UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

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

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

Number of shares of common stock, par value $0.01 per share, outstanding as of October 31, 2008, was 15,116,259.

 

 

TRIAD GUARANTY INC.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007			1
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Unaudited)			2
Consolidated Statements of Cash Flows for the Nine Months Ended September 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			39
Item 4. Controls and Procedures			40
Part II. Other Information
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 6. Exhibits			42
Signature			43
Exhibit Index			44
EX-31.1
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.

		September 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: $870,305 and $710,924)		$	862,486			$	725,631
Equity securities (cost: $615 and $2,520)			615				2,162
Short-term investments			27,619				56,746
Total invested assets			890,720				784,539
Cash and cash equivalents			47,818				124,811
Real estate acquired in claim settlement			3,661				10,860
Accrued investment income			10,808				10,246
Deferred policy acquisition costs			—				36,243
Prepaid federal income taxes			15				116,008
Property and equipment			9,556				11,421
Reinsurance recoverable, net			111,827				5,815
Other assets			27,551				32,910
Total assets		$	1,101,956			$	1,132,853
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	1,042,053			$	359,939
Unearned premiums			16,870				17,793
Amounts payable to reinsurers			1,118				6,525
Deferred income taxes			22,889				123,297
Revolving line of credit			—				80,000
Long-term debt			34,527				34,519
Accrued interest on debt			584				1,355
Accrued expenses and other liabilities			12,314				10,574
Total liabilities			1,130,355				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 September 30, 2008 and 14,920,243 shares at December 31, 2007			151				149
Additional paid-in capital			112,665				109,679
Accumulated other comprehensive income, net of income tax liability of $6,475 at December 31, 2007			(7,913	)			13,405
Retained earnings (accumulated deficit)			(133,302	)			375,618
Total stockholders’ equity (deficiency in assets)			(28,399	)			498,851
Total liabilities and stockholders’ equity		$	1,101,956			$	1,132,853

See accompanying notes.

TRIAD GUARANTY INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands, except per share data)		2008				2007				2008				2007
Revenue:
Premiums written:
Direct		$	79,041			$	86,946			$	252,987			$	248,507
Ceded			(14,847	)			(14,391	)			(46,322	)			(40,081	)
Net premiums written			64,194				72,555				206,665				208,426
Change in unearned premiums			1,460				(465	)			918				(2,656	)
Earned premiums			65,654				72,090				207,583				205,770
Net investment income			10,349				8,370				29,071				23,392
Net realized investment (losses) gains			(6,519	)			85				(7,615	)			(3,020	)
Other income			2				2				6				6
			69,486				80,547				229,045				226,148
Losses and expenses:
Net losses and loss adjustment expenses			231,194				106,813				745,202				181,287
Interest expense on debt			691				1,161				2,863				2,548
Policy acquisition costs			—				4,567				39,416				13,860
Other operating expenses (net of acquisition costs deferred)			8,726				11,686				50,070				32,733
			240,611				124,227				837,551				230,428
Loss before income tax benefit			(171,125	)			(43,680	)			(608,506	)			(4,280	)
Income tax benefit:
Current			(4,593	)			(2,057	)			(4,595	)			1,468
Deferred			(6,437	)			(9,774	)			(94,991	)			(3,248	)
			(11,030	)			(11,831	)			(99,586	)			(1,780	)
Net loss		$	(160,095	)		$	(31,849	)		$	(508,920	)		$	(2,500	)
Loss per common and common equivalent share:
Basic		$	(10.69	)		$	(2.15	)		$	(34.14	)		$	(0.17	)
Diluted		$	(10.69	)		$	(2.15	)		$	(34.14	)		$	(0.17	)
Shares used in computing loss per common and common equivalent share:
Basic			14,973,386				14,838,124				14,907,129				14,827,534
Diluted			14,973,386				14,838,124				14,907,129				14,827,534

See accompanying notes.

TRIAD GUARANTY INC.

		Nine Months Ended
		September 30,
(dollars in thousands)		2008				2007
Operating activities
Net loss		$	(508,920	)		$	(2,500	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			681,191				118,890
Accrued expenses and other liabilities			1,791				6,665
Reinsurance, net			(111,419	)			464
Accrued investment income			(575	)			(1,319	)
Policy acquisition costs deferred			(3,173	)			(14,291	)
Policy acquisition costs			39,416				13,860
Net realized investment losses			7,615				3,020
Provision for depreciation			3,195				1,740
Accretion of discount on investments			1,667				526
Deferred income taxes			(94,991	)			(3,248	)
Prepaid federal income taxes			115,993				(1,909	)
Real estate acquired in claim settlement, net of write-downs			7,199				(2,396	)
Accrued interest on debt			(771	)			(224	)
Other assets			5,361				2,904
Other operating activities			7,059				(13,022	)
Net cash provided by operating activities			150,638				109,160
Investing activities
Securities available-for-sale:
Purchases — fixed maturities			(782,316	)			(237,994	)
Sales — fixed maturities			586,248				104,401
Maturities — fixed maturities			25,902				1,500
Purchases — equities			—				(55	)
Sales — equities			268				7,338
Net change in short-term investments			26,692				(73,671	)
Purchases of property and equipment			(1,348	)			(4,636	)
Net cash used in investing activities			(144,554	)			(203,117	)
Financing activities
Funding (repayment) of revolving credit facility			(80,000	)			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	)			80,791
Foreign currency translation adjustment on cash and cash equivalents			(3,077	)			5,174
Net change in cash and cash equivalents			(76,993	)			(7,992	)
Cash and cash equivalents at beginning of period			124,811				38,609
Cash and cash equivalents at end of period		$	47,818			$	30,617
Supplemental schedule of cash flow information
Cash (received) paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	(115,993	)		$	11,501
Interest		$	3,631			$	2,765

See accompanying notes.

