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, 2007

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

For the transition period from                      to                     

Triad Guaranty Inc.

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

     Number of shares of Common Stock, par value $0.01 per share, outstanding as of August 3, 2007, was 14,920,108.

 

 

TRIAD GUARANTY INC.

INDEX

				Page
Part I. Financial Information
Item 1.		Financial Statements
		Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006			1
		Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2007 and 2006 (Unaudited)			2
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited)			3
		Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			39
Item 4.		Controls and Procedures			39
Part II. Other Information
Item 1.		Legal Proceedings			40
Item 1A.		Risk Factors			40
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3.		Defaults Upon Senior Securities			40
Item 4.		Submission of Matters to a Vote of Security Holders			41
Item 5.		Other Information			42
Item 6.		Exhibits			42
Signature					43
Exhibit 10.47
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.

		June 30,				December 31,
(dollars in thousands, except per share data)		2007				2006
		(unaudited)				(audited)
ASSETS
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $614,182 and $568,992)		$	618,034			$	586,594
Equity securities (cost: $3,744 and $9,530)			3,781				10,417
Other investments			—				5,000
Short-term investments			52,384				5,301
			674,199				607,312
Cash and cash equivalents			26,711				38,609
Real estate acquired in claim settlement			7,923				10,170
Accrued investment income			8,972				8,054
Deferred policy acquisition costs			35,157				35,143
Prepaid federal income taxes			170,076				166,908
Property and equipment			10,086				7,678
Other assets			27,153				21,757
Total assets		$	960,277			$	895,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	122,061			$	84,352
Unearned premiums			15,461				13,193
Amounts payable to reinsurers			6,272				5,909
Deferred income taxes			177,889				176,483
Long-term debt			34,514				34,510
Accrued interest on debt			1,275				1,275
Accrued expenses and other liabilities			8,182				9,685
Total liabilities			365,654				325,407
Commitments and contingencies — Note 4
Stockholders’ equity:
Preferred stock, par value $0.01 per share -— authorized 1,000,000 shares; no shares issued and outstanding			—				—
Common stock, par value $0.01 per share -— authorized 32,000,000 shares; issued and outstanding 14,920,108 shares at June 30, 2007 and 14,856,401 shares at December 31, 2006			149				149
Additional paid-in capital			107,541				104,981
Accumulated other comprehensive income, net of income tax liability of $1,362 at June 30, 2007 and $6,471 at December 31, 2006			4,507				12,018
Retained earnings			482,426				453,076
Total stockholders’ equity			594,623				570,224
Total liabilities and stockholders’ equity		$	960,277			$	895,631

See accompanying notes.

TRIAD GUARANTY INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands, except per share data)		2007				2006				2007				2006
Revenue:
Premiums written:
Direct		$	83,153			$	60,961			$	161,561			$	120,273
Ceded			(12,988	)			(11,603	)			(25,689	)			(22,573	)
Net premiums written			70,165				49,358				135,872				97,700
Change in unearned premiums			(433	)			1,309				(2,192	)			857
Earned premiums			69,732				50,667				133,680				98,557
Net investment income			7,673				6,535				15,022				12,757
Net realized investment (losses) gains			(3,867	)			772				(3,105	)			1,672
Other income			2				5				4				3
			73,540				57,979				145,601				112,989
Losses and expenses:
Net losses and loss adjustment expenses			41,893				17,271				74,474				33,622
Interest expense on debt			694				694				1,387				1,387
Amortization of deferred policy acquisition costs			4,670				4,118				9,293				7,980
Other operating expenses (net of acquisition costs deferred)			10,716				8,496				21,047				17,009
			57,973				30,579				106,201				59,998
Income before income taxes			15,567				27,400				39,400				52,991
Income taxes:
Current			1,766				979				3,525				1,951
Deferred			1,775				6,834				6,526				12,900
			3,541				7,813				10,051				14,851
Net income		$	12,026			$	19,587			$	29,349			$	38,140
Earnings per common and common equivalent share:
Basic		$	0.81			$	1.33			$	1.98			$	2.58
Diluted		$	0.80			$	1.31			$	1.96			$	2.56
Shares used in computing earnings per common and common equivalent share:
Basic			14,834,500				14,769,367				14,824,460				14,763,889
Diluted			14,950,721				14,914,075				14,946,204				14,888,304

See accompanying notes.

TRIAD GUARANTY INC.

CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

		Six Months Ended
		June 30,
(dollars in thousands)		2007				2006
Operating activities
Net income		$	29,349			$	38,140
Adjustments to reconcile net income to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			39,977				2,967
Accrued expenses and other liabilities			(1,503	)			(2,248	)
Amounts due to reinsurer			363				588
Accrued investment income			(918	)			(543	)
Policy acquisition costs deferred			(9,307	)			(8,499	)
Amortization of deferred policy acquisition costs			9,293				7,980
Net realized investment losses (gains)			3,105				(1,672	)
Provision for depreciation			996				1,231
Accretion of discount on investments			317				(50	)
Deferred income taxes			6,526				12,900
Prepaid federal income taxes			(3,168	)			(12,443	)
Real estate acquired in claim settlement, net of write-downs			2,247				(2,893	)
Other assets			(5,396	)			(442	)
Other operating activities			1,765				1,633
Net cash provided by operating activities			73,646				36,649
Investing activities
Securities available-for-sale:
Purchases – fixed maturities			(128,370	)			(90,826	)
Sales – fixed maturities			80,120				54,081
Maturities – fixed maturities			3,391				2,933
Purchases – equities			(55	)			(4,647	)
Sales – equities			7,086				3,001
Purchases of other investments			—				(5,000	)
Net change in short-term investments			(47,083	)			519
Purchases of property and equipment			(3,404	)			(1,358	)
Net cash used in investing activities			(88,315	)			(41,297	)
Financing activities
Excess tax benefits from share-based compensation			175				280
Proceeds from exercise of stock options			616				625
Net cash provided by financing activities			791				905
Foreign currency translation adjustment			1,980				—
Net change in cash and cash equivalents			(11,898	)			(3,743	)
Cash and cash equivalents at beginning of period			38,609				8,934
Cash and cash equivalents at end of period		$	26,711			$	5,191
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	9,091			$	15,343
Interest			1,383				1,383

See accompanying notes.

