SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1996
[ ] 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           (I.R.S.Employer Identification No.)
    incorporation or organization)

    101 South Stratford Road, Suite 500
       Winston-Salem, North Carolina                      27104
  (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (910) 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 /X/ No/ /.

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. / /

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of February 21, 1997,  computed by reference to the last reported
price at which the stock was sold on such date, was $110,089,742.

The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of February 21, 1997 was 6,645,361.

Portions of the following documents are      Part of this Form 10-K into which
incorporated by reference into this          the document is incorporated by
Form 10-K:                                   reference:
    TRIAD GUARANTY INC.
    Proxy Statement for 1997 Annual Meeting             Part III
    of Stockholders
<PAGE>

                                     PART I

ITEM 1.  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 residential
mortgage lenders, including mortgage bankers, mortgage brokers, commercial banks
and savings institutions.

     Private mortgage insurance,  also known as mortgage guaranty insurance,  is
issued  in  most  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  Home Loan  Mortgage  Corporation
("Freddie Mac") and the Federal National  Mortgage  Association  ("Fannie Mae").
Under risk-based capital regulations applicable to savings institutions, private
mortgage  insurance  also  reduces the capital  requirement  for such lenders on
residential mortgage loans with equity of less than 20%.

     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  also  located  in
Birmingham, Alabama.

     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 20.2% and CML owns 19.4% of the  outstanding
Common Stock of the Company.

     The  principal  executive  offices of the  Company are located at 101 South
Stratford Road,  Suite 500,  Winston-Salem,  North Carolina 27104. Its telephone
number is (910) 723-1282.

TYPES OF MORTGAGE INSURANCE

     There are two  principal  types of  private  mortgage  insurance  coverage:
"primary" and "pool". The Company offers only primary insurance.

                                       2
<PAGE>

PRIMARY INSURANCE

     Primary insurance  provides mortgage default protection on individual loans
and covers  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
(typically 15% to 30% as of December 31, 1996) is applied, typically 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  underwrites
primary  insurance on a  loan-by-loan  basis and on a  "delegated  underwriting"
basis to a select group of lenders.  Mortgage originators who participate in the
Company's  delegated  program are allowed to issue a certificate of insurance on
the loans it underwrites if certain strict qualifications are met.

     The Company offers primary coverage generally ranging from 6% to 35% of the
claim amount with most coverage in the 15% to 30% range as of December 31, 1996.
The  coverage  percentage  provided  by the  Company is  selected by the insured
lender,  subject to the  Company's  underwriting  approval,  usually in order to
comply with  existing  Freddie Mac and Fannie Mae  requirements  to reduce their
loss exposure on loans they purchase to 75% or less of the  property's  value at
the time the loan is originated.

     The Company's  premium rates vary depending upon the LTV ratio,  loan type,
mortgage term,  coverage amount and type, which all affect the perceived risk of
a claim on the insured mortgage loan. Generally, premium rates cannot be changed
after the issuance of coverage. The Company,  consistent with industry practice,
generally utilizes a nationally based, rather than a regional or local,  premium
rate structure.

     Mortgage  insurance  premiums are usually paid by the mortgage  borrower to
the  mortgage  lender or  servicer,  which in turn  remits the  premiums  to the
mortgage  insurer.  The Company has three basic types of borrower  paid  premium
plans.  The first is a monthly  premium plan under which only one or two months'
premium is paid at the  mortgage  loan closing and in some cases no premiums are
paid at closing.  Thereafter  level  monthly  premiums are collected by the loan
servicer for monthly  remittance to the Company.  In February  1996, the Company
introduced  a  variation  of the  monthly  premium  plan under which the initial
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 93% of new insurance written
in 1996.  The Company  expects that the  percentage  of new business  written on
monthly premium plans will remain at or slightly above the current level.

                                       3
<PAGE>

     The second type of premium  payment plan is an annual premium plan in which
a  first-year  premium is paid at the mortgage  loan closing and annual  renewal
payments,  which  are  generally  less  than the first  year  premium,  are paid
thereafter.  Renewal  payments are  collected  monthly and held in escrow by the
mortgage  lender or servicer  for annual  remittance  in advance of each renewal
year.

     The third type of premium  payment plan  requires a single  payment paid at
the 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.

     In addition to the borrower paid plans,  the Company has a lender paid plan
whereby mortgage  insurance  premiums are charged to the mortgage lender or loan
servicer,  which pays the premium to the Company. The lender builds the mortgage
insurance  premium into the borrower's  interest rate. The Company's lender paid
plan allows the lender to offer  borrowers  lower cost mortgages by reducing the
necessary  closing costs compared to borrower paid plans.  The Company's  lender
pay plan has been approved for use by Fannie Mae and Freddie Mac.

