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, 2007

OR

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

For the transition period from                      to                     

Commission file number: 0-22342

Triad Guaranty Inc.

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

(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. (Check one):

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 Exchange Act). Yes o No þ

Number of shares of Common Stock, par value $0.01 per share, outstanding as of November 2, 2007, was 14,920,269.

 

 

TRIAD GUARANTY INC.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006			1
Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2007 and 2006 (Unaudited)			2
Consolidated Statements of Cash Flows for the Nine Months Ended September 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			36
Item 4. Controls and Procedures			36
Part II. Other Information
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 6. Exhibits			38
SIGNATURE			39
EXHIBIT INDEX			40
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIAD GUARANTY INC.

		September 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: $701,264 and $568,992)		$	711,918			$	586,594
Equity securities (cost: $3,494 and $9,530)			3,483				10,417
Other investments			—				5,000
Short-term investments			78,972				5,301
Total Invested assets			794,373				607,312
Cash and cash equivalents			30,617				38,609
Real estate acquired in claim settlement			12,566				10,170
Accrued investment income			9,373				8,054
Deferred policy acquisition costs			35,574				35,143
Prepaid federal income taxes			168,817				166,908
Property and equipment			10,574				7,678
Other assets			34,779				21,757
Total assets		$	1,096,673			$	895,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expenses		$	200,455			$	84,352
Unearned premiums			15,980				13,193
Amounts payable to reinsurers			6,373				5,909
Deferred income taxes			170,477				176,483
Revolving line of credit			80,000				—
Long-term debt			34,517				34,510
Accrued interest on debt			1,051				1,275
Accrued expenses and other liabilities			16,350				9,685
Total liabilities			525,203				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 14,920,269 shares at September 30, 2007 and 14,856,401 shares at December 31, 2006			149				149
Additional paid-in capital			108,654				104,981
Accumulated other comprehensive income, net of income tax liability of $3,725 at September 30, 2007 and $6,471 at December 31, 2006			12,091				12,018
Retained earnings			450,576				453,076
Total stockholders’ equity			571,470				570,224
Total liabilities and stockholders’ equity		$	1,096,673			$	895,631

See accompanying notes.

TRIAD GUARANTY INC.

(unaudited)              

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands, except per share data)		2007				2006				2007				2006
Revenue:
Premiums written:
Direct		$	86,946			$	65,828			$	248,507			$	186,101
Ceded			(14,391	)			(11,925	)			(40,081	)			(34,498	)
Net premiums written			72,555				53,903				208,426				151,603
Change in unearned premiums			(465	)			174				(2,656	)			1,031
Earned premiums			72,090				54,077				205,770				152,634
Net investment income			8,370				6,761				23,392				19,518
Net realized investment gains (losses)			85				(36	)			(3,020	)			1,636
Other income			2				3				6				6
			80,547				60,805				226,148				173,794
Losses and expenses:
Net losses and loss adjustment expenses			106,813				19,305				181,287				52,927
Interest expense on debt			1,161				693				2,548				2,080
Amortization of deferred policy acquisition costs			4,567				4,109				13,860				12,089
Other operating expenses (net of acquisition costs deferred)			11,686				9,279				32,733				26,288
			124,227				33,386				230,428				93,384
(Loss) income before income taxes (benefit)			(43,680	)			27,419				(4,280	)			80,410
Income taxes (benefit):
Current			(2,057	)			979				1,468				2,930
Deferred			(9,774	)			7,048				(3,248	)			19,948
			(11,831	)			8,027				(1,780	)			22,878
Net (loss) income		$	(31,849	)		$	19,392			$	(2,500	)		$	57,532
(Loss) earnings per common and common equivalent share:
Basic		$	(2.15	)		$	1.31			$	(0.17	)		$	3.90
Diluted		$	(2.15	)		$	1.30			$	(0.17	)		$	3.86
Shares used in computing (loss) earnings per common and common equivalent share:
Basic			14,838,124				14,774,781				14,827,534				14,767,556
Diluted			14,838,124				14,923,102				14,827,534				14,899,940

See accompanying notes.

TRIAD GUARANTY INC.

		Nine Months Ended
		September 30,
(dollars in thousands)		2007				2006
Operating activities
Net (loss) income		$	(2,500	)		$	57,532
Adjustments to reconcile net income to net cash provided by operating activities:
Losses, loss adjustment expenses and unearned premium reserves			118,890				8,012
Accrued expenses and other liabilities			6,665				(150	)
Amounts due to reinsurer			464				1,028
Accrued investment income			(1,319	)			(458	)
Policy acquisition costs deferred			(14,291	)			(13,086	)
Amortization of deferred policy acquisition costs			13,860				12,089
Net realized investment losses (gains)			3,020				(1,636	)
Provision for depreciation			1,740				1,879
Accretion of discount on investments			526				49
Deferred income taxes			(3,248	)			19,948
Prepaid federal income taxes			(1,909	)			(19,803	)
Real estate acquired in claim settlement, net of write-downs			(2,396	)			(2,261	)
Accrued interest on debt			(224	)			(691	)
Other assets			(13,022	)			(2,489	)
Other operating activities			2,904				2,687
Net cash provided by operating activities			109,160				62,650
Investing activities
Securities available-for-sale:
Purchases — fixed maturities			(237,994	)			(125,797	)
Sales — fixed maturities			104,401				69,280
Maturities — fixed maturities			1,500				3,020
Purchases — equities			(55	)			(4,772	)
Sales — equities			7,338				3,131
Purchases of other investments			—				(5,000	)
Net change in short-term investments			(73,671	)			(1,227	)
Purchases of property and equipment			(4,636	)			(1,894	)
Net cash used in investing activities			(203,117	)			(63,259	)
Financing activities
Borrowings on revolving line of credit, net			80,000				—
Excess tax benefits from share-based compensation			175				280
Proceeds from exercise of stock options			616				625
Net cash provided by financing activities			80,791				905
Foreign currency translation adjustment			5,174				—
Net change in cash and cash equivalents			(7,992	)			296
Cash and cash equivalents at beginning of period			38,609				8,934
Cash and cash equivalents at end of period		$	30,617			$	9,230
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty Tax and Loss Bonds		$	11,501			$	24,438
Interest			2,765				2,765

See accompanying notes.

