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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-22342

Triad Guaranty Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class

Common Stock, par value $.01 per share

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ     No o

      State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $312,932,206 as of June 30, 2003, which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the registrant (however this does not constitute a representation or acknowledgment that any such individual is an affiliate of the registrant).

      The number of shares of the registrant’s common stock, par value $.01 per share, outstanding as of February 17, 2004, was 14,472,553.

TABLE OF CONTENTS

PART I

Item 1.     Business.

      Triad Guaranty Inc. is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation (“Triad”), provides private mortgage insurance (“MI”) coverage in the United States to residential mortgage lenders and investors. Triad Guaranty Inc. and its subsidiaries are collectively referred to as the “Company.” The “Company” when used within this document refers to the holding company and/or one or more of its subsidiaries, as appropriate.

      Private mortgage insurance, also known as mortgage guaranty insurance, is issued in many home purchases and refinancings involving conventional residential first mortgage loans to borrowers with equity of less than 20%. If the homeowner defaults, private mortgage insurance reduces, and in some instances eliminates, the loss to the insured lender. Private mortgage insurance also facilitates the sale of low down payment mortgage loans in the secondary mortgage market, principally to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Under risk-based capital regulations applicable to most financial institutions, private mortgage insurance also reduces the capital requirement for such lenders on residential mortgage loans with equity of less than 20%. In addition, mortgage insurance is purchased by investors and lenders who seek additional default protection or capital relief on loans with equity of greater than 20%.

      Private mortgage insurance has traditionally involved underwriting and insuring an individual loan. This type of mortgage insurance is known as “flow” mortgage insurance and will be referred to as such throughout this document. In 2001, the Company began participating in structured bulk transactions which involve underwriting and insuring a group of loans. This type of mortgage insurance is known as “structured bulk” or “bulk” mortgage insurance and will be referred to as such throughout this document.

      Triad was formed in 1987 as a wholly-owned subsidiary of Primerica Corporation and began writing private mortgage insurance in 1988. In September 1989, Triad was acquired by Collateral Mortgage, Ltd. (“CML”), a mortgage banking and real estate lending firm located in Birmingham, Alabama. In 1990, CML contributed the outstanding stock of Triad to its affiliate, Collateral Investment Corp. (“CIC”), an insurance holding company.

      The Company was incorporated by CIC in Delaware in August 1993, for the purpose of holding all the outstanding stock of Triad and to undertake the initial public offering of the Company’s Common Stock, which was completed in November 1993. CIC currently owns 17.8% and CML owns 17.8% of the outstanding Common Stock of the Company.

      The principal executive offices of the Company are located at 101 South Stratford Road, Winston-Salem, North Carolina 27104. Its telephone number is (336) 723-1282.

Types of Mortgage Insurance Products

      Primary insurance provides mortgage default protection on individual loans and covers a percentage of unpaid loan principal, delinquent interest, and certain expenses associated with the default and subsequent foreclosure (collectively, the “claim amount”). The claim amount, to which the appropriate coverage percentage is applied, generally ranges from 110% to 115% of the unpaid principal balance of the loan. The Company’s obligation to an insured lender with respect to a claim is determined by applying the appropriate coverage percentage to the claim amount. Under its master policy, the Company has the option of paying the entire claim amount and taking title to the mortgaged property or paying the coverage percentage in full satisfaction of its obligations under the insurance written. Primary insurance can be placed on many types of loan instruments and generally applies to loans secured by mortgages on owner occupied homes.

      The Company offers primary coverage generally from 6% to 45% of the loan amount, with most coverage from 12% to 40% as of December 31, 2003. The coverage percentage provided by the Company is selected by

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      Fannie Mae and Freddie Mac are the ultimate purchasers of a large percentage of the loans insured by the Company. Generally they require a coverage percentage that will reduce their loss exposure on loans they purchase to 75% or less of the property’s value at the time the loan is originated. Since 1999, Fannie Mae and Freddie Mac have accepted lower coverage percentages for certain categories of mortgages when the loan is approved by their automated underwriting services. The reduced coverage percentages limit loss exposure to 80% or less of the property’s value at the time the loan is originated.

      The Company’s premium rates vary depending upon the loan-to-value (LTV) ratio, loan type, mortgage term, coverage amount, documentation required, and use of property, which all affect the perceived risk of a claim on the insured mortgage loan. Generally, premium rates cannot be changed after issuance of coverage. The Company, consistent with industry practice, generally utilizes a nationally based, rather than a regional or local, premium rate structure, although special risk rates are utilized as well.

      With respect to its flow mortgage insurance, the premiums are paid by either the borrower (borrower-paid) or the lender (lender-paid). Under the Company’s borrower-paid plan, mortgage insurance premiums are charged to the mortgage lender or servicer that collects the premium from the borrower and, in turn, remits the premiums to the Company. Under the Company’s lender-paid plan, mortgage insurance premiums are charged to the mortgage lender or loan servicer that pays the premium to the Company. The lender may recover the premium through an increase in the borrower’s interest rate. Approximately 69% and 72% of the Company’s flow insurance was written under its borrower-paid plan during 2003 and 2002, respectively. The remainder was written under its lender-paid plan (31% and 28% of flow insurance during 2003 and 2002, respectively). The Company’s lender-paid volume is concentrated among larger mortgage lender customers. The premium rate structures associated with the lender-paid plan are lower than standard borrower-paid rates. The Company is able to have lower premium rate structures with lender-paid plans due to lower acquisition costs, higher expected persistency, and expected favorable loss development associated with lender-paid plans. We define persistency as the percentage of insurance in force remaining from twelve months prior.