     As part of the Company's  efforts to increase its focus on larger  national
lenders,  a mortgage  insurance  program is currently being developed that would
enable  the  Company  to better  meet the needs and  requirements  of the larger
national  lenders.  The program,  which will be marketed  beginning in the first
quarter of 1997,  increases the lender's share of the risk of loss on an insured
book of business and provides for a fee to the lender for this increased risk.

POOL INSURANCE

     Pool insurance has generally 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  percentage of the total original balances of all loans in
the pool.  Modified pool insurance provides coverage for a specified  percentage
of the claim  amount for each loan  insured,  subject  to an  overall  stop-loss
provision  applicable to the entire pool of loans insured.  The Company does not
offer pool insurance.

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,  and
remains  renewable  at the option of the  insured  lender.  Generally,  mortgage
insurance  is  renewable  at a rate  fixed  when the  insurance  on the loan was
initially issued.

                                       4
<PAGE>

     Insured  lenders  may  cancel  insurance  at any  time at their  option.  A
borrower may request  that an insured  servicer  cancel  insurance on a mortgage
loan when its 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  as  well  as by  certain  other  regulatory
restrictions.  Legislation  currently is being discussed,  however,  which could
affect the cancellation of private mortgage insurance.  See "Regulation Indirect
Regulation".

     When a borrower  refinances a Triad-insured  mortgage loan by paying it off
in full with the proceeds of a new  mortgage,  the  insurance  on that  existing
mortgage is canceled,  and insurance on the new mortgage is considered to be new
insurance written. Therefore, continuation of Triad's coverage from a refinanced
loan to a new loan results in both a cancellation of insurance and new insurance
written. The percentage of new insurance written represented by refinanced loans
was 16.9%, 9.3%, and 4.6% in 1996, 1995, and 1994, respectively.

     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,  while borrowers in economically  distressed areas are less
likely to qualify for  refinancing  because of  depreciated  real estate values.
Throughout  the  1990's  high  refinancing  activity  occurred  because of lower
mortgage  interest rates.  The percentage of the Company's  policies in force at
the end of the year that were  canceled  during  the  following  year was 14.7%,
13.6%, and 14.2% in 1996, 1995, and 1994, respectively.  The cancellations which
have  occurred  since  1988 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 the
Company. At December 31, 1996,  approximately 47% of the Company's risk in force
came from mortgage bankers, 24% from mortgage brokers, 17% from commercial banks
and 12% from savings  institutions.  At December 31, 1995,  43% of the Company's
risk in force came from mortgage bankers,  25% from mortgage  brokers,  18% from
commercial banks and 14% from savings  institutions.  Although  mortgage lenders
are the Company's principal  customers,  individual mortgage borrowers generally
bear the cost of primary insurance coverage.

                                       5
<PAGE>

     In addition to providing  insurance  coverage,  the Company  also  provides
contract  underwriting  as a  service  to  lenders  and to  provide  a means  of
generating new mortgage insurance business.  In 1996, the Company began offering
Fannie Mae's  Desktop  Originator  and Desktop  Underwriter  as a service to its
contract customers. The Company also offers its contract customers direct access
to  Freddie  Mac's  Loan  Prospector.  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 loan compliance and
Fannie Mae's or Freddie Mac's decision for loan purchase or securitization.

     To obtain primary insurance from the Company,  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,  among other  factors,  upon an
evaluation of the lender's financial position and its management's  demonstrated
adherence to sound loan origination practices.

     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 the loan,  subject to
certain stringent  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).  The  Company had
approximately 5,750 master policy holders at December 31, 1996.

     The Company's ten largest customers were responsible for 23.4% and 23.7% of
direct risk in force at December  31, 1996 and 1995,  respectively.  The largest
single  customer of the  Company  (including  branches  and  affiliates  of that
customer),  measured by risk in force,  accounted  for 3.3% and 3.4% at December
31, 1996 and 1995, respectively.

SALES AND MARKETING

     The Company currently markets its insurance  products through a field sales
force of twenty-four salaried account executives, three regional sales managers,
two national accounts  representatives  and two exclusive  commissioned  general
agencies each serving a specific  geographic  market. The Company is licensed to
do business in 41 states and the District of Columbia  and has licenses  pending
in five  states.  The Company is actively  serving  mortgage  originators  in 31
states and the District of Columbia.

