commitments for mortgage guaranty insurance coverage on July 15, 2008 and we are in the process of transitioning our business to run-off. We have agreed

to the issuance of a corrective order from the Illinois Division of Insurance regarding restrictions on the distribution of funds from the operating company to the holding company as well as enhanced financial reporting requirements and other matters. See Part II, Item 5 — “Other Information” in this report for additional information concerning the corrective order. Under the corrective order, we are required to submit a corrective plan to the Illinois Division of Insurance and the corrective plan is subject to its approval.

     Our Canadian subsidiary was formed in 2007 for the purpose of exploring the opportunities of providing mortgage insurance in Canada, but did not write any business and incurred only start-up expenses. In the first quarter of 2008, we made the decision to discontinue our Canadian efforts and recorded a $2 million charge to record severance, lease commitments and impairment of fixed assets. The Canadian subsidiary is no longer licensed as an insurance company in Canada. Effective June 30, 2008, there are no employees and the subsidiary is in the process of being liquidated.

     In run-off, our revenues principally consist of (a) renewal earned premiums from flow business (net of reinsurance premiums ceded as part of our risk management strategies), (b) 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 primarily 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 servicing existing policies, (d) other general business expenses, (e) interest expense on long-term debt and any other borrowed funds, and (f) income taxes.

     Our future profitability depends largely on (a) the conditions of the housing, mortgage and capital markets that have a direct impact on mitigation efforts, cure rates and ultimately the amount of claims paid, (b) the overall general state of the economy and job market, (c) persistency levels, (d) operating efficiencies, and (e) the level of investment yield, including realized gains and losses, on our investment portfolio.

     Persistency is an important metric in understanding our premium revenue. The longer a policy remains on our books, or “persists”, the greater the amount of revenue that we will derive from the policy from renewal premiums. We define persistency as the amount of insurance in force at the 12-month end of a financial reporting period as a percentage of the amount of insurance in force at the beginning of the period. 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 at the end of the 12-month measurement period. 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 Item 1, “Business” in our annual report on Form 10-K for the year ended December 31, 2007.

Recent Developments

     On June 19, 2008, we announced that we had ended negotiations with Lightyear Capital LLC, a New York-based private equity firm, to form a new mortgage insurance company. We also reported that Freddie Mac had denied our appeal of Triad’s suspension as an approved mortgage insurer. Effective June 19, 2008, we were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac.

     As a result of these developments, effective July 15, 2008, Triad ceased issuing commitments for mortgage insurance and is transitioning its business to run-off. “Run-off”, as used in this report, means writing no new mortgage insurance policies and continuing to service existing policies. Servicing includes: receiving renewal premium on remaining policies; cancelling coverage at the insured’s request; terminating policies for non-payment of premium; working with borrowers in default to remedy the default and/or mitigate our loss; and settling all legitimate claims filed per our contractual obligations.

     Following the announcement of the decision to transition our business to run-off, we agreed in early August to the issuance of a corrective order from the Illinois Division of Insurance regarding restrictions on the distribution of funds from the operating company to the holding company as well as enhanced reporting requirements and other matters. See Part II, Item 5 — “Other Information” in this report for additional information concerning the corrective order. Under the corrective order, we are required to submit a corrective plan to the Illinois Division of Insurance and other state insurance regulatory authorities and the corrective plan would be subject to their approval. We are working with the Illinois Division of Insurance in the administration of this corrective order.

     Furthermore, we terminated the employment of approximately 100 employees as a result of transitioning our business to run-off. The majority of the terminations were effective on June 30, 2008. These terminations affected all major areas of our business, but were concentrated in the sales and marketing, underwriting, and information services areas. As a result of these terminations, in the second quarter of 2008, we incurred approximately $9.1 million of expenses in severance and other exit costs.

     On July 18, 2008, Mark K. Tonnesen, the Company’s former President and Chief Executive Officer and a former Director of the Company, and the Company mutually agreed that Mr. Tonnesen would resign from these positions effective that day and will retire from the Company as of the close of business on August 15, 2008.

     Effective July 18, 2008, the Board of Directors appointed William T. Ratliff, III, the Company’s Chairman of the Board, as the Company’s President and Chief Executive Officer. The appointment of Mr. Ratliff as President and Chief Executive Officer is on an interim basis, pending the identification and hiring of a permanent President and Chief Executive Officer.