      Premiums may be remitted to the Company monthly, annually, or in one single payment. The monthly premium payment plan involves the payment of one or two months’ premium at the mortgage loan closing. Thereafter, level monthly premiums are collected by the loan servicer for monthly remittance to the Company. The Company also offers a plan under which the first monthly mortgage insurance payment is deferred until the first loan payment is remitted to the Company. This deferred monthly premium product decreases the amount of cash required from the borrower at closing, therefore making home ownership more affordable. Monthly premium plans represented approximately 76% and 80% of flow insurance written in 2003 and 2002, respectively.

      The annual premium payment plan requires a first-year premium paid at mortgage loan closing with annual renewal payments. With respect to the Company’s borrower-paid plans, renewal payments are collected monthly from the borrower and held in escrow by the mortgage lender or servicer for annual remittance to the Company in advance of each renewal year. Annual premium plans represented approximately 23% and 20% of flow insurance written in 2003 and 2002, respectively.

      The single premium payment plan requires a single payment paid at loan closing. The single premium payment can be financed by the borrower by adding it to the principal amount of the mortgage or can be paid in cash at closing by the borrower. Single premium plans represented less than 1% of flow insurance written in 2003 and 2002.

      Pool insurance generally has been offered by private mortgage insurers to lenders as an additional credit enhancement for certain mortgage-backed securities and provides coverage for the full amount of the net loss on each individual loan included in the pool, subject to a provision limiting aggregate losses to a specified

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      The Company participates in structured bulk transactions. Structured bulk transactions involve insuring a group of loans with individual coverage for each loan. These transactions frequently include an aggregate stop-loss limit applied to the entire group of insured loans. Insurance issued in structured bulk transactions is generally either primary, supplemental if the policy already has primary coverage, or a combination of both. Individual loan level coverage is determined in order to reduce the insured’s exposure on a given loan down to a percentage of the loan’s balance (“down to” coverage). Through December 31, 2003, insurance written through the structured bulk channel has not been subject to captive mortgage reinsurance or other risk-sharing arrangements.

      Structured bulk transactions are generally initiated by secondary mortgage market participants, including underwriters of mortgage-backed securities, mortgage lenders, and mortgage investors such as Fannie Mae and Freddie Mac, where mortgage insurance is used as a credit enhancement. The Company is provided loan-level information on the group of loans and, based on the risk characteristics of the entire group of loans and the requirements of the secondary mortgage market participant, the Company will submit a price for insuring the entire group of loans. The Company competes against other mortgage insurers as well as other forms of credit enhancements provided by capital markets for these transactions. During 2003, insurance written related to structured bulk transactions represented 19% of the total insurance written compared to 9% in 2002.

      The Company offers mortgage insurance arrangements designed to allow lenders to share in the risks of mortgage insurance in exchange for a portion of the insurance premium. One such arrangement is the captive reinsurance program. Under the captive reinsurance program, a reinsurance company, generally an affiliate of the lender, assumes a portion of the risk associated with the lender’s insured book of business in exchange for a percentage of the premium. Typically, the reinsurance program is an excess-of-loss arrangement with defined entry and exit points and a maximum exposure limit for the captive reinsurance company. These captive reinsurance programs may also be in the form of a quota share arrangement, although the Company had no quota share arrangements in force as of December 31, 2003. Under excess-of-loss programs, with respect to a given book year of business, Triad retains a first loss position on a defined aggregate layer of risk and reinsures a second defined aggregate layer with the reinsurer. Triad generally retains the remaining risk above the layer reinsured. Because claims incidence is generally highest in the third through six years after loan origination, Triad is likely to retain all losses in the earlier years, particularly in the first two years after loans for a given book year are originated, and the reinsurer will assume the losses in subsequent years subject to the defined layer of risk and up to its aggregate limit. The ultimate impact on the Company’s financial performance of an excess-of-loss captive structure is dependent on the operating environment, primarily the total level of losses and the persistency rates, during the life of a given book year of business. The Company believes that its excess-of-loss captive reinsurance programs provide valuable reinsurance protection by limiting the aggregate level of losses, and under normal operating environments, potentially reduce the degree of volatility in the Company’s earnings from the development of such losses over a period of years. At December 31, 2003 and 2002, approximately 46% of the total insurance in force was subject to risk-sharing products.

      Regulatory issues exist regarding the future of risk-sharing programs currently being marketed within the mortgage insurance industry. Management is unable to predict the impact of the regulatory issues on these products. See further discussion on Regulation in the Business section and in Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this document.

Cancellation of Insurance

      Mortgage insurance coverage cannot be canceled by the Company except for nonpayment of premium or certain material violations of the master policy. It remains renewable at the option of the insured lender.

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      Insured lenders may cancel insurance at any time at their option. Pursuant to the Homeowners Protection Act, lenders are required to cancel automatically the borrower paid private mortgage insurance on most loans made on or after July 29, 1999, when the outstanding loan amount is 78% or less of the property’s original purchase price and certain other conditions are met. A borrower may request that a loan servicer cancel borrower-paid mortgage insurance on a mortgage loan when the loan balance is less than 80% of the property’s current value, but loan servicers are generally restricted in their ability to grant such requests by secondary market requirements and by certain other regulatory restrictions.