TRIAD GUARANTY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)

1. The Company

     Triad Guaranty Inc. is a holding company, which through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”), provides mortgage insurance coverage in the United States. This allows buyers to achieve homeownership with a reduced down payment, facilitates the sale of mortgage loans in the secondary market and protects lenders from credit default-related expenses. Triad Guaranty Inc. and its subsidiaries are collectively referred to as the “Company”.

2. Accounting Policies And Basis Of Presentation

  Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in the Triad Guaranty Inc. annual report on Form 10-K for the year ended December 31, 2006.

Recent Accounting Pronouncements

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed tax positions in its filed income tax returns. The only periods subject to examination for the Company’s federal returns are the 2003 through 2006 tax years. In January 2007, the Company received a final notice from the Internal Revenue Service stating that the examination of its 2004 tax return was completed and no changes were made to the Company’s reported tax. The Company believes that its income and deduction filing positions in the remaining open tax years would be sustained if subject to audit and does not anticipate any adjustments that will result in a material change in its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

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

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

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

  Share-Based Compensation

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

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

  Foreign Currency Translation

     The financial statements of the Company’s foreign subsidiary have been translated into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation” (“SFAS 52”). Assets and liabilities denominated in non-U.S. dollar functional currencies are translated using the period-end spot exchange rates. Revenues and expenses are translated at an average exchange rate for the period. The effects of translating operations with a functional currency other than the reporting currency are reported as a component of accumulated other comprehensive income included in total shareholders’ equity.

3. Consolidation

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

4. Commitments and Contingencies

  Reinsurance

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

  Insurance In Force, Dividend Restrictions, and Statutory Results

     Insurance regulations generally limit the writing of mortgage guaranty insurance to an aggregate amount of insured risk no greater than 25 times the total of statutory capital and surplus and the statutory contingency reserve. The amount of net risk for insurance in force at June 30, 2007, December 31, 2006 and June 30, 2006, as presented below, was computed by applying the various percentage settlement options to the insurance in force amounts, adjusted by risk ceded under reinsurance agreements, any applicable stop-loss limits and deductibles attributable to Modified Pool transactions. Triad’s ratio is as follows:

		June 30,				December 31,				June 30,
(dollars in thousands)		2007				2006				2006
Net risk		$	11,057,092			$	8,612,912			$	7,640,954
Statutory capital and surplus		$	102,942			$	168,439			$	154,695
Statutory contingency reserve			589,661				521,836				492,013
Total		$	692,603			$	690,275			$	646,708
Risk-to-capital ratio		16.0 to 1					12.5 to 1				11.8 to 1

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

     Net income as determined in accordance with statutory accounting practices was $41.7 million and $52.1 million for the six months ended June 30, 2007 and 2006, respectively, and $88.3 million for the year ended December 31, 2006.

     At June 30, 2007 and December 31, 2006, the amount of Triad’s equity that could be paid out in dividends to stockholders was $19.2 million and $84.7 million, respectively, which was the earned surplus of Triad on a statutory basis on those dates. On April 13, 2007, Triad paid a dividend of $30 million to its parent, Triad Guaranty Inc.

  Loss Reserves

     The Company establishes loss reserves to provide for the estimated costs of settling claims on loans reported in default and estimates of loans in default that are in the process of being reported to the Company as of the date of the financial statements. Consistent with industry accounting practices, the Company does not establish loss reserves for future claims on insured loans that are not currently in default. Amounts recoverable from the sale of properties acquired in lieu of foreclosure are considered in the determination of the reserve estimates. Loss reserves are established by management using historical experience and by making various assumptions and judgments about claim rates (frequency) and claim amounts (severity) to estimate ultimate losses to be paid on loans in default. The Company’s reserving methodology gives effect to current economic conditions and profiles delinquencies by such factors as default status, policy year, specific lenders, the number of months the policy has been in default, as well as whether the policies in default were underwritten through the flow channel or as part of a structured bulk transaction. The assumptions utilized in the calculation of the loss reserve estimate are continually

reviewed, and as adjustments to the reserve become necessary, such adjustments are reflected in the financial statements in the periods in which the adjustments are made.

  Litigation

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

  Credit Facility

     On June 28, 2007, the Company entered into a three-year $80.0 million revolving unsecured credit facility with three domestic banks to provide short term liquidity for insurance operations and general corporate purposes. The facility has an increase option and may be increased to an aggregate total of $100.0 million. Under the credit agreement, the Company must maintain a minimum consolidated net worth level and not exceed a risk-to-capital ratio threshold of 22 to 1. In addition, the agreement contains covenants restricting the Company’s ability to incur liens, merge or consolidate with another entity and dispose of all or substantially all of its assets. At June 30, 2007, the Company was in compliance with all such covenants and had no amounts outstanding under the facility.

5. Earnings Per Share

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

6. Comprehensive Income

     Comprehensive income consists of net income and other comprehensive income. For the Company, other comprehensive income is composed of unrealized gains or losses on available-for-sale securities, net of income tax, and the gains or losses on the change in foreign currency translation. For the three months ended June 30, 2007 and 2006, the Company’s comprehensive income was $6.4 million and $14.7 million, respectively. For the six months ended June 30, 2007 and 2006, the Company’s comprehensive income was $21.8 million and $29.4 million, respectively.