TRIAD GUARANTY INC.

(Unaudited)

1. The Company

          Triad Guaranty Inc. (the “Company”) is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”), has historically provided mortgage insurance coverage in the United States. Triad ceased issuing new commitments for mortgage insurance coverage on July 15, 2008 and is in run-off. In run-off, the Company will not write any new mortgage insurance coverage, but will continue to service its remaining insurance in force, including collecting premiums on the remaining business in force and paying claims resulting from loans currently in default or loans that may go into default in the future. Triad has agreed to a corrective order from the Illinois Division of Insurance that, among other items, includes restrictions on the distribution of funds.

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 nine months ended September 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 Company’s 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
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(dollars in thousands)		September 30, 2008				(Level 1)				(Level 2)				(Level 3)
Assets
Securities available-for-sale
Fixed maturities		$	862,486			$	—			$	854,866			$	7,620
Equity securities			615				615				—				—
Real estate acquired in claim settlement			3,661				—				3,661				—
Total		$	866,762			$	615			$	858,527			$	7,620

          Significant unobservable inputs (Level 3) were used in determining the fair value on certain bonds in the fixed maturities portfolio during this period. The following table provides a reconciliation of the beginning and ending balances of these Level 3 bonds and the related gains and losses related to these assets during the first nine months of 2008.

		Fair Value Measurement Using Significant
		Unobservable Inputs (Level 3)
		Certain Bonds in Fixed Maturities AFS
		Three Months Ended				Nine Months Ended
(dollars in thousands)		September 30, 2008				September 30, 2008
Beginning balance		$	33,208			$	7,402
Total gains and losses (realized and unrealized):
Included in operations			—				(130	)
Included in other comprehensive income			(491	)			(834	)
Purchases, issuances and settlements			(24,999	)			383
Transfers in and/or out of Level 3			(98	)			799
Ending balance		$	7,620			$	7,620
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		$	(507	)		$	(854	)

          Gains and losses (realized and unrealized) included in operations or other comprehensive income for the nine months ended September 30, 2008 are reported as net realized investment gains as a gain of $20,000 and an unrealized loss through other comprehensive income of $854,000.

          In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, we did not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities within the scope of FSP 157-2. Examples of items to which the deferral is applicable include, but are not limited to:

•

Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods;

	•		Reporting units measured at fair value in the goodwill impairment test under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), and indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142;
	•		Nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets;
	•		Asset retirement obligations initially measured at fair value under SFAS No. 143, Accounting for Asset Retirement Obligations; and
	•		Nonfinancial liabilities for exit or disposal activities initially measured at fair value under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

          In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active. During times when there is little market activity for a financial asset, the objective of fair value measurement remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (exit price) that is not a forced liquidation or distressed sale at the measurement date. Determining fair value of a financial asset during a period of market inactivity may require the use of significant judgment and evaluation of the facts and circumstances to determine if transactions for financial assets are forced liquidation or distressed sales. An entity’s own assumptions regarding future cash flows and risk-adjusted discount rates for financial assets are acceptable when relevant observable inputs are not available. In addition, FSP 157-3 provides an illustrative example of key considerations when determining fair value of a financial asset when the market for the asset is not active. FSP 157-3 was effective on October 10, 2008, including all prior periods for which financial statements have not been issued. Any changes in valuation techniques resulting from the adoption of FSP 157-3 will be accounted for as a change in accounting estimated in accordance with SFAS No, 154, Accounting Changes and Error Corrections. We adopted the guidance in FSP 157-3 in our financial statements for the reporting period ended September 30, 2008. The adoption did not have a material impact on our consolidated financial condition or results of operations.

          In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company does not anticipate that FSP 142-3 will have a material impact on the Company’s financial position or results of operations.

          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 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.

          Under captive reinsurance agreements, the counterparties are required to establish trust accounts to support the reinsurers’ obligations under the reinsurance agreements. At September 30, 2008, we had approximately $248 million in captive reinsurance trust balances supporting the risk transferred to captives. As of September 30, 2008, there were 2 captive reinsurance arrangements where the total ceded reserves, combined with any unpaid ceded claims, had exceeded the trust balance and the recoverable was therefore limited to the trust balance.

          Triad 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, 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. The coverage period is for 10 years. Additionally, terms of the treaty require Triad to continue the payment of premiums to the reinsurer amounting to approximately $2 million per year for the entire ten year period.

          Under the terms specified above, the reinsurance treaty reached the attachment point at the end of the first quarter of 2008, and Triad subsequently notified the reinsurance carrier of the change in coverage. However, in April 2008, the reinsurance carrier informed Triad that, in its opinion, Triad had not complied with covenants in the reinsurance agreement and provided notice of termination of the agreement. In the second quarter of 2008, Triad notified the reinsurance carrier that it disputed the carrier’s claim, including the carrier’s alleged termination of the reinsurance agreement. Triad believes that the reinsurance carrier’s claims are without merit and has demanded arbitration as provided under the agreement. Triad expects the arbitration hearing will begin in 2008, but does not expect to have a decision until 2009. 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 GAAP financial statements.