     In  1996,   the  Company  added  to  its  existing  sales  force  with  new
representation  in New  England  and  two new  representatives  to  service  the
national account market of larger mortgage  lenders.  Currently,  the Company is
approved to do business with 20 of the top 30 lenders. For 1997, the Company has
already added sales  representation in the Pacific Northwest,  and will continue
to  evaluate  geographic  expansion  opportunities,  as  well  as the  need  for
additional sales representation.

                                       6
<PAGE>

     The success of the Company is  dependent  upon the  services of its account
executives   and  general   agents.   For  1996,  the  Company's  two  exclusive
commissioned  general agencies  produced  approximately 25% of the Company's new
direct insurance written while the salaried account  executives and the national
account representatives  produced the remainder. The loss of the services of any
of its key account  executives or general agencies could have a material adverse
effect on the Company's operations.

COMPETITION AND MARKET SHARE

     Triad 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 which accounted for  approximately 45% of high LTV
loans in 1996 and 39% in 1995. In addition to competition from federal agencies,
Triad and other private mortgage insurers face competition from  state-supported
mortgage  insurance  funds.  Several of these states  (among  them,  California,
Connecticut,  Massachusetts,  New York and Vermont) have state housing insurance
funds which are either  independent  agencies or  affiliated  with state housing
agencies.  Indirectly,  the Company also competes with certain  mortgage lenders
which forego private mortgage insurance and self-insure against the risk of loss
from defaults on all or a portion of their low down payment mortgage loans.

     Various  proposals  are being  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, the effect on the Company.

     The private mortgage  insurance  industry  consists of nine active mortgage
insurance  companies including Triad,  Mortgage Guaranty Insurance  Corporation,
General Electric Mortgage Insurance Corporation, PMI Mortgage Insurance Co., CMG
Mortgage Insurance Co., United Guaranty Residential Insurance Company,  Republic
Mortgage Insurance Company,  Commonwealth  Mortgage Assurance Company and Amerin
Guaranty Corporation. Triad is the eighth largest private mortgage insurer based
on 1996 market share and,  according to industry  data,  had a 1.7% share of net
new mortgage insurance written during 1996, up from 1.5% in 1995.

     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, an  experience-based  pricing  structure and
innovative  products.  Triad was the first in the industry to provide  preferred
rates to approved  lenders that  maintain  lower loss ratios on loans which they
insure with Triad.

                                       7
<PAGE>

UNDERWRITING PRACTICES

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

UNDERWRITING PERSONNEL

     The Company's Vice  Presidents of Risk Management and  Underwriting  report
directly to the  President of the Company and the  Executive  Vice  President of
Sales and  Marketing,  respectively.  In addition to a centralized  underwriting
department in the home office, the Vice President of Underwriting is responsible
for the Company's  regional  offices in Georgia,  Texas,  Illinois,  Arizona and
California.  The Vice President of Risk  Management is responsible for assessing
the risk factors for the Company and for the quality control function.

     The Company employed an underwriting  staff of twenty-three at December 31,
1996. 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.

RISK MANAGEMENT APPROACH

     From  its  inception  in 1988,  Triad  has  adhered  to  conservative  risk
management strategies that were developed,  in part, as a result of management's
assessment of the private mortgage  insurance  industry's loss experience in the
late 1980s.  The Company's risk management  objective is to build a portfolio of
insurance in force with a claims  incidence less than the expected  claims rates
on which its  premium  rates are  based.  In order to meet  this  objective  the
Company focuses its risk management efforts on five key elements:

   o     MORTGAGE LENDER. The Company reviews each lender's financial statements
         and management experience before issuing a master policy. This analysis
         permits  the Company to  determine  if that  lender is  predisposed  to
         maintaining  a loss ratio on loans  which it insures  with the  Company
         that will allow the continued use of the  Company's  preferred  premium
         schedule  after  the three  year  grace  period.  The  Company  assigns
         delegated  underwriting  authority  only to  lenders  with  substantial
         financial resources and established records of originating good quality
         loans.


