##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|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.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(336) 723-1282


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

None


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.

|                                                                                    |  |                                               
|----------------------------------------------------------------------------------- |  | ----------------------------------------------
|Portions of the following documents are incorporated by reference                   |  | Part of this Form 10-K into which the document
|into this Form 10-K:                                                                |  | is incorporated by reference:                 
|                                                                                    |  |                                               
|Triad Guaranty Inc.
    Proxy Statement for 2004 Annual Meeting
    of Stockholders |  | Part III                                      



---






---



##### 



TABLE OF CONTENTS

|                                                                                 |  |                                                                                           |    |      |    | 
|-------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                                 |  |                                                                                           |    | Page
|                                                                                 |  |                                                                                           |    |     
|PART I                                                                          
|Item 1.                                                                          |  | Business                                                                                  |    |      | 1  | 
|Item 2.                                                                          |  | Properties                                                                                |    |      | 23 | 
|Item 3.                                                                          |  | Legal Proceedings                                                                         |    |      | 24 | 
|Item 4.                                                                          |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 24 | 
|PART II                                                                         
|Item 5.                                                                          |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |    |      | 25 | 
|Item 6.                                                                          |  | Selected Financial Data                                                                   |    |      | 26 | 
|Item 7.                                                                          |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 27 | 
|Item 7a                                                                          |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 43 | 
|Item 8.                                                                          |  | Financial Statements and Supplementary Data                                               |    |      | 43 | 
|Item 9.                                                                          |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 44 | 
|Item 9a                                                                          |  | Controls and Procedures                                                                   |    |      | 44 | 
|PART III                                                                        
|Item 10.                                                                         |  | Directors and Executive Officers of the Registrant                                        |    |      | 44 | 
|Item 11.                                                                         |  | Executive Compensation                                                                    |    |      | 44 | 
|Item 12.                                                                         |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 44 | 
|Item 13.                                                                         |  | Certain Relationships and Related Transactions                                            |    |      | 44 | 
|Item 14                                                                          |  | Principal Accountant Fees and Services                                                    |    |      | 45 | 
|PART IV                                                                         
|Item 15.                                                                         |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 45 | 
|Signatures                                                                       |  |                                                                                           | 46 |     
|Index to Consolidated Financial Statements and
    Financial Statement Schedules |  |                                                                                           | 48 |     



---



##### 



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

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

1



---



##### 



the insured lender, subject to the Companys
underwriting approval, usually in order to comply with
investors requirements to reduce investor loss exposure on
loans they purchase.


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

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

2



---



##### 



percentage of the total original balances of all
loans in the pool. The Company does not offer this traditional
form of pool insurance.




| |                             
| | ----------------------------
| | Structured Bulk Transactions

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.



| |                      
| | ---------------------
| | Risk-sharing Products

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.

3



---



##### 



Generally, mortgage insurance is renewable at a
rate determined when the insurance on the loan was initially
issued.


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.

4



---



##### 



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.

5



---



##### 



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.

6



---



##### 





| |                         
| | ------------------------
| | Risk Management Approach

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |                                           
| | ------------------------------------------
| | Underwriting Process for Flow
    Business

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

7



---



##### 



market are modified to address concerns resulting
from the Companys review of regional economies and housing
patterns.


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 LoanSM 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.



| |                                              
| | ---------------------------------------------
| | Underwriting Structured Bulk
    Transactions

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

8



---



##### 



Levels. The Companys pricing for structured
bulk transactions is commensurate with a transactions risk
profile. The Company also employs an audit procedure to test the
integrity of the loan level data provided to Triad. The risk
review and audit procedure may result in a request by the
Company to remove certain loans from the transaction.


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 TAXISM 
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 XpressSM, 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

9



---



##### 



relevant to policyholders, agents, insurance
brokers, and intermediaries. Such ratings are not directed to
the protection of investors and do not apply to any securities
issued by the Company.


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.



| |                          
| | -------------------------
| | Risk-sharing Arrangements

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 LEAPSM (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.



| |                  
| | -----------------
| | Other Reinsurance

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.

10



---



##### 



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



| |         
| | --------
| | Defaults

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

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

11



---



##### 



prorated to the date of claim filing; and (iv)
certain foreclosure and other expenses, including attorneys
fees. Such claim amount is subject to review and possible
adjustment by the Company. Depending on the applicable state
foreclosure law, an average of about 12 months elapses from
date of default to payment of claim on an uncured default. The
Companys experience indicates that the claim amount on a
policy generally ranges from 110% to 115% of the unpaid
principal amount of a foreclosed loan.


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

12



---



##### 



underlying properties subject to mortgage
insurance; and (v) the quality and integrity of lenders
from which the Company receives loans to insure.




| |                                       
| | --------------------------------------
| | Lender and Product
    Characteristics

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)

|                                                     |  |             |       |      |  |   |       |  
|---------------------------------------------------- |  | ----------- | ----- | ---- |  | - | ----- | -
|                                                     |  |            
|                                                     |  | December 31
|                                                     |  |            
|                                                     |  | 2003        |       | 2002
|                                                     |  |             |       |     
|Direct Risk in Force(dollars in millions)            |  |             |       |      |  |   |       |  
|Primary                                              |  | $           | 7,024 |      |  | $ | 5,791 |  
|Pool                                                 |  |             | 0     |      |  |   | 0     |  
|                                                     |  |             |       |      |  |   |       |  
|Total                                                |  | $           | 7,024 |      |  | $ | 5,791 |  
|                                                     |  |             |       |      |  |   |       |  
|Direct Risk in Force by Product(dollars in millions) |  |             |       |      |  |   |       |  
|Flow                                                 |  | $           | 6,411 |      |  | $ | 5,452 |  
|Bulk                                                 |  |             | 613   |      |  |   | 339   |  
|                                                     |  |             |       |      |  |   |       |  
|Total                                                |  | $           | 7,024 |      |  | $ | 5,791 |  
|                                                     |  |             |       |      |  |   |       |  
|Lender Concentration (excludes
    bulk):            |  |             |       |      |  |   |       |  
|Top 10 lenders (by original applicant)               |  |             | 67.4  | %    |  |   | 58.9  | %
|LTV:                                                 |  |             |       |      |  |   |       |  
|95.01% and above                                     |  |             | 8.2   | %    |  |   | 5.1   | %
|90.01% to 95.00%                                     |  |             | 37.0  | %    |  |   | 42.0  | %
|90.00% and below                                     |  |             | 54.8  | %    |  |   | 52.9  | %
|                                                     |  |             |       |      |  |   |       |  
|Total                                                |  |             | 100.0 | %    |  |   | 100.0 | %
|                                                     |  |             |       |      |  |   |       |  
|Loan Type:                                           |  |             |       |      |  |   |       |  
|Fixed                                                |  |             | 80.8  | %    |  |   | 87.3  | %
|ARM (positive amortization)(2)                       |  |             | 19.2  | %    |  |   | 12.7  | %
|ARM (potential negative amortization)(3)             |  |             | 0.0   | %    |  |   | 0.0   | %
|ARM (scheduled negative amortization)(3)             |  |             | 0.0   | %    |  |   | 0.0   | %
|Other                                                |  |             | 0.0   | %    |  |   | 0.0   | %
|                                                     |  |             |       |      |  |   |       |  
|Total                                                |  |             | 100.0 | %    |  |   | 100.0 | %
|                                                     |  |             |       |      |  |   |       |  
|Mortgage Term:                                       |  |             |       |      |  |   |       |  
|15 years and under                                   |  |             | 7.2   | %    |  |   | 5.2   | %
|Over 15 years                                        |  |             | 92.8  | %    |  |   | 94.8  | %
|                                                     |  |             |       |      |  |   |       |  
|Total                                                |  |             | 100.0 | %    |  |   | 100.0 | %
|                                                     |  |             |       |      |  |   |       |  

13



---



##### 



|                                                        |  |             |       |      |  |  |       |  
|------------------------------------------------------- |  | ----------- | ----- | ---- |  |  | ----- | -
|                                                        |  |            
|                                                        |  | December 31
|                                                        |  |            
|                                                        |  | 2003        |       | 2002
|                                                        |  |             |       |     
|Property Type:                                          |  |             |       |      |  |  |       |  
|Noncondominium (principally single-family
    detached) |  |             | 94.3  | %    |  |  | 94.6  | %
|Condominium                                             |  |             | 5.7   | %    |  |  | 5.4   | %
|                                                        |  |             |       |      |  |  |       |  
|Total                                                   |  |             | 100.0 | %    |  |  | 100.0 | %
|                                                        |  |             |       |      |  |  |       |  
|Occupancy Status:                                       |  |             |       |      |  |  |       |  
|Primary residence                                       |  |             | 92.1  | %    |  |  | 94.4  | %
|Second home                                             |  |             | 2.6   | %    |  |  | 2.1   | %
|Nonowner occupied                                       |  |             | 5.3   | %    |  |  | 3.5   | %
|                                                        |  |             |       |      |  |  |       |  
|Total                                                   |  |             | 100.0 | %    |  |  | 100.0 | %
|                                                        |  |             |       |      |  |  |       |  
|Mortgage Amount:                                        |  |             |       |      |  |  |       |  
|$200,000 or less                                        |  |             | 69.5  | %    |  |  | 72.2  | %
|Over $200,000                                           |  |             | 30.5  | %    |  |  | 27.8  | %
|                                                        |  |             |       |      |  |  |       |  
|Total                                                   |  |             | 100.0 | %    |  |  | 100.0 | %
|                                                        |  |             |       |      |  |  |       |  



---



|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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

14



---



##### 



potential negative amortization
characteristics because of possible interest rate increases and
borrower payment option changes are accepted under limited
conditions for approved lenders.


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 type of property securing the insured loan.
In managements opinion, loans on single-family detached
housing are subject to less risk of claim incidence than loans
on other types of properties. The Company believes that attached
housing types, particularly condominiums and cooperatives, are a
higher risk because, in most areas, condominiums and
cooperatives tend to be more susceptible to downward
fluctuations in value than single-family detached dwellings in
the same market.

Loans on primary residences that were owner
occupied at the time of loan origination constituted
approximately 92% of the Companys risk in force at
December 31, 2003. Because management believes that loans
on non-owner occupied properties represent a substantially
higher risk of claim incidence and are subject to greater value
declines than loans on primary homes, the Company does not
actively pursue these loans.

The Companys book of business is less
mature than that of the private mortgage insurance industry as a
whole, with the Companys direct risk in force having a
weighted average life of 1.9 years at December 31,
2003, and 2.3 years at December 31, 2002, compared to
an estimated industry average of 2.5 years at
December 31, 2003.

15



---



##### 



The following table shows the percentage of
direct risk in force as of December 31, 2003, for policies
written from 1988 through 2003 and cumulative loss ratio
(calculated as direct losses paid divided by direct premiums
received, in each case for a particular certificate year) which
has developed through December 31, 2003. It excludes the
effects of reinsurance.

|            |  |               |         |          |  |                              |       |   |  |  |      |  
|----------- |  | ------------- | ------- | -------- |  | ---------------------------- | ----- | - |  |  | ---- | -
|Certificate |  | Direct Risk   |         | Percent  |  | Cumulative Ratio of Losses  
|Year        |  | in Force      |         | of Total |  | Paid to Premiums Received(1)
|            |  |               |         |          |  |                             
|            |  | (In millions) |         |          |  |                             
|1988        |  | $             | 0.1     |          |  |                              | 0.0   | % |  |  | 16.0 | %
|1989        |  |               | 0.3     |          |  |                              | 0.0   |   |  |  | 24.5 |  
|1990        |  |               | 0.7     |          |  |                              | 0.0   |   |  |  | 20.5 |  
|1991        |  |               | 2.1     |          |  |                              | 0.0   |   |  |  | 12.3 |  
|1992        |  |               | 5.2     |          |  |                              | 0.1   |   |  |  | 8.9  |  
|1993        |  |               | 17.2    |          |  |                              | 0.2   |   |  |  | 5.7  |  
|1994        |  |               | 17.6    |          |  |                              | 0.3   |   |  |  | 10.1 |  
|1995        |  |               | 27.1    |          |  |                              | 0.4   |   |  |  | 12.5 |  
|1996        |  |               | 40.0    |          |  |                              | 0.6   |   |  |  | 13.1 |  
|1997        |  |               | 70.5    |          |  |                              | 1.0   |   |  |  | 9.0  |  
|1998        |  |               | 177.3   |          |  |                              | 2.5   |   |  |  | 5.4  |  
|1999        |  |               | 147.9   |          |  |                              | 2.1   |   |  |  | 6.1  |  
|2000        |  |               | 137.0   |          |  |                              | 1.9   |   |  |  | 19.6 |  
|2001        |  |               | 790.9   |          |  |                              | 11.3  |   |  |  | 7.7  |  
|2002        |  |               | 1,758.6 |          |  |                              | 25.0  |   |  |  | 2.9  |  
|2003        |  |               | 3,831.6 |          |  |                              | 54.6  |   |  |  | 0.0  |  
|            |  |               |         |          |  |                              |       |   |  |  |      |  
|Total       |  | $             | 7,024.0 |          |  |                              | 100.0 | % |  |  |      |  
|            |  |               |         |          |  |                              |       |   |  |  |      |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Claim activity is not spread evenly throughout
    the coverage period of the book of business. Based on the
    Companys and the industrys historical experience,
    claims incidence is highest in the third through sixth years
    after loan origination, and relatively few claims are paid
    during the first two years after loan origination. Thus, the
    cumulative loss experience of recent certificate years is not
    indicative of ultimate losses.

The table above reflects a relatively higher
cumulative ratio of losses paid to premium received for the 2000
policy year at this stage of development. This is due, in part,
to the high level of refinancing for this policy year and the
resulting lower aggregate level of premium received.

16



---



##### 



Geographic
Dispersion

The following tables reflect the percentage of
direct risk in force on the Companys book of business (by
location of property) for the top ten states and the top ten
metropolitan statistical areas (MSAs) as of
December 31, 2003.

|               |  |             |       |              |  |                               |  |  |       | 
|-------------- |  | ----------- | ----- | ------------ |  | ----------------------------- |  |  | ----- | 
|               |  | December 31 |       |              |  | December 31                  
|Top Ten States |  | 2003        |       | Top Ten MSAs |  | 2003                         
|               |  |             |       |              |  |                              
|California     |  |             | 11.8% |              |  | Chicago, IL                   |  |  | 3.9%  | 
|Florida        |  |             | 7.8   |              |  | Atlanta, GA                   |  |  | 3.0   | 
|Texas          |  |             | 7.5   |              |  | Los Angeles/ Long Beach, CA   |  |  | 2.9   | 
|Georgia        |  |             | 4.9   |              |  | Phoenix/ Mesa, AZ             |  |  | 2.8   | 
|North Carolina |  |             | 4.6   |              |  | Houston, TX                   |  |  | 2.1   | 
|Illinois       |  |             | 4.4   |              |  | Riverside/ San Bernardino, CA |  |  | 2.1   | 
|Arizona        |  |             | 4.0   |              |  | New York, NY                  |  |  | 1.8   | 
|New York       |  |             | 3.3   |              |  | Dallas, TX                    |  |  | 1.5   | 
|New Jersey     |  |             | 3.3   |              |  | Denver, CO                    |  |  | 1.5   | 
|Colorado       |  |             | 3.3   |              |  | Minneapolis/ St. Paul, MN     |  |  | 1.4   | 
|               |  |             |       |              |  |                               |  |  |       | 
|Total          |  |             | 55.0% |              |  | Total                         |  |  | 22.9% | 
|               |  |             |       |              |  |                               |  |  |       | 

While the Company continues to diversify its risk
in force geographically, a prolonged regional recession,
particularly in its high concentration areas, or a prolonged
national economic recession could significantly increase loss
development.

Investment Portfolio

See complete discussion of the investment
portfolio in Managements Discussion and Analysis of
Financial Condition and Results of Operations section of this
document.

Regulation



| |                  
| | -----------------
| | Direct Regulation

The Companys insurance subsidiaries are
subject to comprehensive, detailed regulation, principally for
the protection of policyholders and their borrowers rather than
for the benefit of investors, by the insurance departments of
the various states in which each insurer is licensed to transact
business. Although their scope varies, state insurance laws, in
general, grant broad powers to supervisory agencies or officials
to examine companies and to enforce rules or exercise discretion
touching almost every significant aspect of the insurance
business. These include the licensing of companies to transact
business and varying degrees of control over claims handling
practices, reinsurance requirements, premium rates, the forms
and policies offered to customers, financial statements,
periodic financial reporting, permissible investments, and
adherence to financial standards relating to statutory surplus,
dividends, and other criteria of solvency intended to assure the
satisfaction of obligations to policyholders.

All states have enacted legislation that requires
each insurance company in a holding company system to register
with the insurance regulatory authority of its state of domicile
and furnish to the regulator financial and other information
concerning the operations of companies within the holding
company system that may materially affect the operations,
management, or financial condition of the insurers within the
system. Generally, all transactions within a holding company
system between an insurer and its affiliates must be fair and
reasonable and the insurers statutory policyholders
surplus following any transaction with an affiliate must be both
reasonable in relation to its outstanding liabilities and
adequate for its needs. Most states also regulate transactions
between insurance companies and their parents and/or affiliates.
There can be no

17



---



##### 



assurance that state regulatory requirements will
not become more stringent in the future and have an adverse
effect on the Company.


Because the Company is an insurance holding
company and Triad is an Illinois domiciled insurance company,
the Illinois insurance laws regulate, among other things,
certain transactions in the Companys Common Stock and
certain transactions between Triad and the Company or
affiliates. Specifically, no person may, directly or indirectly,
offer to acquire or acquire beneficial ownership of more than
10% of any class of outstanding securities of the Company or its
subsidiaries unless such person files a statement and other
documents with the Illinois Director of Insurance and obtains
the Directors prior approval. In addition, material
transactions between Triad and the Company or affiliates are
subject to certain conditions, including that they be fair
and reasonable. These restrictions generally apply to all
persons controlling or under common control with the insurance
companies. Control is presumed to exist if 10% or
more of Triads voting securities is owned or controlled,
directly or indirectly, by a person, although the Illinois
Director may find that control, in fact, does or
does not exist where a person owns or controls either a lesser
or greater amount of securities. Other states in addition to
Illinois may regulate affiliated transactions and the
acquisition of control of the Company or its insurance
subsidiaries.

Triad is required by Illinois insurance laws to
provide for a contingency reserve in an amount equal to at least
50% of earned premiums in its statutory financial statements.
Such reserves must be maintained for a period of 10 years except
in circumstances where high levels of losses exceed regulatory
thresholds. The contingency reserve, designed to provide a
cushion against the effect of adverse economic cycles, has the
effect of reducing statutory surplus and restricting dividends
and other distributions by Triad. At December 31, 2003,
Triad had statutory policyholders surplus of
$128.6 million and a statutory contingency reserve of
$302.7 million. At December 31, 2002, Triad had
statutory policyholders surplus of $112.9 million and
a statutory contingency reserve of $245.0 million.
Triads statutory earned surplus was $44.5 million at
December 31, 2003, and $29.2 million at
December 31, 2002, reflecting growth in statutory net
income greater than the increase in the statutory contingency
reserve.

The insurance laws of Illinois provide that Triad
may pay dividends only out of statutory earned surplus and
further establish standards limiting the maximum amount of
dividends which may be paid without prior approval by the
Illinois Director. Under such standards, Triad may pay dividends
during any 12-month period equal to the greater of (i) 10%
of the preceding year-end statutory policyholders surplus
or (ii) the preceding years net income. In addition,
insurance regulatory authorities have broad discretion to limit
the payment of dividends by insurance companies.

Although not subject to a rating law in Illinois,
premium rates for mortgage insurance are subject to regulation
in most states to protect policyholders against the adverse
effects of excessive, inadequate, or unfairly discriminatory
rates and to encourage competition in the insurance marketplace.
Any increase in premium rates must be justified, generally on
the basis of the insurers loss experience, expenses, and
future trend analysis. The general mortgage default experience
also may be considered.

TGAC, as a subsidiary of Triad under the
insurance laws of the state of Illinois in December 1994 and as
an Illinois domiciled insurer, is subject to all Illinois
insurance regulatory requirements applicable to Triad.

Triad Re, organized as a subsidiary of Triad
under the insurance laws of the state of Vermont in November
1999 and as a Vermont domiciled insurer, is subject to Vermont
insurance regulatory requirements.

Triad, TGAC, and Triad Re are each subject to
examination of their affairs by the insurance departments of
every state in which they are licensed to transact business. The
Illinois Insurance Director and Vermont Insurance Commissioner
periodically conduct financial condition examinations of
insurance companies domiciled in their states. The most recent
examinations of Triad and TGAC were issued by the Illinois
Insurance Department on February 3, 2000, and covered the
period January 1, 1995, through December 31, 1998. No
material recommendations were made as a result of these
examinations. The Illinois Insurance Department has began its
customary examination for the years 1999 through 2003. The
examination is in the preliminary stages and, as a result, there
is no information to report on this examination.

18



---



##### 



A number of states generally limit the amount of
insurance risk which may be written by a private mortgage
insurer to 25 times the insurers total policyholders
surplus. This restriction is commonly known as the
risk-to-capital requirement.

Mortgage insurers are generally restricted by
state insurance laws and regulations to writing residential
mortgage guaranty insurance business only. This restriction
generally prohibits Triad from using its capital resources in
support of other types of insurance and restricts its
noninsurance business. However, noninsurance businesses of the
Company would not generally be subject to regulation under state
insurance laws.

Regulation of reinsurance varies by state. Except
for Illinois, Wisconsin, New York, Ohio, and California, most
states have no special restrictions on reinsurance that would
apply to private mortgage insurers other than standard
reinsurance requirements applicable to property and casualty
insurance companies. Certain restrictions, including reinsurance
trust fund or letter of credit requirements, apply under
Illinois law to domestic companies and under the laws of several
other states to any licensed company ceding business to
unlicensed reinsurers. If a reinsurer is not admitted or
approved, the company doing business with the reinsurer cannot
take credit in its statutory financial statements for the risk
ceded to such reinsurer absent compliance with the reinsurance
security requirements. In addition, some states in which Triad
does business have limited private mortgage insurers to a
maximum policy coverage limit of 25% of the insureds claim
amount and require coverages in excess of 25% to be reinsured
through another licensed mortgage insurer.

The National Association of Insurance
Commissioners (NAIC) adopted a risk-based capital
(RBC) formula designed to help regulators identify
property and casualty insurers in need of additional capital.
The RBC formula establishes minimum capital needs based upon
risks applicable to individual insurers, including asset risks,
off-balance sheet risks (such as guarantees for affiliates and
contingent liabilities), and credit risks (such as reinsurance
ceded and receivables). The NAIC and the Illinois Department of
Insurance currently do not require mortgage guaranty insurers to
file RBC analysis in their annual statements.

As the dominant purchasers and sellers of
conventional mortgage loans and beneficiaries of private
mortgage guaranty insurance, Government Sponsored Enterprises
(GSEs) Fannie Mae and Freddie Mac impose requirements on private
mortgage insurers in order for such insurers to be eligible to
insure loans sold to them. Freddie Macs current
eligibility requirements impose limitations on the types of risk
insured, standards for geographic and customer diversification
of risk, procedures for claims handling, acceptable underwriting
practices, and financial requirements which generally mirror
state insurance regulatory requirements. These requirements are
subject to change from time to time. Freddie Mac most recently
modified its eligibility guidelines in March 2002.

Fannie Mae has recently completed the process of
revising its approval requirements for mortgage insurers. The
new requirements require prior approval by Fannie Mae for many
of Triads activities and new products, allow for other
approved types of mortgage insurers rated less than
AA, and give Fannie Mae increased rights to revise
the eligibility standards of mortgage insurers. While continuing
to study the final requirements, we do not see any material
impact on our current or future operations as a result of the
new rules, although a material impact could still occur if our
interpretation is incorrect.

While Triad is an approved mortgage insurer for
both Fannie Mae and Freddie Mac and meets all existing
eligibility requirements, there can be no assurance, however,
that such requirements or the interpretation of the requirements
will not change or that Triad will continue to meet such
requirements. In addition, to the extent Fannie Mae or Freddie
Mac assumes default risk for itself that would otherwise be
insured, changes current guarantee fee arrangements, allows
alternative credit enhancements, alters or liberalizes
underwriting guidelines on low down payment mortgages it
purchases, or otherwise changes its business practices or
processes with respect to such mortgages, private mortgage
insurers may be affected. Triad could be particularly adversely
affected if changes in eligibility requirements regarding
captive arrangements that permit premium cessions greater than
25% were to impede Triads ability to offer this form of
captive reinsurance.

19



---



##### 



Fannie Mae and Freddie Mac both accept reduced
mortgage insurance coverage from lenders that deliver loans
approved by the their automated underwriting services, Desktop
Underwriter and Loan Prospector, respectively. Generally, Fannie
Maes and Freddie Macs reduced mortgage insurance
coverage options provide for (i) across-the-board
reductions in required MI coverage on 30-year fixed-rate loans
recommended for approval by the their automated underwriting
services to the levels in effect in 1994; (ii) reduction in
required MI coverage for loans with only a 5% down payment (a
95% LTV) from 30% to 25% of the mortgage loan covered by MI; and
(iii) reduction in required MI coverage for loans with a
10% down payment (a 90% LTV loan) from 25% to 17% of the
mortgage loan covered by MI. In addition, Fannie Mae and Freddie
Mac have implemented other programs that further reduce MI
coverage upon the payment of an additional fee by the lender.
Under this option, a 95% LTV loan will require 18% of the
mortgage loan to have mortgage insurance coverage. Similarly, a
90% LTV loan will require 12% of the mortgage loan to have
mortgage insurance coverage. In order for the homebuyer to have
MI at these levels, such loans would require a payment at
closing or a higher note rate.

Certain national mortgage lenders and a large
segment of the mortgage securitization market, including Fannie
Mae and Freddie Mac, generally will not purchase mortgages or
mortgage-backed securities unless the private mortgage insurance
on the mortgages has been issued by an insurer with a financial
strength rating of at least AA- from S&P or
Fitch or a rating of at least Aa3 from Moodys.
Fannie Mae and Freddie Mac require mortgage guaranty insurers to
maintain two ratings of AA- or better. Triad has a
financial strength rating of AA from S&P and
Fitch and a rating of Aa3 from Moodys.
S&P, Fitch, and Moodys consider Triads
consolidated operations and financial position in determining
the rating. There can be no assurance that Triads ratings,
the methods by which the ratings are determined, or the
eligibility requirements of Fannie Mae and Freddie Mac will not
change.