     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 September 30, 2008 and December 31, 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):

		September 30,				December 31,				September 30,
(dollars in thousands)		2008				2007				2007
Net risk		$	11,349,180			$	11,967,179			$	11,741,160
Statutory capital and surplus		$	284,228			$	197,713			$	33,883
Statutory contingency reserve			1,359				387,365				626,182
Total		$	285,587			$	585,078			$	660,066
Risk-to-capital ratio		39.7 to 1				20.5 to 1				17.8 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 was approximately $54.5 million. As determined in accordance with statutory accounting practices, Triad experienced a net loss of $399.2 million for the nine months ended September 30, 2008, compared to a net loss of $121.3 million for the year ended December 31, 2007.

          Effective September 30, 2008, Triad changed its method of calculating the reserve for losses for its statutory financial statements to comply with its State of Domicile (Illinois) code that requires reserves are to be provided on loans that were in default four months or greater, loans in foreclosure and real estate owned. Previously, Triad had provided reserves on loans that were two months or greater in default, loans in foreclosure and real estate owned, which was another acceptable method of statutory accounting. Triad adopted this change on a prospective basis; accordingly, the prior year statutory financial statements have not been restated. Triad recorded the cumulative effect of the change by restating the statutory reserves as of the first day of 2008 as if it had previously utilized the new method. The impact was to decrease reserves and increase statutory surplus by $107.1 million as of January 1, 2008. This change had no impact on the Company’s methodology for calculating reserves under GAAP.

          Triad 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. At September 30, 2008, there was no surplus available to be paid out in dividends to stockholders. 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.

     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. Also, the Company believes policies originated by certain lenders may have involved misrepresentations, fraud or other underwriting violations that provide Triad with the right to deny or rescind coverage and, accordingly, 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. The Company determined that a premium deficiency existed at the end of the first quarter of 2008, however, no premium deficiency existed at June 30, 2008 or at September 30, 2008 due to subsequent additions to the Company’s loss reserves.

     Litigation

          On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. filed an adversary proceeding against Triad in the U.S. Bankruptcy Court for the District of Delaware. The plaintiffs were debtors and debtors in possession in Chapter 11 cases pending in the U.S. Bankruptcy Court. The complaint alleged claims for breach of contract and declaratory judgment. Triad filed a counterclaim for declaratory judgment against the plaintiffs and American Home Mortgage Corp. arising out of the same dispute. The parties filed a joint stipulation of voluntary dismissal of the action on September 29, 2008. The stipulation was granted and the adversary proceeding was dismissed on September 30, 2008 with no payment by Triad.

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 nine months ended September 30, 2008 and 2007, 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. The numerator used in basic EPS and diluted EPS is the same for all periods presented. For the three months and nine months ended September 30, 2008, options to purchase approximately 6,397 shares and 26,007 shares, 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 (loss) and other comprehensive income (loss). For the Company, other comprehensive income (loss) is composed of unrealized gains or losses on available-for-sale securities and foreign currency exchange, net of income tax in 2007. For the three months and nine months ended

September 30, 2008, the Company’s comprehensive net loss was $170.6 million and $530.2 million, respectively, while the comprehensive net loss for the three months and nine months ended September 30, 2007 was $24.3 million and $2.4 million, respectively. The Company recorded a full valuation allowance related to the deferred tax benefit on the unrealized loss included in the other comprehensive income (loss) portion of stockholders’ equity due to the uncertainty surrounding the net operating loss carryforward at September 30, 2008.

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 nine months ended September 30, 2008 reflects the Company’s inability to recognize a benefit for expected tax loss carry forwards. The effective tax rate for the third quarter of 2008 is lower than that utilized in the first two quarters of 2008 due to a change in the estimated tax rate for the full year 2008.

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 nine months ended September 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 operate our business in 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, employment 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

          Triad Guaranty Inc. is a holding company that historically has provided private mortgage insurance coverage in the United States through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”). Triad ceased issuing new commitments for mortgage guaranty insurance coverage on July 15, 2008 and we are operating our business in run-off. The term “run-off”, as used in this report, means writing no new mortgage insurance policies and continuing to service existing policies. Servicing includes: receiving premiums on policies that remain in force; cancelling coverage at the insured’s request; terminating policies for non-payment of premium; working with borrowers in default to remedy the default and/or mitigate our loss; and settling all legitimate filed claims per our contractual obligations. Triad has agreed to a corrective order from the Illinois Division of Insurance that, among other items, includes restrictions on the distribution of funds by Triad.

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

          In run-off, our revenues principally consist of (a) earned premiums from flow insurance in force (net of reinsurance premiums ceded as part of our risk management strategies and net of refunds), (b) earned premiums from structured bulk insurance in force (net of refunds), and (c) investment income on invested assets. We also realize investment gains and investment losses on the sale and impairment of securities where the net gain or loss is reported as a component of revenue.

          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, and (e) interest expense on long-term debt.

          Our future profitability depends largely on (a) the conditions of the housing, mortgage and capital markets that have a direct impact on default rates, mitigation efforts, cure rates and ultimately the amount of claims 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 renewal premium revenue that we will derive from the policy. We define persistency as the amount of insurance in force at the twelve-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 included in our calculation of persistency. Cancellations result primarily from the borrower refinancing or selling insured mortgaged residential properties, from policies being rescinded due to fraud, misrepresentation or other underwriting violations, from a servicer choosing to cancel the insurance, from the payment of a claim, and, to a lesser degree, from the borrower achieving prescribed equity levels, at which point the lender no longer requires mortgage guaranty insurance.