TRIAD GUARANTY INC.

September 30, 2007
(Unaudited)

1. The Company

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

2. Accounting Policies And Basis Of Presentation

     Basis of Presentation

          The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 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 and quarterly reports on Form 10-Q filed during calendar year 2007.

     Income Taxes

          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. 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.

     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 this 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 stockholders’ equity.

Recent Accounting Pronouncements

          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 accordance with generally accepted accounting principles, and expands the required disclosures about fair value measurements. SFAS 157 will be 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 will be effective for the Company beginning January 1, 2008. The Company does not expect to adopt the fair value option for reporting financial assets and liabilities in accordance with SFAS 159.

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 from reinsurers. Triad evaluates the financial condition of its reinsurers and monitors credit risk arising from similar geographic regions, activities, or economic characteristics of its reinsurers to minimize its exposure to significant losses from reinsurer insolvency.

     Insurance In Force, Dividend Restrictions, and Statutory Results

          Insurance regulations generally limit the writing of mortgage guaranty insurance to an aggregate amount of insured risk no greater than 25 times the total of statutory capital and surplus and the statutory contingency reserve. The amount of net risk for insurance in force at September 30, 2007, December 31, 2006 and September 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:

		September 30,				December 31,				September 30,
(dollars in thousands)		2007				2006				2006
Net risk		$	11,741,160			$	8,612,912			$	8,065,064
Statutory capital and surplus		$	33,883			$	168,439			$	157,934
Statutory contingency reserve			626,182				521,836				515,957
Total		$	660,066			$	690,275			$	673,891
Risk-to-capital ratio		17.8 to 1					12.5 to 1				12.0 to 1

          In addition, Triad and its wholly-owned subsidiaries are each required under its respective domiciliary state’s insurance code to maintain a minimum level of statutory capital and surplus, regardless of the amount of mortgage guaranty insurance written. 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 $1.7 million and $79.5 million for the nine months ended September 30, 2007 and 2006, respectively, and $88.3 million for the year ended December 31, 2006.

          The amount of Triad’s equity that can be paid out in dividends to the Company is equal to the amount of earned surplus on a statutory basis. Earned (deficit) surplus was $(49.8) million and $84.7 million at September 30, 2007 and December 31, 2006, respectively. 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 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. 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 Triad in January 2004 in the U.S. District Court for the Western District of Kentucky, Bowling Green Division, by Sally Broessel, on behalf of herself and all others similarly situated, alleging violations of the Fair Credit Reporting Act. An agreement to settle the lawsuit was reached on October 26, 2007 through mediation for an immaterial amount, subject to final court approval.

          On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. filed a complaint against Triad Guaranty Insurance Corp. in the U.S. Bankruptcy Court for the District of Delaware. The plaintiffs are debtors and debtors in possession in Chapter 11 cases pending in the U.S. Bankruptcy Court. The lawsuit is an action for breach of contract and declaratory judgment. The basis for the complaint’s breach of contract action is the cancellation by us of our certification of American Home Mortgage’s coverage on 14 loans due to irregularities that we allegedly uncovered following the submission of claims for payment and that existed when American Home Mortgage originated the loans. The complaint alleges that our actions caused American Home Mortgage to suffer a combined net loss of not less than $1,132,105.51 and seeks monetary damages and a declaratory judgment. We expect to rescind additional loans originated by American Home Mortgage and we intend to contest the lawsuit vigorously.

     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. Under the credit agreement, the Company must maintain a minimum adjusted consolidated net worth level of $410.0 million at September 30, 2007, and must 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 September 30, 2007, the Company was in compliance with all such covenants and had drawn down $80 million under the facility, all of which remained outstanding.

5. (Loss) Earnings Per Share (“EPS”)

          Basic and diluted EPS are based on the weighted-average daily number of shares outstanding. For the quarter and the nine months ended September 30, 2007, the basic and diluted EPS denominator are the same weighted-average daily number of shares outstanding. In computing diluted EPS, only potential common shares that are dilutive – those that reduce earnings per share or increase loss per share – are included. Exercise of options and unvested restricted stock are not assumed if the result would be antidilutive, such as when a loss from operations is reported. For the quarter and nine months ended September 30, 2006, the denominator includes the dilutive effect of stock options and unvested restricted stock on the weighted-average shares outstanding. The numerator used in basic EPS and diluted EPS is the same for all periods presented.

6. Comprehensive (Loss) Income

          Comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income. For the Company, other comprehensive (loss) 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 September 30, 2007 and 2006, the Company’s comprehensive (loss) income was ($24.3) million and $28.9 million, respectively. For the nine months ended September 30, 2007 and 2006, the Company’s comprehensive (loss) income was ($2.4) million and $58.3 million, respectively.