     In connection with the decision to transition Triad’s business into run-off, the Company has notified Standard & Poor’s Ratings Services, Moody’s Investor Services and Fitch Ratings (collectively, the “rating agencies”) that the Company is terminating all agreements with the rating agencies regarding the issuance of ratings for the Company and its subsidiaries, including Triad. As a result, Standard & Poor’s Ratings Services announced that they have withdrawn their “BB-” counterparty credit and financial strength ratings on Triad and their “B-” counterparty credit rating on Triad Guaranty Inc. Moody’s Investor Services and Fitch Ratings may withdraw their existing ratings as well, but they have not done so as of the date of this filing. Moody’s Investor Services’ current financial strength rating on Triad is “BB-” and Fitch Ratings currently maintains a counterparty credit and financial strength ratings on Triad of “BB” and a counterparty credit rating on Triad Guaranty Inc. of “CCC”.

     We maintain a $95 million Excess-of-Loss reinsurance treaty that provides a benefit when Triad’s risk-to-capital ratio exceeds 25-to-1 and the combined ratio exceeds 100%. Once the attachment point has been reached, the treaty terminates and converts to run-off coverage for a ten year period. During the run-off period, following a one time deductible of $25 million, the carrier is responsible for the reimbursement of all paid losses in each quarter that the attachment point is breached up to the one-time $95 million policy limit. Additionally, terms of the treaty require that we continue the payment of premiums to the reinsurer, amounting to approximately $2 million per year for the entire ten year run-off period.

     Under the terms specified above, the reinsurance treaty reached the attachment point at the end of the first quarter of 2008 and we notified the reinsurance carrier that the treaty would convert to run-off coverage beginning in the second quarter of 2008. However, in April 2008, the reinsurance carrier informed us that, in its opinion, we had not complied with unspecified covenants in the reinsurance agreement and provided notice of termination of the agreement. We have notified the reinsurance carrier that we dispute the carrier’s claim, including the carrier’s alleged termination of the reinsurance agreement, and have demanded arbitration as provided under the agreement. We believe that the reinsurance carrier’s claims are without merit and we plan to contest such claims vigorously. Management has reviewed the terms of the treaty, received advice from outside experts in reinsurance arbitration, and concluded that we should prevail in the arbitration proceedings. However, no assurances can be given that an independent arbitrator will agree with our conclusions. The matter is proceeding in the arbitration process. While we believe we will prevail in the arbitration proceedings, we have not recorded any ceded reserves or any recoverable from the carrier under the agreement in our GAAP financial statements. However, in consultation with our primary regulator, based upon our understanding of the facts, we have recorded the full benefit of the reinsurance treaty, which included the $95 million benefit and an accrual for the present value of the future 10-year premium expense due the reinsurer in our second quarter statutory financial statements.

     Included in Triad’s policyholders’ surplus is a “surplus note” of $25 million payable to the registrant, its parent. The accrual of and payment of the interest on the surplus note must be approved by the Illinois Division of Insurance, our primary regulator. Additionally, specific covenants of Triad’s surplus note prohibit the accrual of or payment of interest on the note if the most recently reported policyholders’ surplus is below the level at the time the note was originated. In June of 2008, the Illinois Division of Insurance denied Triad’s request for the payment of the semi-annual interest of $1.1 million due on the surplus note. In denying the

request, the Illinois Division of Insurance cited that Triad’s policyholders’ surplus as of May 31, 2008 was below the level at the time the note was originated. Pursuant to a corrective order issued by the Illinois Division of Insurance, Triad is prohibited from paying principal or interest on the surplus note for the foreseeable future. See Part II, Item 5 — “Other Information” for additional information concerning the corrective order. More information on debt service of the Company can be found in the “Liquidity and Financial Resources” section of this report.