Recent Developments

          On August 5, 2008, we agreed to a corrective order with the Illinois Division of Insurance regarding restrictions on the distribution of funds from Triad to the holding company as well as enhanced reporting requirements and other matters. We have agreed to this corrective order as a result of the following events:

	•		On June 19, 2008, we announced that we had ended negotiations with Lightyear Capital LLC to form a new mortgage insurance company.
	•		We were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac effective June 19, 2008.
	•		We voluntarily ceased issuing commitments for mortgage insurance effective July 15, 2008 and entered into a voluntary run-off of our remaining insurance business.
	•		Our level of statutory capital was and remains significantly below the thresholds required by all state insurance departments to write mortgage guaranty insurance business.

          Under the corrective order, we were required to submit a corrective plan to the Illinois Division of Insurance. The corrective plan we submitted included, among other items, a five-year statutory financial projection and a detailed description of our planned course of action to address our current financial condition. The Illinois Division of Insurance has reviewed our preliminary corrective plan and, based on initial discussions with the Division of Insurance, we resubmitted our revised corrective plan on October 10, 2008. We have received approval of the revised corrective plan from the Illinois Division of Insurance and are in the process of reviewing the revised plan with both Fannie Mae and Freddie Mac, the two primary beneficiaries of our insurance coverage.

          In connection with the decision to transition Triad’s business into run-off, we terminated all agreements with the rating agencies regarding the issuance of ratings for us and our subsidiaries, including Triad. As a result, Standard & Poor’s Ratings Services, Moody’s Investor Services and Fitch Ratings withdrew their counterparty credit and financial strength ratings on Triad and on Triad Guaranty Inc.

          Effective July 18, 2008, Mark K. Tonnesen, our former President and Chief Executive Officer and a former director, resigned from those positions and subsequently retired on August 15, 2008. Also effective July 18, 2008, the Board of Directors appointed William T. Ratliff, III, our existing Chairman of the Board, as the interim President and Chief Executive Officer in addition to continuing his role as Chairman. On October 22, 2008, the Board of Directors appointed Kenneth W. Jones, who had been serving as our Chief Financial Officer, as our new President and Chief Executive Officer, effective immediately. Mr. Jones retained the responsibilities of Chief Financial Officer following his appointment as our President and Chief Executive Officer. Mr. Ratliff continues to serve as our Chairman of the Board following his relinquishment of the positions of President and Chief Executive Officer and will remain as an executive for the foreseeable future.

          Recent adverse events in the real estate, mortgage and financial markets have been unprecedented. Steep declines in real estate values, tightening markets for obtaining capital or credit, and the liquidity concerns of financial institutions have created a significant amount of uncertainty in the capital markets, which has resulted in significant downward pressure on asset values, especially single family homes. Like many other financial companies, we have not been immune to these adverse developments and have seen our financial position and results of operations deteriorate.

          At September 30, 2008, the Company reported a deficiency in assets of $28.4 million compared to stockholders’ equity of $140.9 million at June 30, 2008 and $498.9 million at December 31, 2007. A deficiency in assets occurs when recorded liabilities exceed recorded assets. The deficiency in assets is the result of five straight quarters of losses totaling $615.7 million. The largest portion of our losses is the result of an increase in loss and loss adjustment expense reserves of over $900 million since June 30, 2007, the last quarter for which we reported a profit. In addition, we have paid in excess of $230 million of claims during these last five quarters, an amount greater than the total claims paid during the first 18 years of the Company’s existence. At September 30, 2008 we had over $900 million of cash and invested assets, approximately $240 million more than at June 30, 2007. We reported $150.6 million of cash flow from operations for the first nine months of 2008, with $116.0 million derived from the early redemption of ten-year non-interest bearing United States Mortgage Guaranty Tax and Loss Bonds (“Tax and Loss Bonds”) that will not be an ongoing source of cash. While we reported a deficiency in assets at September 30, 2008 for GAAP purposes, the underlying performance of our insurance portfolio was generally consistent with our run-off plan, which projects significant losses in the early stages of the plan. Additionally, we expect to recognize additional benefits resulting from the Modified Pool stop losses and captive reinsurance in future periods that have not been reflected in our financial statements. We expect to continue to report a deficiency in assets in future periods. While we do not expect the deficiency in net assets to have a direct impact on our operations, it could adversely impact our continued listing on The NASDAQ Stock Market.

          In addition to the anticipated captive and structured benefits mentioned above, our GAAP financial statements do not reflect the net benefit from the $95 million Excess-of-Loss reinsurance treaty that is currently in arbitration. While we believe we will ultimately prevail in the arbitration proceedings, GAAP currently restricts the recognition of this net benefit. However, in consultation with the Illinois Division of Insurance, we recorded in our second quarter statutory financial statements the full net 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.

          Our intention is to pay all legitimate claims and expenses. Based on information currently available to us, we believe the combination of our current cash, investments and anticipated future premiums will provide sufficient resources to enable Triad to meet these obligations. Our focus remains on the efficient and effective servicing of our insured portfolio, particularly with respect to loss mitigation. We continue to improve our processes in this area by examining and refining all aspects of our default management and claims process, particularly for recent policy years.

          Included in Triad’s policyholders’ surplus for statutory purposes is a “surplus note” of $25 million payable to the Company, its parent. 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. Furthermore, the corrective order issued by the Illinois Division of Insurance prohibits Triad from paying principal or interest on the surplus note for the foreseeable future. See the “Liquidity and Financial Resources” section of this report for additional information concerning the corrective order.