7. Income Taxes

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

8. Long-Term Stock Incentive Plan

     In May 2006, the Company’s shareholders approved the 2006 Long-Term Stock Incentive Plan (the “Plan”). Under the Plan, certain directors, officers, and key employees are eligible to receive various share-based compensation awards. Stock options, restricted stock and phantom stock rights may be awarded under the Plan for a fixed number of shares with a requirement for stock options granted to have an exercise price equal to or greater than the fair value of the shares at the date of grant. Generally, most awards vest over three years. Options granted under the Plan expire no later than ten years following the date of grant. As of June 30, 2007, 1,585,930 shares were reserved and 940,733 shares were available for issuance under the Plan. Gross compensation expense of

approximately $1.092 million along with the related tax benefit of approximately $382,000 was recognized in the financial statements for the three months ended June 30, 2007, as compared to gross compensation expense of approximately $896,000 and the related tax benefit of approximately $314,000 for the three months ended June 30, 2006. For the six months ended June 30, 2007 and 2006, approximately $236,000 and $277,000, respectively, of share-based compensation was capitalized as part of deferred acquisition costs.

     A summary of option activity under the Plan for the six months ended June 30, 2007 is presented below:

														Weighted-
						Weighted-				Aggregate				Average
		Number of				Average				Intrinsic				Remaining
(dollars in thousands)		Shares				Exercise Price				Value				Contractual
Outstanding, January 1, 2007			564,712			$	38.36
Granted			107,190				43.56
Exercised			22,937				26.87
Cancelled			3,768				45.06
Outstanding, June 30, 2007			645,197				39.60			$	1,866			5.1 years
Exercisable, June 30, 2007			410,076				37.78			$	1,866			2.9 years

     The fair value of stock options is estimated on the date of grant using a Black-Scholes pricing model. The weighted-average assumptions used for options granted during the six months ended June 30, 2007 and 2006 are noted in the following table. The expected volatilities are based on volatility of the Company’s stock over the most recent historical period corresponding to the expected term of the options. The Company also uses historical data to estimate option exercise and employee terminations within the model; separate groups of employees with similar historical exercise and termination histories are considered separately for valuation purposes. The risk-free rates for the periods corresponding to the expected terms of the options are based on U.S. Treasury rates in effect on the dates of grant.

		June 30,				June 30,
		2007				2006
Expected Volatility			31.9	%			34.0	%
Expected dividend yield			0.0	%			0.0	%
Expected term		5.0 years				5.0 years
Risk-free rate			4.6	%			4.5	%

     The weighted-average grant-date fair value of options granted during the six months ended June 30, 2007 and 2006 was $16.13 and $16.28, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was approximately $470,000 and $839,000, respectively.

     A summary of restricted stock activity under the Plan for the six months ended June 30, 2007 is presented below:

						Weighted-
						Average
		Number of				Grant-Date
		Shares				Fair Value
Outstanding, January 1, 2007			113,941			$	46.41
Granted			47,219				44.61
Exercised			36,584				50.29
Cancelled			6,449				45.89
Outstanding, June 30, 2007			118,127				44.52

     The fair value of restricted stock is determined based on the closing price of the Company’s shares on the grant date. The weighted-average grant-date fair value of restricted stock granted during the six months ended June 30, 2007 and 2006 was $44.61 and $45.37, respectively.

     As of June 30, 2007, there was $6.4 million of total unrecognized compensation expense related to nonvested stock options and restricted stock granted under the Plan. That expense is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of stock options and restricted stock vested during the six months ended June 30, 2007 and 2006 was $1.9 million and $1.6 million, respectively.

     The Company issues new shares upon exercise of stock options.

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

     Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the consolidated financial condition, changes in financial position, and results of operations for the three months and six months ended June 30, 2007 and 2006, of the Company. This discussion supplements Management’s Discussion and Analysis in the Company’s Form 10-K for the year ended December 31, 2006, and should be read in conjunction with the interim financial statements and notes contained herein.

     Certain of the statements contained herein, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive, and legislative developments. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect on us. Actual developments and their results could differ materially from those expected by us, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are different than anticipated, legislative developments, changes in interest rates or the stock markets, stronger than anticipated competitive activity, as well as the risk factors described in Item 1A of our Form 10-K for the year ended December 31, 2006 and the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 with respect to forward-looking statements contained herein. Additional risk factors are also described in Part II, Item 1A Risk Factors of this document.

Update on Critical Accounting Policies and Estimates

     Our Annual Report on Form 10-K for the year ended December 31, 2006 describes the accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. These critical accounting policies relate to the assumptions and judgments utilized in establishing the reserve for losses and loss adjustment expenses, determining if declines in fair values of investments are other than temporary, and establishing appropriate initial amortization schedules for deferred policy acquisition costs (“DAC”) and subsequent adjustments to that amortization.

     We believe that these continue to be the critical accounting policies applicable to the Company and that these policies were applied in a consistent manner during the first six months of 2007. In the 10-K, we provided a sensitivity analysis around the impact on pre-tax income as a result of a 10% increase or decrease in the frequency or severity factors utilized in the reserve model. At December 31, 2006, we stated that a 10% increase or decrease in frequency or severity is reasonably likely based on potential changes in future economic conditions and past experience. During the first quarter of 2007, we raised the frequency factor by approximately 5% and made a small upward adjustment to the severity factor as a result of recent conditions in the housing market. The adjustments to both the frequency and severity factors made during the second quarter were only marginally upward.