The Real Estate Settlement and Procedures Act of
1974 (RESPA) applies to most residential mortgages
insured by Triad, and related regulations provide that the
provision of services involving mortgage insurance is a
settlement service for purposes of loans subject to
RESPA. Subject to limited exceptions, RESPA prohibits persons
from accepting anything of value for referring real estate
settlement services to any provider of such services. Although
many states prohibit mortgage insurers from giving rebates,
RESPA has been interpreted to cover many non-fee services as
well.

Various lawsuits have been filed against each of
the national mortgage insurers. See Item 3: Legal
Proceedings for more information.

Most originators of mortgage loans are required
to collect and report data relating to a mortgage loan
applicants race, nationality, gender, marital status, and
census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 (HMDA). The purpose
of HMDA is to detect possible discrimination in home lending
and, through disclosure, to discourage such discrimination.
Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of
several states, mortgage insurers are currently prohibited from
discriminating on the basis of certain classifications. All but
one of the active mortgage insurers, through their trade
association, the Mortgage Insurance Companies of America
(MICA), have entered into an agreement with the
Federal Financial Institutions Examinations Council
(FFIEC) to report the same data on loans submitted
for insurance as is required for most mortgage lenders under
HMDA.

Upon request by an insured meeting certain
specified guidelines, Triad must cancel the mortgage insurance
for a mortgage loan. Fannie Mae and Freddie Mac guidelines, as
well as several existing and proposed state statutes, contain
various provisions which give borrowers the right to request
cancellation of borrower-paid mortgage insurance when specified
conditions are met.

The Homeowners Protection Act of 1998 provides
for certain termination and cancellation requirements for
borrower-paid mortgage insurance and requires mortgage lenders
to periodically update borrowers about their private mortgage
insurance. Under the legislation, borrowers may generally
request termination of mortgage insurance once the LTV reaches
80%, provided that certain conditions are met. The legislation
further requires lenders to automatically cancel borrower-paid
private mortgage insurance when home equity reaches 78% if
certain conditions are met. The legislation also requires
lenders to notify borrowers that they

20



---



##### 



have private mortgage insurance and requires
certain disclosures to borrowers of their rights under the law.
Because most mortgage borrowers who obtain private mortgage
insurance do not achieve 20% equity in their homes before the
homes are sold or the mortgages refinanced, the Company has not
lost and does not expect to lose a significant amount of its
insurance in force due to the enactment of this legislation.




| |                    
| | -------------------
| | Indirect Regulation

The Company, Triad, and Triads subsidiaries
are also indirectly, but significantly, impacted by regulations
affecting purchasers of mortgage loans, such as Fannie Mae and
Freddie Mac, and regulations affecting governmental insurers,
such as the FHA and the Department of Veterans Affairs
(VA), as well as regulation affecting lenders.
Private mortgage insurers, including Triad, are highly dependent
upon federal housing legislation and other laws and regulations
which affect the demand for private mortgage insurance and the
housing market generally. For example, housing legislation
enacted in 1992 permits up to 100% of borrower closing costs to
be financed by loans insured by FHA, a significant increase from
the previous 57% limit. Also, in 1994, HUD reduced the initial
premium (payable at loan origination) for FHA insurance from
3.0% to 2.25%. FHA loan limits are adjusted in response to
changes in the Freddie Mac/ Fannie Mae conforming loan limits.
Currently, the maximum single family home mortgage that the FHA
can insure is $290,319. The maximum FHA loan amount is subject
to adjustment and may increase in the future. While there is no
maximum VA loan amount, lenders will generally limit VA loans to
$240,000 according to the VA. This implied maximum VA loan
amount may also increase in the future. Any future legislation
that increases the number of persons eligible for FHA or VA
mortgages could have an adverse effect on Triads ability
to compete with the FHA or VA.

Pursuant to the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), the
Office of Thrift Supervision (OTS) issued risk-based
capital rules for savings institutions. These rules establish a
lower capital requirement for a low down payment loan that is
insured with private mortgage insurance, as opposed to remaining
uninsured. Furthermore, the guidelines for real estate lending
policies applicable to savings institutions and commercial banks
provide that such institutions should require appropriate credit
enhancement in the form of either mortgage insurance or readily
marketable collateral for any high LTV mortgage. Future changes,
if any, to FIRREAs risk-based capital rules or the
guidelines for real estate lending policies applicable to
savings institutions and commercial banks could affect demand
for private mortgage insurance products.

In the first quarter of 2002, the Office of
Federal Housing Enterprise Oversight (OFHEO) released its
risk-based capital rules for Fannie Mae and Freddie Mac. The
regulation provides capital guidelines for Fannie Mae and
Freddie Mac in connection with their use of various types of
credit protection counterparties including a more preferential
capital credit for insurance from a AAA rated
private mortgage insurer than for insurance from a
AA rated private mortgage insurer. The phase-in
period for the new rule is ten years. The Company does not
believe the new rules had an adverse impact on it when issued or
in 2003 nor that the new rules will have a significant adverse
impact on the Company in the future. However, if the new capital
guidelines result in future changes to the preferences of Fannie
Mae and Freddie Mac regarding their use of the various types of
credit enhancements or their choice of mortgage insurers based
on credit rating, the Companys financial condition could
be significantly harmed.

Fannie Mae and Freddie Mac each provide their own
automated underwriting system to be used by mortgage originators
selling mortgages to them. These systems, which are provided by
Triad as a service to the Companys contract underwriting
customers, streamline the mortgage process and reduce costs. The
increased acceptance of these products is driving the automation
of the process by which mortgage originators sell loans to
Fannie Mae and Freddie Mac, a trend which is expected to
continue. As a result, Fannie Mae and Freddie Mac could develop
the capability to become the decision maker regarding selection
of a private mortgage insurer for loans sold to them, a decision
traditionally made by the mortgage originator. The Company,
however, is not aware of any plans to do so. The concentration
of purchasing power that would be attained if such development,
in fact, occurred could adversely affect, from the
Companys perspective, the terms on which mortgage
insurance is written on loans sold to Fannie Mae and Freddie Mac.

21



---



##### 



Additionally, proposals have been advanced which
would allow Fannie Mae and Freddie Mac additional flexibility in
determining the amount and nature of alternative recourse
arrangements or other credit enhancements which they could
utilize as substitutes for private mortgage insurance. The
Company cannot predict if or when any of the foregoing
legislation or proposals will be adopted, but if adopted and
depending upon the nature and extent of revisions made, demand
for private mortgage insurance may be adversely affected. There
can be no assurance that other federal laws affecting such
institutions and entities will not change, or that new
legislation or regulation will not be adopted.

In 1996, the Office of the Comptroller of the
Currency (OCC) granted permission to national banks
to have a reinsurance company as a wholly-owned operating
subsidiary for the purpose of reinsuring mortgage insurance
written on loans originated, purchased, or serviced by such
banks. Several subsequent applications by banks to offer
reinsurance have been approved by the OCC including at least one
request to engage in quota share reinsurance. The OTS, which
regulates thrifts and savings institutions, has approved
applications for such captive arrangements as well. The
reinsurance subsidiaries of national banks or savings
institutions could become significant competitors of the Company
in the future.

In November 1999, the Gramm-Leach-Bliley Act,
also known as the Financial Services Modernization Act of 1999,
became effective and allows holding companies of banks also to
own a company that underwrites insurance. As a result of this
Act, banking organizations that previously were not allowed to
be affiliated with insurance companies may now do so. Management
does not know to what extent this expanded opportunity for banks
will be utilized or how it will affect the mortgage insurance
industry. However, the evolution of federal law making it easier
for banks to engage in the mortgage guaranty business through
affiliates may subject mortgage guaranty insurers to more
intense competition and risk-sharing with bank lender customers.

Web Site Access to Company Reports

The Company makes available, free of charge,
through its Web site, its Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports as soon as
reasonably practicable after this material is electronically
filed with or furnished to the Securities and Exchange
Commission. This material may be accessed by visiting the
Investors/ Financial Information/ SEC Filing Information section
of the Companys Web site at www.triadguaranty.com.

Employees

As of December 31, 2003, the Company
employed approximately 225 persons. Employees are not covered by
any collective bargaining agreement. The Company considers its
employee relations to be satisfactory.

Executive Officers

The executive officers of the Company are as
follows:

|                        |  |                                                                                                        |  |     |    | 
|----------------------- |  | ------------------------------------------------------------------------------------------------------ |  | --- | -- | 
|Name                    |  | Position                                                                                               |  | Age
|                        |  |                                                                                                        |  |    
|William T. Ratliff, III |  | Chairman of the Board of the Company and Triad                                                         |  |     | 50 | 
|Darryl W. Thompson      |  | President, Chief Executive Officer, and Director
    of the Company and Triad                          |  |     | 63 | 
|Ron D. Kessinger        |  | Executive Vice President and Chief Financial
    Officer of the Company and Triad                      |  |     | 49 | 
|Kenneth N. Lard         |  | Executive Vice President of the Company and
    Executive Vice President, Sales and Marketing of Triad |  |     | 45 | 
|Earl F. Wall            |  | Senior Vice President, Secretary, and General
    Counsel of the Company and Triad                     |  |     | 46 | 
|Kenneth C. Foster       |  | Senior Vice President, Risk Management of Triad                                                        |  |     | 55 | 

22



---



##### 



William T. Ratliff, IIIhas been the Chairman of the Board of
the Company since 1993. Mr. Ratliff has also been Chairman
of the Board of Triad since 1989, President of CIC since 1990
and was President and General Partner of CML from 1987 to 1995.
Since 1995, he has served as President of Collat, Inc.,
CMLs corporate general partner. Mr. Ratliff has been
Chairman of New South Federal Savings Bank (New
South) since 1986 and President and Director of New South
Bancshares, Inc., New Souths parent company, since 1994.
From March 1994 until December 1996, Mr. Ratliff served as
President of Southwide Life Insurance Corp., of which he had
been Executive Vice President since 1993. Mr. Ratliff joined CML
in 1981 after completing his doctoral degree with a study of
planning processes in an insurance company. Previously, he
worked as an educator, counselor, and organizational consultant.

Darryl W. Thompsonhas been the President, Chief
Executive Officer, and a Director of the Company since 1993.
Mr. Thompson has also been President, Chief Executive
Officer, and a Director of Triad since its inception in 1987.
From 1986 to 1989, Mr. Thompson also served as President
and Chief Executive Officer of Triad Life Insurance Company,
which sold mortgage insurance products. From 1976 to 1985,
Mr. Thompson served as Senior Vice President/ Southeast
Division Manager of MGIC. Mr. Thompson joined MGIC in 1972.

Ron D. Kessingerhas
been Executive Vice President and Chief Financial Officer of the
Company since December 1999. Mr. Kessinger has been Chief
Financial Officer of Triad since November 1999 and Executive
Vice President of Insurance Operations of Triad since June 1996.
Mr. Kessinger was Vice President of Claims and
Administration of Triad from January 1991 to June 1996. From
1985 to 1991, Mr. Kessinger was employed by Integon
Mortgage Guaranty Insurance Corporation, most recently serving
as Senior Vice President of Operations. Prior to joining Integon
Mortgage Guaranty Insurance Corporation, Mr. Kessinger was
employed by the parent company of Integon Mortgage Guaranty
Insurance Corporation.

Kenneth N. Lardhas
been Executive Vice President of the Company and Executive Vice
President, Sales and Marketing of Triad since February 2003.
Mr. Lard was Senior Vice President, Sales and Marketing of
Triad from June 2002 to January 2003. From November 1997 to May
2002, Mr. Lard was Senior Vice President, National Sales
Director of Triad. From November 1995 to September 1996
Mr. Lard was Vice President, National Accounts of Triad.
Prior to joining Triad, Mr. Lard was employed by Signet
Bank from 1987 to 1995 as Vice President, Capital Markets
Division and most recently as Vice President, Secondary
Marketing. Mr. Lard has been with Triad for 8 years
and has over 20 years experience in the mortgage industry.

Earl F. Wallhas
been Senior Vice President of Triad since November 1999, General
Counsel of Triad since January 1996, and Secretary since June
1996. Mr. Wall was Vice President of Triad from 1996 till
1999. Mr. Wall has been Senior Vice President of the
Company since December 1999, and Secretary and General Counsel
of the Company since September 1996. Mr. Wall was Vice
President of the Company from 1996 to 1999. From 1982 to 1995,
Mr. Wall was employed by Integon in a number of capacities
including Vice President, Associate General Counsel, and
Director of Integon Life Insurance Corporation and Georgia
International Life Insurance Corporation, Vice President, and
General Counsel of Integon Mortgage Guaranty Insurance
Corporation, and Vice President, General Counsel, and Director
of Marketing One, Inc.

Kenneth C. Fosterhas been Senior Vice President, Risk
Management of Triad since April 2002. From June 2001 to April
2002 Mr. Foster was Senior Vice President, Product
Development of Triad. Prior to joining Triad, Mr. Foster
was Principal of Applied Mortgage Solutions from 1994 to 2001.
Previously Mr. Foster was employed by MGIC from 1980 to 1994,
most recently as Vice President of Business/ Information
Development. Mr. Foster has been associated with Triad for
9 years and in the insurance/mortgage industry for over
30 years.

Officers of the Company serve at the discretion
of the Board of Directors of the Company.

Item 2.Properties.

The Company leases office space in its
Winston-Salem headquarters and its thirteen underwriting offices
located throughout the country under leases expiring between
2004 and 2012 and which require annual lease

23



---



##### 



payments of approximately $1.3 million in
2004. With respect to all facilities, the Company either has
renewal options or believes it will be able to obtain lease
renewals on satisfactory terms. The Company believes its
existing properties are well utilized and are suitable and
adequate for its present circumstances.


The Company maintains mid-range and
micro-computer systems from its corporate data center located in
its headquarters building to support its data processing
requirements for accounting, claims, marketing, risk management,
and underwriting. The Company has in place back-up procedures in
the event of emergency situations.

Item 3.Legal
Proceedings.

The Company is involved in litigation in the
ordinary course of business including the named cases below. No
pending litigation is expected to have a material adverse affect
on the financial position of the Company.

Triad is a defendant in Patton v. Triad.
This action was commenced on June 30, 2000, with the filing
of a complaint in Federal District Court for the Southern
District of Georgia seeking class action status on behalf of a
nationwide class of home mortgage borrowers. The complaint
alleges that Triad violated the Real Estate Settlement
Procedures Act (RESPA) by entering into transactions
with lenders (including captive mortgage reinsurance and
contract underwriting) that were not properly priced, in return
for the referral of mortgage insurance. In August 2000, Triad
filed a motion for summary judgment in the case which was
granted on February 13, 2001. The summary judgment was
overturned by the 11th Circuit Court of Appeals in January 2002.
In overturning the judgment, the court addressed the
applicability of the McCarron-Ferguson Act (regarding federal
preemption of state law) to the case; it did not address the
merits of the case. Triad subsequently filed a motion opposing
class certification which was granted. Plaintiffs have appealed
this decision. While the ultimate outcome of the RESPA
litigation is uncertain, the litigation is not expected to have
a material adverse affect on the financial position of the
Company.

Triad is also a defendant in Broessel v.
Triad. This action was commenced on January 15, 2004
with a filing in Federal District Court for the Western District
of Kentucky seeking class action status on behalf of a
nationwide class of home mortgage borrowers. The complaint
alleges that Triad violated the Fair Credit Reporting Act
(FCRA) by failing to provide notices to certain
borrowers when mortgage insurance was offered to lenders with
respect to those borrowers mortgage loans at a rate in
excess of Triads lowest available rate. Triad is in the
process of responding to the complaint. While the ultimate
outcome of the FCRA litigation is uncertain, the litigation is
not expected to have a material adverse effect on the financial
position of the Company.

Item 4.Submission
of Matters to a Vote of Security Holders.

None.

24



---



##### 



PART II



|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters.

The Companys Common Stock trades on The
NASDAQ Stock Market® under the symbol TGIC. At
December 31, 2003, 14,438,637 shares were issued and
outstanding. The following table sets forth the highest and
lowest closing prices of the Companys Common Stock, $0.01
par value, as reported by NASDAQ during the periods indicated.

|               |  |      |        |      |  |      |        |     |  |   |        |  |  |   |        | 
|-------------- |  | ---- | ------ | ---- |  | ---- | ------ | --- |  | - | ------ |  |  | - | ------ | 
|               |  |      |        |     
|               |  | 2003 |        | 2002
|               |  |      |        |     
|               |  | High |        | Low  |  | High |        | Low
|               |  |      |        |      |  |      |        |    
|First Quarter  |  | $    | 40.170 |      |  | $    | 31.130 |     |  | $ | 43.470 |  |  | $ | 34.740 | 
|Second Quarter |  | $    | 39.900 |      |  | $    | 34.800 |     |  | $ | 48.470 |  |  | $ | 40.270 | 
|Third Quarter  |  | $    | 49.080 |      |  | $    | 39.260 |     |  | $ | 46.000 |  |  | $ | 32.400 | 
|Fourth Quarter |  | $    | 51.220 |      |  | $    | 46.110 |     |  | $ | 41.610 |  |  | $ | 31.002 | 

As of March 8, 2004, the number of
stockholders of record of the Companys Common Stock was
approximately 200. In addition, there were an estimated 7,700
beneficial owners of shares held by brokers and fiduciaries.

Payments of future dividends are subject to
declaration by the Companys Board of Directors. The
dividend policy is dependent also on the ability of Triad to pay
dividends to the parent company. Because of Triads need to
maintain capital levels required by rating agencies, there are
no present intention to pay dividends.

25



---



##### 



Item 6.Selected
Financial Data.

|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |            |  
|-------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------ | ------- | ---------- | - | ---- | ------- | ---------- | - | ---- | ------ | ---------- | - | - | ------ | ---------- | - | - | ------ | ---------- | -
|                                                                     |                                     |                                                 
|                                                                     |                                     | Year Ended December 31                          
|                                                                     |                                     |                                                 
|                                                                     |                                     | 2003                                             |         | 2002       |   | 2001 |         | 2000       |   | 1999
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |     
|                                                                     |                                     |                                                 
|                                                                     |                                     | (Dollars in thousands, except per share amounts)
|Income Statement Data(for period ended):                             |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|Premiums written:                                                    |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Direct                              |                                                  | $       | 154,046    |   |      | $       | 124,214    |   |      | $      | 95,551     |   |   | $      | 76,867     |   |   | $      | 65,381     |  
|                                                                     | Assumed                             |                                                  |         | 2          |   |      |         | 3          |   |      |        | 4          |   |   |        | 8          |   |   |        | 11         |  
|                                                                     | Ceded                               |                                                  |         | (27,312    | ) |      |         | (18,348    | ) |      |        | (10,557    | ) |   |        | (4,993     | ) |   |        | (1,665     | )
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     |                                     | $                                                | 126,736 |            |   | $    | 105,869 |            |   | $    | 4,998  |            |   | $ | 71,882 |            |   | $ | 63,727 |           
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|Earned premiums                                                      |                                     | $                                                | 119,732 |            |   | $    | 105,067 |            |   | $    | 84,356 |            |   | $ | 71,843 |            |   | $ | 63,970 |           
|Net investment income                                                |                                     |                                                  | 17,082  |            |   |      | 16,099  |            |   |      | 14,765 |            |   |   | 12,645 |            |   |   | 10,546 |           
|Net realized investment gains (losses)                               |                                     |                                                  | 3,029   |            |   |      | (2,519  | )          |   |      | 297    |            |   |   | 286    |            |   |   | 1,153  |           
|Other income                                                         |                                     |                                                  | 24      |            |   |      | 72      |            |   |      | 1,892  |            |   |   | 37     |            |   |   | 13     |           
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Total revenues                      |                                                  |         | 139,867    |   |      |         | 118,719    |   |      |        | 101,310    |   |   |        | 84,811     |   |   |        | 75,682     |  
|Net losses and loss adjustment expenses                              |                                     |                                                  | 23,833  |            |   |      | 14,063  |            |   |      | 9,019  |            |   |   | 7,587  |            |   |   | 7,111  |           
|Interest expense on debt                                             |                                     |                                                  | 2,772   |            |   |      | 2,771   |            |   |      | 2,771  |            |   |   | 2,770  |            |   |   | 2,780  |           
|Amortization of deferred policy acquisition cost                     |                                     |                                                  | 18,112  |            |   |      | 13,742  |            |   |      | 11,712 |            |   |   | 8,211  |            |   |   | 6,955  |           
|Other operating expenses (net of acquisition cost
    deferred)      |                                     |                                                  | 22,776  |            |   |      | 22,900  |            |   |      | 18,136 |            |   |   | 16,008 |            |   |   | 15,061 |           
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|Income before income taxes                                           |                                     |                                                  | 72,374  |            |   |      | 65,243  |            |   |      | 59,672 |            |   |   | 50,235 |            |   |   | 43,775 |           
|Income taxes                                                         |                                     |                                                  | 21,283  |            |   |      | 20,140  |            |   |      | 18,413 |            |   |   | 15,237 |            |   |   | 13,365 |           
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|Net income                                                           |                                     | $                                                | 51,091  |            |   | $    | 45,103  |            |   | $    | 41,259 |            |   | $ | 34,998 |            |   | $ | 30,410 |           
|                                                                     | Basic earnings per share            |                                                  | $       | 3.57       |   |      | $       | 3.21       |   |      | $      | 3.05       |   |   | $      | 2.63       |   |   | $      | 2.28       |  
|                                                                     | Diluted earnings per share          |                                                  | $       | 3.52       |   |      | $       | 3.15       |   |      | $      | 2.95       |   |   | $      | 2.55       |   |   | $      | 2.23       |  
|Weighted average common and common share
    equivalents outstanding |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Basic                               |                                                  |         | 14,322,216 |   |      |         | 14,060,420 |   |      |        | 13,545,725 |   |   |        | 13,321,901 |   |   |        | 13,312,104 |  
|                                                                     | Diluted                             |                                                  |         | 14,509,538 |   |      |         | 14,331,581 |   |      |        | 13,977,435 |   |   |        | 13,726,088 |   |   |        | 13,640,716 |  
|Balance Sheet Data(at year end):                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Total assets                        |                                                  | $       | 575,579    |   |      | $       | 482,886    |   |      | $      | 396,455    |   |   | $      | 328,377    |   |   | $      | 263,141    |  
|                                                                     | Total invested assets               |                                                  | $       | 413,527    |   |      | $       | 344,581    |   |      | $      | 277,200    |   |   | $      | 232,025    |   |   | $      | 191,564    |  
|                                                                     | Losses and loss adjustment expenses |                                                  | $       | 27,186     |   |      | $       | 21,360     |   |      | $      | 17,991     |   |   | $      | 14,987     |   |   | $      | 14,751     |  
|                                                                     | Unearned premiums                   |                                                  | $       | 15,630     |   |      | $       | 8,539      |   |      | $      | 7,650      |   |   | $      | 6,933      |   |   | $      | 6,831      |  
|                                                                     | Long-term debt                      |                                                  | $       | 34,486     |   |      | $       | 34,479     |   |      | $      | 34,473     |   |   | $      | 34,467     |   |   | $      | 34,462     |  
|                                                                     | Stockholders equity                |                                                  | $       | 369,930    |   |      | $       | 309,407    |   |      | $      | 246,070    |   |   | $      | 199,831    |   |   | $      | 157,072    |  
|Statutory Ratios(1):                                                 |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Loss ratio                          |                                                  |         | 19.9       | % |      |         | 13.4       | % |      |        | 10.7       | % |   |        | 10.6       | % |   |        | 11.1       | %
|                                                                     | Expense ratio                       |                                                  |         | 33.0       | % |      |         | 38.0       | % |      |        | 39.9       | % |   |        | 37.4       | % |   |        | 40.5       | %
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Combined ratio                      |                                                  |         | 52.9       | % |      |         | 51.4       | % |      |        | 50.6       | % |   |        | 48.0       | % |   |        | 51.6       | %
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|GAAP Ratios:                                                         |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Loss ratio                          |                                                  |         | 19.9       | % |      |         | 13.4       | % |      |        | 10.7       | % |   |        | 10.6       | % |   |        | 11.1       | %
|                                                                     | Expense ratio                       |                                                  |         | 32.3       | % |      |         | 34.6       | % |      |        | 35.1       | % |   |        | 33.7       | % |   |        | 34.5       | %
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Combined ratio                      |                                                  |         | 52.2       | % |      |         | 48.0       | % |      |        | 45.8       | % |   |        | 44.3       | % |   |        | 45.6       | %
|                                                                     |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|Other Statutory Data(dollars in millions)(1):                        |                                     |                                                  |         |            |   |      |         |            |   |      |        |            |   |   |        |            |   |   |        |           
|                                                                     | Direct insurance in force           |                                                  | $       | 31,747.8   |   |      | $       | 25,379.1   |   |      | $      | 21,726.0   |   |   | $      | 15,123.5   |   |   | $      | 13,038.0   |  
|                                                                     | Direct risk in force (gross)        |                                                  | $       | 7,024.0    |   |      | $       | 5,790.9    |   |      | $      | 4,581.5    |   |   | $      | 3,760.0    |   |   | $      | 3,222.5    |  
|                                                                     | Risk-to-capital                     |                                                  |         | 15.3:1     |   |      |         | 15.5:1     |   |      |        | 15.0:1     |   |   |        | 14.8:1     |   |   |        | 15.4:1     |  



---



|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(1) | Based on statutory accounting practices and
    derived from consolidated statutory financial statements of
    Triad.

26



---



##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation.

Managements Discussion and Analysis of
Financial Condition and Results of Operations analyzes the
consolidated financial condition, changes in financial position,
and results of operations for the three years ended
December 31, 2003, of Triad Guaranty Inc. and its
consolidated subsidiaries, collectively the Company. The
discussion should be read in conjunction with the Consolidated
Financial Statements and Notes.

Certain of the statements contained herein, other
than statements of historical fact, are forward-looking
statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform
Act of 1995 and include estimates and assumptions related to
economic, competitive, and legislative developments. These
forward-looking statements are subject to change and
uncertainty, which are, in many instances, beyond our control
and have been made based upon our expectations and beliefs
concerning future developments and their potential effect on us.
There can be no assurance that future developments will be in
accordance with our expectations or that the effect of future
developments on the Company will be those anticipated by us.
Actual results could differ materially from those expected by
us, depending on the outcome of certain factors, including the
possibility of general economic and business conditions that are
different than anticipated, legislative developments, changes in
interest rates or the stock markets, stronger than anticipated
competitive activity, and the factors described in the
forward-looking statements.

Critical Accounting Estimates

The preparation of financial statements, in
conformity with accounting principles generally accepted in the
United States, requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. The
ultimate outcome could differ from those estimates and
assumptions utilized in the preparation of the financial
statements.