7. Income Taxes

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

8. Long-Term Stock Incentive Plan

          In May 2006, the Company’s stockholders 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, phantom stock rights and other equity awards 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 September 30, 2007, 1,585,769 shares were reserved and 940,572 shares were available for issuance under the Plan. Gross compensation expense of approximately $1.1 million along with the related tax benefit of approximately $389,000 was recognized in the financial statements for the three months ended September 30, 2007, as compared to gross compensation expense of approximately $908,000 and the related tax benefit of approximately $317,000 for the three months ended September 30, 2006. For the nine months ended September 30, 2007 and 2006, approximately $475,000 and $421,000, respectively, of share-based compensation was capitalized as part of deferred acquisition costs.

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

						Weighted-				Aggregate				Weighted-Average
		Number of				Average				Intrinsic				Remaining
(dollars in thousands)		Shares				Exercise Price				Value				Contractual Term
Outstanding, January 1, 2007			564,712			$	38.36
Granted			107,190				43.56
Exercised			22,937				26.87
Cancelled			3,768				45.06
Outstanding, September 30, 2007			645,197				39.60			$	15				4.8 years
Exercisable, September 30, 2007			465,855				38.20			$	15				3.3 years

          The fair value of stock options is estimated on the date of grant using a Black-Scholes pricing model. The weighted-average assumptions used for options granted during the nine months ended September 30, 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.

		September 30,				September 30,
		2007				2006
Expected volatility			31.7	%			34.0	%
Expected dividend yield			0.0	%			0.0	%
Expected term			5.0	years			5.0	years
Risk-free rate			4.5	%			4.5	%

          The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2007 and 2006 was $15.74 and $16.28, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was approximately $470,000 and $839,000, respectively.

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

						Weighted-
		Number of				Average Grant-
		Shares				Date Fair Value
Outstanding, January 1, 2007			113,941			$	46.41
Granted			49,202				43.72
Exercised			37,151				50.31
Cancelled			8,271				47.32
Outstanding, September 30, 2007			117,721				43.99

          The fair value of restricted stock is determined based on the closing price of the Company’s shares on the grant date. The weighted-average grant-date fair value of restricted stock granted during the nine months ended September 30, 2007 and 2006 was $43.72 and $45.50, respectively.

          As of September 30, 2007, there was $5.3 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 1.6 years. The total fair value of stock options and restricted stock vested during the nine months ended September 30, 2007 and 2006 was $3.9 million and $1.7 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 Company’s consolidated financial condition, changes in financial position, and results of operations for the three months and nine months ended September 30, 2007 and 2006. 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 and in our quarterly reports on Form 10-Q filed during calendar year 2007.

          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 financial, economic, competitive, and legislative developments. These forward-looking statements are subject to change and uncertainty due to factors that 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 but not limited to the possibility of general economic and business conditions that are different than anticipated, legislative developments, changes in interest rates or the stock markets, and 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 in this report. Additional risk factors are also described in Part II, Item 1A, “Risk Factors” of this report.

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 provide Modified Pool mortgage guaranty insurance to lenders and investors who seek additional default protection (typically secondary coverage or with respect to loans for which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement on groups of loans that are sold in the secondary market. These transactions are referred to as our structured bulk channel business. All of our Modified Pool insurance is delivered through the structured bulk channel, while approximately 16% of our Primary insurance was delivered through the structured bulk channel for the quarter ended September 30, 2007. We do not expect a significant amount of production of Modified Pool business or any further production of Primary Bulk business from the structured bulk channel for the foreseeable future.

          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.

          Persistency is an important metric in understanding our premium revenue. The longer a policy remains on our books, or “persists”, the greater the amount of revenue that we will derive from the policy from renewal premiums. We define persistency as the amount of insurance in force at the 12-month end of a financial reporting period as a percentage of the amount of insurance in force at the beginning of the period. Cancellations of policies originated during the past twelve months are not considered in our calculation of persistency. This method of calculating persistency may vary from that of other mortgage insurers. We believe that our calculation presents an accurate measure of the percentage of insurance in force remaining at the end of the 12-month measurement period. Cancellations result primarily from the borrower refinancing or selling insured mortgaged residential properties and, to a lesser degree, from the borrower achieving prescribed equity levels, at which point the lender no longer requires mortgage guaranty insurance.

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

          See “Update on Critical Accounting Policies and Estimates” and “Consolidated Results of Operations” below for a discussion of recent developments in the mortgage industry that have had a material adverse effect on our business and the operations of mortgage insurers in general.

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 (“LAE”), determining if declines in fair values of investments are other than temporary, and establishing appropriate initial amortization schedules for deferred policy acquisition costs (“DAC”) and subsequent adjustments to that amortization.

          We believe that these continue to be the critical accounting policies applicable to the Company and that these policies were applied in a consistent manner during the first nine months of 2007. In our annual report on Form 10-K, we provided a sensitivity analysis of the impact that a 10% increase or decrease in the frequency or severity factors utilized in our reserve model would have on our pre-tax income. 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. We raised the frequency factor by approximately 5% during the first quarter of 2007 and marginally in the second quarter. The rapidly changing housing market, especially in the third quarter of 2007, has rendered estimates regarding the frequency factor insufficient. In response to recent declines in home prices and general market events, and the resulting impact on cure rates and increased defaults, we increased the frequency factor by approximately 15% in the third quarter. We have increased the severity factor utilized in the loss reserve model for sensitivity analysis only slightly since December 31, 2006, following an increase of approximately 10% in the fourth quarter of 2006.

          The most significant assumptions utilized in setting the frequency factor are unemployment and home prices. Through September 30, 2007, we have not had any sudden large or prolonged increases in the unemployment rate. We believe that the frequency and severity factors are strongly correlated and that future economic events, such as a significant or sudden increase in the unemployment rate or continued declines in home prices, could further negatively impact both of these factors.