      Mortgage insurance coverage can also be cancelled when an insured loan is refinanced. If the Company provides insurance on the refinanced mortgage, the policy on the refinanced home loan is considered new insurance written. Therefore, continuation of the Company’s coverage from a refinanced loan to a new loan results in both a cancellation of insurance and new insurance written.

      The percentage of the Company’s insurance in force at the end of the previous year that was canceled during 2003, 2002, and 2001 was 49%, 39%, and 32%, respectively. The high cancellation levels in 2003 were due to significant refinance activity, as mortgage rates remained low throughout the year. During periods of high refinance activity, the Company’s earnings and risk profile are more subject to fluctuations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on the effect of the cancellation levels for the last three years.

      To the extent canceled insurance coverage in areas experiencing economic growth is not replaced by new insurance in such areas, the percentage of the Company’s book of business in economically weaker areas may increase. This development may occur during periods of heavy mortgage refinancing. Refinanced loans in regions experiencing economic growth are less likely to require private mortgage insurance because of rising real estate values. Borrowers in economically distressed areas are less likely to qualify for refinancing because of the lack of significant appreciation in real estate values. The recent cancellations have not had a material impact on the geographic dispersion of the Company’s risk in force.

Customers

      Residential mortgage lenders such as mortgage bankers, mortgage brokers, commercial banks, and savings institutions are the principal customers of flow insurance written by the Company.

      To obtain primary insurance from the Company written on a flow basis, a mortgage lender must first apply for and receive a master policy from the Company. The Company’s approval of a lender as a master policyholder is based upon evaluation of the lender’s financial position and demonstrated adherence to sound lending practices as well as other factors.

      The master policy sets forth the terms and conditions of the Company’s mortgage insurance policy. The master policy does not obligate the lender to obtain insurance from the Company, nor does it obligate the Company to issue insurance on a particular loan. The master policy provides that the lender must submit individual loans for insurance to the Company and each loan, subject to certain underwriting criteria, must be approved by the Company to effect coverage (except in the case of delegated underwriting and when the originator has the authority to approve coverage within certain guidelines).

      A high percentage of origination volume is being generated by the large lenders. The top 30 lenders in the United States, as ranked by mortgage origination volume, accounted for approximately 79% of originated mortgage volume in 2003 compared to 82% in 2002 and 73% in 2001. As a result of this concentrated source of mortgage origination volume, the number of lenders making decisions as to which insurer to select for mortgage insurance is being reduced. The Company could be adversely affected if one of its large customers is consolidated with a lender with which the Company is not approved to do business or if one of its large lenders terminates its relationship with the Company for any reason. In 2003, production from the top 30 lenders in the United States accounted for approximately 64% of the Company’s flow insurance written compared to 60% in 2002.

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      Premium revenue for the Company is comprised of premium from current year originated business plus renewal premiums from insurance originated in prior years. There was no single customer whose revenue from current year originated business accounted for 10% or more of the Company’s consolidated revenue in 2003, 2002, or 2001. However, approximately 14% and 13% of the Company’s consolidated revenue in 2003 was from current year and prior years originated business from Countrywide Credit Industries, Inc. and Wells Fargo Home Mortgage, Inc., respectively. In 2002, approximately 11% of the Company’s consolidated revenue was from current year and prior years originated business from Countrywide Credit Industries, Inc. There was no single customer whose revenue from current and prior years originated business accounted for 10% or more of the Company’s consolidated revenue in 2001. See further discussion regarding significant customers in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Sales and Marketing

      The Company currently markets its insurance products through a dedicated sales force, including sales management, of approximately 40 professionals and an exclusive commissioned general agency serving a specific geographic market. The Company is licensed to do business in all 50 states and the District of Columbia.

      The Company’s field sales force is divided into three sales divisions, each with its own manager, regional account representatives, and national account executives. The division managers report to a senior executive who oversees all sales and marketing activities for the Company. The national account executives are primarily responsible for managing the Company’s sales efforts toward the larger national mortgage originators. The division managers and the regional account executives serve key regional accounts and provide support for national account sales efforts. This reporting structure allows the senior executive in charge of all sales activities to focus time on large, national accounts while maintaining responsibility of all other sales activities. This senior executive reports directly to the President of the Company.

      One of the contributors to the Company’s success is the effort of its sales force and its general agency. For 2003, the Company’s commissioned general agency produced approximately 3% of the Company’s flow insurance written while the salaried account executives and the national account representatives produced the remainder.

      The marketing department’s mission is to develop and implement programs in support of the Company’s sales objectives and to promote the Company’s image. A variety of tools are used to achieve these goals including public relations, marketing materials, internal/external publications, convention trade shows, and the Internet. A national advertising and public relations campaign designed to raise corporate visibility to lenders and investors is also part of the Company’s integrated marketing approach.

Contract Underwriting

      The Company provides fee-based contract underwriting services that enable customers to improve the efficiency of their operations by outsourcing all or part of their mortgage loan underwriting. Contract underwriting involves examining a prospective borrower’s information contained in a lender’s mortgage application file and making a determination whether the borrower is approved for a mortgage loan subject to the lender’s underwriting guidelines. This service is provided for loans that require mortgage insurance as well as loans that do not require mortgage insurance. In the event that Triad fails to properly underwrite a loan subject to the lender’s underwriting guidelines, Triad may be required to provide monetary or other remedies to the lender customer.