          In July 2008, the Housing and Economic Recovery Act of 2008 was enacted, which established the Federal Housing and Finance Agency (FHFA) as the successor regulatory agency to both Fannie Mae and Freddie Mac. FHFA has broad legal and regulatory authority to ensure the safety and soundness of the GSEs, including the ability to place the GSEs into receivership or conservatorship. On September 7, 2008, FHFA placed both Fannie Mae and Freddie Mac into conservatorship. Conservatorship is a process designed to stabilize a troubled institution with the objective of returning the troubled institution to normal business operations. FHFA will act as the conservator of both GSEs. FHFA has stated that the purpose of this action is to restore confidence in the GSEs, to enhance their capacity to fulfill their mission, and to mitigate the systematic risk that has contributed directly to the instability in the market. The impact of this action on our results of operations and our financial condition is not clear at this time.

          During October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. EESA, among other things, authorizes the Secretary of the United States Department of the Treasury to purchase from certain financial institutions up to $700 billion of residential and commercial mortgages and any other financial instrument as deemed necessary to promote financial market stability. The Treasury already has allocated $250 billion of these funds to purchase securities issued by certain financial institutions. Additionally, several large lenders have announced plans to implement programs designed to explore the possibility of modifications to certain loans. The impact of these events on our results of operations and our financial condition is unclear at this time.

Consolidated Results of Operations

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

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
										%												%
(dollars in thousands, except per share data)		2008				2007				Change				2008				2007				Change
Earned premiums		$	65,654			$	72,090				(9	)%		$	207,583			$	205,770				1	%
Net losses and loss adjustment expenses			231,194				106,813				116				745,202				181,287				311
Net loss			(160,095	)			(31,849	)			403				(508,920	)			(2,500	)			20,257
Diluted loss per share		$	(10.69	)		$	(2.15	)			398			$	(34.14	)		$	(0.17	)			20,148

          The primary driver for the net loss for the three months and nine months ended September 30, 2008 continues to be a substantial increase in incurred losses and loss adjustment expenses, or LAE. The increase in net losses and LAE is comprised of an increase in loss reserves and an increase in paid losses. Our net loss and LAE reserves increased by $224.8 million during the third quarter of 2008, primarily as a result of a 21% increase in the number of loans in default and a 23% increase in the risk in default attributable to loans in default. For the nine months ended September 30, 2008, our net loss and LAE reserves increased by $682.1 million, due primarily to a 91% increase in the number of loans in default while the risk in default on loans in default increased by 119%. 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.

          Certain segments of our insured portfolio are primarily responsible for the growth rate in the number of defaults and, more specifically, in the risk in default. These segments include: (i) loans on properties in California, Florida, Arizona and Nevada (which we refer to collectively as “distressed markets”), (ii) the adverse development of our 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 2006 and 2007 Modified Pool business, which also has exhibited a significant amount of early payment defaults. At September 30, 2008, distressed markets accounted for 49% of the number of loans in default, but represented 61% of the gross risk in default as these markets have significantly higher loan amounts, on average, than the remainder of the portfolio. At September 30, 2007, distressed markets accounted for 27% of the number of loans in default and represented 41% of the gross risk in default.

          Gross paid losses for the third quarter of 2008 were $59.5 million compared to $28.5 million for the third quarter of 2007. Average paid loss severity was $54,100 during the quarter ended September 30, 2008, compared to $37,700 during the 2007 third 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. Gross paid losses decreased from the $68.4 million paid in the second quarter of 2008. This decrease is due to delayed claim payments resulting from a number of factors, including state and lender foreclosure moratoriums, delays by the servicers, and continued efforts on our part to investigate policies for fraud, misrepresentation or other underwriting violations, as well as an increase in the number of policies rescinded.

          Earned premiums in the third quarter of 2008 decreased by 9% compared to the third quarter of 2007, but increased slightly for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Total insurance in force at September 30, 2008 decreased 5% from the level at September 30, 2007, as increased persistency was offset by a significant decline in production over the twelve months ended September 30, 2008, as we addressed increasing risk-to-capital levels and ultimately made the decision to transition our business into run-off. Total annual persistency increased to 86.3% at September 30, 2008 from 80.1% at September 30, 2007. Annual persistency for Primary and Modified Pool was 85.8% and 87.1%, respectively, at September 30, 2008; and 79.1% and 81.5%, respectively, at September 30, 2007.

          Other operating expenses for the third quarter of 2008 were 25.3% lower compared to the second quarter of 2008. This was primarily attributable to the termination of more than 40% of our workforce during the second and third quarters of 2008, in connection with our decision to transition our business to run-off.

          Our effective tax rate decreased to 6.5% and 16.4%, respectively, for the third quarter and nine months ended September 30, 2008, compared to 27.1% and 41.6% for the same periods of 2007. The effective tax rate is lower than the marginal rate of 35% due to the inability to recognize any tax benefits from expected net operating tax loss carryforwards.

          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 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 wrote approximately $420 million and $3.5 billion, respectively, of new insurance for the three months and nine months ended September 30, 2008. All production in 2008 was from our Primary flow channel. For the three and nine months ended September 30, 2007, we wrote approximately $4.4 billion and $20.2 billion of new insurance. We do not expect a material amount of production going forward.

     Insurance and Risk in Force

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

		September 30,
(dollars in millions)		2008				2007				% Change
Primary insurance:
Flow primary insurance		$	40,451			$	40,610				(0	)%
Structured bulk insurance			4,065				4,700				(14	)
Total Primary insurance			44,516				45,310				(2	)
Modified Pool insurance			19,823				22,737				(13	)
Total insurance		$	64,339			$	68,047				(5	)%

          Our Primary insurance in force at September 30, 2008 declined by approximately 2% compared to September 30, 2007 due to a significant decline in production during that time period. The persistency rate continued to improve during this period, which served to temper the decline in Primary insurance in force. Modified Pool insurance in force declined by 12.8% because no new Modified Pool insurance was written in the twelve months ended September 30, 2008.