We have identified the following estimates as
critical in that they involve a higher degree of judgment and
are subject to a significant degree of variability: reserves for
losses and loss adjustment expenses, the timely identification
of potentially impaired securities and valuation of those
securities, and deferred policy acquisition costs. In developing
these estimates, we make subjective and complex judgments that
are inherently uncertain and subject to material change as facts
and circumstances develop. Although variability is inherent in
these estimates, we believe the amounts provided are appropriate
based on the facts available upon compilation of the financial
statements.



| |                                                     
| | ----------------------------------------------------
| | Reserves for Losses and Loss Adjustment
    Expenses

We establish reserves using estimated claim rates
(frequency) and estimated claim amounts (severity) to
project ultimate losses. Our reserving process incorporates
numerous factors in a formula that give effect to current
economic conditions and profiles delinquencies by such primary
factors as policy year, geography, chronic late payment
characteristics, and the number of months the policy has been in
default. Because the estimate for loss reserves is sensitive to
the estimates of claims frequency and severity, we perform
sensitivity analyses to test the reasonableness of the best
estimate generated by the loss reserve process. The loss reserve
estimation process and the sensitivity analyses support the
reasonableness of the best estimate of loss reserves recorded as
a liability in the financial statements.

Our reserving process is based upon the
assumption that past experience, taking into consideration the
above factors, adjusted for anticipated economic conditions and
projected future economic trends, provides a reasonable basis
for estimating severity and frequency. We consider severity and
frequency to be the most significant assumptions in the
establishment of our loss reserves. Inherently, there are risks
and uncertainties involved in making these assumptions.

27



---



##### 





| |            
| | -----------
| | Investments

Valuing our investment portfolio involves a
variety of assumptions and estimates, particularly for
investments that are not actively traded. We rely on external
pricing sources for highly liquid publicly traded securities and
use an internal pricing matrix for privately placed securities.
This matrix relies on our judgment concerning a) the discount
rate we use in calculating expected future cash flows, b) credit
quality, and c) expected maturity.

We regularly monitor our investment portfolio to
ensure that investments that may be other-than-temporarily
impaired are identified in a timely fashion, properly valued,
and any other-than-temporary impairments are charged against
earnings in the proper period. Our methodology to identify
potential impairments requires judgment and is further described
in the Investments section of Managements Discussion and
Analysis of Financial Condition and Results of Operations.

The timely identification and valuation of
potentially impaired securities involves many judgments.
Inherently, there are risks and uncertainties involved in making
these judgments. Changes in circumstances and critical
assumptions such as unforeseen events which affect our
investments in one or more companies, political subdivisions, or
industries could result in additional write downs in future
periods for impairments that are deemed to be
other-than-temporary.



| |                                      
| | -------------------------------------
| | Deferred Policy Acquisition
    Costs

The costs of acquiring new business, principally
commissions and certain policy underwriting and issue costs
which vary with and are primarily related to the production of
new business, are capitalized as deferred policy acquisition
costs (DAC). Amortization of such policy acquisition costs is
charged to expense in proportion to premium recognized over the
estimated policy life. We make judgments in the identification
of deferrable acquisition costs and the determination of
estimated policy life utilized in the amortization assumptions.
See further discussion of deferred policy acquisition costs
under the Financial Position section of Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

Overview

Through our subsidiaries, we provide mortgage
guaranty insurance coverage to residential mortgage lenders and
investors as a credit-enhancement vehicle, typically when
individual borrowers have less than 20% equity in the property.
Business originated by lenders and submitted to us on an
individual basis is referred to as flow business. Mortgage
guaranty insurance facilitates the sale of individual low down
payment loans in the secondary market and provides protection to
lenders who choose to keep the loans. Additionally, we provide
mortgage insurance to lenders and investors who seek additional
default protection, capital relief, and credit-enhancement on
groups of loans that are sold in the secondary market. This
business is referred to as structured bulk business.

We derive our revenues principally from 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 periodically
as a source of revenue when the opportunity presents itself
within the confines of our overall investment strategy.

Our expenses essentially consist of
a) amounts paid on claims submitted, b) increases in
reserves for estimated future claim payments, c) costs of
acquiring new business and servicing existing policies, and
d) other general business expenses including income taxes.

Our profitability depends largely on a) the
adequacy of our product pricing and underwriting discipline
relative to the risks insured, b) persistency levels,
c) operating efficiencies, and d) the level of investment
yield, including realized gains and losses, on our investment
portfolio.

28



---



##### 



Consolidated Results of Operations

Following is a summary of our results for the
last three years (dollars in thousands except per share
information):

|                                                                 |                |      |         |         |  |      |         |         |  |   |        |         | 
|---------------------------------------------------------------- | -------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------ | ------- | 
|                                                                 |                | 2003 |         | 2002    |  | 2001
|                                                                 |                |      |         |         |  |     
|Earned premiums                                                  |                | $    | 119,732 |         |  | $    | 105,067 |         |  | $ | 84,356 |        
|Net investment income                                            |                |      | 17,082  |         |  |      | 16,099  |         |  |   | 14,765 |        
|Net realized investment gains (losses)                           |                |      | 3,029   |         |  |      | (2,519  | )       |  |   | 297    |        
|Other Income                                                     |                |      | 24      |         |  |      | 72      |         |  |   | 1,892  |        
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        
|                                                                 | Total revenues |      |         | 139,867 |  |      |         | 118,719 |  |   |        | 101,310 | 
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        
|Net losses and loss adjustment expenses                          |                |      | 23,833  |         |  |      | 14,063  |         |  |   | 9,019  |        
|Interest expense on debt                                         |                |      | 2,772   |         |  |      | 2,771   |         |  |   | 2,771  |        
|Amortization of deferred policy acquisition costs                |                |      | 18,112  |         |  |      | 13,742  |         |  |   | 11,712 |        
|Other operating expenses (net of acquisition
    costs deferred) |                |      | 22,776  |         |  |      | 22,900  |         |  |   | 18,136 |        
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        
|Income before income taxes                                       |                |      | 72,374  |         |  |      | 65,243  |         |  |   | 59,672 |        
|Income taxes                                                     |                |      | 21,283  |         |  |      | 20,140  |         |  |   | 18,413 |        
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        
|Net income                                                       |                | $    | 51,091  |         |  | $    | 45,103  |         |  | $ | 41,259 |        
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        
|Diluted earnings per share                                       |                | $    | 3.52    |         |  | $    | 3.15    |         |  | $ | 2.95   |        
|                                                                 |                |      |         |         |  |      |         |         |  |   |        |        

A primary driver of our results is persistency.
We define persistency as the percentage of insurance in force
remaining from twelve months prior. In 2003, we achieved record
levels of production due primarily to the increased level of
refinance activity and our increased penetration in the bulk
marketplace. However, low persistency levels, also reflective of
the higher refinance activity, had a negative impact on our
results. Lower persistency adversely affected us in two ways: a)
renewal earned premium decreased as the mortgages generating the
renewal premium refinanced and b) expenses increased through
higher amortization of deferred policy acquisition costs. We saw
persistency drop through most of 2003, reaching its low point in
the third quarter. Mortgage interest rates crept up in the
latter part of the year, resulting in moderately improved
persistency in the fourth quarter.

Two other important drivers of our results have
been the increase in bulk production and our continued
commitment to risk-sharing arrangements with our lender
partners. We address these primary drivers and the impact each
had in the detailed year-by-year comparisons that follow this
discussion. The information is presented in three categories:
Production and In Force, Revenues, and Losses and Expenses.

2003 Compared to 2002

Net income for 2003 increased 13.3% to
$51.1 million from $45.1 million in 2002. Net income
per share on a diluted basis increased 11.9% to $3.52 for 2003
from $3.15 per share for 2002. This improvement in net income
was driven by a 14.0% increase in earned premiums and a 6.1%
increase in net investment income. Net income for 2003 includes
net realized investment gains, net of income taxes, of
$2.0 million, while net income for 2002 included net
after-tax realized investment losses of $1.6 million.



| |                        
| | -----------------------
| | Production and In Force

Total insurance written in 2003 was
$20.5 billion compared to $13.4 billion in 2002, an
increase of 52.5%. Total insurance written includes insurance
written from flow production and structured bulk transactions.

Flow insurance written for 2003 increased 36.0%
to $16.6 billion from $12.2 billion in 2002. This
increase was primarily the result of expanding relationships
with national lenders, strong demand for risk-sharing
arrangements and other product offerings, and a lower interest
rate environment that contributed to a very strong refinance
market.

Insurance written in 2003 attributable to
structured bulk transactions totaled $3.9 billion compared
to $1.2 billion in 2002. The jump in structured bulk
transactions written was driven by a robust growth in the

29



---



##### 



overall bulk marketplace in 2003 coupled with our
renewed strategic commitment to that market. Our investments in
technology and personnel enabled us to participate successfully
in this arena in 2003. Structured bulk transactions are
generally initiated by secondary mortgage market participants
who wish to use mortgage insurance as a credit enhancement. We
compete against other mortgage insurers as well as other forms
of credit enhancement provided by capital markets for these
transactions. Insurance written attributed to structured bulk
transactions is likely to vary significantly from period to
period, as opposed to insurance written from flow originations,
due to a) the limited number of transactions (but with larger
size) occurring in this market, b) competition from other
mortgage insurers, c) the attractiveness in the marketplace of
mortgage insurance versus other forms of credit enhancement, and
d) the changing loan composition and underwriting criteria of
the market.


Although terms vary, the bulk market can be
broadly categorized into three different segments, or tiers,
depending on the risk characteristics of the loans comprising a
transaction. The loan characteristics of the three segments are
a) predominantly high credit quality, low loan to value
(LTV), fully underwritten loans that may have niche
characteristics such as non-conforming loan balances and risk
concentrations related to geography, transaction purpose, or
occupancy type; b) loans that generally have high credit quality
and low to moderate LTVs that have been underwritten with
reduced, streamlined, or no documentation; and c) generally
fully underwritten loans with credit impaired borrowers (FICO
credit score less than 575). In general, we believe that bulk
business originated in segments b) and c) will report a higher
default rate than our flow business. However, we also believe
that the lower LTVs associated with bulk business ultimately
will generate proportionately lower claim rates as a proportion
of the reported defaults and lower levels of severity than flow
business. We have entered into bulk transactions primarily in
the first two segments mentioned above. At December 31,
2003, only approximately 4% of our insurance in force
attributable to structured bulk transactions is categorized in
segment c) above.

According to industry data, our national market
share of net new primary insurance written, which includes
insurance written on a flow basis as well as that attributed to
structured bulk transactions, was 4.9% for 2003 (5.6% for the
fourth quarter) compared to 3.7% for 2002 (3.9% for the fourth
quarter). Our national market share of net new primary insurance
written on a flow basis was 5.0% for 2003 (4.7% for the fourth
quarter) compared to 4.3% for 2002 (4.7% in the fourth quarter).
Industry data indicates that we had 4.4% of the national market
share attributable to structured bulk transactions in 2003
compared to 0.3% in 2002.

Periodically we enter into structured bulk
transactions involving loans that have insurance effective dates
within the current reporting period but for which detailed loan
information regarding the insured loans is not provided by the
issuer of the transaction until later. When this situation
occurs, we accrue premiums that are due but not yet paid based
upon the estimated commitment amount of the transaction in the
reporting period with respect to each loans insurance
effective date. However, the policies are not reflected in our
in force, insurance written, or related industry data totals
until the loan level detail is reported to us. At
December 31, 2003, we had approximately $1.3 billion
of structured transactions with effective dates within the
fourth quarter for which loan level detail had not been received
and, therefore, are not included in our own data or industry
totals. These amounts will be reported as new production and
insurance in force totals in 2004 when the issuer of the
transactions provides loan level detail to us. We have properly
included in premium written and premium earned the respective
amounts due and earned during the fourth quarter of 2003 related
to this insurance.

Total direct insurance in force reached
$31.7 billion at December 31, 2003, compared to
$25.4 billion at December 31, 2002. Significant
refinance activity in 2003 and 2002 resulted in a high level of
policy cancellations that substantially offset the impact that
the high level of insurance written had on in force growth. As a
result, insurance in force increased by only $6.3 billion
in 2003, even though insurance written during 2003 was
$20.5 billion.

Refinance activity was 52.1% of insurance written
(42.1% in the fourth quarter) in 2003 compared to 40.1% (47.0%
in the fourth quarter) in 2002. Persistency was 50.7% at
December 31, 2003, compared to 60.9% at December 31,
2002. The high level of refinance activity and the resulting
decrease in persistency is reflective of the low interest rate
environment that has been in place during the past year. The
annualized

30



---



##### 



quarterly persistency rate for the fourth quarter
of 2003 was 46.3% compared to 19.3% for the third quarter of
2003 and 32.1% for the fourth quarter of 2002. Changes in
interest rates generally take a few months to affect
persistency. During the third and fourth quarters of 2003,
interest rates moderately increased from the record low levels
seen in June and July. If these interest rate levels persist or
if interest rates increase further, we believe that persistency
should improve in 2004. However, if rates decline significantly
from current levels, persistency could return to levels
comparable to the first nine months of 2003.


We define persistency as the percentage of
insurance in force remaining from twelve months prior.
Cancellations of policies originated during the past twelve
months are not considered in our calculation of persistency.
This method of calculating persistency may vary from that of
other mortgage insurers. We believe that our calculation
presents an accurate measure of the percentage of insurance in
force remaining from twelve months prior. Cancellations result
primarily from the borrower refinancing or selling mortgaged
residential properties and, to a lesser degree, from the
borrower achieving prescribed equity levels at which the lender
no longer requires mortgage guaranty insurance. The primary
driver of our reduced persistency over the past two years has
been the record low interest rates on mortgage loans.

FICO credit scores are one of the factors used in
determining credit risk. The following table presents the FICO
credit score distribution of our insurance in force at
December 31, 2003 and 2002.

|                                 |  |              |      |      |  |  |      |  
|-------------------------------- |  | ------------ | ---- | ---- |  |  | ---- | -
|                                 |  |             
|                                 |  | Percent of  
|                                 |  | Insurance In
|                                 |  | Force       
|                                 |  |             
|                                 |  |             
|                                 |  | December 31 
|                                 |  |             
|                                 |  | 2003         |      | 2002
|                                 |  |              |      |     
|Credit score less than 575       |  |              | 1.3  | %    |  |  | 0.9  | %
|Credit score between 575 and 619 |  |              | 4.8  | %    |  |  | 4.8  | %
|Credit score greater than 619    |  |              | 93.9 | %    |  |  | 94.3 | %

As the table shows, we insure some loans that
have FICO credit scores below 575. We believe that these loans
have a higher probability of loss than a loan with a FICO credit
score of 575 or greater. We do not expect loans with FICO scores
less than 575 to become a significant portion of our insurance
in force.



| |         
| | --------
| | Revenues

Total direct premiums written were
$154.0 million for 2003, an increase of 24.0% compared to
$124.2 million for 2002. Net premiums written increased by
19.7% to $126.7 million in 2003 from $105.9 million
for 2002. Contributing to the increase in premiums written for
2003 were significant writings under our annual premium payment
plan. The annual premium payment plan requires a first-year
premium paid at mortgage loan closing, with the entire amount
reported as premium written. The annual premium payment plan
contrasts with our monthly premium payment plan which involves,
in general, the payment of one or two months premium at
mortgage loan closing and monthly renewal payments thereafter,
with the associated amounts reported as premium written. During
2003, 34% of total insurance written was under the annual
premium payment plan compared to 18% of total insurance written
during 2002.

The difference between direct premiums written
and net premiums written is ceded premium. Ceded premium is
comprised of premiums paid on both excess of loss reinsurance
treaties as well as risk-sharing arrangements with our lender
partners (referred to as captive reinsurance arrangements).
Driven by an increase in the amount of premium subject to
captive reinsurance arrangements, ceded premiums written
increased 48.9% to $27.3 million in 2003 from $18.3 million
in 2002. Our premium cede rate (the ratio of ceded premiums
written to direct premiums written) was 17.7% for 2003 compared
to 14.8% for 2002. Our premium cede rate for captive reinsurance
arrangements (the ratio of ceded premiums written under captive
reinsurance arrangements to total direct premiums written) was
15.4% for 2003 compared to 12.7% for 2002. The average premium
cede rate for direct premiums written subject to captive
reinsurance arrangements was 35.2% in 2003 compared to 35.8% in
2002. During 2003, approximately $7.6 billion of insurance
written, or 46% of flow insurance written (37% of total
insurance written including structured bulk transactions) was
subject to captive reinsurance arrangements compared to
$6.2 billion of insurance written, or 51% of flow

31



---



##### 



insurance written (46% including structured bulk
transactions), in the same period of 2002. The decline in the
percentage of flow insurance written subject to captive
reinsurance arrangements from 2002 to 2003 is primarily a result
of increased production in our lender-paid mortgage insurance
program that is not subject to captive reinsurance arrangements.
Through December 31, 2003, insurance written attributable
to structured bulk transactions was not subject to captive
reinsurance arrangements.


Approximately 54.2% of direct flow insurance in
force (45.9% of total insurance in force) was subject to captive
reinsurance arrangements at December 31, 2003, compared to 51.6%
(45.7% of total insurance in force) at December 31, 2002.
This increase was due primarily to the increased market
penetration of our captive reinsurance arrangements and the high
level of refinance activity in 2003, as policies that were
previously not subject to captive reinsurance arrangements
refinanced and new policies issued were subject to captive
reinsurance arrangements. We anticipate that ceded premiums will
continue to increase as a result of the expected increase in
insurance in force subject to captive reinsurance arrangements.

We continue to see the success of our strategic
initiatives to provide captive risk-sharing alternatives to
selected lender partners. We remain committed to the concept of
captive reinsurance arrangements on a lender-by-lender basis.
Captive reinsurance arrangements have evolved during the past
year and will continue to evolve in 2004. We will continue to be
an active participant with our lender partners in structures
utilizing alternative attachment points, risk bands, cede rates,
and ceding commissions. One of our competitors announced that,
effective April 1, 2003, it would not participate in
captive arrangements where the net premium cede rate is greater
than 25% (deep ceded). According to recent articles,
two other competitors have recently announced that they will
limit the amount of premium they will cede under deep ceded
captive arrangements. Where prudent, we plan to continue to
participate in captive risk-sharing arrangements, including deep
ceded arrangements, on a lender-by-lender basis. It is uncertain
at this time what impact, if any, the competitors
decisions, as described above, will have on our production of
insurance subject to captive reinsurance arrangements.

Earned premiums increased 14.0% to
$119.7 million for 2003 from $105.1 million for 2002. The
difference between net written premiums and earned premiums in
2003 is due to the significant writings of our annual premium
product and the related increase in the unearned premium
reserve. Our unearned premium liability increased to
$15.6 million at December 31, 2003, from $8.5 million
at December 31, 2002. Direct written premium from the
annual premium product represented 15.5% of direct premium
written in 2003 compared to 7.0% of direct premium written in
2002. The growth in written and earned premiums resulted from
strong levels of new insurance written offset by the impact of a
low level of persistency and by the increase in ceded premiums.

Net investment income for 2003 was
$17.1 million, a 6.1% increase over $16.1 million in
2002. Average invested assets grew by $59 million to $360
million for the year ended December 31, 2003, an increase
of 19.6% from $301 million for 2002. The increase in average
invested assets is attributable to funds derived from normal
operating cash flow in 2003. The percentage increase in net
investment income was much lower than the percentage increase in
invested assets primarily due to a decrease in investment yields.

We reported $3.0 million of net realized
investment gains during 2003 and $2.5 million of net
realized investment losses during 2002. Net realized gains
during 2003 included approximately $785,000 of impairment
writedowns. The writedowns primarily involved securities in the
automotive, energy, and pharmaceutical sectors as well as a
commercial mortgage-backed security.



| |                     
| | --------------------
| | Losses and Expenses.

Net incurred losses and loss adjustment expenses
(net of reinsurance recoveries) increased by 69.5% in 2003 to
$23.8 million from $14.1 million in 2002. The increase
in losses and loss adjustment expenses was anticipated based
upon the growth in the number of delinquencies and is reflective
of our overall growth of insurance in force, relative growth of
our participation in the bulk market, and the seasoning of our
in force business. Net paid losses, excluding loss adjustment
expenses, increased to $17.5 million during 2003 from
$10.3 million during 2002, an increase of 70.3%. The
increase in net paid losses approximates the increase in
incurred losses and was within our expected range. Average
severity (direct paid losses divided by number of

32



---



##### 



claims paid) was approximately $24,100 for 2003
compared to $21,400 for 2002. The following table provides
detail on direct paid losses from flow business and structured
bulk business (in thousands of dollars).


|              |  |                    |        |      |  |   |        | 
|------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|              |  |                   
|              |  | Direct Losses Paid
|              |  |                   
|              |  | 2003               |        | 2002
|              |  |                    |        |     
|Flow business |  | $                  | 15,496 |      |  | $ | 10,229 | 
|Bulk business |  |                    | 2,045  |      |  |   | 74     | 
|              |  |                    |        |      |  |   |        | 
|Total         |  | $                  | 17,541 |      |  | $ | 10,303 | 
|              |  |                    |        |      |  |   |        | 

Our loss ratio (the ratio of incurred losses to
earned premiums) was 19.9% for 2003 compared to 13.4% for 2002.
The loss ratio was 21.6% for the fourth quarter of 2003 and
15.4% for the fourth quarter of 2002. As mentioned earlier, the
increase in the loss ratio is consistent with our expectations
given the overall growth of insurance in force, relative growth
of our participation in the bulk market, and the seasoning of
our in force business.

As of December 31, 2003, approximately 92%
of our insurance in force was originated in the last
36 months compared to 83% at December 31, 2002. We
believe, based upon our experience and industry data, that
claims incidence for flow business is generally highest in the
third through sixth years after loan origination. We believe
that the period of highest claims incidence for structured bulk
transactions is earlier than that for flow business. We expect
our incurred losses to increase as a greater amount of our
insurance in force reaches its anticipated highest claim
frequency years. Changes in the economic environment could
accelerate paid and incurred loss development. Due to the
inherent uncertainty of future premium levels, losses, economic
conditions, and other factors that affect earnings, it is
difficult to predict with any degree of certainty the impact of
such higher claim frequencies on future earnings.

Amortization of DAC increased by 31.8% to
$18.1 million in 2003 from $13.7 million for 2002. The
increase reflects growth in DAC related to the expansion of our
insurance in force and accelerated amortization due to higher
cancellations from refinance activity in 2003. Our model
calculates the amortization of DAC separately for each book
year. The model accelerates DAC amortization through a dynamic
adjustment when persistency for a book year is lower than the
estimated persistency originally utilized in the model. The
dynamic adjustment effectively adjusts the estimated policy life
originally utilized in the model to a revised policy life based
upon the current actual persistency. Low persistency levels
during the past two years resulted in additional amortization of
deferred policy acquisition costs through dynamic adjustments
totaling $5.5 million in 2003 and $2.6 million in
2002. If persistency improves in 2004 compared to 2003, we would
expect additional amortization of DAC resulting from the dynamic
adjustment to be lower, depending on the level of improvement.
However, if persistency does not improve, we would expect
similar levels of additional amortization through dynamic
adjustments to that which occurred in 2003.

Other operating expenses decreased 0.5% to
$22.8 million for 2003 from $22.9 million for 2002.
The decline in other operating expenses is primarily the result
of operational efficiencies achieved through the use of
technology. We have made substantial investments in technology
that allow for significant increases in volume without a
proportional increase in operating expenses. As a result, the
substantial majority of our business now enters into our
administrative systems through electronic interfaces at a lower
cost than those requiring manual intervention. The expense ratio
(ratio of the amortization of deferred policy acquisition costs
and other operating expenses to net premiums written) for 2003
was 32.3% compared to 34.6% for 2002. The expense ratio for 2003
improved because other operating expenses decreased and net
written premium increased, offset somewhat by the accelerated
amortization of DAC.

Our effective tax rate was 29.4% for 2003 and
30.9% for 2002. The decrease in the effective tax rate is due
primarily to an increase in tax-exempt interest resulting from a
higher percentage of assets being invested in tax-preferred
securities. We expect our effective tax rate to remain near
current levels or increase slightly as we expect earned premium
to grow faster than tax-preferred income.

33



---



##### 



2002 Compared to 2001

Net income for 2002 increased 9.3% to
$45.1 million from $41.3 million in 2001. Net income
per share on a diluted basis increased 6.6% to $3.15 for 2002
from $2.95 per share for 2001. This improvement in net income
was led by a 24.6% increase in earned premiums and a 9.0%
increase in net investment income. Net income for 2002 included
after-tax net realized investment losses of $1.6 million, while
net income for 2001 included after tax net realized investment
gains of $193,000. Also included in net income for 2001 was the
receipt of a nonrecurring incentive payment of approximately
$1.9 million, relating to the voluntary cancellation of one
of our excess of loss corporate reinsurance contracts.



| |                        
| | -----------------------
| | Production and In Force

Total insurance written in 2002 was
$13.4 billion compared to $13.3 billion in 2001, an
increase of 1.3%. Flow insurance written for 2002 increased
42.8% to $12.2 billion from $8.5 billion in 2001. The
increase in insurance written from flow production was primarily
the result of expanding relationships with national lenders,
strong demand for risk-sharing arrangements, and an expanding
marketplace as the result of lower interest rates. Insurance
written in 2002 attributable to structured bulk transactions
totaled $1.2 billion compared to $4.7 billion in 2001.

According to industry data, Triads national
market share of net new primary insurance written was 3.7% for
2002 compared to 3.6% for 2001. Triads national market
share of net new primary insurance written on a flow basis was
4.3% for 2002 compared to 3.4% for 2001.

Total direct insurance in force reached
$25.4 billion at December 31, 2002, compared to
$21.7 billion at December 31, 2001, an increase of
16.8%. Increased refinance activity in 2002 drove a high level
of policy cancellations that partially offset the impact that
the high level of insurance written had on in force growth.

Refinance activity was 40.1% of insurance written
in 2002 compared to 35.8% in 2001. Excluding structured bulk
transactions, refinance activity was 40.1% of insurance written
in 2002 compared to 37.5% of insurance written in 2001.
Persistency was 60.9% at December 31, 2002, compared to
67.6% at December 31, 2001. The increased level of refinance
activity and the resulting decrease in persistency was
reflective of the low interest rate environment that was in
place during 2002.



| |         
| | --------
| | Revenues

Total direct premiums written were
$124.2 million for 2002, an increase of 30.0% compared to
$95.6 million for 2001. Net premiums written increased by
24.6% to $105.9 million in 2002 from $85.0 million for
2001.