Consolidated Results of Operations

     Following is selected financial information for the three months and six months ended June 30, 2008 and 2007:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands, except per share data)		2008				2007				% Change				2008				2007				% Change
Earned premiums		$	69,865			$	69,732				0	%		$	141,929			$	133,680				6	%
Net losses and loss adjustment expenses			292,749				41,893				599				514,008				74,474				590
Net (loss) income			(198,811	)			12,026				(1,753	)			(348,825	)			29,349				(1,289	)
Diluted (loss) earnings per share		$	(13.36	)		$	0.80				(1,761	)		$	(23.45	)		$	1.96				(1,294	)

     A substantial increase in incurred losses and loss adjustment expenses, or LAE, for the three months and six months ended June 30, 2008 was primarily responsible for our net loss for the respective periods. Net losses and LAE for the quarter ended June 30, 2008 increased $250.9 million compared to the second quarter of 2007. The increase in net losses and LAE is comprised of an increase in loss reserves and an increase in paid losses. We increased our loss and LAE reserves by $195.5 million during the second quarter of 2008, primarily as a result of a 21% increase in the number of loans in default (excluding those in structured bulk transactions with deductibles) and a 28% increase in the risk in default on those loans. The greater growth rate of risk in default compared to loans in default is primarily attributable to the changing characteristics of the default inventory, with new defaults having substantially higher average risk per loan than a year ago. The growth in defaults and, more particularly, the risk in default, are primarily attributable to certain segments of our business including: (i) loans on properties in California, Florida, Arizona and Nevada (which we refer to collectively as “distressed markets”), (ii) the adverse development of the 2006 and 2007 books of business, (iii) our Primary bulk business written in 2006 and 2007, which is showing a significant amount of early payment defaults and has a significant amount of high LTV loans, and (iv) our recent Modified Pool business, which also has exhibited a significant amount of early payment defaults. At June 30, 2008, distressed markets accounted for 34% of the gross risk in force but represented 57% of the gross risk in default and 58% of the gross reserves. At June 30, 2007, distressed markets accounted for 34% of the gross risk in force and represented 34% of the gross risk in default and 29% of gross reserves.

     In addition to this increase in reserves, we also experienced substantial growth in paid losses in terms of both total dollars and the average paid loss severity. Gross paid losses of $68.4 million for the second quarter of 2008 were up $50.3 million, or 278%, as compared to the second quarter of 2007. Average paid loss severity was $53,300 during the quarter ended June 30, 2008, compared to $30,500 during the 2007 second quarter. The increase in average paid

severity is primarily the result of a higher percentage of claims from the more recent vintage years and from the distressed markets, both of which reflect larger loan balances, and a decline in our ability to mitigate losses.

     During the second quarter of 2008, we reversed the net $15 million premium deficiency reserve, recorded in the first quarter of 2008, reflecting the significant increase in recorded reserves. See “Update on Critical Accounting Policies and Estimates — Premium Deficiency” for discussion of the details of the computation and sensitivity surrounding the computation.

     Earned premiums were essentially flat for the second quarter of 2008 compared to the second quarter of 2007 and up slightly for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Total insurance in force decreased slightly from the level at June 30, 2007, as increased persistency was offset by a reduced amount of new insurance written over the 12-month period. Primary annual persistency increased to 85.1% at June 30, 2008 from 78.2% at June 30, 2007.

     Other operating expenses for the second quarter of 2008 increased 154% compared to the second quarter of 2007. Non-recurring charges amounting to $12.1 million were recognized during the second quarter of 2008. These expenses were primarily severance costs and other expenses related to our preparation for the transition of our business into run-off. Approximately $2.2 million of these non-recurring expenses were for investment banking and professional services fees related to our capital raising efforts.

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

     Production

     On June 19, 2008, we were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac. On July 15, 2008, we ceased issuing commitments for mortgage insurance. Going forward, our production will consist of certificates issued from commitments for mortgage insurance that were entered into prior to July 15, 2008. We expect the amount of production to be less than $400 million.