          Primary insurance persistency increased to 85.8% at September 30, 2008 from 79.1% at September 30, 2007. Modified Pool persistency increased to 87.1% at September 30, 2008 from 81.5% one year prior. The increase in persistency rates is reflective of the inability of many borrowers to refinance or sell their homes; the result of tightening credit standards combined with the general decline in home prices. We currently anticipate that persistency rates will continue near current levels throughout the remainder of 2008 and into 2009. However, persistency could decline if interest rates decline significantly, credit becomes more available, or the housing and mortgage markets begin to improve, which could have a significant impact on future earned premiums. It is unclear at this time how recent government intervention in the financial markets will affect the availability of credit or home prices. Furthermore, if persistency were 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 distressed markets or other areas experiencing economic contraction and declining home prices. As a result, our remaining insurance in force could 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 September 30, 2008 and 2007. Risk in force is the total amount of coverage for which we are at risk under our certificates of insurance. Although some of the risk factors addressed in the table showed slight improvement based upon these risk characteristics, the following is a list of characteristics we believe are important indicators of increased risk in our portfolios:

	•		The percentage of business defined as non-prime credit quality;
	•		The percentage of Alt-A business;
	•		The percentage of business with a loan-to-value (LTV) greater than 95%;
	•		The percentage of interest only loans and adjustable rate mortgages (ARMs), particularly 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
		September, 30								September, 30
(dollars in millions)		2008				2007				2008				2007
Gross Risk in Force		$	11,583			$	11,871			$	5,776			$	6,643
Credit Quality:
Prime			75.9	%			73.5	%			27.9	%			27.8	%
Alt-A			20.6				22.8				71.3				71.4
A-Minus			3.1				3.2				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%			24.9	%			25.2	%			—	%			—	%
90.01% to 95.00%			32.6				32.7				0.2				0.3
90.00% and below			42.5				42.1				99.8				99.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan Type:
Fixed			66.6	%			63.3	%			26.3	%			26.1	%
Interest Only			10.4				11.0				23.3				23.1
ARM (amortizing) fixed period 5 years or greater			8.6				10.0				31.1				33.6
ARM (amortizing) fixed period less than 5 years			2.1				2.5				5.6				4.0
ARM (potential negative amortization)			12.3				13.2				13.7				13.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property Type:
Condominium			10.7	%			10.4	%			9.6	%			9.3	%
Other (principally single-family detached)			89.3				89.6				90.4				90.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy Status:
Primary residence			87.8	%			87.6	%			73.4	%			73.6	%
Secondary home			7.9				7.9				6.1				6.2
Non-owner occupied			4.3				4.5				20.5				20.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Amount:
$0 - $50,000			0.8	%			1.1	%			0.5	%			0.3	%
$51,000 - $100,000			9.3				11.2				5.3				3.5
$100,001 - $250,000			51.8				54.9				45.4				39.6
$250,001 - $500,000			32.3				28.4				42.1				42.7
Over $500,000			5.8				4.4				6.7				13.9
Total			100.0	%			100.0	%			100.0	%			100.0	%
Market Status:
Distressed market states (AZ, CA, FL, NV)			27.2	%			26.9	%			48.9	%			47.6	%
Non-distressed market states			72.8				73.1				51.1				52.4
Total			100.0	%			100.0	%			100.0	%			100.0	%

          The above table reflects certain features of loans that may affect levels of risk in our portfolio. For example, 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. Therefore, in many cases, the borrower has not been required to make a significantly increased payment or to refinance. This feature adds some uncertainty and potential risk. Due in part to recent market conditions, the Alt-A loans and the PNAM loans, as a group, performed significantly worse than the remaining prime fixed rate loans through September 30, 2008.

          We believe that a policy with a high LTV, all else being equal, will have a greater risk of default than a policy with a low LTV, especially in periods that experience declining home prices. In the table above, the percentage of risk in force by LTV is based on the LTV at the time the loan was originated. We have not been provided with the “mark-to-market” LTV of our insured portfolio. To the extent that an insured loan in our portfolio has experienced a decline in the underlying value, the “mark-to-market” LTVs of the policy may be substantially higher than that at origination.

          As shown in the table below, business originated in 2006 and 2007 comprises the majority of our direct risk in force. This is due to the significant growth in our production in these years and the amount of refinancing that took place in 2003 through 2005 of prior book years. Policies originated in 2006 and 2007 have significantly higher amounts of average risk per policy than policies originated in prior years.

		Primary								Modified Pool *
		September 30, 2008								September 30, 2008
		Direct Risk								Direct Risk
(dollars in millions)		in Force				Percent				in Force				Percent
2002 and before		$	567.6				4.9	%		$	4.5				0.6	%
2003			996.1				8.6				29.6				3.9
2004			973.0				8.4				74.3				9.8
2005			1,447.9				12.5				255.4				33.7
2006			2,455.6				21.2				285.8				37.7
2007			4,494.2				38.8				108.4				14.3
2008			648.6				5.6				—				—
Total		$	11,583.0				100.0	%		$	758.0				100.0	%

          Under captive reinsurance programs, 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 September 30, 2008, we had approximately $248 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 both September 30, 2008 and at September 30, 2007 was subject to these captive arrangements.