                                      8
<PAGE>

   o      PURPOSE  AND TYPE  OF LOAN.  The   Company   analyzes  four  general
          characteristics  of a loan to  evaluate  its  level of  risk:  (i) LTV
          ratio;  (ii) purpose of the loan;  (iii) type of loan  instrument  and
          (iv) type of  property.  The  Company  seeks  only the most basic loan
          types with proven track records for which an assessment of risk can be
          readily made and the premium received  sufficiently offsets that risk.
          Loans having  higher LTV ratios are charged a higher  premium,  as are
          other  loans  which have been  shown to carry  higher  risks,  such as
          adjustable rate mortgages  ("ARMs").  Certain  categories of loans are
          generally not insured by the Company  because such loans are deemed to
          have an unacceptable level of risk, including negatively and potential
          negatively amortizing ARMs, ARMs with maximum annual and lifetime caps
          greater than two and six percentage points, respectively, and loans on
          nonowner occupied properties.

   o      INDIVIDUAL LOAN AND  BORROWER.  Except to the  extent  its  delegated
          underwriting   program  is  being  utilized,   the  Company  evaluates
          insurance  applications  based  on a set  of  guidelines  designed  to
          evaluate the  suitability of the borrower to the loan program.  In the
          case of delegated underwriting,  compliance with program parameters is
          monitored by periodic audits of delegated business.

   o      EXPERIENCE-BASED  PREMIUM STRUCTURE.  To increase  profitability, the
          Company   targets   lower  risk   business    through  the  Company's
          preferred  premium  rate  schedules.  The Company was the first in the
          industry to provide preferred rates to lenders  maintaining lower loss
          ratios on loans which they insure with the Company. These rates, which
          are lower than those generally available throughout the industry,  are
          offered to lenders for the first three years under a master  policy so
          that a loss ratio on loans which a lender insures with the Company can
          be fairly determined. After that point, approved lenders maintaining a
          loss ratio of 40% or less will continue to operate under the preferred
          rate schedule. Those with loss ratios greater than 40% will be charged
          higher premiums on new business (as well as higher premiums on renewal
          business if a variable  renewal  program  was  chosen)  until the loss
          ratio is  reduced.  These  higher  premiums  are  comparable  to those
          premiums  typically  charged  by  the  Company's   competitors.   This
          experience-based  structure  encourages  lenders to maintain  low loss
          ratios on loans which they insure with the Company.

   o     GEOGRAPHIC  SELECTION OF RISK. The Company places significant  emphasis
         on the condition of the regional  housing  markets in  determining  its
         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.

                                      9
<PAGE>


UNDERWRITING PROCESS

     The Company accepts  applications for insurance under three basic programs:
The  traditional  fully  documented  program,  a reduced  documentation  program
utilizing  credit scoring to determine level of  documentation,  and a delegated
underwriting program,  which allows a lender's underwriters to commit an insurer
to a loan based on strict agreed upon underwriting guidelines.

     The Company  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 are also
largely  influenced by Freddie Mac and Fannie Mae underwriting  guidelines.  The
Company  believes its  guidelines  are generally  consistent  with those used by
other  private  mortgage  insurers  with  respect to the types of loans that the
Company will insure.  As a result of the Company's review of regional  economies
and housing patterns,  specific  underwriting  guidelines  applicable to a given
local,  state or regional  market  will be modified to address  concerns in that
market.

     Subject to the Company's  underwriting  guidelines  and exception  approval
procedures,  the Company allows its underwriters to utilize their experience and
business judgement in evaluating each loan on its own merits.  Accordingly,  the
Company underwriters have 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  this  type of  deviation,  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  ability to repay the loan as  evaluated  by
considering  the  borrower's  debt-to-income  ratio,  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 3.8%
and 4.3% at December 31, 1996 and 1995, respectively.

     In the fourth  quarter of 1996,  the  Company  introduced  a new product in
which a certificate  of insurance is issued based on a borrower's  credit score.
Under this new program,  the Company issues a certificate  of insurance  without
the standard  underwriting  process if certain program  requirements are met and
the borrower has a predetermined minimum credit score.  Documentation submission
requirements vary depending on the borrower's credit score.

                                       10
<PAGE>


     The Company's delegated  underwriting program, in addition to the Company's
conservative risk management  strategies,  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 preferred
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 38% of commitments received in 1996 compared
to 25% in 1995 and 4% in  1994.  The  performance  of loans  insured  under  the
delegated   underwriting   program  has  been   comparable   to  the   Company's
non-delegated business. As a result of the Company's new credit scoring product,
management expects the percentage of commitments processed through the Company's
delegated underwriting program to decrease in 1997.

OTHER RISK MANAGEMENT

     Another  important  aspect of the Company's risk management is the tracking
of risk exposure in condominium projects. The Company's risk management computer
system  tracks the  exposure  in each  project and alerts the  underwriter  once
predetermined  limits are reached. The Company's computer system also identifies
certain exceptions in loan files that deserve special underwriter attention.