Driven primarily by increases in captive
arrangements and also by excess of loss reinsurance, ceded
premiums written increased 73.8% to $18.3 million in 2002
from $10.6 million in 2001. Our premium cede rate was 14.8%
for 2002 compared to 11.0% for 2001. Our premium cede rate for
captive reinsurance was 12.7% for 2002 compared to 6.6% for
2001. Approximately 51% of flow insurance written (46% of total
insurance written including structured bulk transactions) during
2002 was subject to captive mortgage reinsurance compared to 58%
of flow insurance written (37% of total insurance written
including structured bulk transactions) in 2001. Approximately
45.7% of direct insurance in force was subject to captive
arrangements at December 31, 2002, compared to 34.6% at
December 31, 2001. The increase in insurance in force
subject to captive arrangements was due primarily to the
increased market penetration of our captive arrangements and the
increased level of refinance activity during 2002.

Earned premiums increased 24.6% to
$105.1 million for 2002 from $84.4 million for 2001. The
growth in written and earned premium resulted from record levels
of insurance written offset by the impact of a declining
persistency rate due to a high level of refinance activity.

Net investment income for 2002 was
$16.1 million, a 9.0% increase over $14.8 million in
2001. This increase was the result of growth in the average
balance of invested assets by $49 million to
$301 million for the year ended December 31, 2002,
from $252 million for 2001. The growth in invested assets
was attributable

34



---



##### 



to normal operating cash flow. The percentage
increase in net investment income was lower than the percentage
increase in invested assets primarily due to a decrease in
investment yields that were a result of the low interest rates
in 2002 for new investments and the disposal of a number of
higher yielding corporate bonds with lower credit quality during
2002 to enhance the overall quality of the portfolio.


We reported $2.5 million of net realized
investment losses during 2002, which included approximately
$2.0 million of impairment writedowns. The writedowns
primarily involved securities in the telecommunications and
technology sectors and, to a lesser degree, the airline, energy,
electronic manufacturing, and textile manufacturing industries.



| |                     
| | --------------------
| | Losses and Expenses.

Net losses and loss adjustment expenses (net of
reinsurance recoveries) increased by 55.9% in 2002 to
$14.1 million from $9.0 million in 2001. The rise
reflected an increase in paid losses and delinquent loans as our
insurance in force grew and the condition of the economy
remained weak. Net paid losses and loss adjustment expenses
increased to $10.7 million during 2002 from $6.0 million
during 2001. Reported delinquent loans totaled 2,379 at
December 31, 2002, compared to 1,420 at December 31,
2001, an increase of 67.5%. Our loss ratio was 13.4% for 2002
compared to 10.7% for 2001.

Amortization of DAC increased by 17.3% to
$13.7 million in 2002 from $11.7 million for 2001. The
increase in amortization reflected growth in DAC related to the
growth of our insurance in force and accelerated amortization
due to higher cancellations from refinance activity in 2002.
Decreased persistency levels during 2002 and 2001 resulted in
additional DAC amortization through dynamic adjustments totaling
$2.6 million in 2002 and $2.1 million in 2001.

Other operating expenses increased 26.3% to
$22.9 million for 2002 from $18.1 million for 2001.
This increase in expenses was primarily attributable to
personnel, technology amortization, and equipment and software
costs required to support our increased levels of production,
product development, system enhancements, and geographic
expansion. The expense ratio for 2002 was 34.6% compared to
35.1% for 2001.

Our effective tax rate was 30.9% for both 2002
and 2001.

Significant Customers

Our objective is to continually grow market share
through controlled, profitable growth in both the flow and bulk
arenas while adhering to our risk management strategies. Our
strategy is to continue our focus on national lenders while
maintaining the productive relationships that we have built with
regional lenders. However, consolidation within the mortgage
origination industry has resulted in a greater percentage of
production volume being concentrated among a smaller customer
base. Our ten largest customers were responsible for 74%, 73%,
and 64% of flow insurance written during 2003, 2002, and 2001,
respectively. Our two largest customers were responsible for
58%, 53%, and 42% of flow insurance written during 2003, 2002,
and 2001, respectively. Measured by risk in force, our ten
largest customers were responsible for 67%, 59%, and 42% of flow
risk in force at December 31, 2003, 2002, and 2001,
respectively. Additionally, our two largest customers were
responsible for 49%, 40%, and 25% of flow risk in force at
December 31, 2003, 2002, and 2001, respectively. The loss
of one or more of these significant customers could have an
adverse effect on our business.

Financial Position

Total assets increased to $576 million at
December 31, 2003, a 19% growth over the same date in 2002.
Total liabilities increased to $206 million at
December 31, 2003, from $173 million in 2002. This
section identifies several items on our balance sheet that are
important in the overall understanding of our financial
position. These items include deferred policy acquisition costs,
prepaid federal income tax and related deferred income taxes,
and loss and loss adjustment expense reserves. Our mortgage
insurance operations and reserves are primarily supported by our
investment portfolio. The majority of our assets are contained
in the investment

35



---



##### 



portfolio. A separate Investments section follows
the Financial Position section and reviews our investment
portfolio, key portfolio management strategies, and
methodologies in which we manage credit risk.




| |                                      
| | -------------------------------------
| | Deferred Policy Acquisition
    Costs

Costs expended to acquire new business are
capitalized as deferred policy acquisition costs (DAC) and
recognized as expense over the anticipated premium paying life
of the policy. We employ dynamic models that calculate
amortization of DAC separately for each book year. The models
rely on assumptions that we make based upon historical industry
experience and our own unique experience regarding the annual
persistency development of each book year. Persistency is the
most important assumption utilized in determining the timing of
reported amortization expense reflected in the income statement
and the carrying value of DAC on the balance sheet. A change in
the assumed persistency can impact the current and future
amortization expense as well as the carrying value on the
balance sheet. However, our models are dynamic and adjust when
actual book year persistency is lower than the assumptions
employed in the models. When this happens, the DAC amortization
is accelerated through a dynamic adjustment in order to match
the amortization expense with the life of the policies on which
the acquisition costs were originally deferred. The following
table shows the DAC asset for the previous three years and the
effect of persistency on amortization(amounts in thousands):

|                                  |                    |           |         |         |   |      |         |         |   |   |        |         |  
|--------------------------------- | ------------------ | --------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------ | ------- | -
|                                  |                    |          
|                                  |                    | DAC Asset
|                                  |                    |          
|                                  |                    | 2003      |         | 2002    |   | 2001
|                                  |                    |           |         |         |   |     
|Balance  beginning of year       |                    | $         | 28,997  |         |   | $    | 25,943  |         |   | $ | 22,815 |        
|Costs capitalized                 |                    |           | 18,478  |         |   |      | 16,795  |         |   |   | 14,840 |        
|Amortization  normal             |                    |           | (12,569 | )       |   |      | (11,115 | )       |   |   | (9,629 | )      
|Amortization  dynamic adjustment |                    |           | (5,543  | )       |   |      | (2,626  | )       |   |   | (2,083 | )      
|                                  |                    |           |         |         |   |      |         |         |   |   |        |        
|                                  | Total amortization |           |         | (18,112 | ) |      |         | (13,741 | ) |   |        | (11,712 | )
|                                  |                    |           |         |         |   |      |         |         |   |   |        |        
|Balance  end of year             |                    | $         | 29,363  |         |   | $    | 28,997  |         |   | $ | 25,943 |        
|                                  |                    |           |         |         |   |      |         |         |   |   |        |        
|Annual Persistency                |                    |           | 50.7    | %       |   |      | 60.9    | %       |   |   | 67.6   | %      
|                                  |                    |           |         |         |   |      |         |         |   |   |        |        



| |                                                           
| | ----------------------------------------------------------
| | Prepaid Federal Income Taxes and Deferred
    Income Taxes

We purchase ten-year non-interest bearing United
States Mortgage Guaranty Tax and Loss Bonds (Tax and Loss
Bonds) in lieu of paying current federal income taxes to
take advantage of a special contingency reserve deduction for
mortgage guaranty companies. The cumulative sum of the Tax and
Loss Bonds purchased, net of those matured, is classified on our
balance sheet as prepaid federal income taxes. These purchases
of Tax and Loss Bonds are essentially a prepayment of federal
income taxes that will become due in ten years when the Tax and
Loss Bonds mature. At December 31, 2003, prepaid income
taxes amounted to $98.1 million, compared to
$77.8 million at December 31, 2002. The change from
year to year approximates the change in deferred income tax
liability for the year.

Deferred income taxes are provided for the
differences in reporting taxable income in the financial
statements and on the tax return. These cumulative differences
are enumerated in Note 6 in the Notes to Consolidated Financial
Statements. The largest cumulative difference is the special
contingency reserve deduction for mortgage insurers mentioned
above. The remainder of the deferred tax liability has primarily
arisen from book and tax reporting differences related to
deferred policy acquisition costs and unrealized investment
gains.



| |                                             
| | --------------------------------------------
| | Loss and Loss Adjustment Expense
    Reserve

We establish reserves using estimated claim rates
(frequency) and claim amounts (severity) to estimate
ultimate losses. Our reserving process incorporates numerous
factors in a formula that gives effect to current economic
conditions and profiles delinquencies by such factors as policy
year, geography, chronic late payment characteristics, and the
number of months the policy has been in default. Because the
estimate for loss reserves is sensitive to the estimates of
claims frequency and severity, we perform sensitivity analyses
to test

36



---



##### 



the reasonableness of the best estimate generated
by the loss reserve process. We periodically review the loss
reserve process in order to improve its estimate of ultimate
losses on loans currently in default. Adjustments to reserve
estimates are reflected in the financial statements in the
periods in which the adjustments are made.


Our loss and loss adjustment expense reserves
increased to $27.2 million at December 31, 2003,
compared to $21.4 million at December 31, 2002. Note 4
in the Notes to the Consolidated Financial Statements contains a
roll forward of these amounts for the last two years showing the
incurred losses and the actual payments for the current and
prior years. Loss and loss adjustment expense reserves are
established when notices of default on insured mortgage loans
are received. Reserves also are established for estimated losses
incurred on notices of default not yet reported by the lender.
Consistent with industry practices, we do not establish loss
reserves for future claims on insured loans that are not
currently in default. The growth in loss reserves is primarily
the result of the increase in reported defaults. Over 81% of our
insurance in force was written within the last two years.
Experience indicates that years three through six have the
highest incidence of defaults. Because of this fact, we expect
loss reserves to continue to grow, reflecting the growth and
aging of our insurance in force.

The following table shows default statistics as
of December 31, 2003, and 2002.

|                                                          |  |                    |         |      |  |  |         |  
|--------------------------------------------------------- |  | ------------------ | ------- | ---- |  |  | ------- | -
|                                                          |  |                   
|                                                          |  | Default Statistics
|                                                          |  |                   
|                                                          |  | 2003               |         | 2002
|                                                          |  |                    |         |     
|Number of insured loans in force                          |  |                    | 236,234 |      |  |  | 190,480 |  
|Number of loans in default                                |  |                    | 4,242   |      |  |  | 2,379   |  
|Percentage of loans in default (default rate)             |  |                    | 1.80    | %    |  |  | 1.25    | %
|Number of insured loans in force excluding bulk
    loans |  |                    | 205,033 |      |  |  | 171,723 |  
|Number of loans in default excluding bulk loans           |  |                    | 3,053   |      |  |  | 2,120   |  
|Percentage of loans in default excluding bulk
    loans   |  |                    | 1.49    | %    |  |  | 1.23    | %
|Number of bulk loans in force                             |  |                    | 31,201  |      |  |  | 18,757  |  
|Number of bulk loans in default                           |  |                    | 1,189   |      |  |  | 259     |  
|Percentage of bulk loans in default                       |  |                    | 3.81    | %    |  |  | 1.38    | %

The number of loans in default excludes those
loans 60 days past due or less. The increase in the default
rate for bulk business is attributable primarily to the maturing
of the bulk portfolio and the higher expected default rate.
Contributing to changes in default rates is changes in the
number of policies in force, which is the denominator in the
default rate calculation. All else being equal, an
increase/decrease in the policies in force results in a
lower/higher default rate. As a result, production levels as
well as persistency have an effect on the reported default
rates. The default occurrences for both flow business and
structured bulk business are consistent with managements
expectation.

Investment Portfolio



| |                      
| | ---------------------
| | Portfolio Description

Our strategy for managing our investment
portfolio is to meet or exceed regulatory and rating agency
requirements while appropriately managing credit risk. We invest
for the long term, and most of our investments are held until
they mature. Our investment portfolio includes primarily fixed
income securities, and the majority of these are tax-sheltered
state and municipal bonds. We have established a formal
investment policy that describes our overall quality and
diversification objectives and limits. Our investment policies
and strategies are subject to change depending upon regulatory,
economic, and market conditions and the existing or anticipated
financial condition and operating requirements, including the
tax position, of our company. During 2003, we strengthened our
investment portfolio by increasing the overall credit quality.
At the end of 2003, 95.4% of the portfolio was rated
A or higher as compared to 90.1% at the end of 2002.
Additionally, we focused our new purchases on state and
municipal tax-preferred securities in 2003. Our investment
portfolio consists entirely of available-for-sale securities;
therefore, all values are carried on our balance sheet at fair
value.

37



---



##### 



The following schedule shows the growth and
diversification of our investment portfolio (dollars in
thousands).

|                           |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |      |   | 
|-------------------------- | ---------------------------- | ----------------------------------- | ------- | ----------------- | ------- | ------ | ----- | ------- | - | - | ------- | ------- | ------- |  | ----- | ---- | - | 
|                           |                              |                                     |         |                  
|                           |                              | December 31, 2003                   |         | December 31, 2002
|                           |                              |                                     |         |                  
|                           |                              | Amount                              |         | Percent           |         | Amount |       | Percent
|                           |                              |                                     |         |                   |         |        |       |        
|Fixed maturity securities: |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |     
|                           | U. S. government obligations |                                     | $       | 15,623            |         |        |       | 3.8     | % |   | $       | 10,596  |         |  |       | 3.1  | %
|                           | Mortgage-backed bonds        |                                     |         | 99                |         |        |       | 0.0     |   |   |         | 186     |         |  |       | 0.1  |  
|                           | State and municipal bonds    |                                     |         | 330,228           |         |        |       | 79.9    |   |   |         | 242,336 |         |  |       | 70.3 |  
|                           | Corporate bonds              |                                     |         | 29,147            |         |        |       | 7.0     |   |   |         | 45,352  |         |  |       | 13.2 |  
|                           |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |     
|                           |                              | Total fixed maturities              |         |                   | 375,097 |        |       |         |   |   |         |         | 298,470 |  |       |      |   | 
|Equity securities          |                              |                                     | 12,771  |                   |         |        | 3.1   |         |   |   | 10,808  |         |         |  | 3.1   |     
|                           |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |     
|                           |                              | Total available-for-sale securities |         |                   | 387,868 |        |       |         |   |   |         |         | 309,278 |  |       |      |   | 
|Short-term investments     |                              |                                     | 25,659  |                   |         |        | 6.2   |         |   |   | 35,303  |         |         |  | 10.2  |     
|                           |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |     
|                           |                              | $                                   | 413,527 |                   |         |        | 100.0 | %       |   | $ | 344,581 |         |         |  | 100.0 | %   
|                           |                              |                                     |         |                   |         |        |       |         |   |   |         |         |         |  |       |     

We seek to provide liquidity in our investment
portfolio through cash equivalent investments and through
diversification and investment in publicly traded securities. We
attempt to maintain a level of liquidity and duration in our
investment portfolio consistent with our business outlook and
the expected timing, direction, and degree of changes in
interest rates. See Note 2 in Notes to Consolidated Financial
Statements that describes the scheduled maturity of our fixed
maturity investments. Another way that we manage risk and
liquidity is to limit our exposure on individual securities. As
of December 31, 2003, no investment in the securities of any
single issuer exceeded 2% of our investment portfolio.

The growth in net investment income has moderated
recently in spite of an increase in our overall investment
portfolio. The drop in the effective pre-tax yield reflects the
decrease in new money rates available for investment coupled
with our strategies to increase the overall credit quality of
the portfolio and increase our investment in state and municipal
bonds. The portfolios yield was also affected by a higher
percentage of the fixed income portfolio invested in short-term
investments at low yielding money market rates.

The following table shows the results of our
investment portfolio for the last three years (dollars in
thousands).

|                                        |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                        |  | 2003 |         | 2002 |  | 2001
|                                        |  |      |         |      |  |     
|Average Investments                     |  | $    | 360,375 |      |  | $    | 301,434 |   |  | $ | 252,509 |  
|Pre-tax net investment income           |  | $    | 17,082  |      |  | $    | 16,099  |   |  | $ | 14,765  |  
|Effective pre-tax yield                 |  |      | 4.7     | %    |  |      | 5.3     | % |  |   | 5.8     | %
|Tax-equivalent yield-to-maturity        |  |      | 7.1     | %    |  |      | 7.9     | % |  |   | 8.0     | %
|Pre-tax realized investment gain (loss) |  | $    | 3,029   |      |  | $    | (2,519  | ) |  | $ | 297     |  

38



---



##### 





| |            
| | -----------
| | Credit Risk

We manage credit risk in our investment portfolio
by managing to internal investment quality guidelines and
diversification. We improved the overall credit quality of our
fixed maturity portfolio during 2003. The following table
describes our investment portfolio by credit ratings (dollars in
thousands).

|                  |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |      |       |  
|----------------- | ------------------------------ | ---------------------- | - | ----------------- | ------- | ------ |  | ------- | ----- | - | - | ------- | ------- |  |  | ---- | ----- | -
|                  |                                |                        |   |                  
|                  |                                | December 31, 2003      |   | December 31, 2002
|                  |                                |                        |   |                  
|                  |                                | Amount                 |   | Percent           |         | Amount |  | Percent
|                  |                                |                        |   |                   |         |        |  |        
|Fixed Maturities: |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     
|                  | U.S. treasury and agency bonds |                        | $ | 15,722            |         |        |  | 4.2     | %     |   | $ | 9,040   |         |  |  | 3.0  | %    
|                  | AAA                            |                        |   | 256,291           |         |        |  | 68.3    |       |   |   | 185,346 |         |  |  | 62.1 |      
|                  | AA                             |                        |   | 50,428            |         |        |  | 13.4    |       |   |   | 32,114  |         |  |  | 10.8 |      
|                  | A                              |                        |   | 35,937            |         |        |  | 9.6     |       |   |   | 42,433  |         |  |  | 14.2 |      
|                  | BBB                            |                        |   | 10,347            |         |        |  | 2.8     |       |   |   | 14,784  |         |  |  | 5.0  |      
|                  | BB                             |                        |   | 2,204             |         |        |  | 0.7     |       |   |   | 8,534   |         |  |  | 2.9  |      
|                  | B                              |                        |   | 1,669             |         |        |  | 0.4     |       |   |   | 2,437   |         |  |  | 0.8  |      
|                  | CCC and lower                  |                        |   | 525               |         |        |  | 0.1     |       |   |   | 399     |         |  |  | 0.1  |      
|                  | Not rated                      |                        |   | 1,974             |         |        |  | 0.5     |       |   |   | 3,383   |         |  |  | 1.1  |      
|                  |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     
|                  |                                | Total fixed maturities |   | $                 | 375,097 |        |  |         | 100.0 | % |   | $       | 298,470 |  |  |      | 100.0 | %
|                  |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     
|Equities:         |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     
|                  | AAA                            |                        | $ | 0                 |         |        |  | 0.0     | %     |   | $ | 361     |         |  |  | 3.3  | %    
|                  | AA                             |                        |   | 3,279             |         |        |  | 25.7    |       |   |   | 1,432   |         |  |  | 13.2 |      
|                  | A                              |                        |   | 4,640             |         |        |  | 36.3    |       |   |   | 4,622   |         |  |  | 42.8 |      
|                  | BBB                            |                        |   | 523               |         |        |  | 4.1     |       |   |   | 2,132   |         |  |  | 19.7 |      
|                  | BB                             |                        |   | 0                 |         |        |  | 0.0     |       |   |   | 180     |         |  |  | 1.7  |      
|                  | B                              |                        |   | 2,427             |         |        |  | 19.0    |       |   |   | 2,081   |         |  |  | 19.3 |      
|                  | C                              |                        |   | 153               |         |        |  | 1.2     |       |   |   | 0       |         |  |  | 0.0  |      
|                  | Not rated                      |                        |   | 1,749             |         |        |  | 13.7    |       |   |   | 0       |         |  |  | 0.0  |      
|                  |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     
|                  |                                | Total equities         |   | $                 | 12,771  |        |  |         | 100.0 | % |   | $       | 10,808  |  |  |      | 100.0 | %
|                  |                                |                        |   |                   |         |        |  |         |       |   |   |         |         |  |  |     

Credit risk is inherent in an investment
portfolio. We manage this risk through a structured approach in
which we assess the effects of the changing economic landscape.
In identifying potentially distressed securities, we
first screen for all securities that have a fair value to cost
or amortized cost ratio of less than 80%. Additionally, as part
of this identification process, we utilize the following
information for inclusion on the potentially distressed
securities list:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Length of time the fair value was below amortized
    cost                                       
|
| |  | Industry factors or conditions related to a
    geographic area negatively affecting the security
|
| |  | Downgrades by a rating agency                                                                    
|
| |  | Past due interest or principal payments or other
    violation of covenants                      
|
| |  | Deterioration of the overall financial condition
    of the specific issuer                      

In analyzing our potentially distressed
securities list for other-than-temporary impairments, we
pay special attention to securities that have been on the list
for a period greater than six months. Our ability and intent to
retain the investment for a sufficient time to recover its value
is also considered. We assume that, absent reliable
contradictory evidence, a security that is potentially
distressed for a continuous period greater than nine months has
incurred an other-than-temporary impairment. Such reliable
contradictory evidence might include, among other factors, a
liquidation analysis performed by our investment advisers or
outside consultants, improving financial performance of the
issuer, or valuation of underlying assets specifically pledged
to support the credit.

39



---



##### 



When we conclude that the decline is other than
temporary based on managements judgment, the security is
written down to fair value through a charge to realized
investment gains and losses. We adjust the amortized cost for
securities that have experienced other-than-temporary
impairments to reflect fair value at the time of the impairment.
We consider factors that lead to an other-than-temporary
impairment of a particular security in order to determine
whether these conditions have impacted other similar securities.



| |                  
| | -----------------
| | Unrealized Losses

At December 31, 2003, we had unrealized
investment gains of $18.0 million and unrealized investment
losses of $769,000. These unrealized gains and losses do not
necessarily represent future gains or losses that we will
realize. Changing conditions related to specific securities,
overall market interest rates, or credit spreads, as well as our
decisions concerning the timing of a sale, may impact values we
ultimately realize. We monitor unrealized losses through further
analysis according to maturity date, credit quality, individual
creditor exposure and the length of time the individual security
has continuously been in an unrealized loss position. Unrealized
losses related to fixed maturities amounted to $687,000 at
December 31, 2003, with the preponderance of the unrealized
losses related to bonds with a maturity date in excess of ten
years. The largest individual unrealized loss on any one
security at December 31, 2003, was $134,000 on a
$1 million par bond.

Of the $769,000 gross unrealized losses at
December 31, 2003, none was included in our potentially
distressed securities list mentioned above.

Information about unrealized gains and losses is
subject to changing conditions. Securities with unrealized gains
and losses will fluctuate, as will those securities that we have
identified as potentially distressed. The recent volatility of
financial markets has led to an increase in both unrealized
gains and losses. We consider all of the factors discussed
earlier when we determine if an unrealized loss is other than
temporary, including our ability and intent to hold the security
until the value recovers. Our current evaluation of
other-than-temporary impairments reflects our positive intent to
hold certain securities until maturity. However, we may
subsequently decide to sell certain of these securities in
future periods within the overall context of our portfolio
management strategies. If we make the decision to dispose of a
security with an unrealized loss, we will write down the
security to its fair value if we have not sold it by the end of
the reporting period.

Liquidity and Capital Resources

Our sources of operating funds consist primarily
of premiums written and investment income. Operating cash flow
is applied primarily to the payment of claims, interest,
expenses, and prepaid federal income taxes in the form of Tax
and Loss Bonds.

We generated positive cash flow from operating
activities of $59.3 million in 2003 compared to
$47.0 million for 2002 and $43.8 million for 2001. The
increase in cash flow from operating activities in 2003 reflects
the growth in premiums and investment income and a decrease in
other operating expenses paid offset partially by an increase in
losses paid. Our business does not routinely require significant
capital expenditures other than for enhancements to our computer
systems and technological capabilities. Positive cash flows are
invested pending future payments of claims and expenses. Cash
flow shortfalls, if any, could be funded through sales of
short-term investments and other investment portfolio securities.

The insurance laws of the State of Illinois
impose certain restrictions on dividends that an insurance
subsidiary can pay the parent company. These restrictions, based
on statutory accounting practices, include requirements that
dividends may be paid only out of statutory earned surplus and
that limit the amount of dividends that may be paid without
prior approval of the Illinois Insurance Department. There have
been no dividends paid by the insurance subsidiaries to the
parent company.

We cede business to captive reinsurance
subsidiaries of certain mortgage lenders (captives),
primarily under excess of loss reinsurance agreements.
Generally, reinsurance recoverables on loss reserves and
unearned premiums ceded to these captives are backed by trust
funds or letters of credit.

40



---



##### 



Total stockholders equity increased to
$369.9 million at December 31, 2003, from
$309.4 million at December 31, 2002. This increase
resulted primarily from 2003 net income of $51.1 million,
an increase in net unrealized gains on invested assets
classified as available-for-sale of $2.6 million (net of
income tax), and additional paid-in-capital of $6.8 million
resulting from the exercise of employee stock options and the
related tax benefit.

Total statutory policyholders surplus for
our insurance subsidiaries increased to $128.6 million at
December 31, 2003, from $112.9 million at
December 31, 2002. The primary difference between statutory
policyholders surplus and equity computed under generally
accepted accounting principles is the statutory contingency
reserve. The balance in the statutory contingency reserve was
$302.7 million at December 31, 2003, compared to
$245.0 million at December 31, 2002. Statutory
capital, for the purpose of computing the total risk in force to
statutory capital, includes both policyholders surplus and
the contingency reserve. Statutory capital amounted to
$431.3 million at December 31, 2003, compared to
$357.9 million at December 31, 2002.