      Contract underwriting services have become increasingly important to lenders as they seek to reduce fixed costs. Accordingly, contract underwriting significantly contributes to the Company’s mortgage insurance production. The Company provides contract underwriting services through its own employees as well as independent contractors. If the Company becomes unable to maintain and provide a sufficient number of qualified underwriters, the Company’s operations could be materially adversely affected.

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Competition and Market Share

      The Company and other private mortgage insurers compete directly with federal and state governmental and quasi-governmental agencies, principally the Federal Housing Administration (“FHA”). These agencies sponsor government-backed mortgage insurance programs under which approximately 36% of high LTV loans were insured in both 2003 and 2002. In addition to competition from federal agencies, the Company and other private mortgage insurers face competition from state-supported mortgage insurance funds, some of which are either independent agencies or affiliates of state housing agencies. Indirectly, the Company also competes with certain mortgage lenders which forego private mortgage insurance to self-insure against the risk of loss from defaults on all or a portion of their low down payment mortgage loans.

      Fannie Mae and Freddie Mac have the ability to modify the required level of mortgage insurance coverage which should be maintained by lenders on loans that they purchase. Both Fannie Mae and Freddie Mac have programs that reduce the required amount of private mortgage insurance in exchange for an upfront delivery fee from the lender. The Company’s financial condition and results of operations could be adversely affected as a result of these programs or if Fannie Mae and/or Freddie Mac adopt private mortgage insurance substitutes.

      Various proposals are periodically discussed by Congress and certain federal agencies to reform or modify the FHA. Management is unable to predict the scope and content of such proposals, or whether any such proposals will be enacted into law, and if enacted, what effect they may have on the Company.

      The private mortgage insurance industry consists of eight active mortgage insurance companies including Triad, Mortgage Guaranty Insurance Corporation, PMI Mortgage Insurance Co., United Guaranty Residential Insurance Company, Radian Guaranty Inc., General Electric Mortgage Insurance Corporation, Republic Mortgage Insurance Company, and CMG Mortgage Insurance Co. Triad is the seventh largest private mortgage insurer based on 2003 market share and, according to estimated industry data, had a 4.9% share of net new primary insurance written in 2003 compared to 3.7% in 2002.

      Management believes the Company competes with other private mortgage insurers principally on the basis of personalized and professional service, a strong management and sales team, responsive and versatile technology, and innovative products.

Underwriting Practices

      The Company considers effective risk management to be critical to its long–term financial stability. Market analysis, prudent underwriting, the use of automated risk evaluation models, auditing, and customer service are all important elements of the Company’s risk management process.

     Underwriting Personnel

      The Company’s Senior Vice President of Underwriting has been in his position since shortly after the Company was formed. In addition to a centralized underwriting department in the home office, the Senior Vice President of Underwriting is responsible for the Company’s regional offices in Arizona, California, Colorado, Georgia, Illinois, Ohio, Pennsylvania, Texas, and Washington. The Company’s Senior Vice President of Risk Management has been with the Company since 2001 and has more than 20 years of industry experience. The Senior Vice President of Risk Management is responsible for assessing the risk factors used by the Company in its underwriting procedures.

      The Company employed an underwriting staff of approximately 45 at December 31, 2003. The Company’s field underwriters and underwriting managers are limited in their authority to approve programs for certain mortgage loans. The authority levels are tied to underwriting position, knowledge, and experience and relate primarily to loan amounts and property type. All loans insured by the Company are subject to quality control reviews.

      The Company also utilizes various non-employee underwriters to perform contract underwriting services. The number can vary substantially depending on the need for this service.

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      The Company evaluates risk based on historical performance of risk factors and utilizes automated underwriting systems in the risk selection process to assist the underwriter with decision-making. This process evaluates the following categories of risk:

	•	Mortgage Lender. The Company reviews each lender’s financial statements and management experience before issuing a master policy. This information is updated and evaluated on an annual basis. The Company also tracks the historical risk performance, including loan level risk characteristics, of all customers that hold a master policy. This information is factored into determining the loan programs the Company approves for various lenders. The Company assigns delegated underwriting authority only to lenders with substantial financial resources and established records of originating good quality loans.
	•	Purpose and Type of Loan. The Company analyzes five general characteristics of a loan to evaluate its level of risk: (i) LTV ratio; (ii) purpose of the loan; (iii) type of loan instrument; (iv) level of documentation; and, (v) type of property. Generally, the Company seeks loan types with proven track records for which an assessment of risk can be readily made and the premium received sufficiently offsets that risk. Loan types that do not have a proven track record are charged a higher premium, as are other loans which have been shown to carry higher risks, such as adjustable rate mortgages (“ARMs”), loans with limited or no documentation, and loans having higher LTV ratios. Certain categories of loans are not actively pursued by the Company because such loans have a disproportionate amount of risk, including scheduled negatively amortizing ARMs and investment properties.
	•	Individual Loan and Borrower. Individual insurance applications are evaluated based on analysis of the borrower’s ability and willingness to repay the mortgage loan and the characteristics and value of the mortgaged property. The analysis of the borrower includes reviewing the borrower’s housing and total debt ratios as well as the borrower’s Fair, Isaac and Co., Inc. (“FICO”) credit score, as reported by credit rating agencies. Individual insurance applications are reviewed by Triad’s underwriting personnel except for loans originated by lenders under delegated underwriting authority or through automated underwriting services provided by Fannie Mae and Freddie Mac. In the case of delegated underwriting, compliance with program parameters is monitored by periodic audits of delegated business. With the automated underwriting services provided by Fannie Mae and Freddie Mac, lenders are able to obtain approval for mortgage guaranty insurance with any participating mortgage insurer. Triad works with both agencies in offering insurance services through their systems while monitoring the risk quality of loans insured through such systems.
	•	Geographic Selection of Risk. The Company places significant emphasis on the condition of the regional housing markets in determining marketing and underwriting policies. Using both internal and external data, the Company’s risk management department continually monitors the economic conditions in the Company’s active and potential markets.