Consolidated Results of Operations

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

		Three Months Ended												Nine Months Ended
(dollars in thousands, except		September 30,												September 30,
per share data)		2007				2006				% Change				2007				2006				% Change
Earned premiums		$	72,090			$	54,077				33	%		$	205,770			$	152,634				35	%
Net losses and loss adjustment expenses			106,813				19,305				453				181,287				52,927				243
Net (loss) income			(31,849	)			19,392				(264	)			(2,500	)			57,532				(104	)
Diluted (loss) earnings per share		$	(2.15	)		$	1.30				(265	)		$	(0.17	)		$	3.86				(104	)

          The earnings per share denominator used in calculating diluted loss per share for the three months ended September 30, 2007 shown above excludes exercise of options and unvested restricted stock, which is appropriate when a loss from operations is being reported or the result would otherwise be antidilutive. The denominator used in calculating diluted loss per share as reported in our press release dated October 24, 2007 included exercise of options and unvested restricted stock and accordingly was $0.02 lower than shown above.

          A substantial increase in the reserve for losses and LAE in the third quarter drove our net loss for the third quarter. The increase in the reserves was precipitated by the growth in the number of reported loans in default, an increase in the frequency factor utilized in the reserve model dictated by a declining cure rate, and the change in the characteristics of the loans entering the default pool, with new defaults having substantially higher average risk per loan than a year ago. These factors have been especially evident in our (i) soft markets (California, Florida, Arizona and Nevada), (ii) Primary bulk business written in 2007, which is showing a significant amount of early payment defaults and has a significant amount of high LTV loans, and (iii) recent Modified Pool business, which also has exhibited a significant amount of early payment defaults. Notably, our soft market states had an average risk in default more than twice our national average at September 30, 2007. Approximately $43 million of the $78 million third quarter reserve increase was attributable to the soft market states. Further, our 2006 and 2007 vintage years contributed $59 million to the increased reserve, reflecting higher default rates and average loan amounts. Moreover, 58% of current defaults relate to business written less than 24 months ago, with 21% relating to business written in the last 12 months.

          Net losses and LAE for the quarter ended September 30, 2007 increased $87.5 million compared to the same period a year earlier. In the third quarter of 2007, we experienced a 62% increase over the third quarter of 2006 in the number of loans in default for which we provide a reserve, as well as a 43% increase in the average risk in default on those loans, which contributed to the significant increase in reserves. Year-to-date, total incurred losses increased $128.4 million compared to the first nine months of 2006. In addition to the substantial increase in reserves, there was also substantial growth of paid losses in both total dollars and the average paid loss severity. Paid losses of $28.5 million for the third quarter of 2007 were up $14.9 million, or 109%, compared to the quarter ended September 30, 2006. Average paid loss severity was $37,700 and $33,300, respectively, for the third quarter and the first nine months of 2007, compared to $25,300 and $25,200, respectively, for the comparable periods of 2006. The increase in average paid severity is primarily the result of a higher percentage of claims from the more recent vintage years, which reflect larger loan balances.

          Earned premiums for the third quarter and first nine months of 2007 grew significantly when compared to the same time periods of 2006, principally due to growth in Primary insurance in force. Increased persistency has more than offset both a slight sequential drop in New Insurance Written (“NIW”) and the growth in insurance in force during the third quarter of 2007 following three consecutive quarters of strong NIW growth.

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

Production

          The table below represents a summary of NIW for the third quarter and the first nine months of 2007 and 2006, broken out between Primary and Modified Pool:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in millions)		2007				2006				% Change				2007				2006				% Change
Primary insurance written:
Flow		$	3,720			$	2,844				31	%		$	13,181			$	7,350				79	%
Structured bulk			694				436				59				3,723				822				353
Total Primary insurance written		$	4,414			$	3,280				35			$	16,904			$	8,172				107
Modified Pool insurance written			—				2,956				(100	)			3,331				10,542				(68	)
Total insurance written		$	4,414			$	6,236				(29	)%		$	20,235			$	18,714				8	%

          According to estimates published by Fannie Mae, the overall mortgage loan origination market for the third quarter of 2007 declined approximately 20% from the third quarter of 2006, and approximately 7% for the first nine months of 2007 as compared to the first nine months of 2006. The housing market continued to slow throughout 2007, as evidenced by reduced sales of new and existing homes and near record high levels of unsold inventories in many markets. A significant contributor to the decline in mortgage originations in the third quarter was the liquidity crisis that developed in the secondary markets, which prevented many mortgage originators from selling their loans in the secondary markets. This development contributed to the failure of several large national lenders and has negatively altered the outlook for mortgage originations by almost all lenders for the remainder of 2007 and for the foreseeable future.

          Many lenders have significantly reduced their emphasis on simultaneous seconds or “piggyback” mortgage products, which has created an opportunity for increased penetration of mortgage insurance in loan originations. However, an increase in the number of high LTV loans, especially those greater than 95%, has offset these positive developments. These products present a higher level of risk as home values have declined, especially in the soft market areas where home values have declined at a more rapid pace. Evidence exists that important positive changes in the market are emerging, including the development of a more stringent and pragmatic underwriting environment. We remain cautious about loans with higher LTVs, and have further tightened our underwriting guidelines to help limit our exposure to them, especially in the soft markets that have experienced the greatest decline in home prices. We are reducing our dependence on certain significant customers and are expanding existing relationships with customers that we believe share our focus on quality. Our enhanced quality standards will cause us to forgo some volume opportunities. However, the reduced volume will enable us to marshal our capital against what we believe to be the most profitable opportunities.