Triads ability to write insurance depends
on the maintenance of its financial strength ratings and the
adequacy of its capital in relation to risk in force. A
significant reduction of capital or a significant increase in
risk may impair Triads ability to write additional
insurance. A number of states also generally limit Triads
risk-to-capital ratio to 25-to-1. As of December 31, 2003,
Triads risk-to-capital ratio was 15.3-to-1 as compared to
15.5-to-1 at December 31, 2002, and 11.0-to-1 for the
industry as a whole at December 31, 2002, the latest
industry data available. The risk-to-capital ratio is calculated
using net risk in force, which takes into account risk ceded
under reinsurance arrangements, including captive risk-sharing
arrangements as well as any applicable stop-loss limits, as the
numerator, and statutory capital as the denominator.

Triad is rated AA by both Standard
& Poors Ratings Services and Fitch Ratings and
Aa3 by Moodys Investors Service. In July of
2003, S&P revised its rating outlook for the U.S. private
mortgage insurance industry to Negative from
Stable. According to S&P, industry outlooks are
primarily determined by the expected course of rating actions
during the next one to two years. S&P stated that they see
little chance that there will be any outlook or rating
improvements among the mortgage insurers in the next one to two
years, but they do see a considerable possibility that there
will be some negative revisions in outlooks and ratings. In
January 2003, Fitch revised its rating outlook for the U.S.
private mortgage insurance industry to Negative from
Stable. Currently, Fitch, S&P, and Moodys
all report a Stable ratings outlook for Triad. A
reduction in Triads rating or outlook could adversely
affect our operations.

Fannie Mae has recently completed the process of
revising its approval requirements for mortgage insurers. The
new requirements require prior approval by Fannie Mae for many
of Triads activities and new products, allow for other
approved types of mortgage insurers rated less than
AA, and give Fannie Mae increased rights to revise
the eligibility standards of mortgage insurers. While continuing
to study the final requirements, we do not see any material
impact on our current or future operations as a result of the
new rules, although a material impact could still occur if our
interpretation is incorrect.

The Office of Federal Housing Enterprise
Oversight (OFHEO) issued its risk-based capital rules for
Fannie Mae and Freddie Mac in the first quarter of 2002. The
regulation provides capital guidelines for Fannie Mae and
Freddie Mac in connection with their use of various types of
credit protection counterparties including a more preferential
capital credit for insurance from a AAA rated
private mortgage insurer than for insurance from a
AA rated private mortgage insurer. The phase-in
period for OFHEOs risk-based capital rules is ten years.
We do not believe the new risk-based capital rules had an
adverse impact on our financial condition for 2003 nor that
these rules will have a significant adverse impact on our
financial condition in the future. However, if the risk-based
capital rules result in future changes to the preferences of
Fannie Mae and Freddie Mac regarding their use of the various
types of credit enhancements or their choice of mortgage
insurers based on their credit rating, our financial condition
could be significantly harmed.

41



---



##### 



Off Balance Sheet Arrangements and Aggregate
Contractual Obligations

We lease office facilities, automobiles, and
office equipment under operating leases with minimum lease
commitments that range from one to ten years. We have no
capitalized leases or material purchase commitments.

Our long-term debt has a single maturity date of
2028. The following schedule represents our aggregate
contractual obligations as of December 31, 2003 (in
thousands of dollars).

|                        |  |       |        |                        |  |       |       |       |  |             |       |  |  |   |       |  |  |   |        | 
|----------------------- |  | ----- | ------ | ---------------------- |  | ----- | ----- | ----- |  | ----------- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                        |  |       |        |                        |  |      
|                        |  |       |        | Payments Due By Period |  |      
|                        |  |       |        |                        |  |      
|                        |  |       |        | Less Than 1            |  | 1  3 |       | 3  5 |  | More Than 5
|Contractual Obligations |  | Total |        | Year                   |  | Years |       | Years |  | Years      
|                        |  |       |        |                        |  |       |       |       |  |            
|Long-term debt          |  | $     | 35,000 |                        |  | $     |      |       |  | $           |      |  |  | $ |      |  |  | $ | 35,000 | 
|Operating leases        |  |       | 11,559 |                        |  |       | 1,773 |       |  |             | 3,042 |  |  |   | 2,209 |  |  |   | 4,535  | 
|                        |  |       |        |                        |  |       |       |       |  |             |       |  |  |   |       |  |  |   |        | 
|Total                   |  | $     | 46,559 |                        |  | $     | 1,773 |       |  | $           | 3,042 |  |  | $ | 2,209 |  |  | $ | 39,535 | 
|                        |  |       |        |                        |  |       |       |       |  |             |       |  |  |   |       |  |  |   |        | 

Market Risk Exposure

Fixed maturity securities represented
approximately 91% of our invested assets at December 31,
2003. While the fair value of these fixed rate securities
generally bears an inverse relationship to changes in prevailing
market interest rates, a change in market interest rates would
not immediately impact earnings because we generally hold these
securities until maturity. However, a decrease in market
interest rates generally will have the effect of initiating an
early call provision of those securities possessing such
provisions. The proceeds relating to the early called securities
in a decreasing interest rate environment generally are invested
in lower yielding investments that would ultimately decrease
earnings. Our long-term debt matures in 2028 with no early call
or put provisions and bears interest at a fixed rate of 7.9% per
annum. The fair value of this debt is sensitive to changes in
prevailing interest rates; however, a change in rates would not
impact earnings. We believe that a 20% increase or decrease in
market interest rates is reasonable for the upcoming year. A 20%
relative increase or decrease in market interest rates that
affect our financial instruments would not have a material
impact on earnings during the next fiscal year.

Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995

Managements Discussion and Analysis and
this Report contain forward-looking statements relating to
future plans, expectations, and performance which involve
various risks and uncertainties, including, but not limited to,
the following:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest rates may increase or decrease from
    their current levels;                                                                                                                                                                                  
|
| |  | housing transactions requiring mortgage insurance
    may decrease for many reasons including changes in interest
    rates or economic conditions;                                                                                                     
|
| |  | our market share may change as a result of
    changes in underwriting criteria or competitive products or
    rates;                                                                                                                                   
|
| |  | the amount of insurance written could be
    adversely affected by changes in federal housing legislation,
    including changes in the Federal Housing Administration loan
    limits and coverage requirements of Freddie Mac and Fannie Mae;         
|
| |  | our financial condition and competitive position
    could be affected by legislation or regulation impacting the
    mortgage guaranty industry or the Government Sponsored Entities,
    specifically, and the financial services industry in general;
|
| |  | rating agencies may revise methodologies for
    determining our financial strength ratings and may revise or
    withdraw the assigned ratings at any time;                                                                                            
|
| |  | decreases in persistency, which are affected by
    loan refinancings in periods of low interest rates, may have an
    adverse effect on earnings;                                                                                                     

42



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the amount of insurance written and the growth in
    insurance in force or risk in force as well as our performance
    may be adversely impacted by the competitive environment in the
    private mortgage insurance industry, including the type,
    structure, and pricing of our products and services and our
    competitors;           
|
| |  | if we fail to properly underwrite mortgage loans
    under contract underwriting service agreements, we may be
    required to assume the costs of repurchasing those loans;                                                                                                                                                                     
|
| |  | with consolidation occurring among mortgage
    lenders and our concentration of insurance in force generated
    through relationships with significant lender customers, our
    margins may be compressed and the loss of a significant customer
    may have an adverse effect on our earnings;                                              
|
| |  | our performance may be impacted by changes in the
    performance of the financial markets and general economic
    conditions;                                                                                                                                                                                                                  
|
| |  | economic downturns in regions where our risk is
    more concentrated could have a particularly adverse effect on
    our financial condition and loss development;                                                                                                                                                                              
|
| |  | OFHEO risk-based capital rules could severely
    limit our ability to compete against various types of credit
    protection counterparties, including AAA rated
    private mortgage insurers;                                                                                                                                               
|
| |  | changes in the eligibility guidelines of Fannie
    Mae or Freddie Mac could have an adverse effect on the Company;                                                                                                                                                                                                                              
|
| |  | proposed regulation by the Department of Housing
    and Urban Development to exclude packages of real estate
    settlement services, which may include any required mortgage
    insurance premium paid at closing, from the anti-referral
    provisions of the Real Estate Settlement Procedures Act could
    adversely affect our earnings.

Accordingly, actual results may differ from those
set forth in the forward-looking statements. Attention also is
directed to other risk factors set forth in documents filed by
the Company with the Securities and Exchange Commission.



|           |                                                                 
|---------- | ----------------------------------------------------------------
|Item 7(a). | Qualitative and Quantitative Disclosures
    about Market Risks.

See information in this report under the heading
Market Risk Exposures in Managements
Discussion and Analysis of Financial Condition and Results of
Operations.



|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The Financial Statements and Supplementary Data
are presented in a separate section of this report.

43



---



##### 





|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

None.



|         |                         
|-------- | ------------------------
|Item 9a. | Controls and Procedures.

Triad Guaranty Inc.s management is
responsible for establishing and maintaining effective
disclosure controls and procedures, as defined under
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934. As of December 31, 2003, an evaluation was
performed under the supervision and with the participation of
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures. Based upon that evaluation, management has concluded
that disclosure controls and procedures as of December 31, 2003
were effective in ensuring that material information required to
be disclosed in this Annual Report on Form 10-K was
recorded, processed, summarized, and reported on a timely basis.
Additionally, there were no changes in the Companys
internal controls over financial reporting that occurred during
the quarter ended December 31, 2003 that have materially
affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.

Managements responsibilities related to
establishing and maintaining effective disclosure controls and
procedures include maintaining effective internal controls over
financial reporting that are designed to produce reliable
financial statements in accordance with accounting principles
generally accepted in the United States. Management has assessed
the Companys system of internal control over financial
reporting as of December 31, 2003, in relation to criteria
for effective internal control over financial reporting as
described in Internal Control  Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31,
2003, its system of internal controls over financial reporting
met those criteria.

There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect the Companys internal controls
subsequent to the date management carried out its evaluation.

PART III



|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Information regarding our directors and nominees
for directors is included in our Proxy Statement for the 2004
Annual Meeting of Stockholders, and is hereby incorporated by
reference.

For information regarding our executive officers,
reference is made to the section entitled Executive
Officers in Part I, Item 1 of this Report.



|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

This information is included in our Proxy
Statement for the 2004 Annual Meeting of Stockholders, and is
hereby incorporated by reference.



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

This information is included in our Proxy
Statement for the 2004 Annual Meeting of Stockholders, and is
hereby incorporated by reference.



|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

This information is included in our Proxy
Statement for the 2004 Annual Meeting of Stockholders, and is
hereby incorporated by reference.

44



---



##### 





|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

This information is included in our Proxy
Statement for the 2004 Annual Meeting of Stockholders, and is
hereby incorporated by reference.

PART IV



|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K.

(a) (1) and (2) The response to
this portion of Item 15 is submitted as a separate section
of this report.

(a) (3) Listing of Exhibits 
The response to this portion of Item 15 is submitted as a
separate section of this report.

(b) Reports on Form 8-K filed or
furnished during the fourth quarter of 2003 and through the date
of this Form 10-K filing.

October 29, 2003  Triad Guaranty
Inc. issued a news release announcing its financial results for
the three-month and nine-month periods ended September 30,
2003.

January 30, 2004  Triad Guaranty
Inc. issued a news release announcing its financial results for
the fourth quarter and the fiscal year ended December 31,
2003.

(c) Exhibits  The response to
this portion of Item 15 is submitted as a separate section
of this report.

(d) Financial Statement
Schedules  The response to this portion of
Item 15 is submitted as a separate section of this report.

45



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 12th day of March
2004.



| |    |                       
| | -- | ----------------------
| | By | /s/ DARRYL W. THOMPSON

| |                                          
| | -----------------------------------------
| |                                          
| | Darryl W. Thompson                       
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on the
12th day of March, 2003 by the following persons on behalf of
the Registrant in the capacities indicated.

|                                                   |  |                                                                 |  | 
|-------------------------------------------------- |  | --------------------------------------------------------------- |  | 
|                                                   |  |                                                                
|Signature                                          |  | Title                                                          
|                                                   |  |                                                                
|                                                  
|/s/ WILLIAM T. RATLIFF, IIIWilliam T. Ratliff, III |  | Chairman of the Board                                          
|                                                  
|/s/ DARRYL W. THOMPSONDarryl W. Thompson           |  | President, Chief Executive Officer, and Director               
|                                                  
|/s/ RON D. KESSINGERRon D. Kessinger               |  | Executive Vice President and Chief Financial
    Officer       
|                                                  
|/s/ KENNETH S. DWYERKenneth S. Dwyer               |  | Vice President, Controller and
    Principal Accounting Officer
|                                                  
|/s/ DAVID W. WHITEHURSTDavid W. Whitehurst         |  | Director                                                       
|                                                  
|/s/ ROBERT T. DAVIDRobert T. David                 |  | Director                                                       
|                                                  
|/s/ MICHAEL A. F. ROBERTSMichael A. F. Roberts     |  | Director                                                       
|                                                  
|/s/ RICHARD S. SWANSONRichard S. Swanson           |  | Director                                                       
|                                                  
|/s/ GLENN T. AUSTIN, JR.Glenn T. Austin, Jr.       |  | Director                                                       

46



---



##### 



ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 15(a)(1) and (2), (3), (c), and
(d)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES

INDEX TO EXHIBITS

CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENT SCHEDULES

CERTAIN EXHIBITS

YEAR ENDED DECEMBER 31, 2003

TRIAD GUARANTY INC.

WINSTONSALEM, NORTH CAROLINA

47



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES


(Item 15(a) 1 and 2)

|                                                                                                                                     |                                                                                     |      |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                                                                     |                                                                                     | Page
|                                                                                                                                     |                                                                                     |     
|Consolidated Financial Statements                                                                                                    |                                                                                     |      |    |   
|Report of Independent Auditors                                                                                                       |                                                                                     |      | 51 |   
|Consolidated Balance Sheets at December 31,
    2003 and 2002                                                                        |                                                                                     |      | 52 |   
|Consolidated Statements of Income for each of the
    three years in the period ended December 31, 2003                              |                                                                                     |      | 53 |   
|Consolidated Statements of Changes in
    Stockholders Equity for each of the three years in the
    period ended December 31, 2003 |                                                                                     |      | 54 |   
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003                          |                                                                                     |      | 55 |   
|Notes to Consolidated Financial Statements                                                                                           |                                                                                     |      | 56 |   
|Financial Statement Schedules                                                                                                        |                                                                                     |      |    |   
|Schedules at and for each of the three years in
    the period ended December 31, 2003                                               |                                                                                     |      |    |   
|                                                                                                                                     | Schedule I  Summary of
    Investments  Other Than Investments in Related Parties |      |    | 70 | 
|                                                                                                                                     | Schedule II  Condensed Financial
    Information of Registrant                     |      |    | 71 | 
|                                                                                                                                     | Schedule IV  Reinsurance                                                           |      |    | 76 | 

All other schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require submission of the schedules, or because
the information required is included in the consolidated
financial statements and notes thereto.

48



---



##### 



INDEX TO EXHIBITS

(Item 15(a) 3)


|        |       |                        |  |                                                                                                                                                                                       
|------- | ----- | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                       
|Number  |       | Description of Exhibit
|        |       |                       
|        | 3.1   |                        |  | Certificate of Incorporation of the Registrant,
    as amended(5) (Exhibit 3.1)                                                                                                       
|        | 3.2   |                        |  | By-Laws of the Registrant as amended
    March 21, 2003 (Exhibit 3.2(c))(10)                                                                                                          
|        | 4.1   |                        |  | Form of Common Stock certificate(1)
    (Exhibit 4(a))                                                                                                                                
|        | 4.2   |                        |  | Indenture Between Triad Guaranty Inc. and
    Bankers Trust Co.(6) (Exhibit 4.2)                                                                                                     
|        | 10.1  |                        |  | 1993 Long-Term Stock Incentive Plan(1)(3)
    (Exhibit 10(a))                                                                                                                         
|        | 10.3  |                        |  | Agreement for Administrative Services among Triad
    Guaranty Insurance Corporation and Collateral Investment Corp.
    and Collateral Mortgage, Ltd.(1) (Exhibit 10(c))             
|        | 10.4  |                        |  | Investment Advisory Agreement between Triad
    Guaranty Insurance Corporation and Collateral Mortgage, Ltd.(2)
    (Exhibit 10(d))                                                   
|        | 10.6  |                        |  | Registration Agreement among the Registrant,
    Collateral Investment Corp. and Collateral Mortgage, Ltd.(2)
    (Exhibit 10.6)                                                      
|        | 10.7  |                        |  | Employment Agreement between the Registrant and
    Darryl W. Thompson(2)(3) (Exhibit 10.7)                                                                                           
|        | 10.10 |                        |  | Employment Agreement between the Registrant and
    Henry B. Freeman(2)(3) (Exhibit 10.10)                                                                                            
|        | 10.11 |                        |  | Employment Agreement between the Registrant and
    Ron D. Kessinger(2)(3) (Exhibit 10.11)                                                                                            
|        | 10.16 |                        |  | Economic Value Added Incentive Bonus Program
    (Senior Management)(4) (Exhibit 10.16)                                                                                               
|        | 10.17 |                        |  | Amendment to Employment Agreement between the
    Registrant and Darryl W. Thompson(3)(4) (Exhibit 10.17)                                                                             
|        | 10.19 |                        |  | Amendment to Employment Agreement between the
    Registrant and Henry B. Freeman)(3)(4) (Exhibit 10.19)                                                                              
|        | 10.20 |                        |  | Amendment to Employment Agreement between the
    Registrant and Ron D. Kessinger(3)(4) (Exhibit 10.20)                                                                               
|        | 10.21 |                        |  | Excess of Loss Reinsurance Agreement between
    Triad Guaranty Insurance Corporation, Capital Mortgage
    Reinsurance Company, and Federal Insurance Company.(7)
    (Exhibit 10.21)
|        | 10.22 |                        |  | Excess of Loss Reinsurance Agreement between
    Triad Guaranty Insurance Corporation and Ace Capital Mortgage
    Reinsurance Company.(8) (Exhibit 10.22)                            
|        | 10.23 |                        |  | Employment Agreement between the Registrant and
    Earl F. Wall(3)(9) (Exhibit 10.23)                                                                                                
|        | 10.24 |                        |  | Employment Agreement between the Registrant and
    Michael R. Oswalt(3)(9) (Exhibit 10.24)                                                                                           

49



---



##### 



|        |       |                        |  |                                                                                                                                                                                                           
|------- | ----- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                       
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.25 |                        |  | Employment Agreement between the Registrant and
    Kenneth N. Lard(3) (Exhibit 10.25)                                                                                                                    
|        | 10.26 |                        |  | Employment Agreement between the Registrant and
    Kenneth C. Foster(3) (Exhibit 10.26)                                                                                                                  
|        | 21.1  |                        |  | Subsidiaries of the Registrant(7)
    (Exhibit 21.1)                                                                                                                                                      
|        | 23.1* |                        |  | Consent of Ernst & Young LLP
    (Exhibit 23.1)                                                                                                                                                           
|        | 31.1* |                        |  | Chief Executive Officer Sarbanes-Oxley Act
    Section 302 Certification dated March 12, 2004, 2004
    for the Triad Guaranty Inc.s Annual report on
    Form 10-K for the year ended December 31, 2003.
|        | 31.2* |                        |  | Chief Financial Officer Sarbanes-Oxley Act
    Section 302 Certification dated March 12, 2004, 2004
    for the Triad Guaranty Inc.s Annual report on
    Form 10-K for the year ended December 31, 2003.
|        | 32.1* |                        |  | Chief Executive Officer Sarbanes-Oxley Act
    Section 906 Certification dated March 12, 2004, 2004
    for the Triad Guaranty Inc.s Annual report on
    Form 10-K for the year ended December 31, 2003.
|        | 32.2* |                        |  | Chief Financial Officer Sarbanes-Oxley Act
    Section 906 Certification dated March 12, 2004, 2004
    for the Triad Guaranty Inc.s Annual report on
    Form 10-K for the year ended December 31, 2003.



---



| |   |                
| | - | ---------------
| | * | Filed Herewith.



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the
    Registrants Registration Statement on Form S-1 filed
    October 22, 1993 and amendments thereto.
|   
|(2) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 1993
    Form 10-K.                                                                                   
|   
|(3) | Denotes management contract or compensatory plan
    of arrangement required to be filed as an exhibit to this report
    pursuant to Item 601 of Regulation S-K.                                        
|   
|(4) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 1996
    Form 10-K.                                                                                   
|   
|(5) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the
    June 30, 1997 Form 10-Q.                                                                          
|   
|(6) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 1997
    Form 10-K.                                                                                   
|   
|(7) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 1999
    Form 10-K.                                                                                   
|   
|(8) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 2000
    Form 10-K.                                                                                   
|   
|(9) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the
    June 30, 2002 Form 10-Q.                                                                          



|     |                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the exhibit
    identified in parentheses, filed as an exhibit in the 2002
    Form 10-K.

50



---



##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

Triad Guaranty Inc.


We have audited the accompanying consolidated
balance sheets of Triad Guaranty Inc. as of December 31,
2003 and 2002, and the related consolidated statements of
income, stockholders equity, and cash flows for each of
the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedules listed in
the Index at item 15(a). These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Triad Guaranty Inc. at
December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | -s- ERNST & YOUNG LLP

Greensboro, North Carolina

January 29, 2004


51



---



##### 



TRIAD GUARANTY INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                  |                                               |                                                                         |         |        |         |   |         |        |         | 
|------------------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                                                  |                                               |                                                                        
|                                                                                                  |                                               | December 31                                                            
|                                                                                                  |                                               |                                                                        
|                                                                                                  |                                               | 2003                                                                    |         | 2002  
|                                                                                                  |                                               |                                                                         |         |       
|                                                                                                  |                                               |                                                                        
|                                                                                                  |                                               | (In thousands, except                                                  
|                                                                                                  |                                               | share data)                                                            
|ASSETS                                                                                           
|Invested assets:                                                                                  |                                               |                                                                         |         |        |         |   |         |       
|                                                                                                  | Securities available-for-sale, at fair value: |                                                                         |         |        |         |   |         |        |        
|                                                                                                  |                                               | Fixed maturities (amortized cost:
    2003  $359,885; 2002  $284,737) |         | $      | 375,097 |   |         | $      | 298,470 | 
|                                                                                                  |                                               | Equity securities (cost: 2003 
    $10,769; 2002  $11,266)            |         |        | 12,771  |   |         |        | 10,808  | 
|                                                                                                  | Short-term investments                        |                                                                         |         | 25,659 |         |   |         | 35,303 |        
|                                                                                                  |                                               |                                                                         |         |        |         |   |         |       
|                                                                                                  |                                               |                                                                         | 413,527 |        |         |   | 344,581 |       
|Cash                                                                                              |                                               |                                                                         | 973     |        |         |   | 233     |       
|Real estate                                                                                       |                                               |                                                                         | 146     |        |         |   | 1,561   |       
|Accrued investment income                                                                         |                                               |                                                                         | 4,575   |        |         |   | 3,088   |       
|Deferred policy acquisition costs                                                                 |                                               |                                                                         | 29,363  |        |         |   | 28,997  |       
|Property and equipment, at cost less accumulated
    depreciation (2003  $11,867; 2002  $8,146) |                                               |                                                                         | 9,369   |        |         |   | 9,533   |       
|Prepaid federal income tax                                                                        |                                               |                                                                         | 98,124  |        |         |   | 77,786  |       
|Reinsurance recoverable                                                                           |                                               |                                                                         | 881     |        |         |   | 396     |       
|Other assets                                                                                      |                                               |                                                                         | 18,621  |        |         |   | 16,711  |       
|                                                                                                  |                                               |                                                                         |         |        |         |   |         |       
|Total assets                                                                                      |                                               | $                                                                       | 575,579 |        |         | $ | 482,886 |       
|                                                                                                  |                                               |                                                                         |         |        |         |   |         |       

|                                                       |                                                                                                                                                                                       |   |         |         |   |   |         |         |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------- | - | - | ------- | ------- | -
|LIABILITIES AND STOCKHOLDERS
    EQUITY              
|Liabilities:                                           |                                                                                                                                                                                       |   |         |         |   |   |         |        
|                                                       | Losses and loss adjustment expenses                                                                                                                                                   |   | $       | 27,186  |   |   | $       | 21,360  |  
|                                                       | Unearned premiums                                                                                                                                                                     |   |         | 15,629  |   |   |         | 8,539   |  
|                                                       | Amounts payable to reinsurer                                                                                                                                                          |   |         | 3,243   |   |   |         | 3,415   |  
|                                                       | Current taxes payable                                                                                                                                                                 |   |         | 6       |   |   |         | 598     |  
|                                                       | Deferred income taxes                                                                                                                                                                 |   |         | 115,459 |   |   |         | 94,241  |  
|                                                       | Unearned ceding commission                                                                                                                                                            |   |         | 669     |   |   |         | 1,386   |  
|                                                       | Long-term debt                                                                                                                                                                        |   |         | 34,486  |   |   |         | 34,479  |  
|                                                       | Accrued interest on debt                                                                                                                                                              |   |         | 1,275   |   |   |         | 1,275   |  
|                                                       | Accrued expenses and other liabilities                                                                                                                                                |   |         | 7,696   |   |   |         | 8,186   |  
|                                                       |                                                                                                                                                                                       |   |         |         |   |   |         |        
|Total liabilities                                      |                                                                                                                                                                                       |   | 205,649 |         |   |   | 173,479 |        
|Commitments and contingencies (Notes 5, 7, and
    14) |                                                                                                                                                                                       |   |         |         |   |   |         |        
|Stockholders equity:                                  |                                                                                                                                                                                       |   |         |         |   |   |         |        
|                                                       | Preferred stock, par value $.01 per
    share  authorized 1,000,000 shares, no shares issued
    and outstanding                                                                     |   |         |        |   |   |         |        |  
|                                                       | Common stock, par value $.01 per
    share  authorized 32,000,000 shares, issued and
    outstanding 14,438,637 shares at December 31, 2003, and
    14,159,601 at December 31, 2002 |   |         | 144     |   |   |         | 142     |  
|                                                       | Additional paid-in capital                                                                                                                                                            |   |         | 87,513  |   |   |         | 80,169  |  
|                                                       | Accumulated other comprehensive income, net of
    income tax liability of $6,025 at December 31, 2003, and
    $4,646 at December 31, 2002                                           |   |         | 11,190  |   |   |         | 8,634   |  
|                                                       | Deferred compensation                                                                                                                                                                 |   |         | (1,128  | ) |   |         | (658    | )
|                                                       | Retained earnings                                                                                                                                                                     |   |         | 272,211 |   |   |         | 221,120 |  
|                                                       |                                                                                                                                                                                       |   |         |         |   |   |         |        
|Total stockholders equity                             |                                                                                                                                                                                       |   | 369,930 |         |   |   | 309,407 |        
|                                                       |                                                                                                                                                                                       |   |         |         |   |   |         |        
|Total liabilities and stockholders equity             |                                                                                                                                                                                       | $ | 575,579 |         |   | $ | 482,886 |        
|                                                       |                                                                                                                                                                                       |   |         |         |   |   |         |        

See accompanying notes.