      The Company accepts applications for insurance under three basic programs: a fully-documented program, a credit-score driven reduced documentation program, and a delegated underwriting program which allows a lender’s underwriters to commit insurance to a loan based on strict, agreed upon underwriting guidelines. The Company also accepts loans approved through Freddie Mac’s or Fannie Mae’s automated underwriting systems.

      The Company generally utilizes nationwide underwriting guidelines to evaluate the potential risk of default on mortgage loans submitted for insurance coverage. These guidelines have evolved over time and take into account the loss experience of the entire private mortgage insurance industry. They also are largely influenced by Fannie Mae and Freddie Mac underwriting guidelines. The Company believes its guidelines generally are consistent with those used by other private mortgage insurers with respect to the types of loans that the Company will insure. Specific underwriting guidelines applicable to a given local, state, or regional

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      Subject to the Company’s underwriting guidelines and exception approval procedures, the Company expects its internal underwriters and contract underwriters to utilize their experience and business judgment in evaluating each loan on its own merits. Accordingly, the Company’s underwriting staff has discretionary authority to insure loans which deviate in certain minor respects from the Company’s underwriting guidelines. More significant exceptions are subject to management approval. In all such cases, compensating factors must be identified. The predominant reason for such deviations involves instances where the borrower’s debt-to-income ratio exceeds the Company’s guidelines. To compensate for exceptions, the Company’s underwriters give favorable consideration to such factors as excellent borrower credit history, the availability of satisfactory cash reserves after closing, and employment stability.

      In addition to the borrower’s willingness and ability to repay the loan, the Company believes that mortgage default risk is affected by a variety of other factors, including the borrower’s employment status. Insured mortgage loans made to self-employed borrowers are perceived by the Company to have higher risk of claim, all other factors being equal, than loans to borrowers employed by third parties. The Company’s percentage of risk in force involving self-employed borrowers was 2.1% at December 31, 2003, and 2.6% at December 31, 2002.

      The Company’s Stick With Triad program, featuring the Slam Dunk Loan^SM approval process, allows lenders to submit insurance applications with reduced documentation. Under this program, Triad issues a commitment of insurance based on the borrower’s FICO credit score or the approval of the loan through either Fannie Mae’s or Freddie Mac’s automated underwriting system. The Company issues a commitment of insurance without the standard underwriting process if certain program parameters are met and the borrower has a credit score above established thresholds. Documentation submission requirements for non-automated underwritten loans vary depending on the borrower’s credit score. The Stick With Triad program’s Slam Dunk approval process represented approximately 28% of the Company’s flow applications in 2003 and 33% in 2002. The Company randomly and through specific identification of selected risk factors audits lenders’ files on loans submitted under the Stick With Triad program.

      Under the delegated underwriting program, the Company utilizes extensive quality control practices including reunderwriting, reappraisal, and similar procedures following issuance of the policy. Standards for type of loan, property type, and credit history of the borrower are established consistent with the Company’s risk strategy. The program has allowed the Company to serve a greater number of the larger, well-established mortgage originators. The Company’s delegated underwriting program accounted for 59% of flow applications received in 2003 compared to 44% in 2002. The performance of loans insured under the delegated underwriting program has been comparable to the Company’s non-delegated business.

      The Company utilizes its underwriting staff as well as contract personnel to provide contract underwriting services to customers. For a fee, Triad underwrites applications for secondary market compliance, while at the same time assessing the application for mortgage insurance, if applicable. In addition, the Company offers Fannie Mae’s Desktop Originator® and Desktop Underwriter® and Freddie Mac’s Loan Prospector®, as well as the personnel to conduct the underwriting tasks, as a service to its contract underwriting customers. These products, which are designed to streamline and reduce costs in the mortgage origination process, supply the Company’s customers with fast and accurate service regarding compliance with underwriting standards and Fannie Mae’s or Freddie Mac’s decision for loan purchase or securitization.