          The increase in Primary NIW in the third quarter and first nine months of 2007 compared to the same periods of 2006 reflects the general increase in mortgage insurance penetration in the flow channel noted above. NIW in the flow channel increased $876 million and $5.8 billion, respectively, for the third quarter and first nine months of 2007 compared to the same periods in 2006. While there was an increase in Primary NIW for the nine months ended September 30, 2007, we believe it is unlikely that this trend will continue in the last quarter of 2007 for the reasons described below:

•

American Home Mortgage Corp. (“AHM”) was our single largest customer for the first six months of 2007, comprising 34% of our Primary flow production and contributing 26% of Primary NIW and 15% of Modified Pool NIW. AHM filed for protection under Chapter 11 of the U.S. Bankruptcy Code during the third quarter and, as a result, we received extremely limited production from AHM during the third quarter of 2007 and anticipate no further business from AHM. The AHM

bankruptcy, coupled with contractions in personnel and a reduction in estimated production for the reminder of 2007 by two of our other large lender customers due to the unsettled nature of the mortgage marketplace, negatively impacted production for the third quarter of 2007. We expect that we will see further reductions in production in the fourth quarter of 2007 and likely into 2008.

	•		We discontinued a special lender-paid program at the end of the second quarter that had been responsible for approximately $600 million of NIW per quarter for each of the first two quarters of 2007 and the last quarter of 2006.
	•		For the three month and nine month periods ended September 30, 2007, our exposure to loans with LTV of greater than 95% represented 37.4% and 33.1%, respectively, of Primary NIW. As noted above, we are reducing the risk in our portfolio through tightened underwriting guidelines and are limiting our exposure to loans with LTV of greater than 95%. Our renewed focus on quality through tightened underwriting guidelines has resulted, and we expect will continue to result, in the elimination of certain mortgage lenders with which we had historically done business.
	•		At September 30, 2007, our risk to capital ratio stood at 17.8-to-1 compared to 12.5-to-1 at December 31, 2006. The maximum risk to capital ratio permitted by most states is 25.0-to-1. In addition, we are subject to a maximum risk to capital ratio of 22.1-to-1 under our $80 million credit facility. Our risk to capital ratio has been increasing over the last several quarters, partially as the result of operating losses during the third quarter of 2007. In order to manage our risk to capital ratio in this environment, we are carefully monitoring the writing of new business and allocating our capital against what we believe to be the most promising opportunities. This allocation is expected to further limit the amount of future production.

          Bulk insurance is a term that describes Primary and supplemental mortgage insurance written for a large package of loans that is 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. In the Primary bulk channel, we booked $694 million of NIW during the quarter, ending a forward commitment created in the fourth quarter of 2006. We recorded $3.7 billion of NIW for the first nine months of 2007, much of which was attributable to the same forward contract entered into in 2006. Most of the loans contained in the forward contract were loans with LTVs greater than 95%. These loans represent the majority of the increase in greater than 95% LTV lending during the third quarter and the nine months ended September 30, 2007. We do not expect any further production in the Primary bulk channel for the foreseeable future.

          Structured bulk transactions, which include both Primary and Modified Pool, are likely to vary significantly from period to period due to (a) the limited number of transactions occurring in this market, (b) the larger size of such transactions compared with Primary insurance, (c) the level of competition from other mortgage insurers, (d) the relative attractiveness in the marketplace of mortgage insurance versus other forms of credit enhancement, and (e) the changing loan composition and underwriting criteria of the market. During the third quarter of 2007, we viewed the structured bulk market as unsettled, with a wide variety of products and a lack of clear direction in spreads and pricing. In this environment, we chose to decrease our participation in structured bulk transactions during the quarter ended September 30, 2007. We do not expect a significant amount of production of Modified Pool NIW for the foreseeable future.

          The following table provides estimates of our national market share of net NIW, using industry definitions, through our flow and structured bulk channels based on information available from Mortgage Insurance Companies of America (“MICA”) and other public sources for the three months and nine months ended September 30, 2007 and 2006, respectively:

               Market Share by Channel

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Flow channel			4.5	%			6.0	%			6.5	%			5.7	%
Structured bulk channel			4.9	%			17.5	%			10.9	%			16.5	%
Total			4.6	%			9.4	%			7.5	%			9.4	%

          Our total market share declined in the third quarter and for the first nine months of 2007 due primarily to our decision to stay out of the structured bulk market and, with respect to the first nine months of 2007, the variability of structured bulk transactions due to the factors described above. In addition, our flow market share declined in the third quarter due to the termination of two lender paid programs and the termination of production from AHM, our largest customer in this channel, which filed for bankruptcy protection during the third quarter.

          As part of our overall risk management, we monitor various risk characteristics in both our Primary and Modified Pool NIW. The following three tables detail certain risk characteristics - credit quality, loan type and LTV — of our Primary NIW during the respective periods.

          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 NIW production during the third quarter and the first nine months of 2007 and 2006:

               Credit Quality of Primary NIW

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Prime			75.3	%			66.5	%			63.7	%			68.2	%
Alt-A			20.4	%			31.2	%			33.0	%			29.6	%
A-Minus			3.8	%			2.0	%			2.9	%			2.0	%
Sub Prime			0.5	%			0.3	%			0.4	%			0.2	%
Total			100.0	%			100.0	%			100.0	%			100.0	%

          The changes in the percentage makeup of the credit quality of Primary NIW for the third quarter and first nine months of 2007 compared to the same periods of 2006 reflect in part the greater impact of the structured bulk transactions classified as Primary NIW.

          The following table summarizes the loan type characteristics of our Primary NIW production for the third quarter and the first nine months of 2007 and 2006. The increase in loans with fixed rates reflects the conversion of ARM products to more stable fixed loan products during the third quarter.