52



---



##### 



TRIAD GUARANTY INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |            |         |  
|----------------------------------------------------------------------------- | ----------------------------------- | --------------------------------- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                                              |                                     |                                  
|                                                                              |                                     | Year Ended December 31           
|                                                                              |                                     |                                  
|                                                                              |                                     | 2003                              |         | 2002       |         | 2001
|                                                                              |                                     |                                   |         |            |         |     
|                                                                              |                                     |                                  
|                                                                              |                                     | (In thousands, except share data)
|Revenue:                                                                      |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Premiums written:                   |                                   |         |            |         |      |         |            |         |   |         |            |        
|                                                                              |                                     | Direct                            |         | $          | 154,046 |      |         | $          | 124,214 |   |         | $          | 95,551  |  
|                                                                              |                                     | Assumed                           |         |            | 2       |      |         |            | 3       |   |         |            | 4       |  
|                                                                              |                                     | Ceded                             |         |            | (27,312 | )    |         |            | (18,348 | ) |         |            | (10,557 | )
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Net premiums written                |                                   |         | 126,736    |         |      |         | 105,869    |         |   |         | 84,998     |        
|                                                                              | Change in unearned premiums         |                                   |         | (7,004     | )       |      |         | (802       | )       |   |         | (642       | )      
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Earned premiums                                                               |                                     |                                   | 119,732 |            |         |      | 105,067 |            |         |   | 84,356  |           
|Net investment income                                                         |                                     |                                   | 17,082  |            |         |      | 16,099  |            |         |   | 14,765  |           
|Net realized investment gains (losses)                                        |                                     |                                   | 3,029   |            |         |      | (2,519  | )          |         |   | 297     |           
|Other income                                                                  |                                     |                                   | 24      |            |         |      | 72      |            |         |   | 1,892   |           
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              |                                     |                                   | 139,867 |            |         |      | 118,719 |            |         |   | 101,310 |           
|Losses and expenses:                                                          |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Losses and loss adjustment expenses |                                   |         | 23,834     |         |      |         | 14,064     |         |   |         | 9,020      |        
|                                                                              | Reinsurance recoveries              |                                   |         | (1         | )       |      |         | (1         | )       |   |         | (1         | )      
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Net losses and loss adjustment expenses                                       |                                     |                                   | 23,833  |            |         |      | 14,063  |            |         |   | 9,019   |           
|Interest expense on debt                                                      |                                     |                                   | 2,772   |            |         |      | 2,771   |            |         |   | 2,771   |           
|Amortization of deferred policy acquisition costs                             |                                     |                                   | 18,112  |            |         |      | 13,742  |            |         |   | 11,712  |           
|Other operating expenses (net of acquisition
    costs deferred)              |                                     |                                   | 22,776  |            |         |      | 22,900  |            |         |   | 18,136  |           
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              |                                     |                                   | 67,493  |            |         |      | 53,476  |            |         |   | 41,638  |           
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Income before income taxes                                                    |                                     |                                   | 72,374  |            |         |      | 65,243  |            |         |   | 59,672  |           
|Income taxes:                                                                 |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Current                             |                                   |         | 716        |         |      |         | 667        |         |   |         | 187        |        
|                                                                              | Deferred                            |                                   |         | 20,567     |         |      |         | 19,473     |         |   |         | 18,226     |        
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              |                                     |                                   | 21,283  |            |         |      | 20,140  |            |         |   | 18,413  |           
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Net income                                                                    |                                     | $                                 | 51,091  |            |         | $    | 45,103  |            |         | $ | 41,259  |           
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Earnings per common and common equivalent share:                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Basic                               |                                   | $       | 3.57       |         |      | $       | 3.21       |         |   | $       | 3.05       |        
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Diluted                             |                                   | $       | 3.52       |         |      | $       | 3.15       |         |   | $       | 2.95       |        
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|Shares used in computing earnings per common and
    common equivalent share: |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Basic                               |                                   |         | 14,322,216 |         |      |         | 14,060,420 |         |   |         | 13,545,725 |        
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           
|                                                                              | Diluted                             |                                   |         | 14,509,538 |         |      |         | 14,331,581 |         |   |         | 13,977,435 |        
|                                                                              |                                     |                                   |         |            |         |      |         |            |         |   |         |           

See accompanying notes.

53



---



##### 



TRIAD GUARANTY INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |        |        |  
|---------------------------- | ----------------------------------------------------------------------- | --------------------------------- | --- | ---------- | - | ------------- | ------ | ------------ | - | -------- | ------ | ----- | ------ | - | ------ | ------ | - | - | ------- | ------ | - | - | ------- | ------ | ------ | -
|                             |                                                                         |                                   |     |            |   | Accumulated   |        |              |   |          |        |      
|                             |                                                                         |                                   |     | Additional |   | Other         |        |              |   |          |        |      
|                             |                                                                         | Common                            |     | Paid-In    |   | Comprehensive |        | Deferred     |   | Retained |        |      
|                             |                                                                         | Stock                             |     | Capital    |   | Income        |        | Compensation |   | Earnings |        | Total
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |      
|                             |                                                                         |                                  
|                             |                                                                         | (In thousands, except share data)
|Balance at December 31, 2000 |                                                                         | $                                 | 134 |            |   | $             | 62,724 |              |   | $        | 2,351  |       |        | $ | (135   | )      |   | $ | 134,758 |        |   | $ | 199,832 |       
|                             | Net income                                                              |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        |       |   |   |         | 41,259 |   |   |         | 41,259 |       
|                             | Other comprehensive income  net of tax:                                |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |        |       
|                             |                                                                         | Change in unrealized (loss) gain  |     |            |  |               |        |              |  |          |        |       | (1,376 | ) |        |        |  |   |         |        |  |   |         |        | (1,376 | )
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|                             | Comprehensive income                                                    |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         | 39,883 |       
|                             | Issuance of 336,628 shares of common stock under
    stock option plans |                                   |     | 3          |   |               |        | 2,871        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 2,874  |       
|                             | Tax effect of exercise of non-qualified stock
    options               |                                   |     |           |   |               |        | 3,363        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 3,363  |       
|                             | Issuance of 3,350 shares of restricted stock                            |                                   |     |           |   |               |        | 100          |   |          |        |      |        |   |        | (100   | ) |   |         |       |   |   |         |       |       
|                             | Amortization of deferred compensation                                   |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        | 118    |   |   |         |       |   |   |         | 118    |       
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|Balance at December 31, 2001 |                                                                         |                                   | 137 |            |   |               | 69,058 |              |   |          | 975    |       |        |   | (117   | )      |   |   | 176,017 |        |   |   | 246,070 |       
|                             | Net income                                                              |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        |       |   |   |         | 45,103 |   |   |         | 45,103 |       
|                             | Other comprehensive income  net of tax:                                |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |        |       
|                             |                                                                         | Change in unrealized gain         |     |            |  |               |        |              |  |          |        |       | 7,659  |   |        |        |  |   |         |        |  |   |         |        | 7,659  |  
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|                             | Comprehensive income                                                    |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         | 52,762 |       
|                             | Issuance of 444,349 shares of common stock under
    stock option plans |                                   |     | 5          |   |               |        | 5,684        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 5,689  |       
|                             | Tax effect of exercise of non-qualified stock
    options               |                                   |     |           |   |               |        | 4,494        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 4,494  |       
|                             | Issuance of 23,580 shares of restricted stock                           |                                   |     |           |   |               |        | 933          |   |          |        |      |        |   |        | (933   | ) |   |         |       |   |   |         |       |       
|                             | Amortization of deferred compensation                                   |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        | 392    |   |   |         |       |   |   |         | 392    |       
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|Balance at December 31, 2002 |                                                                         |                                   | 142 |            |   |               | 80,169 |              |   |          | 8,634  |       |        |   | (658   | )      |   |   | 221,120 |        |   |   | 309,407 |       
|                             | Net income                                                              |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        |       |   |   |         | 51,091 |   |   |         | 51,091 |       
|                             | Other comprehensive income  net of tax:                                |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |        |       
|                             |                                                                         | Change in unrealized gain         |     |            |  |               |        |              |  |          |        |       | 2,556  |   |        |        |  |   |         |        |  |   |         |        | 2,556  |  
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|                             | Comprehensive income                                                    |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         | 53,647 |       
|                             | Issuance of 244,156 shares of common stock under
    stock option plans |                                   |     | 2          |   |               |        | 4,051        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 4,053  |       
|                             | Tax effect of exercise of non-qualified stock
    options               |                                   |     |           |   |               |        | 2,133        |   |          |        |      |        |   |        |       |   |   |         |       |   |   |         | 2,133  |       
|                             | Issuance of 34,880 shares of restricted stock                           |                                   |     |           |   |               |        | 1,160        |   |          |        |      |        |   |        | (1,160 | ) |   |         |       |   |   |         |       |       
|                             | Amortization of deferred compensation                                   |                                   |     |           |   |               |        |             |   |          |        |      |        |   |        | 690    |   |   |         |       |   |   |         | 690    |       
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       
|Balance at December 31, 2003 |                                                                         | $                                 | 144 |            |   | $             | 87,513 |              |   | $        | 11,190 |       |        | $ | (1,128 | )      |   | $ | 272,211 |        |   | $ | 369,930 |       
|                             |                                                                         |                                   |     |            |   |               |        |              |   |          |        |       |        |   |        |        |   |   |         |        |   |   |         |       

See accompanying notes.

54



---



##### 



TRIAD GUARANTY INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------- | ------- | -------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                      |                                                                         |                       
|                                                                                      |                                                                         | Year Ended December 31
|                                                                                      |                                                                         |                       
|                                                                                      |                                                                         | 2003                   |         | 2002     |   | 2001
|                                                                                      |                                                                         |                        |         |          |   |     
|                                                                                      |                                                                         |                       
|                                                                                      |                                                                         | (In thousands)        
|Operating activities                                                                  |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Net income                                                                            |                                                                         | $                      | 51,091  |          |   | $    | 45,103  |         |   | $ | 41,259  |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|                                                                                      | Loss and unearned premium reserves                                      |                        |         | 12,916   |   |      |         | 4,258   |   |   |         | 3,720   |  
|                                                                                      | Accrued expenses and other liabilities                                  |                        |         | 215      |   |      |         | (2,624  | ) |   |         | 1,359   |  
|                                                                                      | Current taxes payable                                                   |                        |         | (592     | ) |      |         | 558     |   |   |         | (45     | )
|                                                                                      | Amounts due to/from reinsurer                                           |                        |         | (743     | ) |      |         | 492     |   |   |         | 1,082   |  
|                                                                                      | Accrued investment income                                               |                        |         | (1,487   | ) |      |         | 108     |   |   |         | (299    | )
|                                                                                      | Policy acquisition costs deferred                                       |                        |         | (18,478  | ) |      |         | (16,795 | ) |   |         | (14,840 | )
|                                                                                      | Amortization of policy acquisition costs                                |                        |         | 18,112   |   |      |         | 13,742  |   |   |         | 11,712  |  
|                                                                                      | Net realized investment losses (gains)                                  |                        |         | (3,029   | ) |      |         | 2,519   |   |   |         | (297    | )
|                                                                                      | Provision for depreciation                                              |                        |         | 2,941    |   |      |         | 2,778   |   |   |         | 2,246   |  
|                                                                                      | Accretion of discount on investments                                    |                        |         | (3,212   | ) |      |         | (4,601  | ) |   |         | (3,128  | )
|                                                                                      | Deferred income taxes                                                   |                        |         | 20,567   |   |      |         | 19,473  |   |   |         | 18,226  |  
|                                                                                      | Prepaid federal income taxes                                            |                        |         | (20,338  | ) |      |         | (15,167 | ) |   |         | (13,244 | )
|                                                                                      | Unearned ceding commission                                              |                        |         | (717     | ) |      |         | (938    | ) |   |         | 842     |  
|                                                                                      | Other assets                                                            |                        |         | (1,450   | ) |      |         | (1,318  | ) |   |         | (4,819  | )
|                                                                                      | Other operating activities                                              |                        |         | 3,518    |   |      |         | (636    | ) |   |         | 56      |  
|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Net cash provided by operating activities                                             |                                                                         |                        | 59,314  |          |   |      | 46,952  |         |   |   | 43,830  |        
|Investing activities                                                                  |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Securities available-for-sale:                                                        |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|                                                                                      | Purchases  fixed maturities                                            |                        |         | (186,509 | ) |      |         | (94,889 | ) |   |         | (76,932 | )
|                                                                                      | Sales and maturities  fixed maturities                                 |                        |         | 117,908  |   |      |         | 59,696  |   |   |         | 36,576  |  
|                                                                                      | Purchases  equities                                                    |                        |         | (2,044   | ) |      |         | (2,160  | ) |   |         | (4,999  | )
|                                                                                      | Sales and maturities  equities                                         |                        |         | 1,525    |   |      |         | 1,797   |   |   |         | 3,899   |  
|Net change in short-term investments                                                  |                                                                         |                        | 9,644   |          |   |      | (16,564 | )       |   |   | (1,727  | )      
|Purchases of property and equipment                                                   |                                                                         |                        | (3,151  | )        |   |      | (1,141  | )       |   |   | (4,181  | )      
|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Net cash used in investing activities                                                 |                                                                         |                        | (62,627 | )        |   |      | (53,261 | )       |   |   | (47,364 | )      
|Financing activities                                                                  |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Proceeds from exercise of stock options                                               |                                                                         |                        | 4,053   |          |   |      | 5,689   |         |   |   | 2,874   |        
|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Net cash provided by financing activities                                             |                                                                         |                        | 4,053   |          |   |      | 5,689   |         |   |   | 2,874   |        
|Net change in cash                                                                    |                                                                         |                        | 740     |          |   |      | (620    | )       |   |   | (660    | )      
|Cash at beginning of year                                                             |                                                                         |                        | 233     |          |   |      | 853     |         |   |   | 1,513   |        
|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Cash at end of year                                                                   |                                                                         | $                      | 973     |          |   | $    | 233     |         |   | $ | 853     |        
|                                                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Supplemental schedule of cash flow
    information                                    |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|Cash paid during the period for:                                                      |                                                                         |                        |         |          |   |      |         |         |   |   |         |        
|                                                                                      | Income taxes and United States Mortgage Guaranty
    Tax and Loss Bonds |                        | $       | 21,588   |   |      | $       | 16,024  |   |   | $       | 13,270  |  
|                                                                                      | Interest                                                                |                        |         | 2,765    |   |      |         | 2,765   |   |   |         | 2,765   |  

See accompanying notes.

55



---



##### 



TRIAD GUARANTY INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003


1.     Accounting
Policies

Nature of
Business

Triad Guaranty Inc. (the Company) is
a holding company which, through its wholly-owned subsidiary,
Triad Guaranty Insurance Corporation (Triad),
provides private mortgage insurance coverage in the United
States to mortgage lenders or investors to protect the lender or
investor against loss from defaults on low down payment
residential mortgage loans.

Basis of
Presentation

The accompanying consolidated financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States, which vary
in some respects from statutory accounting practices which are
prescribed or permitted by the various insurance departments.

Consolidation

The consolidated financial statements include the
amounts of Triad Guaranty Inc. and its wholly-owned subsidiary,
Triad Guaranty Insurance Corporation (Triad) and
Triads wholly-owned subsidiaries, Triad Guaranty Assurance
Corporation (TGAC) and Triad Re Insurance
Corporation (Triad Re). All significant intercompany
accounts and transactions have been eliminated.

Use of
Estimates

The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.

Investments

All fixed maturity and equity securities are
classified as available-for-sale and are carried at
fair value. Unrealized gains and losses on available-for-sale
securities, net of tax, are reported as a separate component of
accumulated other comprehensive income.

Fair value generally represents quoted market
value prices for securities traded in the public market or
prices analytically determined using bid or closing prices for
securities not traded in the public marketplace. Realized
investment gains or losses are determined on a specific
identification basis. The Company evaluates its investments
regularly to determine whether there are declines in value that
are other-than-temporary. When the Company determines that a
security has experienced an other-than-temporary impairment, the
impairment loss is recognized as a realized investment loss.
Short-term investments are defined as short-term, highly liquid
investments both readily convertible to known amounts of cash
and having maturities of twelve months or less upon acquisition
by the Company.

Deferred
Policy Acquisition Costs

The costs of acquiring new business, principally
commissions and certain policy underwriting and issue costs,
which vary with and are primarily related to the production of
new business, are deferred. Amortization of such policy
acquisition costs is charged to expense in proportion to premium
revenue recognized over the estimated policy life. The Company
reviews the persistency of policies in force and makes
appropriate adjustments to reflect policy cancellations.

56



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and
Equipment

Property and equipment is recorded at cost and is
depreciated principally on a straight-line basis over the
estimated useful lives, generally three to five years, of the
depreciable assets. Property and equipment primarily consists of
computer hardware and software and furniture and equipment.

Loss and Loss
Adjustment Expense Reserves

Reserves are provided for the estimated costs of
settling claims in respect of loans reported to be in default
and estimates of loans in default which have not been reported
to the Company. Consistent with industry accounting practices,
the Company does not establish loss reserves for future claims
on insured loans that are not currently in default. 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 age, policy year, geography, and chronic late
payment characteristics. The estimates are continually reviewed
and, as adjustments to these liabilities become necessary, such
adjustments are reflected in current operations.

Reinsurance

Certain premiums and losses are assumed from and
ceded to other insurance companies under various reinsurance
agreements. Reinsurance premiums, loss reimbursement, and
reserves related to reinsurance business are accounted for on a
basis consistent with that used in accounting for the original
policies issued and the terms of the reinsurance contracts. The
Company may receive a ceding commission in connection with ceded
reinsurance. If so, the ceding commission is earned on a monthly
pro rata basis in the same manner as the premium and is recorded
as a reduction of other operating expenses.

Income
Taxes

The Company uses the asset and liability method
of accounting for income taxes. Under the asset and liability
method, deferred tax assets, net of a valuation allowance, and
deferred tax liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.

Triad purchases ten-year non-interest bearing
United States Mortgage Guaranty Tax and Loss Bonds (Tax
and Loss Bonds) in lieu of paying federal income taxes.
Purchases of these Tax and Loss Bonds are treated as prepaid
federal income taxes because the payment for Tax and Loss Bonds
is essentially a prepayment of federal income taxes that will
become due in ten years when the Tax and Loss Bonds mature.
Current income tax expense is primarily associated with the
maturing of a portion of Triads Tax and Loss Bonds.

Income
Recognition

The Company writes policies that are guaranteed
renewable contracts at the policyholders option on single
premium, annual premium, and monthly premium bases. The Company
does not have the option to reunderwrite these contracts.
Premiums written on annual policies are earned on a monthly pro
rata basis. Single premium policies covering more than one year
are amortized over the estimated policy life in accordance with
the expiration of risk. Premiums written on a monthly basis
generally are earned when received.

57



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant
Customers

During 2003, two individual customers each
accounted for approximately 13% of total revenue. One customer
accounted for approximately 11% of the Companys revenue in
2002 while no single customer accounted for 10% or more of the
Companys revenue in 2001.

Stock
Options

The Company grants stock options to employees and
directors for a fixed number of shares with an exercise price
equal to or greater than the fair value of the shares at the
date of grant. The Company accounts for stock option grants
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, recognizes no
compensation expense for the stock option grants.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. Had compensation expense for
stock options been recognized using the fair value method on the
grant date, net income and earnings per share on a pro forma
basis would have been (in thousands, except for earnings per
share data):

|                                  |         |      |        |      |  |      |        |      |  |   |        |      | 
|--------------------------------- | ------- | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                  |         | 2003 |        | 2002 |  | 2001
|                                  |         |      |        |      |  |     
|Net income  as reported          |         | $    | 51,091 |      |  | $    | 45,103 |      |  | $ | 41,259 |     
|Net income  pro forma            |         | $    | 50,434 |      |  | $    | 44,261 |      |  | $ | 40,375 |     
|Earnings per share  as reported: |         |      |        |      |  |      |        |      |  |   |        |     
|                                  | Basic   |      | $      | 3.57 |  |      | $      | 3.21 |  |   | $      | 3.05 | 
|                                  | Diluted |      | $      | 3.52 |  |      | $      | 3.15 |  |   | $      | 2.95 | 
|Earnings per share  pro forma:   |         |      |        |      |  |      |        |      |  |   |        |     
|                                  | Basic   |      | $      | 3.52 |  |      | $      | 3.15 |  |   | $      | 2.98 | 
|                                  | Diluted |      | $      | 3.48 |  |      | $      | 3.09 |  |   | $      | 2.89 | 

Earnings Per
Share

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

58



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Comprehensive
Income

The only element of other comprehensive income
applicable to the Company is changes in unrealized gains and
losses on securities classified as available-for-sale, which is
displayed in the following table, along with related tax effects
(in thousands):

|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |      |  
|------------------------------------------------------------------------- | ------------------------------------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ---- | -
|                                                                          |                                       | 2003 |        | 2002   |   | 2001
|                                                                          |                                       |      |        |        |   |     
|Unrealized gains (losses) arising during the
    period, before taxes     |                                       | $    | 6,964  |        |   | $    | 9,265  |        |   | $ | (1,820 | )   
|Income taxes                                                              |                                       |      | (2,439 | )      |   |      | (3,243 | )      |   |   | 637    |     
|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |     
|Unrealized gains (losses) arising during the
    period, net of taxes     |                                       |      | 4,525  |        |   |      | 6,022  |        |   |   | (1,183 | )   
|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |     
|Less reclassification adjustment:                                         |                                       |      |        |        |   |      |        |        |   |   |        |     
|                                                                          | Gains (losses) realized in net income |      |        | 3,029  |   |      |        | (2,519 | ) |   |        | 297  |  
|                                                                          | Income taxes                          |      |        | (1,060 | ) |      |        | 882    |   |   |        | (104 | )
|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |     
|Reclassification adjustment for gains
    (losses) realized in net income |                                       |      | 1,969  |        |   |      | (1,637 | )      |   |   | 193    |     
|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |     
|Other comprehensive income                                                |                                       | $    | 2,556  |        |   | $    | 7,659  |        |   | $ | (1,376 | )   
|                                                                          |                                       |      |        |        |   |      |        |        |   |   |        |     

2.     Investments

The cost or amortized cost and the fair value of
investments are as follows (in thousands):

|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |        |         | 
|------------------------------ | -------------------------- | ------------------- | ------- | ---------- | ------- | ---------- | ------ | ---------- | ------ | - | ----- | ----- | --- | - | ------- | ------ | ------- | 
|                               |                            | Cost or             |         | Gross      |         | Gross      |        |           
|                               |                            | Amortized           |         | Unrealized |         | Unrealized |        |           
|                               |                            | Cost                |         | Gains      |         | Losses     |        | Fair Value
|                               |                            |                     |         |            |         |            |        |           
|At December 31, 2003           |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Available-for-sale securities: |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|                               | Fixed maturity securities: |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |        |        
|                               |                            | Corporate           |         | $          | 25,951  |            |        | $          | 3,367  |   |       | $     | 171 |   |         | $      | 29,147  | 
|                               |                            | U.S. Government     |         |            | 15,477  |            |        |            | 238    |   |       |       | 92  |   |         |        | 15,623  | 
|                               |                            | Mortgage-backed     |         |            | 89      |            |        |            | 10     |   |       |       |    |   |         |        | 99      | 
|                               |                            | State and municipal |         |            | 318,368 |            |        |            | 12,284 |   |       |       | 424 |   |         |        | 330,228 | 
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Total                          |                            |                     | 359,885 |            |         |            | 15,899 |            |        |   | 687   |       |     |   | 375,097 |       
|                               | Equity securities          |                     |         | 10,769     |         |            |        | 2,084      |        |   |       | 82    |     |   |         | 12,771 |        
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Total                          |                            | $                   | 370,654 |            |         | $          | 17,984 |            |        | $ | 769   |       |     | $ | 387,868 |       
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|At December 31, 2002           |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Available-for-sale securities: |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|                               | Fixed maturity securities: |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |        |        
|                               |                            | Corporate           |         | $          | 43,171  |            |        | $          | 3,131  |   |       | $     | 950 |   |         | $      | 45,352  | 
|                               |                            | U.S. Government     |         |            | 10,189  |            |        |            | 439    |   |       |       | 32  |   |         |        | 10,596  | 
|                               |                            | Mortgage-backed     |         |            | 167     |            |        |            | 19     |   |       |       |    |   |         |        | 186     | 
|                               |                            | State and municipal |         |            | 231,210 |            |        |            | 11,610 |   |       |       | 484 |   |         |        | 242,336 | 
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Total                          |                            |                     | 284,737 |            |         |            | 15,199 |            |        |   | 1,466 |       |     |   | 298,470 |       
|                               | Equity securities          |                     |         | 11,266     |         |            |        | 733        |        |   |       | 1,191 |     |   |         | 10,808 |        
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       
|Total                          |                            | $                   | 296,003 |            |         | $          | 15,932 |            |        | $ | 2,657 |       |     | $ | 309,278 |       
|                               |                            |                     |         |            |         |            |        |            |        |   |       |       |     |   |         |       

59



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table shows the Companys
gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2003 (in thousands):

|                                      |                     |                     |        |                   |        |       |     |            |     |       |       |            |       |   |     |     |     |   |        |        |        |   |     |     |     | 
|------------------------------------- | ------------------- | ------------------- | ------ | ----------------- | ------ | ----- | --- | ---------- | --- | ----- | ----- | ---------- | ----- | - | --- | --- | --- | - | ------ | ------ | ------ | - | --- | --- | --- | 
|                                      |                     |                     |        |                   |        |      
|                                      |                     | Less Than 12 Months |        | 12 Months or More |        | Total
|                                      |                     |                     |        |                   |        |      
|                                      |                     | Fair                |        | Unrealized        |        | Fair  |     | Unrealized |     | Fair  |       | Unrealized
|Description of Securities             |                     | Value               |        | Losses            |        | Value |     | Losses     |     | Value |       | Losses    
|                                      |                     |                     |        |                   |        |       |     |            |     |       |       |           
|Fixed maturities:                     |                     |                     |        |                   |        |       |     |            |     |       |       |            |       |   |     |     |     |   |        |        |        |   |     |    
|                                      | Corporate           |                     | $      | 473               |        |       | $   | 1          |     |       | $     | 1,154      |       |   | $   | 170 |     |   | $      | 1,797  |        |   | $   | 171 |    
|                                      | U. S. Government    |                     |        | 4,404             |        |       |     | 92         |     |       |       |           |       |   |     |    |     |   |        | 4,404  |        |   |     | 92  |    
|                                      | State and municipal |                     |        | 13,660            |        |       |     | 246        |     |       |       | 2,672      |       |   |     | 178 |     |   |        | 16,756 |        |   |     | 424 |    
|                                      |                     |                     |        |                   |        |       |     |            |     |       |       |            |       |   |     |     |     |   |        |        |        |   |     |    
|                                      |                     | Subtotal            |        |                   | 18,357 |       |     |            | 339 |       |       |            | 3,826 |   |     |     | 348 |   |        |        | 22,957 |   |     |     | 687 | 
|Equity securities                     |                     |                     | 980    |                   |        |       | 20  |            |     |       | 661   |            |       |   | 62  |     |     |   | 1,723  |        |        |   | 82  |    
|                                      |                     |                     |        |                   |        |       |     |            |     |       |       |            |       |   |     |     |     |   |        |        |        |   |     |    
|Total temporarily impaired securities |                     | $                   | 19,337 |                   |        | $     | 359 |            |     | $     | 4,487 |            |       | $ | 410 |     |     | $ | 24,680 |        |        | $ | 769 |    
|                                      |                     |                     |        |                   |        |       |     |            |     |       |       |            |       |   |     |     |     |   |        |        |        |   |     |    

The majority of the unrealized losses related to
fixed maturities that have been in a continuous loss position
less than 12 months are interest rate related. The majority
of the fixed maturities that have unrealized losses continuously
for 12 months or more are the result of thinly traded
securities that tend to have lower valuations than actively
traded securities. None of the fixed maturity securities with
unrealized losses have ever missed, or been delinquent on, a
scheduled principal or interest payment. The unrealized losses
related to equity securities are the result of temporary market
fluctuations.