     As detailed later under Losses and Expenses, the significant increase in reserves during the second quarter was the result of an increase in the number of defaults and the larger loan size of those loans in default and not necessarily the result of a change in the assumptions utilized in setting the factors. Economic conditions that could give rise to a significant increase in the frequency rate include a sudden increase, or a prolonged period of increase, in the unemployment rate. A sudden nationwide or widespread regional decline in home prices or a continued prolonged period of flat or slowly depreciating home prices are among the conditions that could increase the severity factors.

Overview

     Through our subsidiaries, we provide Primary and Modified Pool mortgage guaranty insurance coverage to residential mortgage lenders and investors as a credit-enhancement vehicle. We classify insurance as Primary in

those instances where we are in the first loss position and the loan to value (“LTV”) is 80% or greater (with the LTV calculation determined when the loan is first insured). We classify all other insurance as Modified Pool. The majority of our Primary insurance is delivered through the flow channel, which is defined as loans originated by lenders and submitted to us on a loan-by-loan basis. We also provide mortgage insurance to lenders and investors who seek additional default protection (typically secondary coverage or on loans for which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement on groups of loans that are sold in the secondary market. These transactions are referred to as our structured bulk channel business. Those individual loans in the structured bulk channel in which we are in the first loss position and the LTV ratio is greater than 80% are classified as Primary. All of our Modified Pool insurance is delivered through the structured bulk channel.

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

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

     Our profitability depends largely on a) the volume of business insured combined with the adequacy of our product pricing and underwriting discipline relative to the risks insured, b) the conditions of the housing, mortgage and capital markets that have a direct impact on mitigation efforts, cure rates and ultimately the amount of claims paid, c) the overall general state of the economy and job market, d) persistency levels, e) operating efficiencies, and f) the level of investment yield, including realized gains and losses, on our investment portfolio.

     We define persistency as the percentage of insurance in force remaining from twelve months prior. Cancellations of policies originated during the past twelve months are not considered in our calculation of persistency. This method of calculating persistency may vary from that of other mortgage insurers. We believe that our calculation presents an accurate measure of the percentage of insurance in force remaining from twelve months prior. Cancellations result primarily from the borrower refinancing or selling insured mortgaged residential properties and, to a lesser degree, from the borrower achieving prescribed equity levels at which point the lender no longer requires mortgage guaranty insurance.

     For a more detailed description of our industry and operations, refer to the “Business” section of our Form 10-K.

Consolidated Results of Operations

     Following is selected financial information for the three months and six months ended June 30, 2007 and 2006:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands, except
per share data)		2007				2006				% Change				2007				2006				% Change
Earned premiums		$	69,732			$	50,667				38	%		$	133,680			$	98,557				36	%
Net losses and loss adjustment expenses			41,893				17,271				143				74,474				33,622				122
Net income			12,026				19,587				(39	)			29,349				38,140				(23	)
Diluted earnings per share		$	0.80			$	1.31				(39	)		$	1.96			$	2.56				(23	)

     The net income and diluted earnings per share for the second quarter and six months ended June 30, 2007 shown above are lower than those reflected in our press release dated July 25, 2007, due to the subsequent recording of a material impairment of an equity investment after our earnings release. For further discussion about this impairment, see Part II, Item 5. Other Information.

     Net losses and loss adjustment expenses for the quarter ended June 30, 2007 increased $24.6 million compared to the same period a year earlier. Year-to-date, total incurred losses increased $40.9 million compared to the first six months of 2006. While paid losses increased during 2007 for the three months and six months ended June 30, we had a significant increase in reserves during the same periods when compared to 2006. The principal reason for the reserve increases was the change in characteristics of the loans entering the default pool, with the newer defaults having substantially higher average risk per loan. Additionally, the number of filed claims included in our default inventory increased by about 15% during the second quarter resulting in an increased reserve under our methodology.

     Paid losses of $18.1 million for the second quarter were up $3.6 million, or 25.2%, as compared to the quarter ended June 30, 2006. Average paid loss severity was $30,500 for both the second quarter and first six months of 2007 compared to $25,300 and $25,200, respectively, for the second quarter and the first six months of 2006.

     We experienced a 36% increase over the second quarter of 2006 in both the number of loans in default for which we provide a reserve as well as the average risk in default on those loans which compounded the increase in reserves. Additionally, the composition of the default inventory has changed such that we had a significantly greater number of pending claims at June 30, 2007, which, through our reserve methodology, carries a larger reserve percentage of the amount of risk in default than other defaults for which a claim has yet to be filed.

     Earned premiums for the second quarter and first six months of 2007 grew significantly when compared to the same time periods of 2006, principally due to growth in Primary insurance in force. Based on information available from the industry association and other public sources, our estimated market share of net new insurance written including flow and bulk channels, using industry definitions, was 8.3% for the second quarter of 2007 compared to 8.8% for the second quarter of 2006.

     Realized investment losses and gains, net of taxes, decreased diluted earnings per share by $0.17 and $0.14, respectively, in the second quarter and first six months of 2007, compared to increases of $0.03 and $0.07, respectively, in the second quarter and first six months of 2006. Realized investment gains and losses per diluted share is a non-GAAP measure. We believe this is relevant and useful information to investors because, except for write-downs on other-than-temporarily impaired securities, it shows the effect that our discretionary sales of investments had on earnings. For a further discussion of an impairment write-down that has been recorded recently, see “Realized Gains (Losses) and Impairments” below.