     A summary of new insurance written (NIW) or production for the second quarter of 2008 and 2007 broken out between Primary and Modified Pool follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in millions)		2008				2007				% Change				2008				2007				% Change
Primary insurance written:
Flow		$	1,148			$	5,089				(77	)%		$	3,061			$	9,461				(68	)%
Structured bulk			—				1,702				(100	)			—				3,029				(100	)
Total Primary insurance written		$	1,148			$	6,791				(83	)		$	3,061			$	12,490				(75	)
Modified Pool insurance written			—				1,406				(100	)			—				3,331				(100	)
Total insurance written		$	1,148			$	8,197				(86	)%		$	3,061			$	15,821				(81	)%

     Total NIW decreased significantly during the three and six months ended June 30, 2008 compared to the same periods one year ago. We had no structured bulk production in either Primary or Modified Pool in the first six months of 2008. We believe that the decrease in primary flow production was primarily due to our customers’ uncertainty surrounding our long-term ability to continue to write new mortgage insurance. We reported net losses during each of the previous three quarters ended March 31, 2008 and our risk-to-capital ratio was 27.7-to-1 as of March 31, 2008, which is above the maximum risk-to-capital ratio of 25.0-to-1 generally permitted by most states. Although we began the second quarter of 2008 as an eligible mortgage insurer for both the GSEs and we were writing new business, many of our large lenders, including five of our top ten customers during the first quarter of 2008, notified us of their intention to stop insuring new business with Triad.

     Insurance and Risk in Force

     The following table provides detail on our direct insurance in force at June 30, 2008 and 2007:

		June 30,
(dollars in millions)		2008				2007				% Change
Primary insurance:
Flow primary insurance		$	41,646			$	38,591				8	%
Structured bulk insurance			4,248				4,133				3
Total Primary insurance			45,894				42,724				7
Modified pool insurance			20,439				23,649				(14	)
Total insurance		$	66,333			$	66,373				—	%

     Our Primary insurance in force at June 30, 2008 grew from June 30, 2007 primarily due to production in the last two quarters of 2007 and improving persistency rates. Primary insurance persistency increased to 85.1% at June 30, 2008 from 77.7% at June 30, 2007. Although Modified Pool persistency increased to 86.4% at June 30, 2008 from 79.1% one year prior, insurance in force decreased from 12 months prior as there was no Modified Pool production during this period. We currently anticipate that persistency rates will continue near current levels throughout the remainder of 2008 due to current housing market weakness and general lack of mortgage credit available in the marketplace. However, persistency could decline if interest rates decline significantly, credit becomes more available, or the housing and mortgage markets begin to improve. Furthermore, if persistency was to decline, the decline may be concentrated in areas experiencing economic expansion and home price appreciation, but may not decrease or may not decrease to the same degree in areas experiencing economic contraction and declining home prices. As a result, our remaining insurance in force would be more heavily concentrated in areas experiencing economic contraction and declining home prices, resulting in increased risk and the possibility of a higher percentage of defaults.

     The following tables provide information on selected risk characteristics of our business based on risk in force at June 30, 2008 and 2007. Risk in force is the total amount of coverage for which we are at risk under our certificates of insurance. Of the risk factors addressed in the table, the following is a list of what we believe are important indicators of increased risk:

	•		The percentage of business defined as non-prime credit quality;
	•		The percentage of Alt-A business;
	•		The percentage of business with an LTV greater than 95%;
	•		The percentage of interest only loans and ARMs with potential negative amortization;
	•		The percentage of condominium property types;
	•		The percentage of non-primary residence occupancy status;
	•		The percentage of loans in excess of $250,000;
	•		The concentration of risk in distressed market states; and
	•		The presence of multiple risk factors on a single insured loan.

