Summary of TRIAD GUARANTY INC

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

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes our consolidated financial condition, changes in financial position, and results of operations for the three months and nine months ended September 30, 2009 and 2008. This discussion supplements Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008, and should be read in conjunction with the interim financial statements and notes contained herein.

Certain of the statements contained in this release are "forward-looking statements" and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include estimates and assumptions related to economic, competitive, regulatory, operational and legislative developments and typically are identified by use of terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are subject to change, uncertainty and circumstances that are, in many instances, beyond our control and they have been made based upon our current expectations and beliefs concerning future developments and their potential effect on us. Actual developments and their results could differ materially from those expected by us, depending on the outcome of a number of factors, including: the possibility that the Illinois Department of Insurance may take various actions regarding Triad if it does not operate its business in accordance with its revised financial and operating plan and the Corrective Orders, including seeking receivership proceedings; our ability to operate our business in run-off and maintain a solvent run-off; our ability to continue as a going concern; the possibility of general economic and business conditions that are different than anticipated; legislative, regulatory, and other similar developments; changes in interest rates, employment rates, the housing market, the mortgage industry and the stock market; our ability to maintain the listing of our common stock on The NASDAQ Stock Market; and the relevant factors described in this report under the headings "Risk Factors" and "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" in our Annual Report on Form 10-K for the year ended December 31, 2008, as well as in other reports and statements that we file with the Securities and Exchange Commission. Forward-looking statements are based upon our current expectations and beliefs concerning future events and we undertake no obligation to update or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made, other than as is required under the federal securities laws.

Overview

Triad Guaranty Inc. ("TGI") is a holding company that historically provided private mortgage insurance coverage in the United States through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("TGIC"). TGI and its subsidiary are collectively referred to herein as the "Company". "Triad", as used in this report, includes the operations of TGIC and its wholly-owned subsidiary, Triad Guaranty Assurance Corporation. TGIC is an Illinois-domiciled insurance company and the Illinois Department of Insurance (the "Insurance Department") is our primary regulator. The Illinois Insurance Code grants broad powers to the Insurance

Department and its director (collectively, the "Department") to enforce rules or exercise discretion over almost all significant aspects of our insurance business. Triad ceased issuing new commitments for mortgage guaranty insurance coverage on July 15, 2008 and we are operating our remaining business in run-off. As used in this report, the term "run-off" means writing no new mortgage insurance policies, but continuing to service existing policies. Servicing existing policies includes: receiving premiums on policies that remain in force; cancelling coverage at the insured's request; terminating policies for non-payment of premium; working with borrowers in default to remedy the default and/or mitigate our loss; reviewing policies for the existence of misrepresentation, fraud or non-compliance with stated programs; and settling all legitimate filed claims per the provisions of the two Corrective Orders issued by the Department. The first Corrective Order was issued in August 2008. The second Corrective Order was issued in March 2009 and subsequently amended in May 2009. These Corrective Orders, among other things, include restrictions on the distribution of dividends or interest on notes payable to its parent by Triad, allow management to continue to operate Triad under close supervision, and include restrictions on the payment of claims. Failure to comply with the provisions of the Corrective Orders may result in the imposition of fines or penalties or subject Triad to further legal proceedings, including receivership proceedings for the conservation, rehabilitation or liquidation of Triad.

We have historically provided Primary and Modified Pool mortgage guaranty insurance coverage on U.S. residential mortgage loans. We classify insurance as Primary when we are in the first loss position and the loan-to-value amount, or LTV, is 80% or greater when the loan is originated. We classify all other insurance as Modified Pool. The majority of our Primary insurance was delivered through the flow channel, which is defined as loans originated by lenders and submitted to us on a loan-by-loan basis. We have also historically provided mortgage insurance to lenders and investors who seek additional default protection (typically secondary coverage or on loans for which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement on groups of loans that are sold in the secondary market. Insurance provided on these individual transactions was provided through the structured bulk channel. 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 was delivered through the structured bulk channel. Our insurance remains effective until one of the following events occurs: the policy is cancelled at the insured's request or pre-determined aggregate stop loss limits are met for certain Modified Pool transactions; we terminate the policy for non-payment of premium; the policy defaults and we satisfy our obligations under the insurance contract; or we rescind the policy for violations of provisions of a master policy.