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

Production and In Force

     The table below represents a summary of New Insurance Written (NIW), or production for the second quarter and the first six months of 2007 and 2006 broken out between Primary and Modified Pool:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in millions)		2007				2006				% Change				2007				2006				% Change
Primary insurance written:
Flow		$	5,089			$	2,559				99	%		$	9,461			$	4,506				110	%
Structured bulk			1,702				385				342				3,029				386				685
Total Primary insurance written		$	6,791			$	2,944				131			$	12,490			$	4,892				155
Modified pool insurance written			1,405				2,980				(53	)			3,330				7,585				(56	)
Total insurance written		$	8,196			$	5,924				38	%		$	15,820			$	12,477				27	%

     According to estimates published by Fannie Mae, the overall mortgage loan origination market for the second quarter of 2007 declined approximately 6% from the second quarter of 2006, and approximately 2% for the first six months of 2007 as compared to the first six months of 2006. The housing market slowed significantly during 2006, continuing into the first half of 2007, as evidenced by reduced sales of existing homes and near record high levels of unsold inventories in many markets. Although the overall loan origination market slowed during the quarter and for the year, there continues to be an increase in the market penetration of mortgage insurance products because “piggyback” or simultaneous second mortgages have lost favor from a lender’s perspective.

     The significant increase in Primary NIW in the second quarter and first six months of 2007 reflects the general increase in mortgage insurance penetration in the flow channel noted above. NIW in the flow channel increased $2.5 billion and $5.0 billion, respectively, for the second quarter and first six months of 2007 compared to the same periods in 2006. We believe it is unlikely that this trend will continue in the second half of 2007 for the reasons described below:

	•		Our largest lender in terms of production of NIW through the flow channel was American Home Mortgage, Inc. (“AHM”), which comprised 30% and 34% of our flow production for the second quarter and first six months of 2007, respectively. On August 6, 2007, AHM formally announced that it was seeking protection under Chapter 11 of the U.S. bankruptcy code. See “Significant Customers” below. We currently expect that the loss of production from AHM will have a significant impact on our NIW during the remainder of 2007.
	•		During the second quarter of 2007, we discontinued a specific lender-paid program which was a significant contributor to NIW in the second half of 2006.
	•		We are concerned with the increased risk involved with insuring loans with higher LTV ratios such as 100% loans. We intend to monitor this activity carefully and will continue to place emphasis on the credit quality of our insurance written.

     Bulk insurance is a term that describes Primary and supplemental mortgage insurance written for a large package of loans that are then securitized in the secondary market. Mortgage insurance provides loss protection to the issuer and thus increases the credit rating and pricing of the securitization. Primary bulk NIW increased $1.3 billion and $2.6 billion, respectively, for the second quarter and first six months of 2007. Most of the Primary NIW

booked for the quarter came from carryover transactions from the first quarter, or business placed under existing forward contracts.

     We write Modified Pool insurance only through our structured bulk channel. Structured bulk transactions for the entire industry increased approximately 21% and 5%, respectively, during the second quarter and first six months of 2007 according to information available from Mortgage Insurance Companies of America (“MICA”) and other publicly available data. As noted above, approximately $1.7 billion and $3.0 billion, respectively, of structured bulk transactions during the second quarter and first six months of 2007 were classified as Primary. Structured bulk transactions, which include both Primary and Modified Pool is likely to vary significantly from period to period due to: a) the limited number of transactions (but with larger size) occurring in this market, b) the level of competition from other mortgage insurers, c) the relative attractiveness in the marketplace of mortgage insurance versus other forms of credit enhancement, and d) the changing loan composition and underwriting criteria of the market. During the second quarter of 2007, we viewed the structured bulk market as unsettled, with a wide variety of product and a lack of clear direction in spreads and pricing. In this environment, we chose to stay on the sidelines and much of the reported Modified Pool NIW from the bulk channel was the result of carryover transactions. Approximately 18% and 35%, respectively, of our insurance written attributable to our structured bulk channel during the second quarter and first six months of 2007 was structured with deductibles that put us in the second loss position compared to 43% for both the second quarter and the first six months of 2006.

     The following table provides estimates of our national market share of net new insurance written, using industry definitions, through our flow and structured bulk channels based on information available from MICA and other public sources for the three months and six months ended June 30, 2007 and 2006:

Market Share by Channel

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Flow channel			6.9	%			5.7	%			7.8	%			5.5	%
Structured bulk channel			12.3	%			15.3	%			12.7	%			16.1	%
Total			8.3	%			8.8	%			9.2	%			9.4	%

     Our total market share declined slightly in the second quarter and for the first six months of 2007 due mostly to our decision to wait out some of the uncertainties in the structured bulk market. As mentioned earlier, our structured bulk market share will vary from period to period since this market can have significantly larger transactions and our share of this market is dependent on the availability of transactions that meet our credit quality and pricing benchmarks and on our ability to bid successfully to provide insurance on these transactions. Our flow market share increased in the second quarter and for the first six months of 2007 due mostly to two specific lender-paid programs that will not be continued in the second half of 2007.

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

Credit Quality of Primary NIW

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Prime			62.0	%			65.5	%			59.6	%			69.3	%
Alt-A			34.2				32.3				37.5				28.5
A-Minus			3.4				1.9				2.6				1.9
Sub Prime			0.4				0.3				0.3				0.3
Total			100.0	%			100.0	%			100.0	%			100.0	%

     The changes in the percentage makeup of the credit quality of Primary NIW for the second quarter and first six months of 2007 are partially reflective of the impact of the structured bulk transactions classified as Primary NIW. Bulk transactions are classified as either prime, Alt-A or sub prime.

     The following table summarizes the loan type characteristics of our Primary new insurance written during the second quarter and the first six months of 2007 and 2006. The increase in loans with fixed rates for the second quarter is reflective of the general marketplace as many borrowers have refinanced ARM products to more stable fixed loan products.