               Loan Type of Primary NIW

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Fixed			77.9	%			54.0	%			60.9	%			57.2	%
ARM (positive amortization)			17.1	%			19.1	%			21.2	%			15.8	%
ARM (potential negative amortization)			5.0	%			26.9	%			17.9	%			27.0	%
Total			100.0	%			100.0	%			100.0	%			100.0	%

          Adjustable rate mortgages that include a feature allowing for a Potential Negative Amortization Mortgage (“PNAM”) declined significantly in the third quarter of 2007. 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 minimum payments required for the first five years. While most of these PNAM loans have interest rates that will reset on an annual basis, these loans do not have scheduled payment increases until later years, so the borrower has not been required to make an increased payment or to refinance, adding uncertainty and potential risk to this product. We limited our exposure to PNAM loans by reducing the number of PNAM loans for which we provide insurance in the third quarter of 2007.

          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 third quarter and the first nine months of 2007 and 2006:

               Loan to Value of Primary NIW

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Greater than 95%			37.4	%			20.7	%			40.4	%			15.1	%
90.01% to 95.00%			23.1	%			23.3	%			28.7	%			23.3	%
90.00% and below			39.5	%			56.0	%			30.9	%			61.6	%
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. Many of the greater than 95% loans are the result of lenders turning away from “piggyback” or simultaneous second mortgages in favor of a loan product that has a higher LTV ratio. Although we began to limit production of the greater than 95% LTV loans from the flow channel during the third quarter, we do not expect to see the full impact of the reduced production of these types of loans until the fourth quarter of 2007 and into 2008. The majority of Primary bulk transactions that were included in 2007 NIW consisted of loans that were greater than 95% LTV, which impacted the overall Primary stratifications by LTV as shown above and were the result of the forward contract entered into in 2006 discussed earlier in this report.

          The risk characteristics of Modified Pool NIW are also monitored closely. Almost all of the recent Modified Pool NIW has been in the Alt-A credit quality classification over the last two years. The risk associated

with our Modified Pool NIW certificates differs from Primary NIW in that Modified Pool structures in which we participate generally include either loans that have Primary coverage by other insurers in front of our risk or loans that are originally written with a LTV lower than 80%. The 2006 and early 2007 structured bulk transactions that are classified as Modified Pool, while similar in many risk characteristics when compared to earlier years, have exhibited an earlier and greater default pattern in the early stages of development.

Insurance and Risk in Force

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

               Direct Insurance in Force

		September 30,
(dollars in millions)		2007				2006				% Change
Primary insurance:
Flow primary insurance		$	40,610			$	31,012				31	%
Structured bulk insurance			4,700				1,094				330
Total Primary insurance			45,310				32,106				41
Modified pool insurance			22,737				21,779				4
Total insurance		$	68,047			$	53,885				26	%

          Our Primary insurance in force at September 30, 2007 grew from September 30, 2006 as a result of strong production and improved persistency rates. Primary insurance persistency improved to 79.1% at September 30, 2007 compared to 75.3% at September 30, 2006. We anticipate that persistency rates will continue near current levels or increase moderately throughout the remainder of 2007 based upon the uncertainty surrounding the existing housing and mortgage markets. Over the past year, we have experienced a significant amount of growth in Primary direct insurance in force, which is due in part to an increase in structured bulk production. As noted above, we do not expect any further production in the Primary bulk line for the foreseeable future.

          The following tables provide information on selected risk characteristics of our business based on risk in force at September 30, 2007 and 2006. Risk in force is the total amount of coverage for which we are at risk under our certificates of insurance. The following is a list of indicators of increased risk that are present in our risk in force.

	•		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 PNAM loan types;
	•		An increase in condominium property types;
	•		A decline in Primary residence occupancy status; and
	•		A growing percentage of loans in excess of $500,000.

Risk in Force⁽¹⁾

		Primary								Modified Pool
		September 30,								September 30,
(dollars in millions)		2007				2006				2007				2006
Direct Risk in Force		$	11,871			$	8,128			$	922			$	837
Net Risk In Force			10,933				7,321				807				743
Credit Quality:
Prime			73.5	%			81.2	%			27.8	%			30.8	%
Alt-A			22.8				14.5				71.4				68.1
A-Minus			3.2				3.6				0.7				0.9
Sub Prime			0.5				0.7				0.1				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%
LTV:
Greater than 95%			25.2	%			16.1	%			—	%			—	%
90.01% to 95.00%			69.2				77.4				0.9				0.9
90.00% and below			5.6				6.5				99.1				99.1
Total			100.0	%			100.0	%			100.0	%			100.0	%
Loan Type:
Fixed			66.8	%			71.0	%			26.7	%			32.1	%
ARM (positive amortization)			19.9				19.4				60.1				56.1
ARM (potential negative amortization)			13.3				9.6				13.2				11.8
Total			100.0	%			100.0	%			100.0	%			100.0	%
Property Type:
Condominium			10.4	%			9.2	%			9.3	%			7.3	%
Other (principally single-family detached)			89.6				90.8				90.7				92.7
Total			100.0	%			100.0	%			100.0	%			100.0	%
Occupancy Status:
Primary residence			87.6	%			89.7	%			73.6	%			73.7	%
Secondary home			7.9				7.0				6.2				6.0
Non-owner occupied			4.5				3.3				20.2				20.3
Total			100.0	%			100.0	%			100.0	%			100.0	%
Mortgage Amount:
$0 - $50,000			1.1	%			1.4	%			0.3	%			0.5	%
$51,000 - $100,000			11.2				14.6				3.5				4.4
$100,001 - $250,000			54.9				60.0				39.6				43.6
$250,001 - $500,000			28.4				21.7				42.7				40.8
Over $500,000			4.4				2.3				13.9				10.7
Total			100.0	%			100.0	%			100.0	%			100.0	%