      The Company employs a risk review process in underwriting structured bulk transactions that is designed to identify the loans which pose the greatest risk of nonperformance. High risk loans are identified based on an analysis of multiple risk factors including, but not limited to, credit score, loan-to-value ratio, documentation type, loan purpose, and loan amount. The pertinent risk characteristics of each loan are evaluated to determine the impact on the transaction’s frequency and severity of loss and persistency. The Company may utilize an outside due diligence firm in this process as well as mortgage risk analysis systems such as Standard & Poor’s

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     Other Risk Management

      A comprehensive audit plan determines whether underwriting decisions being made are consistent with the policies, procedures, and expectations for quality set forth by management. All areas of business activity which involve an underwriting decision are examined, with emphasis on new products, new procedures, contract underwritten loans, delegated loans, new employees, new master policyholders, and new branches of an existing master policyholder. The process used to identify categories of loans selected for audit begins with identification and evaluation of certain defined and verifiable risk elements. Each loan is then tested against these elements to identify loans which fail to meet prescribed policies or an identified norm. The procedure allows the Company’s management to identify concerns which may exist within individual loans as well as concerns which may exist within a given category of business.

Technology

      Triad’s TAXI^SM — Transactions Across the Internet — allows qualified customers to view, update, and process certain data within their borrowers’ private mortgage insurance records. Business areas that can be addressed through TAXI include mortgage insurance applications, contract underwriting through eU Xpress^SM, loan servicing, claims and default processing, and risk-sharing performance.

      eU Xpress is an internet-based service that automates the contract underwriting and mortgage insurance commitment process. The Company introduced eU Xpress in 2002. eU Xpress is accessed through TAXI and provides an interface with automated underwriting systems.

Financial Strength Rating

      Credit ratings generally are considered an important element in a mortgage insurer’s ability to compete for new business, indicating the insurer’s present financial strength and capacity to pay future claims. Certain national mortgage lenders and a large segment of the mortgage securitization market, including Fannie Mae and Freddie Mac, generally will not purchase high LTV mortgages or mortgage-backed securities unless the insurer issuing private mortgage insurance coverage has a financial strength rating of at least “AA-” by either Standard & Poor’s Ratings Services (“S&P”) or Fitch Ratings (“Fitch”) or a rating of at least “Aa3” from Moody’s Investors Service (“Moody’s”). Fannie Mae and Freddie Mac require mortgage guaranty insurers to maintain two ratings of “AA-” or better. Triad is rated “AA” by both S&P and Fitch and “Aa3” by Moody’s. Private mortgage insurers are not rated by any other independent nationally-recognized insurance industry rating organization or agency (such as the A.M. Best Company).

      S&P defines insurers rated “AA” as having very strong financial security characteristics, differing only slightly from those rated higher. Fitch defines insurance companies rated “AA” as i) ones that posses very strong capacity to meet policyholder and contract obligations, ii) ones that have modest risk factors, and iii) ones that expect very small impact from any adverse business and economic factors.. Moody’s defines insurers rated “Aa” as offering excellent financial security but appearing to have somewhat larger long-term risks than companies rated “Aaa.” Ratings from S&P and Fitch are modified with a “+” or “–” sign to indicate the relative position of a company within its category. Moody’s uses numeric modifiers to refer to the ranking within a group — with “1” being the highest and “3” being the lowest.

      When assigning a financial strength rating, S&P, Fitch, and Moody’s generally consider: (i) the specific risks associated with the mortgage insurance industry, such as regulatory climate, market demand, growth, and competition; (ii) management depth, corporate strategy, and effectiveness of operations; (iii) historical operating results and expectations of current and future performance; and, (iv) long-term capital structure, the ratio of debt to equity, the ratio of risk to capital, near-term liquidity, and cash flow levels, as well as any reinsurance relationships and the financial strength ratings of such reinsurers. Ratings are based on factors

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      Some rating agencies issue financial strength ratings based, in part, upon a company’s performance sensitivity to various economic depression scenarios. In determining capital levels required to maintain a company’s rating, the rating agencies allow the use of different forms of capital including statutory capital, reinsurance, and debt. In January 1998, the Company completed a $35 million private offering of notes due January 15, 2028. The notes, which are rated “A” by S&P and “A+” by Fitch, were issued to provide additional capital considered in the rating agency’s depression models.

      S&P, Fitch, and Moody’s will periodically review Triad’s rating as they do with all rated insurers. Ratings can be withdrawn or changed at any time by a rating agency. A reduction in the Company’s rating by S&P, Fitch, or Moody’s, while not anticipated, could materially impact the ability of the Company to write new business.

Reinsurance

      The use of reinsurance as a source of capital and as a risk management tool is well established within the mortgage insurance industry. Reinsurance does not legally discharge an insurer from its primary liability for the full amount of the risk it insures, although it does make the reinsurer liable to the primary insurer. There can be no assurance that the Company’s reinsurers will be able to meet their obligations under the reinsurance agreements.

      Triad’s product offerings include captive mortgage reinsurance programs whereby an affiliate of a lender reinsures a portion of the insured risk on loans originated or purchased by the lender. Triad entered the captive reinsurance market in 1999 with the LEAP^SM (Lower Entry — Additional Profitability) program. The LEAP program is an excess of loss mortgage reinsurance program that provides lenders an opportunity to share in the risk and return of mortgage insurance on loans the lender originates or services.

      In November 1999, Triad formed Triad Re Insurance Corporation (“Triad Re”) as a wholly-owned sponsored captive reinsurance company domiciled in Vermont. Triad Re was formed to allow small and mid-sized lenders to participate in captive reinsurance arrangements with reduced up-front capital costs and without co-mingling its risk with other lenders. Triad Re was initially capitalized in February 2000 with regulatory capital of $1.0 million. As of December 31, 2003, approximately $7.1 million of Triad’s risk in force had been ceded to sponsored captive reinsurer accounts under participating agreements with Triad Re.