The amortized cost and estimated fair value of
investments in fixed maturity securities, at December 31,
2003, are summarized by stated maturity as follows (in
thousands):

|          |                                    |                    |         |         |  |   |         |         | 
|--------- | ---------------------------------- | ------------------ | ------- | ------- |  | - | ------- | ------- | 
|          |                                    |                   
|          |                                    | Available-for-Sale
|          |                                    |                   
|          |                                    | Amortized          |         | Fair   
|          |                                    | Cost               |         | Value  
|          |                                    |                    |         |        
|Maturity: |                                    |                    |         |         |  |   |         |        
|          | One year or less                   |                    | $       | 3,778   |  |   | $       | 3,863   | 
|          | After one year through five years  |                    |         | 13,762  |  |   |         | 14,613  | 
|          | After five years through ten years |                    |         | 26,950  |  |   |         | 28,839  | 
|          | After ten years                    |                    |         | 315,306 |  |   |         | 327,683 | 
|          | Mortgage-backed securities         |                    |         | 89      |  |   |         | 99      | 
|          |                                    |                    |         |         |  |   |         |        
|Total     |                                    | $                  | 359,885 |         |  | $ | 375,097 |        
|          |                                    |                    |         |         |  |   |         |        

60



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Realized gains and losses on sales of investments
are as follows (in thousands):

|                               |                            |                        |       |      |       |      |        |     |        |   |     |     |        |  
|------------------------------ | -------------------------- | ---------------------- | ----- | ---- | ----- | ---- | ------ | --- | ------ | - | --- | --- | ------ | -
|                               |                            |                       
|                               |                            | Year Ended December 31
|                               |                            |                       
|                               |                            | 2003                   |       | 2002 |       | 2001
|                               |                            |                        |       |      |       |     
|Securities available-for-sale: |                            |                        |       |      |       |      |        |     |        |   |     |    
|                               | Fixed maturity securities: |                        |       |      |       |      |        |     |        |   |     |     |       
|                               |                            | Gross realized gains   |       | $    | 4,579 |      |        | $   | 1,833  |   |     | $   | 1,203  |  
|                               |                            | Gross realized losses  |       |      | (885  | )    |        |     | (3,948 | ) |     |     | (1,485 | )
|                               | Equity securities:         |                        |       |      |       |      |        |     |        |   |     |     |       
|                               |                            | Gross realized gains   |       |      | 101   |      |        |     | 15     |   |     |     | 940    |  
|                               |                            | Gross realized losses  |       |      | (742  | )    |        |     | (576   | ) |     |     | (417   | )
|Covered call options:          |                            |                        |       |      |       |      |        |     |        |   |     |    
|                               | Gross realized gains       |                        |       | 4    |       |      |        | 189 |        |   |     | 113 |       
|                               | Gross realized losses      |                        |       | (28  | )     |      |        | (32 | )      |   |     | (57 | )     
|                               |                            |                        |       |      |       |      |        |     |        |   |     |    
|Net realized gains (losses)    |                            | $                      | 3,029 |      |       | $    | (2,519 | )   |        | $ | 297 |    
|                               |                            |                        |       |      |       |      |        |     |        |   |     |    

Net unrealized appreciation
(depreciation) on fixed maturity securities changed by
$1,479,000, $13,410,000, and ($1,821,000) in 2003, 2002, and
2001, respectively; the corresponding amounts for equity
securities were $2,460,000, ($1,626,000), and ($290,000).

Major categories of the Companys net
investment income are summarized as follows (in thousands):

|                      |                                 |                        |        |        |  |      |        |        |  |   |        |        | 
|--------------------- | ------------------------------- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                      |                                 |                       
|                      |                                 | Year Ended December 31
|                      |                                 |                       
|                      |                                 | 2003                   |        | 2002   |  | 2001
|                      |                                 |                        |        |        |  |     
|Income:               |                                 |                        |        |        |  |      |        |        |  |   |        |       
|                      | Fixed maturities                |                        | $      | 16,929 |  |      | $      | 15,809 |  |   | $      | 14,188 | 
|                      | Preferred stocks                |                        |        | 368    |  |      |        | 438    |  |   |        | 468    | 
|                      | Common stocks                   |                        |        | 197    |  |      |        | 179    |  |   |        | 157    | 
|                      | Cash and short-term investments |                        |        | 263    |  |      |        | 270    |  |   |        | 495    | 
|                      |                                 |                        |        |        |  |      |        |        |  |   |        |       
|                      |                                 |                        | 17,757 |        |  |      | 16,696 |        |  |   | 15,308 |       
|Expenses              |                                 |                        | 675    |        |  |      | 597    |        |  |   | 543    |       
|                      |                                 |                        |        |        |  |      |        |        |  |   |        |       
|Net investment income |                                 | $                      | 17,082 |        |  | $    | 16,099 |        |  | $ | 14,765 |       
|                      |                                 |                        |        |        |  |      |        |        |  |   |        |       

At December 31, 2003 and 2002, investments
with an amortized cost of $6,556,000 and $6,634,000,
respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.

61



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Deferred
Policy Acquisition Costs

An analysis of deferred policy acquisition costs
is as follows (in thousands):

|                                     |                                 |                        |        |        |  |      |        |        |  |   |        |       | 
|------------------------------------ | ------------------------------- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ----- | 
|                                     |                                 |                       
|                                     |                                 | Year Ended December 31
|                                     |                                 |                       
|                                     |                                 | 2003                   |        | 2002   |  | 2001
|                                     |                                 |                        |        |        |  |     
|Balance at beginning of year         |                                 | $                      | 28,997 |        |  | $    | 25,944 |        |  | $ | 22,816 |      
|Acquisition costs deferred:          |                                 |                        |        |        |  |      |        |        |  |   |        |      
|                                     | Sales compensation              |                        |        | 7,038  |  |      |        | 6,291  |  |   |        | 5,929 | 
|                                     | Underwriting and issue expenses |                        |        | 11,440 |  |      |        | 10,504 |  |   |        | 8,911 | 
|                                     |                                 |                        |        |        |  |      |        |        |  |   |        |      
|                                     |                                 |                        | 18,478 |        |  |      | 16,795 |        |  |   | 14,840 |      
|Amortization of acquisition expenses |                                 |                        | 18,112 |        |  |      | 13,742 |        |  |   | 11,712 |      
|                                     |                                 |                        |        |        |  |      |        |        |  |   |        |      
|Net increase                         |                                 |                        | 366    |        |  |      | 3,053  |        |  |   | 3,128  |      
|                                     |                                 |                        |        |        |  |      |        |        |  |   |        |      
|Balance at end of year               |                                 | $                      | 29,363 |        |  | $    | 28,997 |        |  | $ | 25,944 |      
|                                     |                                 |                        |        |        |  |      |        |        |  |   |        |      

4.     Reserve for
Losses and Loss Adjustment Expenses

Activity for the reserve for losses and loss
adjustment expenses for 2003, 2002, and 2001 is summarized as
follows (in thousands):

|                                                                                                                                                                 |                                        |      |        |        |  |      |        |        |   |   |        |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                                                                                 |                                        | 2003 |        | 2002   |  | 2001
|                                                                                                                                                                 |                                        |      |        |        |  |     
|Reserve for losses and loss adjustment expenses
    at January 1, net of reinsurance recoverables                                                                |                                        | $    | 21,355 |        |  | $    | 17,981 |        |   | $ | 14,976 |       
|Incurred losses and loss adjustment expenses net
    of reinsurance recoveries (principally in respect of default
    notices
    occurring in):                 |                                        |      |        |        |  |      |        |        |   |   |        |       
|                                                                                                                                                                 | Current year                           |      |        | 17,724 |  |      |        | 14,798 |   |   |        | 14,219 |  
|                                                                                                                                                                 | Deficiency (redundancy) on prior years |      |        | 6,109  |  |      |        | (735   | ) |   |        | (5,200 | )
|                                                                                                                                                                 |                                        |      |        |        |  |      |        |        |   |   |        |       
|Total incurred losses and loss adjustment expenses                                                                                                               |                                        |      | 23,833 |        |  |      | 14,063 |        |   |   | 9,019  |       
|Loss and loss adjustment expense payments net of
    reinsurance recoveries (principally in respect of default
    notices
    occurring in):                    |                                        |      |        |        |  |      |        |        |   |   |        |       
|                                                                                                                                                                 | Current year                           |      |        | 677    |  |      |        | 508    |   |   |        | 286    |  
|                                                                                                                                                                 | Prior years                            |      |        | 17,328 |  |      |        | 10,181 |   |   |        | 5,728  |  
|                                                                                                                                                                 |                                        |      |        |        |  |      |        |        |   |   |        |       
|Total loss and loss adjustment expense payments                                                                                                                  |                                        |      | 18,005 |        |  |      | 10,689 |        |   |   | 6,014  |       
|                                                                                                                                                                 |                                        |      |        |        |  |      |        |        |   |   |        |       
|Reserve for losses and loss adjustment expenses
    at December 31, net of reinsurance recoverables of $3, $5,
    and $10 in 2003, 2002, and 2001, respectively |                                        | $    | 27,183 |        |  | $    | 21,355 |        |   | $ | 17,981 |       
|                                                                                                                                                                 |                                        |      |        |        |  |      |        |        |   |   |        |       

The foregoing reconciliation indicates a
deficiency in 2003. The deficiency is a result of the increase
in reserves from prior years due to increased severity
assumptions, and not from paid claims. Years 2002 and 2001 show
a redundancy in reserves. These redundancies in prior years
resulted principally from settling case-basis reserves on
default notices occurring in prior years for amounts less than
expected or reducing incurred but not reported reserves.

62



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Commitments

The Company leases certain office facilities,
autos, and equipment under operating leases. Rental expense for
all leases was $1,950,000, $1,792,000, and $1,657,000 for 2003,
2002, and 2001, respectively. Future minimum payments under
noncancellable operating leases at December 31, 2003, are
as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 1,773  | 
|2005       |  |   | 1,627  | 
|2006       |  |   | 1,415  | 
|2007       |  |   | 1,113  | 
|2008       |  |   | 1,096  | 
|Thereafter |  |   | 4,535  | 
|           |  |   |        | 
|           |  | $ | 11,559 | 
|           |  |   |        | 

The Company leases facilities for its corporate
headquarters under an operating lease that is to expire in 2012.
The Company has options to renew this lease for up to ten
additional years at the fair market rental rate at the time of
the renewal.

6.     Federal Income
Taxes

Income tax expense differed from the amounts
computed by applying the Federal statutory income tax rate to
income before taxes as follows (in thousands):

|                                             |                     |      |        |        |   |      |        |        |   |   |        |        |  
|-------------------------------------------- | ------------------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                             |                     | 2003 |        | 2002   |   | 2001
|                                             |                     |      |        |        |   |     
|Income tax computed at statutory rate        |                     | $    | 25,331 |        |   | $    | 22,835 |        |   | $ | 20,885 |       
|(Decrease) increase in taxes resulting from: |                     |      |        |        |   |      |        |        |   |   |        |       
|                                             | Tax-exempt interest |      |        | (4,730 | ) |      |        | (3,933 | ) |   |        | (3,105 | )
|                                             | Other               |      |        | 682    |   |      |        | 1,238  |   |   |        | 633    |  
|                                             |                     |      |        |        |   |      |        |        |   |   |        |       
|Income tax expense                           |                     | $    | 21,283 |        |   | $    | 20,140 |        |   | $ | 18,413 |       
|                                             |                     |      |        |        |   |      |        |        |   |   |        |       

63



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of deferred tax assets and
deferred tax liabilities at December 31, 2003 and 2002, are
presented below (in thousands):

|                               |                                     |      |         |        |  |   |        |        | 
|------------------------------ | ----------------------------------- | ---- | ------- | ------ |  | - | ------ | ------ | 
|                               |                                     | 2003 |         | 2002  
|                               |                                     |      |         |       
|Deferred tax liabilities       |                                     |      |         |        |  |   |        |       
|                               | Statutory contingency reserve       |      | $       | 98,493 |  |   | $      | 78,420 | 
|                               | Deferred policy acquisition costs   |      |         | 10,277 |  |   |        | 10,149 | 
|                               | Unrealized investment gain          |      |         | 6,025  |  |   |        | 4,646  | 
|                               | Other                               |      |         | 3,078  |  |   |        | 3,083  | 
|                               |                                     |      |         |        |  |   |        |       
|Total deferred tax liabilities |                                     |      | 117,873 |        |  |   | 96,298 |       
|Deferred tax assets            |                                     |      |         |        |  |   |        |       
|                               | Unearned premiums                   |      |         | 1,202  |  |   |        | 685    | 
|                               | Losses and loss adjustment expenses |      |         | 655    |  |   |        | 516    | 
|                               | Other                               |      |         | 557    |  |   |        | 856    | 
|                               |                                     |      |         |        |  |   |        |       
|Total deferred tax assets      |                                     |      | 2,414   |        |  |   | 2,057  |       
|                               |                                     |      |         |        |  |   |        |       
|Net deferred tax liability     |                                     | $    | 115,459 |        |  | $ | 94,241 |       
|                               |                                     |      |         |        |  |   |        |       

At December 31, 2003, Triad had purchased
$269,000 of Tax and Loss Bonds in excess of its current
obligations.

7.     Insurance in
Force, Dividend Restriction, and Statutory Results

At December 31, 2003, approximately 55% of
Triads direct risk in force was concentrated in
10 states, with 12% in California, 8% each in Florida and
Texas, 5% in Georgia and North Carolina, 4% each in Illinois and
Arizona, and 3% each in New York, New Jersey, and Colorado.
While Triad continues to diversify its risk in force
geographically, a prolonged recession in its high concentration
areas could result in higher incurred losses and loss adjustment
expenses.

Insurance regulations limit the writing of
mortgage guaranty insurance to an aggregate amount of insured
risk no greater than twenty-five times the total of statutory
capital and surplus and the statutory contingency reserve. The
amount of net risk for insurance in force at December 31,
2003 and 2002, 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 and
by any applicable aggregate stop-loss limits. Triads ratio
is as follows (in thousands except ratio):

|                              |  |      |           |      |  |   |           | 
|----------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                              |  | 2003 |           | 2002
|                              |  |      |           |     
|Net risk                      |  | $    | 6,590,222 |      |  | $ | 5,534,420 | 
|                              |  |      |           |      |  |   |           | 
|Statutory capital and surplus |  | $    | 128,212   |      |  | $ | 112,874   | 
|Contingency reserve           |  |      | 302,740   |      |  |   | 245,006   | 
|                              |  |      |           |      |  |   |           | 
|Total                         |  | $    | 430,952   |      |  | $ | 357,880   | 
|                              |  |      |           |      |  |   |           | 
|Risk-to-capital ratio         |  |      | 15.3 to 1 |      |  |   | 15.5 to 1 | 
|                              |  |      |           |      |  |   |           | 

Triad and its wholly-owned subsidiaries, TGAC and
Triad Re, are each required under their respective domiciliary
states insurance code to maintain a minimum level of
statutory capital and surplus. Triad, an Illinois domiciled
insurer, is required under the Illinois Insurance Code (the
Code) to maintain minimum capital and surplus of
$5,000,000.

64



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 market 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. Consolidated net income
as determined in accordance with statutory accounting practices
was $69,848,000, $61,787,000, and $55,448,000 for the years
ended December 31, 2003, 2002, and 2001, respectively. At
December 31, 2003, the amount of the Companys equity
that can be paid out in dividends to the stockholders is
$44,496,000, which is the earned surplus of Triad on a statutory
basis.

8.     Related Party
Transactions

The Company pays unconsolidated affiliated
companies for management, investment, and other services. The
total expense incurred for such items was $704,000, $664,000,
and $562,000 in 2003, 2002, and 2001, respectively. Management
believes that the income and expenses incurred for such services
approximate costs that the Company and affiliates would have
incurred if those services had been provided by unaffiliated
third parties.

9.     Employee
Benefit Plan

Approximately 70% of eligible employees
participate in the Companys 401(k) Profit Sharing Plan.
Under the plan, employees elect to defer a portion of their
wages, with the Company matching deferrals at the rate of 50% of
the first 8% of the employees salary deferred. The
Companys expense associated with the plan totaled
$449,000, $374,000, and $353,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.

10.     Reinsurance

Certain premiums and losses are assumed from and
ceded to other insurance companies under various reinsurance
agreements. The ceding agreements principally provide Triad with
increased capacity to write business and achieve a more
favorable geographic dispersion of risk.

Reinsurance activity for the years ended
December 31, 2003, 2002, and 2001, respectively, is as
follows (in thousands):

|                        |  |      |        |      |  |      |        |   |  |   |        | 
|----------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                        |  | 2003 |        | 2002 |  | 2001
|                        |  |      |        |      |  |     
|Earned premiums ceded   |  | $    | 27,226 |      |  | $    | 18,260 |   |  | $ | 10,482 | 
|Losses ceded            |  |      | 1      |      |  |      | 1      |   |  |   | 1      | 
|Earned premiums assumed |  |      | 2      |      |  |      | 4      |   |  |   | 5      | 
|Losses assumed          |  |      | (2     | )    |  |      | (1     | ) |  |   | 1      | 

The Company cedes business to captive reinsurance
subsidiaries or affiliates of certain mortgage lenders
(captives) primarily under excess of loss
reinsurance agreements. Reinsurance recoverables on loss
reserves and unearned premiums ceded to these captives are
backed by trust funds or letters of credit.

The Company maintains $125,000,000 of excess of
loss reinsurance through non-affiliated reinsurers. The excess
of loss reinsurance agreements are designed to protect the
Company in the event of a catastrophic level of losses.

In 2001, the Company recognized a nonrecurring
incentive payment of $1,863,000 related to voluntary
cancellation of an excess of loss reinsurance contract
maintained by the Company with a non-affiliated

65



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reinsurer. This payment is included as other
income in the accompanying Consolidated Statement of Income for
2001.

Reinsurance contracts do not relieve Triad from
its obligations to policyholders. Failure of the reinsurer to
honor its obligation could result in losses to Triad;
consequently, allowances are established for amounts deemed
uncollectible. Triad evaluates the financial condition of its
reinsurers and monitors credit risk arising from similar
geographic regions, activities, or economic characteristics of
its reinsurers to minimize its exposure to significant losses
from reinsurer insolvency.

11.     Long-Term
Stock Incentive Plan

In August 1993, the Company adopted the 1993
Long-Term Stock Incentive Plan (the Plan). Under the
Plan, certain directors, officers, and key employees are
eligible to be granted various stock-based awards. The number of
shares of common stock which may be issued or sold or for which
options or stock appreciation rights may be granted under the
Plan is 2,600,000 shares.

Information concerning the stock option plan is
summarized below:

|     |                                |           |  |              |  |                |   |             |  |  |   |       | 
|---- | ------------------------------ | --------- |  | ------------ |  | -------------- | - | ----------- |  |  | - | ----- | 
|     |                                |           |  |              |  | Weighted-     
|     |                                | Number of |  |              |  | Average       
|     |                                | Shares    |  | Option Price |  | Exercise Price
|     |                                |           |  |              |  |               
|2001 |                                |           |  |              |  |                |   |             |  |  |   |      
|     | Outstanding, beginning of year |           |  | 1,484,722    |  |                | $ | 4.58-49.08  |  |  | $ | 16.17 | 
|     | Granted                        |           |  | 169,950      |  |                |   | 29.65-39.00 |  |  |   | 36.33 | 
|     | Exercised                      |           |  | 336,628      |  |                |   | 4.58-27.88  |  |  |   | 8.54  | 
|     | Canceled                       |           |  | 9,270        |  |                |   | 8.92-41.94  |  |  |   | 23.06 | 
|     | Outstanding, end of year       |           |  | 1,308,774    |  |                |   | 4.58-49.08  |  |  |   | 20.71 | 
|     | Exercisable, end of year       |           |  | 1,097,213    |  |                |   | 4.58-49.08  |  |  |   | 18.56 | 
|2002 |                                |           |  |              |  |                |   |             |  |  |   |      
|     | Outstanding, beginning of year |           |  | 1,308,774    |  |                |   | 4.58-49.08  |  |  |   | 20.71 | 
|     | Granted                        |           |  | 88,640       |  |                |   | 32.96-47.60 |  |  |   | 40.48 | 
|     | Exercised                      |           |  | 444,349      |  |                |   | 4.58-41.94  |  |  |   | 12.80 | 
|     | Canceled                       |           |  | 2,760        |  |                |   | 29.65-39.49 |  |  |   | 35.92 | 
|     | Outstanding, end of year       |           |  | 950,305      |  |                |   | 4.58-49.08  |  |  |   | 25.94 | 
|     | Exercisable, end of year       |           |  | 804,652      |  |                |   | 4.58-49.08  |  |  |   | 23.91 | 
|2003 |                                |           |  |              |  |                |   |             |  |  |   |      
|     | Outstanding, beginning of year |           |  | 950,305      |  |                |   | 4.58-49.08  |  |  |   | 25.94 | 
|     | Granted                        |           |  | 73,500       |  |                |   | 33.1847.01 |  |  |   | 34.57 | 
|     | Exercised                      |           |  | 244,156      |  |                |   | 5.3339.49  |  |  |   | 16.60 | 
|     | Canceled                       |           |  | 20,939       |  |                |   | 28.0039.49 |  |  |   | 33.03 | 
|     | Outstanding, end of year       |           |  | 758,710      |  |                |   | 4.5849.08  |  |  |   | 29.58 | 
|     | Exercisable, end of year       |           |  | 657,748      |  |                |   | 4.5849.08  |  |  |   | 28.44 | 

66



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information concerning stock options outstanding
and exercisable at December 31, 2003, is summarized below:

|            |         |              |  |           |               |           |  |           |       |             |  |  |      |  |  |  |         |  |  |   |       | 
|----------- | ------- | ------------ |  | --------- | ------------- | --------- |  | --------- | ----- | ----------- |  |  | ---- |  |  |  | ------- |  |  | - | ----- | 
|            |         |             
|Outstanding |         | Exercisable 
|            |         |             
|            |         | Weighted-    |  | Weighted- |               |           |  | Weighted-
|            |         | Average      |  | Average   |               |           |  | Average  
|Number of   |         |              |  | Exercise  |               | Remaining |  | Number of |       | Exercisable
|Shares      |         | Option Price |  | Price     |               | Life      |  | Shares    |       | Price      
|            |         |              |  |           |               |           |  |           |       |            
|            |         |              |  |           |               |           |  |           |       |            
|            | 102,879 |              |  | $         | 4.58 - 11.48  |           |  | $         | 9.36  |             |  |  | 1.68 |  |  |  | 102,879 |  |  | $ | 9.36  | 
|            | 72,851  |              |  |           | 14.81 - 20.07 |           |  |           | 19.08 |             |  |  | 3.49 |  |  |  | 72,851  |  |  |   | 19.08 | 
|            | 234,671 |              |  |           | 21.50 - 31.90 |           |  |           | 26.36 |             |  |  | 5.80 |  |  |  | 226,449 |  |  |   | 26.21 | 
|            | 271,534 |              |  |           | 32.96 - 39.75 |           |  |           | 37.65 |             |  |  | 7.26 |  |  |  | 194,461 |  |  |   | 38.38 | 
|            | 76,775  |              |  |           | 41.40 - 49.08 |           |  |           | 47.96 |             |  |  | 5.32 |  |  |  | 61,108  |  |  |   | 48.39 | 
|            |         |              |  |           |               |           |  |           |       |             |  |  |      |  |  |  |         |  |  |   |       | 
|            | 758,710 |              |  |           |               |           |  |           |       |             |  |  |      |  |  |  | 657,748 |  |  |   |       | 
|            |         |              |  |           |               |           |  |           |       |             |  |  |      |  |  |  |         |  |  |   |       | 

At December 31, 2003, 1,143,217 shares of
the Companys common stock were reserved and 384,507 shares
were available for issuance under the Plan.

The options issued under the Plan in 2003, 2002,
and 2001 vest over three years. Certain of the options will
immediately vest in the event of a change in control of the
Company. Options granted under the Plan terminate no later than
10 years following the date of grant.