In run-off, our revenues principally consist of:

· earned premiums from the remaining insurance in force, net of:

· reinsurance premiums ceded, primarily for captive reinsurance, and

· refunds paid or accrued resulting from the cancellation of insurance in force or for coverage anticipated to be rescinded due to violations of certain provisions of a master policy; and

· investment income.

We may also realize investment gains and investment losses on the sale and impairment of securities, with the net gain or loss reported as a component of revenue.

In run-off, our expenses consist primarily of:
· settled claims;

· changes in reserves for estimated future claim payments on loans that are currently in default;

· general and administrative costs of servicing existing policies;

· other general business expenses; and

· interest expense.

Our results of operations in run-off depend largely on:
· the conditions of the housing, mortgage and capital markets that have a direct impact on default rates, mitigation efforts, cure rates and ultimately the amount of claims settled;

· the overall general state of the economy and job market;

· persistency levels on our remaining insurance in force;

· operating efficiencies; and

· the level of investment yield, including realized gains and losses, on our investment portfolio.

Persistency is an important metric in understanding our premium revenue, especially in run-off as no new business is being written and our overall premium base declines over time. Generally, the longer a policy remains on our books, or "persists", the greater the amount of premium revenue we will earn from the policy. Cancellations result primarily from the borrower refinancing or selling the insured mortgaged residential properties; from policies being rescinded due to fraud, misrepresentation or other underwriting violations; from a servicer choosing to cancel the insurance; from the payment of a claim; and, to a lesser degree, from the borrower achieving prescribed equity levels, at which point the lender no longer requires mortgage guaranty insurance.

Recent Events Affecting our Business

Our operating results continue to be negatively impacted by the continued decline in the housing and mortgage markets as well as the recessionary economic environment in general. Recent unemployment trends and the ongoing decline in home prices have adversely impacted our net losses. We believe the conditions that have contributed to this downturn, namely depressed house prices, high unemployment, and lack of credit in the mortgage market, among others, will persist for the foreseeable future and will continue to have an adverse impact on our financial results.

Triad has entered into two Corrective Orders with the Department. The first Corrective Order was entered into on August 5, 2008 and remains in effect. This Corrective Order was implemented as a result of our decision to cease writing new mortgage guaranty insurance and to commence a run-off of our existing insurance in force as of July 15, 2008. Among other things, that Corrective Order:

· Required Triad to submit a corrective plan to the Department;

· Prohibits all stockholder dividends from Triad to its parent company without the prior approval of the Department;

· Prohibits interest and principal payments on Triad's surplus note to its parent company without the prior approval of the Department;

· Restricts Triad from making any payments or entering into any transaction that involves the transfer of assets to, or liabilities from, any affiliated parties without the prior approval of the Department;

· Requires Triad to obtain prior written approval from the Department before entering into certain transactions with unaffiliated parties;

· Requires Triad to meet with the Department in person or via teleconference as necessary; and

· Requires Triad to furnish to the Department certain reports, agreements, actuarial opinions and information on an ongoing basis at specified times.

We submitted a corrective plan to the Department as required under the initial Corrective Order. The corrective plan we submitted included, among other items, a five-year statutory financial projection for Triad and a detailed description of our planned course of action to address our current financial condition. The financial projections that form the basis of our corrective plan were prepared in accordance with Statutory Accounting Principles ("SAP") set forth in the Illinois Insurance Code. SAP differs from generally accepted accounting principles ("GAAP"), which are utilized in the preparation of the financial statements presented in this report. We received approval of the corrective plan from the Department in October 2008.

Since the approval of our initial corrective plan, we have revised the assumptions initially utilized in our run-off financial projections as a result of a number of factors, including continued deteriorating economic conditions impacting our financial condition, the actual results of operations and future prospects. The revised assumptions produced a range of potential ultimate outcomes for our run-off, but included projections showing that absent additional action by the Department or favorable changes in our business, we would report a deficiency in policyholders' surplus as calculated in accordance with SAP as early as March 31, 2009. This statutory insolvency would likely lead to the Department seeking receivership of Triad in the courts and the institution of bankruptcy proceedings by the Company.