      Triad’s captive reinsurance agreements provide for trust arrangements whereby the captive reinsurer is the grantor of the trust and Triad is the beneficiary of the trust. Trusts are established to support the reinsurers’ obligations under the reinsurance agreements. The trust agreement includes covenants regarding minimum and ongoing capitalization, required reserves, authorized investments, and withdrawal of assets and is funded by ceded premium and investment earnings on trust assets as well as capital contributions by the reinsurer.

      Pursuant to deeper coverage requirements imposed by Fannie Mae and Freddie Mac, certain loans eligible for sale to such agencies with a loan-to-value ratio over 90% require insurance with a coverage percentage of 30% or more. Certain states limit the amount of risk a mortgage insurer may retain with respect to coverage of an insured loan to 25% of the claim amount, and, as a result, the deeper coverage portion of such insurance must be reinsured. To minimize reliance on third-party reinsurers and to permit the Company to retain the premiums and related risk on deeper coverage business, Triad reinsures this deeper coverage business with its wholly-owned subsidiary, Triad Guaranty Assurance Corporation (“TGAC”). As of December 31, 2003, TGAC had assumed approximately $59 million in risk from Triad.

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      The Company continues to maintain excess of loss reinsurance arrangements designed to protect the Company in the event of a catastrophic level of losses. The Company currently maintains $125 million of excess of loss reinsurance through non-affiliated reinsurers that have financial strength ratings of “AA” or better from Standard & Poor’s.

Defaults and Claims

      The claim process on private mortgage insurance begins with the insurer’s receipt of notification from the lender of a default on an insured’s loan. Default is defined in the primary master policy as the failure by the borrower to pay, when due, an amount at least equal to the scheduled monthly mortgage payment under the terms of the mortgage. The master policy requires lenders to notify the Company of default on a mortgage payment within 10 days of either (i) the date on which the borrower becomes four months in default or (ii) the date on which any legal proceeding affecting the loan commences, whichever occurs first. Notification is required within 45 days of default if it occurs when the first payment is due. The incidence of default is affected by a variety of factors including, but not limited to, changes in borrower income, unemployment, divorce, illness, and the level of interest rates. Defaults that are not cured generally result in a claim to the Company. Borrowers may cure defaults by making all delinquent loan payments or by selling the property and satisfying all amounts due under the mortgage. Reference is made to the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this document that notes default statistics at December 31 for the last two years.

      Claims result from defaults that are not cured. The frequency of claims does not directly correlate to the frequency of defaults due, in part, to the Company’s loss mitigation efforts and the borrower’s ability to overcome temporary financial setbacks. The likelihood that a claim will result from a default, and the amount of such claim, principally depend on the borrower’s equity at the time of default and the borrower’s (or the lender’s) ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage, as well as the effectiveness of loss mitigation efforts. The ability to mitigate a claim is affected by the local housing market, interest rates, employment growth, the housing supply, and the borrower’s desire to avoid foreclosure. During the default period, the Company works with the insured as well as the borrower in an effort to either reinstate the loan and eliminate the default, sell the property for an amount which results in a reduced claim submission, or minimize the claim submission with reduced foreclosure costs and expenses.

      The payment of claims is not evenly spread through the coverage period. Relatively few claims are paid during the first two years following issuance of insurance. A period of rising claim payments follows, which, based on industry experience, has historically reached its highest level in the third through sixth years after the loan origination. Thereafter, the number of claim payments made has historically declined at a gradual rate, although the rate of decline can be affected by local economic conditions. There can be no assurance that the historical pattern of claims will continue in the future.

      Generally, the Company does not pay a claim for loss under the master policy if the application for insurance for the loan in question contains fraudulent information, material omissions, or misrepresentations which increase the risk characteristics of the loan. The Company’s master policy also excludes any cost or expense related to the repair or remedy of any physical damage (other than “normal wear and tear”) to the property collateralizing an insured mortgage loan. Such physical damage may be caused by accident, natural occurrence, or other conditions.

      Under the terms of the master policy, the lender is required to file a claim with the Company no later than 60 days after it has acquired borrower’s title to the underlying property through foreclosure, a negotiated short sale, or a deed-in-lieu of foreclosure. A primary insurance claim amount includes (i) the amount of unpaid principal due under the loan; (ii) the amount of accumulated delinquent interest due on the loan (excluding late charges) to the date of claim filing; (iii) expenses advanced by the insured under the terms of the master policy, such as hazard insurance premiums, property maintenance expenses and property taxes

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      Within 60 days after the claim has been filed, the Company has the option of either (i) paying the coverage percentage specified on the certificate of insurance (usually 12% to 40% of the claim), with the insured retaining title to the underlying property and receiving all proceeds from the eventual sale of the property, or (ii) paying 100% of the claim amount in exchange for the lender’s conveyance of good and marketable title to the property to the Company, with the Company selling the property for its own account. The Company chooses the claim settlement option believed to cost the least. In most cases, the Company settles claims by paying the coverage percentage of the claim amount. At December 31, 2003, the Company held one property with a net realizable value of $146,000 which was acquired by electing to pay 100% of the claim amount.