Pro forma information required by Financial
Accounting Standards Board Statement No. 123, Accounting
for Stock-Based Compensation, has been estimated as if the
Company had accounted for stock-based awards under the fair
value method of that Statement. The fair value of options
granted in 2003, 2002, and 2001 was estimated at the date of the
grant using a Black-Scholes option pricing model with the
following weighted-average input assumptions: risk-free interest
rate of 3.34% for 2003, 3.63% for 2002, and 4.86% for 2001;
dividend yield of 0.0%; expected volatility of .38 for 2003, .39
for 2002, and .40 for 2001; and a weighted-average expected life
of the option of seven years.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the Companys stock options have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options. The following table summarizes
the fair value of options granted in 2003, 2002, and 2001:

|                             |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------------- |  | ---------------- | ----- | ---------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                             |  |                  |       |                 
|                             |  | Weighted-Average |       | Weighted-Average
|                             |  | Exercise Price   |       | Fair Value      
|                             |  |                  |       |                 
|Type of Option               |  | 2003             |       | 2002             |  | 2001 |       | 2003 |  | 2002 |       | 2001
|                             |  |                  |       |                  |  |      |       |      |  |      |       |     
|Stock Price = Exercise Price |  | $                | 34.57 |                  |  | $    | 40.48 |      |  | $    | 31.89 |      |  | $ | 15.77 |  |  | $ | 13.21 |  |  | $ | 11.14 | 
|Stock Price< Exercise Price  |  | $                |      |                  |  | $    |      |      |  | $    | 39.00 |      |  | $ |      |  |  | $ |      |  |  | $ | 8.81  | 

12.     Long-term
Debt

In 1998, the Company completed a $35,000,000
private offering of notes due January 15, 2028. Proceeds
from the offering, net of debt issue costs, totaled $34,453,000.
The notes, which represent unsecured obligations of the Company,
bear interest at a rate of 7.9% per annum and are non-callable.

67



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Fair Value of
Financial Instruments

The carrying values and fair values of financial
instruments as of December 31, 2003 and 2002 are summarized
below (in thousands):

|                                             |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | -------- | ------- | ----- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                                             |  |          |         |      
|                                             |  | 2003     |         | 2002 
|                                             |  |          |         |      
|                                             |  | Carrying |         | Fair  |  | Carrying |         | Fair 
|                                             |  | Value    |         | Value |  | Value    |         | Value
|                                             |  |          |         |       |  |          |         |      
|Financial Assets                             |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 
|Fixed maturity securities available-for-sale |  | $        | 375,097 |       |  | $        | 375,097 |       |  | $ | 298,470 |  |  | $ | 298,470 | 
|Equity securities available-for-sale         |  |          | 12,771  |       |  |          | 12,771  |       |  |   | 10,808  |  |  |   | 10,808  | 
|Financial Liabilities                        |  |          |         |       |  |          |         |       |  |   |         |  |  |   |         | 
|Long-term debt                               |  |          | 34,486  |       |  |          | 38,037  |       |  |   | 34,479  |  |  |   | 38,430  | 

The fair values of cash and short-term
investments approximate their carrying values due to their
short-term maturity or availability.

The fair values of fixed maturity securities and
equity securities have been determined using quoted market
prices for securities traded in the public market or prices
using bid or closing prices for securities not traded in the
public marketplace.

The fair value of the Companys long-term
debt is estimated using discounted cash flow analysis based on
the Companys current incremental borrowing rates for
similar types of borrowing arrangements.

14.     Contingencies

Lawsuits have been filed against the Company in
the ordinary course of the Companys business. In the
opinion of management, the ultimate resolution of the pending
litigation will not have a material adverse effect on the
financial position or results of operations of the Company.

15.     Unaudited
Quarterly Financial Data

The following is a summary of the unaudited
quarterly results of operations for the years ended
December 31, 2003 and 2002. (The sum of the quarterly basic
earnings per share does not equal the amount for the year as the
basis for calculating average outstanding number of shares
differs.) (in thousands):

|                                |  |              |        |        |  |       |        |        |  |      |        |  |  |   |        |  |  |   |         | 
|------------------------------- |  | ------------ | ------ | ------ |  | ----- | ------ | ------ |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                |  |              |        |       
|                                |  | 2003 Quarter |        |       
|                                |  |              |        |       
|                                |  | First        |        | Second |  | Third |        | Fourth |  | Year
|                                |  |              |        |        |  |       |        |        |  |     
|Net premiums written            |  | $            | 28,140 |        |  | $     | 31,381 |        |  | $    | 33,119 |  |  | $ | 34,096 |  |  | $ | 126,736 | 
|Earned premiums                 |  |              | 28,132 |        |  |       | 28,266 |        |  |      | 30,323 |  |  |   | 33,011 |  |  |   | 119,732 | 
|Net investment income           |  |              | 4,333  |        |  |       | 4,333  |        |  |      | 4,230  |  |  |   | 4,186  |  |  |   | 17,082  | 
|Net losses incurred             |  |              | 5,265  |        |  |       | 5,380  |        |  |      | 6,053  |  |  |   | 7,135  |  |  |   | 23,833  | 
|Underwriting and other expenses |  |              | 9,952  |        |  |       | 9,886  |        |  |      | 11,535 |  |  |   | 12,287 |  |  |   | 43,660  | 
|Net income                      |  |              | 12,352 |        |  |       | 12,631 |        |  |      | 12,547 |  |  |   | 13,561 |  |  |   | 51,091  | 
|Basic earnings per share        |  |              | .87    |        |  |       | .88    |        |  |      | .87    |  |  |   | .94    |  |  |   | 3.57    | 
|Diluted earnings per share      |  |              | .86    |        |  |       | .87    |        |  |      | .86    |  |  |   | .93    |  |  |   | 3.52    | 

68



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                |  |              |        |        |  |       |        |        |  |      |        |  |  |   |        |  |  |   |         | 
|------------------------------- |  | ------------ | ------ | ------ |  | ----- | ------ | ------ |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                |  |              |        |       
|                                |  | 2002 Quarter |        |       
|                                |  |              |        |       
|                                |  | First        |        | Second |  | Third |        | Fourth |  | Year
|                                |  |              |        |        |  |       |        |        |  |     
|Net premiums written            |  | $            | 24,492 |        |  | $     | 25,291 |        |  | $    | 28,281 |  |  | $ | 27,805 |  |  | $ | 105,869 | 
|Earned premiums                 |  |              | 24,535 |        |  |       | 25,499 |        |  |      | 27,351 |  |  |   | 27,682 |  |  |   | 105,067 | 
|Net investment income           |  |              | 3,764  |        |  |       | 3,953  |        |  |      | 4,156  |  |  |   | 4,226  |  |  |   | 16,099  | 
|Net losses incurred             |  |              | 2,516  |        |  |       | 2,879  |        |  |      | 4,392  |  |  |   | 4,276  |  |  |   | 14,063  | 
|Underwriting and other expenses |  |              | 9,748  |        |  |       | 9,516  |        |  |      | 9,657  |  |  |   | 10,492 |  |  |   | 39,413  | 
|Net income                      |  |              | 10,038 |        |  |       | 11,290 |        |  |      | 11,765 |  |  |   | 12,010 |  |  |   | 45,103  | 
|Basic earnings per share        |  |              | .73    |        |  |       | .80    |        |  |      | .83    |  |  |   | .85    |  |  |   | 3.21    | 
|Diluted earnings per share      |  |              | .71    |        |  |       | .78    |        |  |      | .82    |  |  |   | .84    |  |  |   | 3.15    | 

69



---



##### 



SCHEDULE I

SUMMARY OF INVESTMENTS  OTHER THAN
INVESTMENTS IN RELATED PARTIES


TRIAD GUARANTY INC.


December 31, 2003


|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |         |         | 
|--------------------------------------------------------------- | --------------- | ---------------------------- | ------- | ------- | ------- | ---------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                |                 | Cost or                      |         |         |         | Amount at       
|                                                                |                 | Amortized                    |         | Fair    |         | Which Shown     
|Type of Investment                                              |                 | Cost                         |         | Value   |         | in Balance Sheet
|                                                                |                 |                              |         |         |         |                 
|                                                                |                 |                             
|                                                                |                 | (In thousands)              
|Fixed maturity securities, available-for-sale:                  |                 |                              |         |         |         |                  |         |         |         |   |         |        
|                                                                | Bonds:          |                              |         |         |         |                  |         |         |         |   |         |         |        
|                                                                |                 | U.S. Government obligations  |         | $       | 15,477  |                  |         | $       | 15,623  |   |         | $       | 15,623  | 
|                                                                |                 | Mortgage-backed securities   |         |         | 89      |                  |         |         | 99      |   |         |         | 99      | 
|                                                                |                 | State and municipal bonds    |         |         | 318,368 |                  |         |         | 330,228 |   |         |         | 330,228 | 
|                                                                |                 | Corporate bonds              |         |         | 25,922  |                  |         |         | 29,117  |   |         |         | 29,117  | 
|                                                                |                 | Public utilities             |         |         | 29      |                  |         |         | 30      |   |         |         | 30      | 
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        
|                                                                | Total           |                              |         | 359,885 |         |                  |         | 375,097 |         |   |         | 375,097 |        
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        
|Equity securities, available-for-sale:                          |                 |                              |         |         |         |                  |         |         |         |   |         |        
|                                                                | Common stocks:  |                              |         |         |         |                  |         |         |         |   |         |         |        
|                                                                |                 | Bank, trust, and insurance   |         |         | 511     |                  |         |         | 803     |   |         |         | 803     | 
|                                                                |                 | Industrial and miscellaneous |         |         | 4,098   |                  |         |         | 5,247   |   |         |         | 5,247   | 
|                                                                | Preferred stock |                              |         | 6,160   |         |                  |         | 6,721   |         |   |         | 6,721   |        
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        
|                                                                | Total           |                              |         | 10,769  |         |                  |         | 12,771  |         |   |         | 12,771  |        
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        
|Short-term investments                                          |                 |                              | 25,659  |         |         |                  | 25,659  |         |         |   | 25,659  |        
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        
|Total investments other than investments in
    related parties |                 | $                            | 396,313 |         |         | $                | 413,527 |         |         | $ | 413,527 |        
|                                                                |                 |                              |         |         |         |                  |         |         |         |   |         |        

70



---



##### 



SCHEDULE II  CONDENSED
FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS


TRIAD GUARANTY INC.


(Parent Company)


|                                           |                                        |                |         |         |   |   |         |         |  
|------------------------------------------ | -------------------------------------- | -------------- | ------- | ------- | - | - | ------- | ------- | -
|                                           |                                        |               
|                                           |                                        | December 31   
|                                           |                                        |               
|                                           |                                        | 2003           |         | 2002   
|                                           |                                        |                |         |        
|                                           |                                        |               
|                                           |                                        | (In thousands)
|ASSETS:                                   
|                                           | Fixed maturities, available-for-sale   |                | $       | 16,745  |   |   | $       | 13,315  |  
|                                           | Equity securities, available-for-sale  |                |         | 521     |   |   |         | 760     |  
|                                           | Notes receivable from subsidiary       |                |         | 25,000  |   |   |         | 25,000  |  
|                                           | Investment in subsidiary               |                |         | 358,302 |   |   |         | 302,559 |  
|                                           | Short-term investments                 |                |         | 2,564   |   |   |         | 1,995   |  
|                                           | Cash                                   |                |         | 1,272   |   |   |         | 196     |  
|                                           | Accrued investment income              |                |         | 1,308   |   |   |         | 1,294   |  
|                                           | Other Assets                           |                |         | 428     |   |   |         | 350     |  
|                                           |                                        |                |         |         |   |   |         |        
|Total assets                               |                                        | $              | 406,140 |         |   | $ | 345,469 |        
|                                           |                                        |                |         |         |   |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY: 
|Liabilities:                               |                                        |                |         |         |   |   |         |        
|                                           | Current taxes payable                  |                | $       |        |   |   | $       | 52      |  
|                                           | Long-term debt                         |                |         | 34,486  |   |   |         | 34,479  |  
|                                           | Deferred income taxes                  |                |         | 449     |   |   |         | 256     |  
|                                           | Accrued interest on long-term debt     |                |         | 1,275   |   |   |         | 1,275   |  
|                                           |                                        |                |         |         |   |   |         |        
|Total liabilities                          |                                        |                | 36,210  |         |   |   | 36,062  |        
|Stockholders Equity:                      |                                        |                |         |         |   |   |         |        
|                                           | Common stock                           |                |         | 144     |   |   |         | 142     |  
|                                           | Additional paid-in capital             |                |         | 87,513  |   |   |         | 80,169  |  
|                                           | Accumulated other comprehensive income |                |         | 11,190  |   |   |         | 8,634   |  
|                                           | Deferred compensation                  |                |         | (1,128  | ) |   |         | (658    | )
|                                           | Retained earnings                      |                |         | 272,211 |   |   |         | 221,120 |  
|                                           |                                        |                |         |         |   |   |         |        
|Total stockholders equity                 |                                        |                | 369,930 |         |   |   | 309,407 |        
|                                           |                                        |                |         |         |   |   |         |        
|Total liabilities and stockholders equity |                                        | $              | 406,140 |         |   | $ | 345,469 |        
|                                           |                                        |                |         |         |   |   |         |        

See supplementary notes to condensed financial
statements.

71



---



##### 



SCHEDULE II  CONDENSED
FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF INCOME


TRIAD GUARANTY INC.


(Parent Company)


|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |       |  
|---------------------------------------------------------------------------------------------- | ---------------------------------- | ---------------------- | ------ | ----- |  | ---- | ------ | ------ | - | - | ------ | ----- | -
|                                                                                               |                                    |                       
|                                                                                               |                                    | Year Ended December 31
|                                                                                               |                                    |                       
|                                                                                               |                                    | 2003                   |        | 2002  |  | 2001
|                                                                                               |                                    |                        |        |       |  |     
|                                                                                               |                                    |                       
|                                                                                               |                                    | (In thousands)        
|Revenues:                                                                                      |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               | Net investment income              |                        | $      | 3,120 |  |      | $      | 3,170  |   |   | $      | 3,000 |  
|                                                                                               | Realized investment gains (losses) |                        |        | 486   |  |      |        | (1,168 | ) |   |        | (266  | )
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               |                                    |                        | 3,606  |       |  |      | 2,002  |        |   |   | 2,734  |      
|Expenses:                                                                                      |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               | Interest on long-term debt         |                        |        | 2,772 |  |      |        | 2,771  |   |   |        | 2,771 |  
|                                                                                               | Operating expenses                 |                        |        | 752   |  |      |        | 885    |   |   |        | 396   |  
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               |                                    |                        | 3,524  |       |  |      | 3,656  |        |   |   | 3,167  |      
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|Income (loss) before federal income taxes
    and equity in undistributed income of subsidiary |                                    |                        | 82     |       |  |      | (1,654 | )      |   |   | (433   | )    
|Income taxes:                                                                                  |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               | Current                            |                        |        |      |  |      |        |       |   |   |        | (121  | )
|                                                                                               | Deferred                           |                        |        | 142   |  |      |        | (176   | ) |   |        | 172   |  
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|                                                                                               |                                    |                        | 142    |       |  |      | (176   | )      |   |   | 51     |      
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|Loss before equity in undistributed income of
    subsidiary                                   |                                    |                        | (60    | )     |  |      | (1,478 | )      |   |   | (484   | )    
|Equity in undistributed income of subsidiary                                                   |                                    |                        | 51,151 |       |  |      | 46,581 |        |   |   | 41,743 |      
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      
|Net income                                                                                     |                                    | $                      | 51,091 |       |  | $    | 45,103 |        |   | $ | 41,259 |      
|                                                                                               |                                    |                        |        |       |  |      |        |        |   |   |        |      

See supplementary notes to condensed financial
statements.

72



---



##### 



SCHEDULE II  CONDENSED
FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS


TRIAD GUARANTY INC.


(Parent Company)


|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |         |        |  
|----------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------ | - | ------ | ------- | ------ | -
|                                                                                                |                                               |                       
|                                                                                                |                                               | Year Ended December 31
|                                                                                                |                                               |                       
|                                                                                                |                                               | 2003                   |        | 2002    |         | 2001
|                                                                                                |                                               |                        |        |         |         |     
|                                                                                                |                                               |                       
|                                                                                                |                                               | (In thousands)        
|Operating Activities:                                                                           |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Net income                                                                                      |                                               | $                      | 51,091 |         |         | $    | 45,103 |         |        | $ | 41,259 |        
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                               |                        |        |         |         |      |        |         |        |   |        |        
|                                                                                                | Equity in undistributed income of subsidiary  |                        |        | (51,151 | )       |      |        | (46,581 | )      |   |        | (41,743 | )     
|                                                                                                | Accrued investment income                     |                        |        | (14     | )       |      |        | (33     | )      |   |        | (40     | )     
|                                                                                                | Other assets                                  |                        |        | (78     | )       |      |        | (230    | )      |   |        | 96      |       
|                                                                                                | Deferred income taxes                         |                        |        | 142     |         |      |        | (176    | )      |   |        | 172     |       
|                                                                                                | Current taxes payable                         |                        |        | (52     | )       |      |        | (18     | )      |   |        |        |       
|                                                                                                | Accretion of discount on investments          |                        |        | (91     | )       |      |        | (98     | )      |   |        | (52     | )     
|                                                                                                | Amortization of deferred compensation         |                        |        | 690     |         |      |        | 392     |        |   |        | 118     |       
|                                                                                                | Amortization of debt issue costs              |                        |        | 7       |         |      |        | 6       |        |   |        | 6       |       
|                                                                                                | Realized investment (gain) loss on securities |                        |        | (486    | )       |      |        | 1,168   |        |   |        | 266     |       
|                                                                                                | Other operating activities                    |                        |        | (2      | )       |      |        | 188     |        |   |        |        |       
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Net cash provided by (used in) operating
    activities                                         |                                               |                        | 56     |         |         |      | (279   | )       |        |   | 82     |        
|Investing Activities:                                                                           |                                               |                        |        |         |         |      |        |         |        |   |        |        
|                                                                                                | Fixed maturities:                             |                        |        |         |         |      |        |         |        |   |        |         |       
|                                                                                                |                                               | Purchases              |        |         | (14,468 | )    |        |         | (8,600 | ) |        |         | (5,756 | )
|                                                                                                |                                               | Sales and maturities   |        |         | 11,748  |      |        |         | 4,258  |   |        |         | 3,369  |  
|                                                                                                | Equity Securities:                            |                        |        |         |         |      |        |         |        |   |        |         |       
|                                                                                                |                                               | Purchases              |        |         |        |      |        |         | (250   | ) |        |         | (500   | )
|                                                                                                |                                               | Sales                  |        |         | 256     |      |        |         | 2      |   |        |         |       |  
|                                                                                                | Change in short-term investments              |                        |        | (569    | )       |      |        | (776    | )      |   |        | (87     | )     
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Net cash used in investing activities                                                           |                                               |                        | (3,033 | )       |         |      | (5,366 | )       |        |   | (2,974 | )      
|Financing Activities:                                                                           |                                               |                        |        |         |         |      |        |         |        |   |        |        
|                                                                                                | Proceeds from exercise of stock options       |                        |        | 4,053   |         |      |        | 5,689   |        |   |        | 2,874   |       
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Net cash provided by financing activities                                                       |                                               |                        | 4,053  |         |         |      | 5,689  |         |        |   | 2,874  |        
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Increase (decrease) in cash                                                                     |                                               |                        | 1,076  |         |         |      | 44     |         |        |   | (18    | )      
|Cash at beginning of year                                                                       |                                               |                        | 196    |         |         |      | 152    |         |        |   | 170    |        
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        
|Cash at end of year                                                                             |                                               | $                      | 1,272  |         |         | $    | 196    |         |        | $ | 152    |        
|                                                                                                |                                               |                        |        |         |         |      |        |         |        |   |        |        

See supplementary notes to condensed financial
statements.

73



---



##### 



SCHEDULE II  CONDENSED
FINANCIAL INFORMATION OF REGISTRANT

TRIAD GUARANTY INC.


(Parent Company)


SUPPLEMENTARY NOTES


Note 1

In the parent company financial statements, the
Companys investment in its subsidiaries is stated at cost
plus equity in undistributed earnings of the subsidiaries. The
Companys share of net income of its subsidiaries is
included in income using the equity method. The accompanying
Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes
to Consolidated Financial Statements included as part of this
Form 10K.

Note 2

Triad Guaranty Inc. (the Company) is
a holding company which, through its whollyowned
subsidiary, Triad Guaranty Insurance Corporation
(Triad), provides private mortgage insurance
coverage in the United States to mortgage lenders to protect the
lender against loss from defaults on low down payment
residential mortgage loans.

Note 3

The cost or amortized cost and the fair value of
investments held by the parent company are as follows (in
thousands):

|                           |                   |           |        |            |  |            |     |       |  |   |    |   |  |   |        |        | 
|-------------------------- | ----------------- | --------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | -- | - |  | - | ------ | ------ | 
|                           |                   | Cost or   |        | Gross      |  | Gross      |     |      
|                           |                   | Amortized |        | Unrealized |  | Unrealized |     | Fair 
|At December 31, 2003       |                   | Cost      |        | Gains      |  | Losses     |     | Value
|                           |                   |           |        |            |  |            |     |      
|Fixed maturity securities: |                   |           |        |            |  |            |     |       |  |   |    |   |  |   |        |       
|                           | Corporate         |           | $      | 2,660      |  |            | $   | 234   |  |   | $  | 8 |  |   | $      | 2,886  | 
|                           | Municipal         |           |        | 13,365     |  |            |     | 479   |  |   |    | 5 |  |   |        | 13,859 | 
|                           |                   |           |        |            |  |            |     |       |  |   |    |   |  |   |        |       
|Total                      |                   |           | 16,025 |            |  |            | 733 |       |  |   | 13 |   |  |   | 16,745 |       
|                           | Equity securities |           |        | 500        |  |            |     | 21    |  |   |    |  |  |   |        | 521    | 
|                           |                   |           |        |            |  |            |     |       |  |   |    |   |  |   |        |       
|Total                      |                   | $         | 16,525 |            |  | $          | 754 |       |  | $ | 13 |   |  | $ | 17,266 |       
|                           |                   |           |        |            |  |            |     |       |  |   |    |   |  |   |        |       

74



---



##### 



SCHEDULE II  CONDENSED
FINANCIAL INFORMATION OF REGISTRANT

TRIAD GUARANTY INC.


(Parent Company)


SUPPLEMENTARY NOTES


|                           |                   |           |        |            |  |            |     |       |  |   |     |     |  |   |        |       | 
|-------------------------- | ----------------- | --------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | --- | --- |  | - | ------ | ----- | 
|                           |                   | Cost or   |        | Gross      |  | Gross      |     |      
|                           |                   | Amortized |        | Unrealized |  | Unrealized |     | Fair 
|At December 31, 2002       |                   | Cost      |        | Gains      |  | Losses     |     | Value
|                           |                   |           |        |            |  |            |     |      
|Fixed maturity securities: |                   |           |        |            |  |            |     |       |  |   |     |     |  |   |        |      
|                           | Corporate         |           | $      | 7,959      |  |            | $   | 389   |  |   | $   | 120 |  |   | $      | 8,228 | 
|                           | Municipal         |           |        | 4,775      |  |            |     | 312   |  |   |     |    |  |   |        | 5,087 | 
|                           |                   |           |        |            |  |            |     |       |  |   |     |     |  |   |        |      
|Total                      |                   |           | 12,734 |            |  |            | 701 |       |  |   | 120 |     |  |   | 13,315 |      
|                           | Equity securities |           |        | 750        |  |            |     | 17    |  |   |     | 7   |  |   |        | 760   | 
|                           |                   |           |        |            |  |            |     |       |  |   |     |     |  |   |        |      
|Total                      |                   | $         | 13,484 |            |  | $          | 718 |       |  | $ | 127 |     |  | $ | 14,075 |      
|                           |                   |           |        |            |  |            |     |       |  |   |     |     |  |   |        |      

Major categories of the parent companys
investment income are summarized as follows (in thousands):

|                      |                                 |                        |       |       |  |      |       |       |  |   |       |       | 
|--------------------- | ------------------------------- | ---------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                      |                                 |                       
|                      |                                 | Year Ended December 31
|                      |                                 |                       
|                      |                                 | 2003                   |       | 2002  |  | 2001
|                      |                                 |                        |       |       |  |     
|Income:               |                                 |                        |       |       |  |      |       |       |  |   |       |      
|                      | Fixed maturities                |                        | $     | 889   |  |      | $     | 918   |  |   | $     | 770   | 
|                      | Equity securities               |                        |       | 36    |  |      |       | 51    |  |   |       | 19    | 
|                      | Cash and shortterm investments |                        |       | 26    |  |      |       | 28    |  |   |       | 45    | 
|                      | Note receivable from subsidiary |                        |       | 2,225 |  |      |       | 2,225 |  |   |       | 2,225 | 
|                      |                                 |                        |       |       |  |      |       |       |  |   |       |      
|                      |                                 |                        | 3,176 |       |  |      | 3,222 |       |  |   | 3,059 |      
|Expenses              |                                 |                        | 56    |       |  |      | 52    |       |  |   | 59    |      
|                      |                                 |                        |       |       |  |      |       |       |  |   |       |      
|Net investment income |                                 | $                      | 3,120 |       |  | $    | 3,170 |       |  | $ | 3,000 |      
|                      |                                 |                        |       |       |  |      |       |       |  |   |       |      

Note 4

In 1998, the Company completed a $35,000,000
private offering of notes due January 15, 2028. Proceeds
from the offering, net of debt issue costs, totaled $34,453,000.
The notes, which represent unsecured obligations of the Company,
bear interest at a rate of 7.9% per annum and are non-callable.

75



---



##### 



SCHEDULE IV 
REINSURANCE

TRIAD GUARANTY INC.


MORTGAGE INSURANCE PREMIUM EARNED


Years Ended December 31, 2003, 2002 and
2001


|     |  |                |         |           |  |            |        |        |  |            |   |  |  |   |         |  |  |  |     |  
|---- |  | -------------- | ------- | --------- |  | ---------- | ------ | ------ |  | ---------- | - |  |  | - | ------- |  |  |  | --- | -
|     |  |                |         |           |  |            |        |        |  | Percentage
|     |  |                |         | Ceded To  |  | Assumed    |        |        |  | of Amount 
|     |  | Gross          |         | Other     |  | From Other |        | Net    |  | Assumed   
|     |  | Amount         |         | Companies |  | Companies  |        | Amount |  | to Net    
|     |  |                |         |           |  |            |        |        |  |           
|     |  |               
|     |  | (In thousands)
|2003 |  | $              | 146,947 |           |  | $          | 27,218 |        |  | $          | 3 |  |  | $ | 119,732 |  |  |  | 0.0 | %
|     |  |                |         |           |  |            |        |        |  |            |   |  |  |   |         |  |  |  |     |  
|2002 |  | $              | 123,323 |           |  | $          | 18,260 |        |  | $          | 4 |  |  | $ | 105,067 |  |  |  | 0.0 | %
|     |  |                |         |           |  |            |        |        |  |            |   |  |  |   |         |  |  |  |     |  
|2001 |  | $              | 94,833  |           |  | $          | 10,482 |        |  | $          | 5 |  |  | $ | 84,356  |  |  |  | 0.0 | %
|     |  |                |         |           |  |            |        |        |  |            |   |  |  |   |         |  |  |  |     |  

76