As a result, the Department issued the second Corrective Order effective on March 31, 2009, as amended on May 26, 2009. This second Corrective Order stipulates or prescribes:

· Effective June 1, 2009, all valid claims under Triad's mortgage guaranty insurance policies will be settled 60% in cash and 40% by recording a deferred payment obligation ("DPO");

· At March 31, 2009, Triad was required to adjust surplus and reserves reflecting the impact of the Corrective Order on future settled claims;

· The DPO requires that we accrue a carrying charge based on the investment yield earned by Triad's investment portfolio;

· Triad will establish an escrow account at least equal to the DPO balance and any associated carrying charges;

· Triad will require that any risk or obligation of any captive reinsurer must be paid in full, and will deposit any excess reinsurance recovery above the 60% cash payment into an escrow account;

· Payment of the DPO and the carrying charge will be subject to Triad's future financial performance and will require the approval of the Department;

· Procedures to account for the impact of the Corrective Order in the financial statements prepared in accordance with SAP;

· Upon payment of a claim under these provisions, Triad shall be deemed to have fully satisfied its obligations under the respective insurance policy;

· Other restrictions and requirements affecting the payment and transferability of the DPOs and associated carrying charge; and

· Certain reporting requirements.

The DPO recording requirements of the second Corrective Order became effective on June 1, 2009. At September 30, 2009, the recorded DPOs, including a carrying charge of $0.5 million, amounted to $97.0 million. The recording of a DPO does not impact reported settled losses as we will continue to report the entire amount. The accounting for the DPO on a SAP basis is similar to a surplus note which is reported as a component of statutory surplus and, as such, is dependent on the approval by the Department for any repayment of the DPO or the associated carrying charge. However, in our financial statements prepared in accordance with GAAP, the DPO is reported as a liability.

Failure to comply with the provisions of the Corrective Orders or any other violation of the Illinois Insurance Code may result in the imposition of fines or penalties or subject Triad to further legal proceedings, including receivership proceedings for the conservation, rehabilitation or liquidation of Triad. See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 for more information.

Prior to the second Corrective Order, our recurring losses from operations and resulting decline in policyholders' surplus as calculated in accordance with SAP increased the likelihood that Triad would be placed into receivership and raised substantial doubt about our ability to continue as a going concern. The positive impact on surplus resulting from the second Corrective Order has resulted in Triad reporting a policyholders' surplus in its financial statements reported under SAP of $150.7 million at September 30, 2009, as opposed to a deficiency in

policyholders' surplus of $511.1 million on the same date had the second Corrective Order not been implemented. While implementation of the second Corrective Order has deferred the institution of an involuntary receivership proceeding, no assurance can be given that the Department will not seek receivership of Triad in the future and there continues to be substantial doubt about our ability to continue as a going concern. The Department may seek receivership of Triad based on its determination that Triad will ultimately become insolvent or for other reasons stated above. If the Department were to seek receivership of Triad, the holding company could be compelled to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws. Our consolidated financial statements that are presented in this report do not include any adjustments that reflect the financial risks of Triad entering receivership proceedings and assume that we will continue as a going concern. We expect losses from operations to continue and our ability to continue as a going concern is dependent on the successful implementation of the revised corrective plan. See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 for more information about our financial solvency and going concern risks and uncertainties.

On September 4, 2009, we filed a complaint against American Home Mortgage ("AHM") in the United States Bankruptcy Court for the District of Delaware seeking rescission of multiple master mortgage guaranty insurance policies ("master policies") and declaratory relief. The complaint seeks relief from AHM as well as all owners of loans insured under the master policies by way of a defendant class action. We alleged that AHM failed to follow the delegated insurance underwriting guidelines approved by TGIC, that this failure breached the master policies as well as the implied covenants of good faith and fair dealing, and that these breaches were so substantial and fundamental that the intent of the master policies could not be fulfilled and TGIC should be excused from its obligations under the master policies. The total amount of risk originated under the AHM master policies, accounting for any applicable stop loss limits associated with modified pool contracts, was $1.7 billion, of which $1.2 billion remains in force at September 30, 2009. We continue to accept premiums and process claims under the master policies but, as a result of this action, we ceased remitting claim payments to companies servicing loans originated by AHM. Both premiums and claim payments subsequent to the filing of the complaint have been segregated pending resolution of this action. We have not recognized any benefit in our financial statements pending the outcome of the litigation.