     Revenues

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

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Direct premium written		$	79,041			$	86,946				(9	)%		$	252,987			$	248,507				2	%
Ceded premium written			(14,847	)			(14,391	)			3				(46,322	)			(40,081	)			16
Net premium written			64,194				72,555				(12	)			206,665				208,426				(1	)
Change in unearned premiums			1,460				(465	)			(414	)			918				(2,656	)			(135	)
Earned premiums		$	65,654			$	72,090				(9	)%		$	207,583			$	205,770				1	%
Net investment income		$	10,349			$	8,370				24	%		$	29,071			$	23,392				24	%
Net realized investment (losses) gains		$	(6,519	)		$	85				(7,769	)%		$	(7,615	)		$	(3,020	)			152	%
Total revenues		$	69,486			$	80,547				(14	)%		$	229,045			$	226,148				1	%

          For the three months ended September 30, 2008, direct premium written decreased by 9% as total insurance in force declined 3% from the period one-year prior and premium refunded increased to $4.8 million from $840,000 in the third quarter of 2007. This increase in premium refunded is primarily the result of an increase in rescission activity during the third quarter of 2008. When an investigation finds that fraud, misrepresentation or other specified violations occurred in the origination of a loan, our master policy provides that we may rescind the insurance certificate. When this happens, insurance coverage from the date of issuance is cancelled and all of the previously paid premium is refunded. The year-over-year increase in premium written for the nine months ended September 30, 2008 is primarily a result of higher levels of insurance in force in the first half of 2008 compared to the first half of 2007, offset in part by an increase in premiums 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 the three months and nine months ended September 30, 2008 increased over the respective periods of 2007 due to an increase in average insurance in force subject to captive reinsurance. The premium cede rate for the three months and nine months ended September 30, 2008 increased to 18.8% and 18.3%, respectively, from 16.6% and 16.1%, respectively, in the periods one-year prior as insurance in force subject to captive reinsurance comprised a larger percentage of our total insurance in force.

          Net investment income grew during the third quarter and the first nine months of 2008 as compared to the same periods of 2007, primarily due to the growth in average invested assets. During the third quarter and first nine months of 2008, average invested assets at cost or amortized cost grew by 21.0% and 21.2%, respectively, compared to the same periods of 2007 as a result of the investment of positive cash flows from operations, which included $62.3 million and $114.6 million, respectively, from the redemption of Tax and Loss Bonds. The book yield of the investment portfolio was 4.55% at September 30, 2008 compared to 4.63% at September 30, 2007. Net realized investment losses for the third quarter and nine months ended September 30, 2008 increased to $6.5 million and $7.6 million, respectively, compared to a net realized investment gain of $85,000 in the third quarter of 2007 and a net realized investment loss of $3.0 million in the nine months ended September 30, 2007. The increase in net realized investment losses is primarily the result of other-than-temporary impairment losses on our tax- preferred portfolio. 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 nine months ended September 30, 2008 and 2007 follows:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Net losses and loss adjustment expenses:
Net paid claims		$	59,357			$	28,470				108	%		$	167,708			$	64,272				161	%
Change in reserves			165,958				76,612				117	%			559,469				113,888				391	%
Loss adjustment expenses			5,879				1,731				240	%			18,025				3,127				476	%
Total		$	231,194			$	106,813				116	%		$	745,202			$	181,287				311	%
Policy acquisition costs			—				4,567				(100	)			39,416				13,860				184
Other operating expenses (net of acquisition costs deferred)			8,726				11,686				(25	)			50,070				32,733				53
Loss ratio			352.1	%			148.2	%			138				359.0	%			88.1	%			307
Expense ratio			13.6	%			22.4	%			(39	)			26.4	%			22.4	%			18
Combined ratio			365.7	%			170.6	%			114				385.4	%			110.5	%			249

          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 third quarter and first nine months of 2008 increased significantly over the same periods of 2007, reflecting 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 third quarter and nine months ended September 30, 2008 and 2007:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Paid claims:
Primary insurance		$	48,766			$	23,058				111.5	%		$	126,189			$	56,192				125	%
Modified Pool insurance			10,755				5,413				98.7				41,799				8,080				417
Total		$	59,521			$	28,471				109.1	%		$	167,988			$	64,272				161	%
Number of claims paid:
Primary insurance			950				625				52.0	%			2,555				1,691				51	%
Modified Pool insurance			150				131				14.5				680				237				187
Total			1,100				756				45.5	%			3,235				1,928				68	%

          The amount of paid claims increased significantly during the third quarter and the first nine months of 2008 compared to the same periods in 2007. The growth rate in the amount of paid claims continues to outpace 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 $37,700 in the third quarter of 2007 to $54,100 during the third 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 amount of paid claims decreased in the third quarter compared to the second quarter of 2008. This was due to delays in claim payments resulting from a number of factors, including state and lender foreclosure moratoriums, delays by the servicers and our ongoing effort to identify fraud, misrepresentation or other underwriting violations in policies which are currently in default, as well as increases in rescission activity.

          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, 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. We also expect policies from the 2006 and 2007 books will comprise a greater percent of our paid claim inventory in the future, which is expected to increase the average paid claim.

		Primary								Modified Pool
		Average				Average				Average				Average
Vintage Year		Loan Size				Insured Risk				Loan Size				Insured Risk
2002 and Prior		$	105,000			$	26,812			$	78,646			$	25,485
2003			116,321				28,090				142,804				42,269
2004			130,940				34,893				147,811				43,855
2005			156,352				40,991				177,428				57,766
2006			208,012				53,746				262,528				69,437
2007			207,695				56,024				272,463				79,328
2008			203,440				46,645				—				—
Overall Average		$	171,510			$	44,628			$	208,465			$	60,744

          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 a result of 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 through sales of properties before or during the foreclosure process. 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. Declining home prices combined with the limited availability of credit in the U.S. financial markets continues to adversely impact our ability to mitigate claims. To the extent these conditions do not significantly improve, our loss mitigation opportunities will continue to be adversely impacted.