Risk in Force⁽¹⁾

		Primary								Modified Pool
		June, 30								June, 30
(dollars in millions)		2008				2007				2008				2007
Gross Risk in Force		$	11,943			$	11,128			$	5,965			$	6,920
Credit Quality:
Prime			75.6	%			73.6	%			27.8	%			29.6	%
Alt-A			20.9				22.8				71.4				69.6
A-Minus			3.1				3.1				0.7				0.7
Sub Prime			0.4				0.5				0.1				0.1
Total			100.0	%			100.0	%			100.0	%			100.0	%
LTV:
Greater than 95%			25.1	%			23.2	%			—	%			—	%
90.01% to 95.00%			32.5				33.6				0.2				0.3
90.00% and below			42.4				43.2				99.8				99.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan Type:
Fixed			66.2	%			62.7	%			26.2	%			26.8	%
Interest Only			10.4				9.6				23.3				22.9
ARM (amortizing) fixed period 5 years or greater			8.8				11.0				31.3				33.7
ARM (amortizing) fixed period less than 5 years			2.2				2.7				5.7				4.1
ARM (potential negative amortization)			12.4				14.0				13.5				12.5
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property Type:
Condominium			10.6	%			10.3	%			9.5	%			9.3	%
Other (principally single-family detached)			89.4				89.7				90.5				90.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy Status:
Primary residence			87.7	%			87.6	%			73.5	%			73.7	%
Secondary home			7.9				7.9				6.1				6.2
Non-owner occupied			4.4				4.5				20.4				20.1
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Amount:
$0 — $50,000			0.8	%			0.9	%			0.5	%			0.5	%
$51,000 — $100,000			9.3				10.4				5.3				5.4
$100,001 — $250,000			51.8				52.7				45.4				45.8
$250,001 — $500,000			32.2				29.9				42.2				41.8
Over $500,000			5.9				6.1				6.6				6.5
Total			100.0	%			100.0	%			100.0	%			100.0	%
Market Status:
Distressed market states (AZ, CA, FL, NV)			27.2	%			26.6	%			48.8	%			47.1	%
Non-distressed market states			72.8				73.4				51.2				52.9
Total			100.0	%			100.0	%			100.0	%			100.0	%

     The above table reflects that certain indicators of increased risk comprise a significant part of our portfolio. Our portfolio contains significant exposure to Alt-A loans as well as loans

with the potential for negative amortization (“PNAMs”). An inherent risk in a PNAM loan is the scheduled milestone in which the borrower must begin making amortizing payments. These payments can be substantially greater than the minimum payments required before the milestone is met. While most of these PNAMs have interest rates that will reset frequently, these loans generally have only minimal payment increases until the amortizing payments begin, so in most cases the borrower has not been required to make a significantly increased payment or to refinance, adding uncertainty and potential risk to this product. As a group, the Alt-A loans and the PNAM loans have performed significantly worse than the remaining prime fixed rate loans through June 30, 2008.

     The more recent book years have a significantly higher average loan amount on which we are providing coverage than previous book years. As indicated above, loans greater than $250,000 make up a greater percentage of our risk in force at June, 30, 2008 than one year prior. In addition, the percentage of our risk in force with LTVs greater than 95%, which historically produced higher default rates, has increased from one year prior.

     Due to the significant growth in our production in 2006 and 2007 and the amount of refinancing that took place in 2002 through 2005, our insurance portfolio is relatively unseasoned, having a weighted average life of 2.89 years at June 30, 2008, 2.50 years at December 31, 2007 and 2.24 years at June 30, 2007. The following table shows direct risk in force as of June 30, 2008 by year of loan origination.

		Primary								Modified Pool *
		June 30, 2008								June 30, 2008
(dollars in millions)		Direct Risk in Force				Percent				Direct Risk in Force				Percent
2002 and before		$	573.3				4.8	%		$	36.3				4.7	%
2003			1,051.0				8.8				108.1				14.0
2004			1,015.2				8.5				126.6				16.4
2005			1,504.8				12.6				212.3				27.5
2006			2,531.9				21.2				257.1				33.3
2007			4,645.8				38.9				31.7				4.1
2008			621.0				5.2				—				—
Total		$	11,943.0				100.0	%		$	772.0				100.0	%

     Mortgage insurance structures designed to allow lenders to share in the risks of such insurance have long been a standard in the industry. 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. Under the captive reinsurance program, the risk held by the captive is supported by assets held in trust with Triad as the beneficiary. At June 30, 2008, we had approximately $239 million in captive reinsurance trust balances supporting the risk transferred to captives, helping to limit our future loss exposure. Approximately 58% of our Primary flow insurance in force at June 30, 2008 was subject to these captive arrangements compared to approximately 57% at June 30, 2007.