Loan Type of Primary NIW

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Fixed			61.9	%			54.1	%			55.0	%			59.4	%
ARM (positive amortization)			21.3				11.9				22.6				13.6
ARM (potential negative amortization)			16.8				34.0				22.4				27.0
Total			100.0	%			100.0	%			100.0	%			100.0	%

     ARMs with the potential for negative amortization declined significantly in the second quarter of 2007 reflecting a trend in the overall marketplace. Our year-to-date production has been limited to a few lenders where we believe we have a good understanding of both their product and their underwriting guidelines. An inherent risk in this product is the scheduled milestone in which the borrower must begin making amortizing payments. These payments can be substantially greater than the existing minimum payments currently required. Many of these loans do not have scheduled payment increases until 2008 or 2009, so the borrower has not been required to make an increased payment or to refinance, adding uncertainty and potential risk to this product. However, we are aware of the risks of concentration in this product and we have limits on the amount of potentially negative amortizing ARMs that we will accept.

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

Loan to Value of Primary NIW

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Greater than 95%			36.1	%			12.2	%			31.6	%			11.4	%
90.01% to 95.00%			23.3				22.0				23.5				23.2
90.00% and below			40.6				65.8				44.9				65.4
Total			100.0	%			100.0	%			100.0	%			100.0	%

     The above table indicates an increase in the Primary production of NIW on loans with LTV greater than 95%. These loans are coming from both the flow and bulk channels. As mentioned earlier, many of the greater than 95% loans are the result of the change from lenders preferring “piggyback” or simultaneous second mortgages to a loan product that has the higher LTV ratio. This has produced an increase in risk that we will continue to monitor. We are committed to supporting our customers in their lending efforts but want to ensure sound underwriting and appropriate pricing of product for the risks that we assume.

     The majority of our Modified Pool production has been in the Alt-A marketplace over the last two years. LTVs on policies originated in the structured bulk channel are generally lower than those on policies we receive via the flow channel. Those structures generally include loans that have other Primary coverage in front of our risk or loans that are written with a LTV lower than 80%. As shown in the summary of NIW table, Modified Pool production for the second quarter of 2007 declined 53% as compared to the second quarter of 2006, and declined 56% for the first six months of 2007 as compared to the first six months of 2006 as we wait for more clarity on pricing.

     The following table provides detail on our direct insurance in force at June 30, 2007 and 2006:

		June 30,
(dollars in millions)		2007				2006				% Change
Primary insurance		$	42,724			$	30,783				39	%
Modified pool insurance			23,649				20,022				18
Total insurance		$	66,373			$	50,805				31	%

     Our Primary insurance in force at June 30, 2007 grew from June 30, 2006 as a result of increased production and improved persistency rates. Primary insurance persistency improved to 77.7% at June 30, 2007 compared to 72.7% at June 30, 2006. We anticipate that persistency rates will continue near current levels or increase moderately throughout the remainder of 2007 due to current housing market weakness and the relative flatness of the yield curve. However, persistency may be adversely affected if interest rates decline significantly from the levels experienced during the first half of 2007. Over the past year, we have experienced a significant amount of growth in Primary direct insurance in force, partially the result of the structured bulk production. Of the $42.7 billion of Primary insurance in force at June 30, 2007, approximately $4.1 billion is attributable to structured bulk transactions compared to only $700 million a year ago.

     Similar to the trend in NIW discussed above, Alt-A continues to grow as a percentage of our Primary insurance in force and continues to comprise the majority of our Modified Pool insurance in force. Because Alt-A loans lack the full documentation required in Prime loans, these present a greater risk than fully documented loans. The following table shows the percentage of our insurance in force that we have classified as Alt-A at June 30, 2007 and 2006:

		June 30,
		2007				2006
Primary insurance in force			21.5	%			12.3	%
Modified Pool insurance in force			71.5	%			68.0	%
Total insurance in force			39.3	%			34.3	%

     The following tables provide information on selected slices of our business based on risk in force at June 30, 2007 and 2006. Indicators of possible increased risk which could be also characterized as non-traditional mortgages would include the following:

	•		A decline in the percentage of business with prime credit quality
	•		An increase in the percentage of Alt-A business
	•		An increase in Primary LTV greater than 95%
	•		An increase in potential negative amortization loan types
	•		An increase in condominium property types
	•		A decline in Primary residence occupancy status
	•		A growing percentage of loans in excess of $250,000

Risk in Force ⁽¹⁾

		Primary								Modified Pool
		June 30,								June 30,
(dollars in millions)		2007				2006				2007				2006
Direct Risk in Force		$	11,128			$	7,741			$	935			$	764
Net Risk In Force			10,239				6,966				818				674
Credit Quality:
Prime			73.6	%			82.6	%			29.6	%			32.1	%
Alt-A			22.8				12.8				69.6				66.7
A-Minus			3.1				3.9				0.7				1.0
Sub Prime			0.5				0.7				0.1				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
LTV:
Greater than 95%			23.2	%			14.7	%			—	%			—	%
90.01% to 95.00%			70.8				78.8				0.9				1.1
90.00% and below			6.0				6.5				99.1				98.9
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan Type:
Fixed			65.4	%			72.6	%			26.8	%			35.5	%
ARM (positive amortization)			20.3				19.8				60.2				58.7
ARM (potential negative amortization)			14.3				7.6				13.0				5.8
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property Type:
Condominium			10.3	%			8.7	%			9.3	%			7.2	%
Other (principally single-family detached)			89.7				91.3				90.7				92.8
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy Status:
Primary residence			87.6	%			90.3	%			73.7	%			73.9	%
Secondary home			7.9				6.2				6.2				5.9
Non-owner occupied			4.5				3.5				20.1				20.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Amount:
$0 - $50,000			0.9	%			1.3	%			0.5	%			0.5	%
$51,000 - $100,000			10.4				15.0				5.4				6.8
$100,001 - $250,000			52.7				61.0				45.8				51.1
$250,001 - $500,000			29.9				20.5				41.8				39.0
Over $500,000			6.1				2.2				6.5				2.6
Total			100.0	%			100.0	%			100.0	%			100.0	%

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

for which we are providing coverage. Loans over $250,000 totaled 36.0% of total Primary risk in force at June 30, 2007 compared to 22.7% at June 30, 2006. Loans over $250,000 also totaled 48.3% of total Modified Pool risk in force at June 30, 2007 compared to 41.6% at June 30, 2006. In addition, the increase in loans with LTV’s greater than 95% has increased our risk as our experience with these products is that they have historically produced higher default rates.