Loss Mitigation

      Once a default notice is received, the Company attempts to mitigate its loss. Through proactive intervention with insured lenders and borrowers, the Company has been successful in reducing the number and severity of its claims for loss. Loss mitigation techniques include pre-foreclosure sales, property sales after foreclosure, advances to assist distressed borrowers who have suffered a temporary economic setback, and the use of repayment schedules, refinances, loan modifications, forbearance agreements, and deeds-in-lieu of foreclosure. Such mitigation efforts typically result in a savings to the Company over the percentage coverage amount payable under the certificate of insurance. Through loss mitigation efforts, the Company paid out approximately 66% of its potential exposure on claims in 2003, and since inception, has paid out 68% of its potential exposure.

Loss Reserves

      The Company establishes reserves to provide for the estimated costs of settling claims on loans reported in default and estimates of loans in default which have not been reported. Consistent with industry accounting practices, the Company does not establish loss reserves for future claims on insured loans currently not in default. See discussion on Loss Reserves under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 4 to the Consolidated Financial Statements for a detailed analysis of the activity in this account for the year.

      The Company’s reserving process is based upon the assumption that past experience, adjusted for the anticipated effect of current economic conditions and projected future economic trends, provides a reasonable basis for estimating future events. However, estimation of loss reserves is a difficult and inexact process. Economic conditions that have affected the development of loss reserves in the past may not necessarily affect development patterns in the future in either a similar manner or degree. Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, there can be no assurance that reserves will be adequate to cover ultimate loss developments on loans in default, currently or in the future. The Company’s profitability and financial condition could be adversely affected to the extent that the Company’s estimated reserves are insufficient to cover losses on loans in default.

Analysis of Direct Risk in Force

      A foundation of the Company’s business strategy is proactive risk selection. The Company analyzes its portfolio in a number of ways to identify any concentrations of risk or imbalances in risk dispersion. The Company believes that the quality of its insurance portfolio is affected predominantly by (i) the quality of loan originations (including the strength of the borrower and the marketability of the property); (ii) the attributes of loans insured (including LTV ratio, purpose of the loan, type of loan instrument, and type of underlying property securing the loan); (iii) the seasoning of the loans insured; (iv) the geographic dispersion of the

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      The Company reported $7.0 billion of direct risk in force as of December 31, 2003. Direct risk in force includes risk from both flow mortgage insurance as well as structured bulk mortgage insurance, adjusted for applicable stop loss limits.

      The following table provides information on direct risk in force (as determined on the basis of information available on the date of mortgage origination) by the categories indicated on December 31, 2003 and 2002.

Direct Risk in Force(1)

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(1)	Percentages represent distribution of risk in force on a per policy basis and does not account for applicable stop-loss amounts.
(2)	Refers to loans where payment adjustments are the same as mortgage interest rate adjustments.
(3)	Scheduled negative amortization is defined by the Company as the increase in loan balance that will occur if interest rates do not change. Loans with potential negative amortization will not have increasing principal balances unless interest rates increase.

      An important determinant of claim incidence is the relative amount of borrower’s equity in the home. For the industry as a whole, historical evidence indicates that, in general, claim incidence on loans with a higher LTV is greater than a loan with a lower LTV, all else being equal. The Company believes the higher premium rates charged on high LTV loans adequately reflects the additional risk.

      Approximately 8.2% of the Company’s risk in force is comprised of loans with an LTV greater than 95%. These high LTV loans are offered primarily to low and moderate income borrowers. The Company believes that these loans have higher risks than its other insured business and have often attracted borrowers with weak credit histories, generally resulting in higher loss ratios. In keeping with the Company’s established risk strategy, the Company has not aggressively solicited this segment of the industry. The Company does not routinely delegate the underwriting of high LTV loans.

      In 2000, the State of Illinois Insurance Department, as well as the insurance departments of several other states, began to permit mortgage insurers to write coverage on loans with LTVs in excess of 97% up to 100% and, in certain instances, up to 103%. This determination was made in response to the development by certain entities in the mortgage securitization market, including Fannie Mae and Freddie Mac, of programs that allowed LTVs in excess of 97%. These programs are designed to accommodate the credit-worthy borrower who lacks the ability or otherwise chooses not to provide a down payment on a home. The Company accepts loans with LTVs greater than 97% on a limited basis.

      The Company actively pursues only positively amortizing ARMs with industry standard caps. Payments on these loans adjust fully with interest rate adjustments. To date, the performance of the Company’s ARM loans has been consistent with that of its fixed rate portfolio. However, since historical claim frequency data on ARMs has not yet been tested during a prolonged period of economic stress, there can be no assurance that claim frequency on ARMs may not eventually be higher, particularly during a period of rising interest rates combined with decreasing housing prices. In its normal course of operations, the Company’s existing underwriting policy does not permit coverage of ARMs with “scheduled” negative amortization. ARMs with

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      Historical evidence indicates that higher-priced properties experience wider fluctuations in value than moderately priced residences. These fluctuations exist primarily because there is a smaller pool of qualified buyers for higher-priced homes which, in turn, reduces the likelihood of achieving a quick sale at fair market value when necessary to avoid a default.

      The Company believes that 15-year mortgages present a lower level of risk than 30-year mortgages, primarily as a result of the faster amortization and the more rapid accumulation of borrower equity in the property. Accordingly, the Company charges lower premium rates on these loans than on comparable 30-year mortgages.

      The Company believes that the risk of claim is also affected by the