     Revenues

     A summary of the significant individual components of our revenue for the second quarter and the first six months of 2008 and 2007 follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Direct premium written		$	84,561			$	83,153				2	%		$	173,946			$	161,561				8	%
Ceded premium written			(15,480	)			(12,988	)			19				(31,475	)			(25,689	)			23
Net premium written			69,081				70,165				(2	)			142,471				135,872				5
Change in unearned premiums			784				(433	)			(281	)			(542	)			(2,192	)			(75	)
Earned premiums		$	69,865			$	69,732				0	%		$	141,929			$	133,680				6	%
Net investment income		$	9,175			$	7,673				20	%		$	18,722			$	15,022				25	%
Total revenues		$	75,243			$	73,540				2	%		$	159,559			$	145,601				10	%

     Earned premium for the second quarter of 2008 was essentially flat compared to the second quarter of 2007. For the six months ended June 30, 2008, earned premiums increased from the prior year, reflecting the growth of insurance in force during 2007.

     During 2008, premium written on new business declined in accordance with the decline in production. However, renewal premiums grew substantially. The increase in direct renewal premium written was primarily the result of an increase in average insurance in force during the respective periods. The increase in direct renewal premium for the second quarter of 2008 was offset somewhat by approximately $2 million of premium refunded as a result of rescission activity during the second quarter of 2008. When an insurance policy is rescinded, insurance coverage from the date of issuance is cancelled and all of the previously paid premium is refunded.

     Ceded premium written is comprised of premiums written under excess of loss reinsurance treaties with captives as well as non-captive reinsurance companies. Ceded premium during 2008 increased over 2007 due to the increase in both the insurance in force and the percentage of insurance in force subject to captive reinsurance. Several of our larger lenders ceased reinsuring their 2008 books at the beginning of the year, however, the prior book years remain under reinsurance treaties for which the renewal premiums are still being remitted to the trusts.

     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 and single payment plans. Our unearned premium liability increased $2.9 million during the 12 months ending June 30, 2008, primarily due to our introduction of a single premium product during the second half of 2007 and continuing into 2008. We do not expect the unearned premium liability to continue to grow as a result of our decision to cease issuing commitments for mortgage insurance.

     Net investment income grew during the second quarter and the first six months of 2008 as compared to the same periods of 2007 primarily due to the growth in average invested assets. During the second quarter and first six months of 2008, average invested assets at cost or amortized cost grew by 22.2% and 28.9%, respectively, compared to the same periods of 2007 as a result of the investment of positive cash flows from operations which included $52.3 million from the redemption of ten-year non-interest bearing United States Mortgage Guaranty Tax and Loss Bonds (“Tax and Loss Bonds”). Our investment portfolio tax-equivalent yield decreased to 5.6% at June 30, 2008 from 6.6% at June 30, 2007. This decrease was primarily the result of the repositioning of the investment portfolio out of tax-exempt municipal securities and into taxable securities with a shorter duration. The book yield of the investment portfolio was 4.6% at June 30, 2008 compared to 4.6% at June 30, 2007. For a further discussion on the investment portfolio and the repositioning of the investment portfolio, see “Investment Portfolio.”

     Losses and Expenses

     A summary of the individual components of losses and expenses for the three months and six months ended June 30, 2008 and 2007 follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands)		2008				2007				%				2008				2007				%
Net losses and loss adjustment expenses		$	292,749			$	41,893				599	%		$	514,008			$	74,474				590	%
Net change in premium deficiency			(15,000	)			—				n/a				—				—
Policy acquisition costs			—				4,670				(100	)			39,416				9,293				324
Other operating expenses (net of acquisition costs deferred)			27,238				10,716				154				41,344				21,047				96
Loss ratio			419.0	%			60.1	%			597				362.2	%			55.7	%			550
Expense ratio			39.4	%			21.9	%			80				32.2	%			22.3	%			44
Combined ratio			458.4	%			82.0	%			459				394.4	%			78.0	%			406

     Net losses and LAE are comprised of both paid losses and the increase in the loss and LAE reserve during the period. Net losses and LAE for the second quarter and first six months of 2008 increased significantly over the same periods of 2007 primarily due to significant increases in reserves as well as growth in paid losses.