     Due to the recent significant growth in our production and the amount of refinancing that took place in 2002 through 2005 that caused much of our earlier vintage years to lapse, our insurance portfolio remains relatively unseasoned, having a weighted average life of 2.2 years at June 30, 2007 compared to 2.3 years at December 31, 2006 and 2.4 years at December 31, 2005. The following table shows direct risk in force as of June 30, 2007 by year of loan origination.

		Primary								Modified Pool *
		June 30, 2007								June 30, 2007
		Direct Risk								Direct Risk
(dollars in millions)		in Force				Percent				in Force				Percent
2002 and before		$	756.6				6.8	%		$	46.6				5.7	%
2003			1,302.0				11.7				113.7				13.9
2004			1,257.5				11.3				139.1				17.0
2005			1,802.8				16.2				229.9				28.1
2006			2,893.3				26.0				260.1				31.8
2007			3,115.9				28.0				28.6				3.5
Total		$	11,128.1				100.0	%		$	818.0				100.0	%

     We also offer mortgage insurance structures designed to allow lenders to share in the risks of such insurance. One such structure is our captive reinsurance program under which reinsurance companies that are affiliates of the lenders assume a portion of the risk associated with the lender’s insured book of business in exchange for a percentage of the premium. The following table shows the percentage of our Primary flow channel insurance in force as well as the percentage of our total insurance in force that was subject to captive reinsurance arrangements at June 30, 2007 and 2006.

		June 30,
		2007				2006
Primary flow insurance in force			51.4	%			62.7	%
Total insurance in force			33.0	%			37.1	%

     The decline of the Primary flow insurance in force that was subject to captive reinsurance arrangements at June 30, 2007 over June 30, 2006 was the result of a switch by some of our larger lender partners to lender paid products that do not qualify for captive participation. The decline in the total direct insurance in force subject to captive reinsurance at June 30, 2007 from June 30, 2006 also reflects the fact that a greater portion of our insurance in force consists of Modified Pool insurance in force, which is written through the structured bulk channel and is not subject to captive reinsurance arrangements.

     We believe captive reinsurance arrangements are an effective risk management tool as selected lenders share in the risk under these arrangements. Additionally, captive reinsurance arrangements are structured so that Triad receives credit against the capital required in certain risk-based capital models utilized by rating agencies. We remain committed to structuring captive reinsurance arrangements, including deep ceded arrangements where

the net premium cede rate is greater than 25%, on a lender-by-lender basis as we deem it to be prudent. We will continue to be an active participant with our lender partners in captive reinsurance arrangements.

  Revenues

     A summary of the significant individual components of our revenue for the second quarter and the first six months of 2007 and 2006 follows:

		Three Months Ended													Six Months Ended
		June 30,													June 30,
(dollars in thousands)		2007				2006				% Change					2007				2006				% Change
Direct premium written		$	83,153			$	60,961				36	%			$	161,561			$	120,273				34	%
Ceded premium written			(12,988	)			(11,603	)			12					(25,689	)			(22,573	)			14
Net premium written			70,165				49,358				42					135,872				97,700				39
Change in unearned premiums			(433	)			1,309				(133	)				(2,192	)			857				(356	)
Earned premiums		$	69,732			$	50,667				38	%			$	133,680			$	98,557				36	%
Net investment income		$	7,673			$	6,535				17	%			$	15,022			$	12,757				18	%
Total revenues		$	73,540			$	57,979				27	%			$	145,601			$	112,989				29	%

     Our direct premium written for the second quarter and first six months of 2007 grew substantially over that of 2006 as a result of increased insurance in force over the past year and the increased average basis points earned due to the change in the risk characteristics of our portfolio discussed earlier in the section titled “Consolidated Results of Operations”. The announcement by AHM to seek bankruptcy protection is not expected to have a significant impact on premium income in the near term as the insurance in force would not be anticipated to drop substantially. Total overall annual persistency was 78.2% at June 30, 2007 compared to 72.1% at June 30, 2006.

     Ceded premium written is comprised of premiums written under excess of loss reinsurance treaties with captive as well as non-captive reinsurance companies. The growth in ceded premium written in the second quarter and the first six months of 2007 over the same periods of 2006 was not as large as the growth in direct premium written as a result of a larger percentage of direct premiums written not subject to captive reinsurance arrangements. The following table provides further data on ceded premiums for the three months and six months ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Premium cede rate (ceded premiums written as a percentage of direct premiums written)			15.6	%			19.0	%			15.9	%			18.8	%
Captive reinsurance premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written)			15.0	%			17.8	%			15.3	%			17.5	%
Average captive premium cede rate (ceded premiums written under captive reinsurance arrangements as a percentage of direct premiums written under captive reinsurance arrangements)			36.1	%			36.7	%			36.2	%			36.9	%

     The table below provides data on insurance written that was subject to captive reinsurance arrangements for the three months and six months ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Primary insurance in force			34.3	%			53.2	%			31.4	%			54.0	%
Total insurance in force			21.3	%			26.5	%			18.8	%			21.2	%

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

     The difference between net written premiums and earned premiums is the change in the unearned premium reserve, which is established primarily on premiums received on annual products. One of the most actively utilized lender paid programs during the first half of 2007 included annual premiums, which was responsible for most of the increase in unearned premium during the second quarter and first six months of 2007. Our unearned premium liability for June 30, 2007 increased $2.3 million from December 31, 2006 compared to a decrease of $0.9 million from December 31, 2005 to June 30, 2006.