          As illustrated under “Insurance and Risk in Force,” we have insured a larger percentage of mortgages in excess of $250,000 in recent years. 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 nine months 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 develop.

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

		Cumulative Paid Loss Ratios
		as of September 30,
Book Year		2008				2007
1996			14.6	%			14.5	%
1997			10.4				10.2
1998			6.9				6.7
1999			9.9				9.9
2000			35.7				35.3
2001			32.2				30.6
2002			33.0				31.6
2003			19.2				15.7
2004			23.1				15.9
2005			40.0				15.3
2006			37.3				6.0
2007			9.1				—
2008			—				—

          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. We expect the cumulative paid loss ratios for the 2005, 2006, and 2007 books of business will ultimately be significantly higher than the previous books of business.

          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 September 30, 2008, December 31, 2007 and September 30, 2007:

		September 30,				December 31,				September 30,
(dollars in thousands)		2008				2007				2007
Primary insurance:
Reserves for reported defaults		$	656,096			$	251,316			$	144,189
Reserves for defaults incurred but not reported			86,961				40,691				19,765
Total Primary insurance			743,057				292,007				163,954
Modified Pool insurance:
Reserves for reported defaults			258,347				54,876				31,164
Reserves for defaults incurred but not reported			23,735				8,340				2,619
Total Modified Pool insurance			282,082				63,216				33,783
Reserve for loss adjustment expenses			16,914				4,716				2,718
Total reserves for losses and loss adjustment expenses		$	1,042,053			$	359,939			$	200,455

          The following table shows the change in reserves for losses and LAE for the three and nine months ended September 30, 2008 and September 30, 2007:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2008				2007				% Change				2008				2007				% Change
Increase in reserve for losses and loss adjustment expenses		$	165,958			$	76,612				117	%		$	559,469			$	113,888				391	%

          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 420% from a year ago, and 190% since December 31, 2007. The increase in reserves reflects a growing number of loans in default, an increase in the average risk in default, and a decline in the cure rate of defaults. 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 have occurred over the past year, both the frequency and severity factors utilized in the calculation of the reserve have increased since September 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.

          In general, defaults have increased across the country although the distressed markets have experienced more significant increases. Defaults in the distressed markets have increased 371% from September 30, 2007 to September 30, 2008. Defaults related to the remaining states, excluding the distressed markets, have increased 81% from September 30, 2007 to September 30, 2008. Additionally, on average, the distressed market states have a higher average loan balance and average risk in default than the other states. At September 30, 2008, these four states had average loan balances of approximately $249,000 compared to approximately $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.

          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 September 30, 2008, December 31, 2007 and September 30, 2007.

		September 30,				December 31,				September 30,
(dollars in thousands)		2008				2007				2007
% of Gross Risk In Force:
California			14.7	%			15.1	%			15.2	%
Florida			11.5	%			12.1	%			12.2	%
Arizona			5.2	%			5.5	%			5.6	%
Nevada			3.0	%			3.1	%			3.1	%
Total Distressed Market States			34.4	%			35.9	%			36.1	%
% of Gross Risk in Default:
California			25.5	%			19.1	%			15.8	%
Florida			23.7	%			20.0	%			16.5	%
Arizona			6.7	%			5.6	%			4.9	%
Nevada			4.7	%			3.9	%			4.1	%
Total Distressed Market States			60.6	%			48.7	%			41.3	%
% of Gross Reserves:
California			24.4	%			18.3	%			15.0	%
Florida			24.2	%			20.0	%			16.3	%
Arizona			6.7	%			5.4	%			4.7	%
Nevada			4.5	%			3.9	%			3.8	%
Total Distressed Market States			59.9	%			47.6	%			39.8	%

          Certificates originated during 2006 and 2007 comprise 62.7% of our loans in default, but 73.4% of the risk in default at September 30, 2008. The difference in percentages of loans in default and risk in default reflects the higher loan amounts and the mix of our business. 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 in default at September 30, 2008, December 31, 2007 and September 30, 2007.

		September 30,				December 31,				September 30,
(dollars in thousands)		2008				2007				2007
Risk on loans in default		$	2,191,743			$	1,000,384			$	669,839
Gross Case Reserves as a percentage of risk in default (1)			45.4	%			36.6	%			32.1	%

          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.

          The following table shows default statistics as of September 30, 2008, December 31, 2007 and September 30, 2007:

		September 30,				December 31,				September 30,
(dollars in thousands)		2008				2007				2007
Total business:
Number of insured loans in force			354,645				378,907				378,814
With deductibles			53,780				59,592				61,634
Without deductibles			300,865				319,315				317,180
Number of loans in default			32,105				16,821				12,367
With deductibles			7,278				4,072				3,104
Without deductibles			24,827				12,749				9,263
Percentage of loans in default (default rate)			9.05	%			4.44	%			3.26	%
Percentage of loans in default excluding deductibles			8.25	%			3.99	%			2.92	%
Primary insurance:
Number of insured loans in force			259,556				273,798				269,681
Number of loans in default			19,441				10,419				7,541
Percentage of loans in default			7.49	%			3.81	%			2.80	%
Modified Pool insurance:
Number of insured loans in force			95,089				105,109				109,133
With deductibles			53,758				59,569				61,611
Without deductibles			41,331				45,540				47,522
Number of loans in default			12,664				6,402				4,826
With deductibles			7,278				4,072				3,104
Without deductibles			5,386				2,330				1,722
Percentage of loans in default			13.32	%			6.09	%			4.42	%
Percentage of loans in default excluding deductibles			13.03	%			5.12	%			3.62	%