          The above table reflects that certain indicators of increased risk continue to grow as a percentage of our risk in force, consistent with a general shift to these products and risk characteristics in the overall mortgage industry. While we have limited our exposure to 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 PNAM. As discussed earlier in this report, PNAM loans contain an additional future risk when scheduled positive amortization is required in later years. We also have experienced a significant increase in the size of the mortgages for which we are providing coverage. Loans over $500,000 totaled 11.2% of total Primary risk in force at September 30, 2007 compared to 2.3% at September 30, 2006. Loans over $500,000 also totaled 13.9% of total Modified Pool risk in force at September 30,

2007 compared to 10.7% at September 30, 2006. In addition, the increase in loans with LTVs greater than 95%, which historically produced higher default rates, has increased our risk.

          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 2.4 years at September 30, 2007 compared to 2.3 years at December 31, 2006. The following table shows direct risk in force as of September 30, 2007 by year of loan origination.

		Primary								Modified Pool *
		September 30, 2007								September 30, 2007
		Direct Risk in								Direct Risk in
(dollars in millions)		Force				Percent				Force				Percent
2002 and before		$	712.2				6.0	%		$	44.4				5.5	%
2003			1,222.7				10.3				117.0				14.5
2004			1,187.1				10.0				130.7				16.2
2005			1,709.4				14.4				231.6				28.7
2006			2,789.6				23.5				253.4				31.4
2007			4,249.7				35.8				29.9				3.7
Total		$	11,870.8				100.0	%		$	807.0				100.0	%

          As noted above, approximately 60% of the Primary and 35% of the Modified Pool risk in force has been generated in 2006 and 2007. This is the result of increased production in the number of certificates and an increase in the size of the loans during these periods. The 2006 and 2007 vintage years have so far exhibited higher default rates than we have historically experienced from preceding vintage years. For additional information regarding these vintage years, see “Losses and Expenses,” below.

          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. 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, 2007, we had $185 million in captive reinsurance trust balances supporting the risk transferred to captives, helping to limit our loss exposure. Approximately 58% of our Primary flow insurance in force at September 30, 2007 was subject to these captive arrangements compared to approximately 63% at September 30, 2006. The decline of the Primary flow insurance in force that was subject to captive reinsurance arrangements at September 30, 2007 compared to September 30, 2006 resulted from two of our larger lender customers moving to a lender-paid product that does not qualify for captive participation. The portion of our total direct insurance in force that was subject to captive reinsurance at September 30, 2007 declined compared to September 30, 2006. This decline reflects both the shift to lender-paid products described above as well as the fact that a greater portion of our insurance in force at September 30, 2007 consisted of Modified Pool or Primary Bulk insurance in force, both of which are written through the structured bulk channel and are not subject to captive reinsurance arrangements.

          During the third quarter of 2007, four relatively small captive reinsurers breached individual vintage year layers for incurred losses, which resulted in the ceding of reserves of approximately $0.5 million. If the current default and paid claim trends continue, we expect other vintage year layers and other captives to reach the attachment points on both incurred losses and paid claims, especially the 2006 and 2007 vintage years that have experienced a higher default rate at a faster pace than we have seen historically.

     Revenues

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

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2007				2006				% Change				2007				2006				% Change
Direct premium written		$	86,946			$	65,828				32	%		$	248,507			$	186,101				34	%
Ceded premium written			(14,391	)			(11,925	)			21				(40,081	)			(34,498	)			16
Net premium written			72,555				53,903				35				208,426				151,603				37
Change in unearned premiums			(465	)			174				(367	)			(2,656	)			1,031				(358	)
Earned premiums		$	72,090			$	54,077				33	%		$	205,770			$	152,634				35	%
Net investment income		$	8,370			$	6,761				24	%		$	23,392			$	19,518				20	%
Total revenues		$	80,547			$	60,805				32	%		$	226,148			$	173,794				30	%

          Our direct premium written for the third quarter and first nine months of 2007 grew substantially compared to the comparable periods of 2006 as a result of increases in insurance in force during 2007 and average basis points earned attributable to an increase in risk characteristics in the portfolio. Primary insurance in force at September 30, 2007 increased 41% compared to September 30, 2006 while Modified Pool insurance in force increased 4% for the same period. Overall annual persistency was 80.1% at September 30, 2007 compared to 75.1% at September 30, 2006. Increased persistency has a positive effect on insurance in force. The average basis points earned for the first nine months also grew by approximately 5% compared to the nine months ended September 30, 2006. The increase in average basis points reflects the changes in the risk profile as detailed earlier under “Insurance and Risk in Force”. The average basis points earned is expected to increase slightly as mortgages containing increased risk characteristics from recent vintage years comprise a greater percentage of our risk in force.

          Ceded premium written is comprised of premiums written under excess of loss reinsurance treaties with captive as well as non-captive reinsurance companies. The growth in ceded premium written in the third quarter and the first nine months of 2007 over the same periods of 2006 was not as large as the growth in direct premium written in the same periods, because a larger percentage of direct premiums written were not subject to captive reinsurance arrangements.

          Net investment income increased for the third quarter and the first nine months of 2007 as compared to the comparable 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 third quarter of 2007 grew by 24.2% compared to the third quarter of 2006 and grew 22.1% year-to-date compared to the first nine 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 6.49% at September 30, 2007 compared to 6.69% at September 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 “Investment Portfolio” for further discussion in this report.