On October 7, 2009, Triad announced that it had reached a definitive agreement to sell its information technology and operating platform to Essent Guaranty, Inc. ("Essent"), a new mortgage insurer. Under the terms of the agreement, Essent will acquire all of our proprietary mortgage insurance software and substantially all of the supporting hardware, as well as certain other assets, in exchange for up to $30 million in cash and assumption by Essent of certain software contractual obligations. Approximately $15 million of the consideration is fixed and up to an additional $15 million is contingent on Essent writing a certain minimum amount of insurance in the five-year period following closing. The transaction is expected to close in the fourth quarter of 2009. Essent will establish its operations and technology center in Winston-Salem and a number of Triad's information technology and operations employees are expected to join Essent upon closing of the transaction. Under a services agreement, Essent will provide ongoing information systems maintenance and services, customer service and policy administration support to Triad following the successful closing of the transaction. Triad's results of operations for the quarter ended September 30, 2009 were not affected by this transaction.

At September 30, 2009, we reported a GAAP deficit in assets of $625.0 million compared to a deficit in assets of $136.7 million at December 31, 2008 and a deficit in assets of $28.4 million at September 30, 2008. A deficit in assets occurs when recorded liabilities exceed recorded assets and is not necessarily a measure of insolvency. The growth in the deficit in assets is the result of the substantial increase in loss reserves and settled claims since the quarter ended September 30, 2007 reflecting the continued decline in housing and mortgage loan conditions. The Company will have to earn in excess of $625.0 million on a GAAP basis during the remaining run-off period and continue to meet its debt obligations in order to become financially solvent and continue as a going concern. We expect to continue to report a deficit in assets for the foreseeable future. See Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q for more information about our financial solvency and going concern risks and uncertainties.

We have identified a substantial number of underwriting or program violations and borrower's misrepresentations in some of the defaults reported to us. As a result, we have subsequently rescinded or cancelled coverage on these policies at a rate substantially greater than we have historically experienced. While we expect to continue to settle all legitimate claims, we expect an increase in rescission activity for the remainder of 2009 based on the number of policies under review and the number of occurrences of master policy violations identified during the first nine months of 2009. The impact of rescissions on reserves provided and accruals for anticipated premium refunds has been significant. See "Update on Critical Accounting Policies and Estimates" in this report for additional discussion on rescissions. Any impediment to our ability to rescind coverage for underwriting violations would be detrimental to our success in run-off.

The Company's common stock is listed on The NASDAQ Stock Market. The NASDAQ Stock Market has minimum continued listing standards that must be satisfied in order for a Nasdaq-traded company to maintain its listing. These standards include requirements regarding market value of publicly held shares, shareholders' equity, and bid price, among others. We believe that by mid-November 2009, we will no longer be compliant with certain of the continued listing requirements of The NASDAQ Stock Market. While The NASDAQ Stock Market's listing rules provide for a specified amount of time to regain compliance, given our current financial position and outlook, we believe it is improbable that we will regain compliance. As a result, we believe it is likely that our common stock will be delisted from The NASDAQ Stock Market in the near future and we are considering other listing alternatives.

Since the latter part of 2008, several programs have been initiated by the Federal government to be implemented through the government sponsored entities ("GSEs") and the FDIC in cooperation with lenders that are, in general, designed to prevent foreclosures and provide relief to homeowners and to the financial markets. These programs involve both modifications to the original terms of existing mortgages and complete refinancing in other instances in an effort to reduce foreclosures. The basic purpose of these programs is to provide a means for borrowers to qualify for lower payments by modifying the interest rate or extending the term of the mortgage in an effort to prevent foreclosure. Several of these programs have subsequently been expanded or extended and may continue to change as the Federal government continues to seek ways to help prevent foreclosures. While we are actively working with both servicers and the GSEs in the implementation of these programs, they are in the early stages of development and the results to date have not been meaningful to our operations. To a large degree, the benefit we receive from these programs is dependent on the efforts of servicers and the GSEs. We believe, however, that certain servicers may first attempt to modify or refinance loans that have lower LTVs or that do not have mortgage insurance, which would delay or reduce efforts to modify or refinance loans that we insure. If a loan is modified or refinanced as part of one of these programs, we intend to maintain insurance on the loan and are subject to the same ongoing risk if the policy were to re-default. We have seen only a marginal positive impact from these programs through September 30, 2009. The ultimate impact of these government programs on our future results of operations and prospects are unknown at this time. This uncertainty around the impact of these programs is amplified by the complexity of the programs, our reliance on loan servicers to implement the programs, and conditions within the housing market and the economy, among other factors.