     The following table provides detail on paid claims and the average severity for our Primary and Modified Pool insurance for the three months and six months ended June 30, 2008 and 2007:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Paid claims:
Primary insurance		$	48,187			$	16,687				188.8	%		$	77,423			$	33,134				134	%
Modified Pool insurance			20,192				1,386				1,356.9				31,044				2,667				1,064
Total		$	68,379			$	18,073				278.3	%		$	108,467			$	35,801				203	%
Number of claims paid:
Primary insurance			919				540				70.2	%			1,605				1,066				51	%
Modified Pool insurance			363				52				598.1				530				106				400
Total			1,282				592				116.6	%			2,135				1,172				82	%

     The amount of paid claims increased significantly during second quarter and the first half of 2008 compared to the respective periods of 2007. The growth rate in the amount of paid claims outpaced the growth rate in the number of paid claims due to a significant increase in average severity on claims paid. Average severity on claims paid increased from $30,500 in the second quarter of 2007 to $53,300 during the second quarter of 2008. This increase was primarily the result of larger loan sizes on the claims paid and is reflective of (i) the development of the more recent vintage years, specifically the 2005, 2006 and 2007 vintage years, which have significantly higher average loan sizes than previous books, (ii) an increase in paid claims relating to loans originated in the distressed markets, which have significantly higher average loan sizes in general than other states, and (iii) a reduced ability to mitigate losses.

     The following table reflects the average loan size and average per policy risk in force by vintage year. 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 claims as well as the average paid claim are expected to increase. Furthermore, the 2006 and 2007 books are exhibiting adverse development patterns and thus are expected to impact the amount of paid claims and the average paid claim earlier than what we have experienced historically.

		Primary								Modified Pool
		Average				Average				Average				Average
		Loan Size				Insured Risk				Loan Size				Insured Risk
Vintage Year
2002 and Prior		$	105,257			$	26,779			$	78,962			$	25,576
2003			117,560				28,317				144,123				42,564
2004			131,417				34,908				148,536				44,066
2005			156,526				40,937				177,739				57,859
2006			207,866				53,699				262,090				69,578
2007			208,179				56,278				272,252				79,505
2008			203,033				46,411				—				—
Overall Average		$	171,444			$	44,615			$	208,647			$	60,897

     Beginning in late 2006, we experienced a reduction in our ability to reduce the severity of our claims paid through our traditional mitigation processes, which was related to weakness in

the housing market at that time. Subsequent declines in home prices across almost all markets with significant declines in the distressed markets have significantly impacted our ability to mitigate losses on paid claims. In some cases, properties for 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 sells 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. Full option settlements as a percentage of our paid claims have generally increased since the fourth quarter of 2006. During the second half of 2007 and continuing into the first half of 2008, the rapid decline in home prices in certain markets coupled with the overall uncertainty in the housing markets on a national basis had a significant negative impact on our ability to mitigate claims and negatively impacted the average severity.

     As illustrated under “Insurance and Risk in Force,” we are insuring a larger percentage of mortgages in excess of $250,000. Claim payments on larger mortgages are greater even if coverage percentages remain constant. Claim payments on these larger mortgages are reflected in the increase in average severity during the first half of 2008. We expect severity will continue to trend upward as the more recent vintage years, which contain the majority of the mortgages in excess of $250,000, continue to age. Additional deterioration in the housing market could further reduce our loss mitigation opportunities, which could lead to an increase in severity.

     The table below provides the gross cumulative paid loss ratios by certificate year (calculated as direct losses paid divided by direct premiums received, in each case for a particular policy year) that have developed through June 30, 2008 and 2007. The data below excludes the effects of reinsurance.

		Cumulative Paid Loss Ratios as of June 30,
Certificate Year		2008				2007
1996			14.6	%			14.5	%
1997			10.3				10.1
1998			6.9				6.7
1999			9.9				9.7
2000			35.5				35.2
2001			31.9				30.0
2002			32.7				31.0
2003			18.3				15.0
2004			21.1				14.4
2005			35.2				9.9
2006			29.3				1.8
2007			5.3				—
2008			—				—

     The table above reflects relatively higher cumulative ratios of losses paid to premium received for the 2000 through 2002 policy years at this stage of development. This is due, in part, to a large portion of this business being refinanced in subsequent years and the resulting lower aggregate level of premiums received for these policy years. As discussed in Item 1, “Business” of our Annual Report on Form 10-K for the year ended December 31, 2007, we generally anticipate making higher claim payments in the second through the fifth years after the loan is originated. The more recent vintage years have developed at a much faster rate from a

default and paid claim perspective than the historical trends primarily due to the rapid decline in housing markets.