     Losses and Expenses

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

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2007				2006				% Change				2007				2006				% Change
Net losses and loss adjustment expenses		$	106,813			$	19,305				453	%		$	181,287			$	52,927				243	%
Amortization of deferred policy acquisition costs			4,567				4,109				11				13,860				12,089				15
Other operating expenses (net of acquisition costs deferred)			11,686				9,279				26				32,733				26,288				25
Loss ratio			148.2	%			35.7	%			315				88.1	%			34.7	%			154
Expense ratio			22.4	%			24.8	%			(10	)			22.4	%			25.3	%			(11	)
Combined ratio			170.6	%			60.5	%			182				110.5	%			60.0	%			84

          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 2007 increased significantly over the same time periods of 2006 primarily due to an increase in the reserve. The reserve increase reflects both an increase in the number of loans in default and an increase in the average risk per loan on the loans that were in default at September 30, 2007. As mentioned previously under “Critical Accounting Policies”, we increased the frequency factor utilized in the calculation of the reserve, which also impacted the size of the reserve increase. We experienced a significant increase in the dollar amount of paid claims reflecting an increase in both the number of claims and the average severity on the paid claims.

          The following table provides detail on the dollar amount and number of paid claims for our Primary and Modified Pool insurance for the three months and nine months ended September 30, 2007 and 2006:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2007				2006				% Change				2007				2006				% Change
Paid claims:
Primary insurance		$	23,058			$	13,016				77	%		$	56,192			$	39,823				41	%
Modified Pool insurance			5,413				603				798				8,080				2,611				209
Total		$	28,471			$	13,619							$	64,272			$	42,434
Number of claims paid:
Primary insurance			625				506				24	%			1,691				1,535				10	%
Modified Pool insurance			131				32				309				237				147				61
Total			756				538				41	%			1,928				1,682				15	%

          The increase in the number of paid claims reflects to an extent the growth in our insurance in force and the ongoing seasoning of our portfolio. However, the significant increase in paid claims also reflects the general decline in home prices and increased foreclosures. The amount of paid losses in the third quarter of 2007 increased 58% compared to the second quarter of 2007 while the actual number of paid losses increased 28%, reflecting a 24% increase in average severity on paid claims (the total amount paid divided by the number of claims paid). A significant amount of the paid claims relate to business written in recent vintage years, which carries higher loan balances and has been characterized by a decline in mitigation opportunities through the default and claim process.

          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		$	106,770			$	26,934			$	81,265			$	26,375
2003			120,197				28,799				146,529				43,181
2004			133,189				35,117				151,475				44,891
2005			157,210				40,757				179,041				58,198
2006			207,291				53,468				260,263				69,258
2007			212,090				58,261				270,853				79,024
Overall Average		$	168,012			$	44,018			$	208,343			$	60,874

     As shown in the chart below, average severity on paid claims 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 due to growth in the amount of risk in force on paid claims on loans with larger loan amounts. Although the average paid severity remained relatively flat in the second quarter of 2007, we experienced a significant increase in severity in the third quarter of 2007 due to the number of claims that are from more recent vintage years, particularly those in our soft markets, which typically have higher loan balances.

		Primary				Modified Pool
(dollars in thousands)		Insurance				Insurance				Total
Three Months Ended:
March 31, 2006		$	26.3			$	16.1			$	25.1
June 30, 2006			25.8				19.4				25.3
September 30, 2006			25.7				18.8				25.3
December 31, 2006			28.1				26.2				27.9
March 31, 2007			31.3				23.7				30.6
June 30, 2007			30.9				26.6				30.5
September 30, 2007			36.9				41.3				37.7

     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 some cases, properties for which loans have defaulted are sold during the foreclosure process, which generally reduces our loss. When the property does not sell prior to foreclosure, or sells after foreclosure but prior to when the claim is paid, we often pay the full amount of our coverage, which we call a full option settlement. Full option settlements as a percentage of our paid claims have increased quarter to quarter since the fourth quarter of 2006. During the third quarter of 2007, the rapid decline in home prices in certain markets coupled with the overall uncertainty in the housing markets on a national basis had a significant impact on our ability to successfully mitigate claims and negatively impacted the average severity.

     We expect severity will continue to trend upward as the average loan amounts in our portfolio continue to rise. Continued deterioration in the housing market could further reduce our loss mitigation opportunities and serve to increase severity. The expected increase in severity and the seasoning of our portfolio are expected to cause paid claims to increase during the remainder of 2007.

          Net losses and LAE also include the change in reserves for losses and LAE. The following table breaks out the loss reserves between Primary and Modified Pool at September 30, 2007, December 31, 2006 and September 30, 2006:

		September 30,				December 31,				September 30,
(dollars in thousands)		2007				2006				2006
Primary insurance:
Reserves for reported defaults		$	144,189			$	65,417			$	50,237
Reserves for defaults incurred but not reported			19,765				5,676				5,240
Total Primary insurance			163,954				71,093				55,477
Modified Pool insurance:
Reserves for reported defaults			31,164				11,477				3,683
Reserves for defaults incurred but not reported			2,619				773				858
Total Modified Pool insurance			33,783				12,250				4,541
Reserve for loss adjustment expenses			2,718				1,009				105
Total reserves for losses and loss adjustment expenses		$	200,455			$	84,352			$	60,123

          The following table shows the change in reserves for losses and LAE for the third quarter and year-to-date ending September 30, 2007 and 2006:

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(dollars in thousands)		2007				2006				% Change				2007				2006				% Change
Net increase in reserve for losses and loss adjustment expenses		$	78,394			$	5,218				1,402	%		$	116,103			$	9,049				1,183	%