     Net investment income increased for the second quarter and the first six months of 2007 as compared to the same time periods in 2006, due primarily to growth in invested assets, partially offset by declines in portfolio yields. Average invested assets at cost or amortized cost for the second quarter of 2007 grew by 18.3% over the second quarter of 2006 and grew 14.7% year-to-date compared to the first six months of 2006 as a result of the investment of cash flows from operations for the past year. Our investment portfolio tax-equivalent yield was 6.58% at June 30, 2007 compared to 6.73% at June 30, 2006. We anticipate a continuing decline in the overall

portfolio tax-equivalent yield as current interest rates are still below our average portfolio rate. See further discussion of the Investment Portfolio section of this document.

     Losses and Expenses

          A summary of the individual components of losses and expenses for the three months and six months ended June 30, 2007 and 2006 follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
(dollars in thousands)		2007				2006				% Change				2007				2006				% Change
Net losses and loss adjustment expenses		$	41,893			$	17,271				143	%		$	74,474			$	33,622				122	%
Amortization of deferred policy acquisition costs		$	4,670			$	4,118				13			$	9,293			$	7,980				16
Other operating expenses (net of acquisition costs deferred)		$	10,716			$	8,496				26			$	21,047			$	17,009				24
Loss ratio			60.1				34.1	%			76				55.7				34.1	%			63
Expense ratio			21.9				25.6	%			(14	)			22.3				25.6	%			(13	)
Combined ratio			82.0				59.7	%			37				78.0				59.7	%			31

          Net losses and loss adjustment expenses (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 2007 increased significantly over the same time periods of 2006 primarily due to an increase in reserves. The reserve increase reflected both an increase in the number of loans in default as well as an increase in the average risk per loan on the loans that were in default at June 30, 2007. The growth in reserves is a result of the continued seasoning of our portfolio, a change in the make up of our default inventory and the decline in the housing market in general. We will focus separately on paid claims and the increase in reserves.

          The following table provides detail on paid claims for our Primary and Modified Pool insurance for the three months and six months ended June 30, 2007 and 2006:

		Three Months Ended													Six Months Ended
		June 30,													June 30,
(dollars in thousands)		2007				2006				% Change					2007				2006				% Change
Paid claims:
Primary insurance		$	16,687			$	13,501				24	%			$	33,134			$	26,806				24	%
Modified Pool insurance			1,386				930				49					2,667				2,008				33
Total		$	18,073			$	14,431								$	35,801			$	28,814
Number of claims paid:
Primary insurance			540				523				3					1,066				1,029				4
Modified Pool insurance			52				48				8					106				115				(8	)
Total			592				571				4					1,172				1,144				2

          Average severity remained relatively flat during the first three quarters of 2006, but increased significantly in the fourth quarter of 2006 and again in the first quarter of 2007, primarily the result of growth in the amount of risk in force on paid claims arising from increased loan size. For the three months ended June 20, 2007 average severity remained stable with the prior quarter as the majority of the paid claims continued to be from policy years 2005 and earlier, and these insured loans have lower average balances than loans insured subsequent to 2005. Loans from the 2006 and subsequent policy years will make up a larger percentage of paid claims going forward

and we expect average severity to increase in future quarters. The following table shows the average quarterly severity of paid claims during 2006 and 2007:

		Three Months Ended
		June 30,				March 31,				December 31,				September 30,				June 30,				March 31,
(dollars in thousands)		2007				2007				2006				2006				2006				2006
Average severity:
Primary insurance		$	30.9			$	31.3			$	28.1			$	25.7			$	25.8			$	26.3
Modified Pool insurance			26.6				23.7				26.2				18.8				19.4				16.1
Total			30.5				30.6				27.9				25.3				25.3				25.1

     Beginning in late 2006, we experienced a significant reduction in our ability to mitigate claims through our traditional processes, which we believe was related to weakness in the housing market. In many 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 after foreclosure but prior to when the claim is paid, we often pay the full amount of our coverage, which we call a full option settlement. In the fourth quarter of 2006 and continuing into the first quarter of 2007, full option settlements represented a greater percentage of our paid claims than in the prior sequential quarters. The lack of mitigation opportunities contributed to the increase in severity for the fourth quarter of 2006 and the first quarter of 2007. However, mitigation efforts were more positive in the second quarter of 2007.

     As shown in the “Production and In Force” section previously, we are insuring a larger percentage of mortgages in excess of $250,000 which generally equates to a larger insured risk. Claim payments and reserves on defaults of these larger mortgages are generally larger even if coverage percentages remain constant. The following table shows the average loan size and risk in force per policy 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 is expected to increase.

		Primary								Modified Pool
		Average				Average				Average				Average
		Loan Size				Insured Risk				Loan Size				Insured Risk
Vintage Year
2002 and Prior		$	107,236			$	27,004			$	81,506			$	26,481
2003			121,206				28,990				147,545				43,477
2004			133,841				35,197				152,566				45,260
2005			157,866				40,798				179,369				58,263
2006			207,779				53,623				259,136				69,156
2007			219,833				60,581				270,177				78,889
Overall Average		$	165,491			$	43,105			$	207,951			$	60,851