     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 excluding the effects of captive reinsurance at June 30, 2008, December 31, 2007 and June 30, 2007:

		June 30,				December 31,				June 30,
(dollars in thousands)		2008				2007				2007
Primary insurance:
Reserves for reported defaults		$	530,733			$	251,316			$	89,752
Reserves for defaults incurred but not reported			62,154				40,691				9,382
Total Primary insurance			592,887				292,007				99,134
Modified Pool insurance:
Reserves for reported defaults			193,506				54,876				20,482
Reserves for defaults incurred but not reported			17,689				8,340				1,004
Total Modified Pool insurance			211,195				63,216				21,486
Reserve for loss adjustment expenses			13,180				4,716				1,441
Total reserves for losses and loss adjustment expenses		$	817,262			$	359,939			$	122,061

     The following table shows the change in reserves for losses and LAE excluding the effects of captive reinsurance for the three and six months ended June 30, 2008 and June 30, 2007:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Increase in reserve for losses and loss adjustment expenses		$	269,496			$	23,340				1,055	%		$	457,323			$	37,709				1,113	%

     Reacting to the rapidly changing housing markets and the shifting mix in the composition of our defaults, such as geographic location, loan size and policy year, we have increased reserves by 570% from a year ago, and 127% for the first six months of 2008. The increase in reserves reflects a growing number of loans in default and an increase in the average risk in default. In addition, we experienced a general decline in our cure rates on reported defaults during 2007 that has continued into the first half of 2008. Our reserving model incorporates management’s judgments and assumptions regarding the impact of the current housing and economic environment on the estimate of the ultimate claims we will pay on loans currently in default. To reflect the significant changes in the housing marketplace and economy that has occurred over the past year, both the frequency and severity factors utilized in the calculation of the reserve have increased since June 30, 2007, which also impacted the size of the reserve increase. Future economic conditions surrounding the housing or mortgage markets could significantly impact the development of our default inventory and the ultimate amount of claims paid.

     Although defaults increased across the board geographically, defaults in the distressed markets increased 507% from June 30, 2007 to June 30, 2008. Defaults related to the remaining states, excluding the distressed markets, increased 83% from June 30, 2007 to June 30, 2008. Additionally, the higher average loan balance in the distressed market states has resulted in a significantly higher reserve per default, all else being equal, compared to the rest of the portfolio. As of June 30, 2008, the gross case reserve per default for distressed market states was $38,100, compared to the gross case reserve per default of $23,300 for the remaining states.

     The following table indicates the growth in both the gross risk in default in these four distressed market states and reserves attributable to these states at June 30, 2008, December 31, 2007 and June 30, 2007. The gross reserves related to the distressed market states were 58% of total gross reserves at June 30, 2008, compared to 29% at June 30, 2007. Additionally, at June 30, 2008, these four states had average loan balances of $250,000 compared to $161,000 for the remainder of the portfolio, which increases the potential adverse impact that further defaults in these distressed markets may have on future growth in risk in default and reserves.

		June 30,				December 31,				June 30,
(dollars in thousands)		2008				2007				2007
Gross Risk In Force:
California		$	2,629,211			$	2,683,853			$	2,644,006
Florida			2,057,036				2,120,745				2,084,041
Arizona			938,772				978,132				941,315
Nevada			536,340				553,708				542,787
Total Distressed Market States		$	6,161,359			$	6,336,439			$	6,212,150
Total Gross Risk in Force		$	17,908,367			$	18,534,333			$	18,048,443
% in Distressed Market States			34.4	%			34.2	%			34.4	%
% of Gross Risk in Default:
California			23.3	%			19.1	%			13.2	%
Florida			23.0	%			19.6	%			13.4	%
Arizona			6.1	%			5.3	%			3.8	%
Nevada			4.2	%			3.8	%			3.6	%
Total Distressed Market States			56.6	%			47.8	%			34.0	%
% of Gross Reserves:
California			23.3	%			18.3	%			11.3	%
Florida			24.6	%			19.9	%			10.9	%
Arizona			6.2	%			5.4	%			3.4	%
Nevada			4.2	%			3.9	%			2.8	%
Total Distressed Market States			58.4	%			47.4	%			28.5	%