     The Company uses a comprehensive  audit plan designed to determine  whether
the  underwriting  decisions  being  made  are  consistent  with  the  policies,
procedures and expectations for quality as set forth by management. All areas of
business  activity  which involve an  underwriting  decision are included,  with
emphasis on new products,  procedures and new master policyholders.  The process
used to  identify  categories  of loans  selected  for an audit  begins with the
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
management  to identify  concerns not only at the loan level but also  portfolio
concerns which may exists within a given category of business.

CLAIMS-PAYING ABILITY RATINGS

     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 private
mortgage  insurance coverage on the mortgages has been issued by an insurer with
a  claims-paying  ability  rating  of at  least  "AA-"  from  Standard  & Poor's
Corporation  (S&P),  Fitch Investors  Service,  Inc.  ("Fitch") or Duff & Phelps
Credit Rating Co. ("Duff & Phelps") or a financial  strength rating from Moody's

                                       11
<PAGE>

Investor  Service  ("Moody's")  of at least  "Aa3".  Fannie Mae and  Freddie Mac
require mortgage  guaranty  insurers to maintain two ratings of "AA-" or better.
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).

     Triad has its claims-paying  ability rated by S&P, Fitch and Duff & Phelps.
These  ratings  are an  indication  to a  mortgage  insurer's  customers  of the
insurer's  present  financial  strength and its  capacity to pay future  claims.
Ratings are generally  considered an important  element in a mortgage  insurer's
ability to compete for new business. Triad's claims-paying ability rating by S&P
was  upgraded  to "AA" from "AA-" in January  1997.  Triad is also rated "AA" by
Fitch and Duff & Phelps.  Triad has not sought and does not presently  intend to
seek a financial strength rating from Moody's.

     S&P defines insurers rated "AA" as offering  excellent  financial  security
and having the capacity to meet policy holder obligations that is strong under a
variety  of  economic  and  underwriting  conditions.  Fitch  defines  insurance
companies  rated "AA" as having a very  strong  claims-paying  ability and to be
only slightly more  susceptible  than  companies  rated "AAA" to exhibiting  any
weakening   of  financial   strength  due  to  adverse   business  and  economic
developments.  Duff & Phelps  defines  insurers rated "AA" as having a very high
claims-paying  ability with only modest risk which may vary  slightly  over time
due to economic and/or underwriting conditions. Ratings from S&P, Fitch and Duff
& Phelps are modified  with a "+" or "-" sign to indicate the relative  position
of a company within its category.

     Triad's   improved  rating  from  S&P  allows  it  to  compete  on  similar
risk-to-capital  guidelines as its competitors.  Management expects that Triad's
risk-to-capital  ratio can  increase  up to the  industry's  average  without an
adverse effect on its claims-paying ability rating.

     S&P, Fitch and Duff & Phelps review Triad's claims-paying  ability, as they
do with all rated  insurers.  Ratings can be withdrawn or changed at any time by
the rating agency.

REINSURANCE

     Effective  January  1,  1996,  the  Company   eliminated  its  quota  share
reinsurance on new business,  recaptured substantial portions of its coverage on
renewal business and obtained $25 million in excess of loss reinsurance designed
to protect  the  Company  in the event of  catastrophic  levels of  losses.  The
restructured  reinsurance program reduced the Company's quota share cede rate to
5.3% of direct premium  written in 1996 compared to 20.8% in 1995. The recapture
of business  previously  ceded  resulted in increased  premium  revenues for the
Company.  The Company's  geographic  risk  concentration  was also affected as a
result of the  recapture of the  previously  ceded  business.  See  "Analysis of
Direct Risk in Force - Geographic Dispersion".

                                       12
<PAGE>

     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 reinsurer will be able to meet their obligations under the reinsurance
agreement.

     Pursuant to deeper coverage  requirements imposed by Fannie Mae and Freddie
Mac in 1995,  loans  eligible for sale to such  agencies with a loan to value of
over 90% require insurance with a coverage percentage of 30%, in contrast to the
25%  coverage  previously  required.  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,  the Company formed Triad Guaranty Assurance  Corporation  ("TGAC") in
1995 as a wholly-owned subsidiary to provide reinsurance of such deeper coverage
to Triad. As of December 31, 1996, TGAC had assumed approximately $72 million in
risk from Triad.

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  which  affects  the  loan has been  commenced,
whichever  occurs first.  Notification is required within 45 days of the default
if it occurs when the first payment is due. The incidence of default is affected
by a variety of  factors,  including  change in borrower  income,  unemployment,
divorce,   illness,   the  level  of  interest   rates  and   general   borrower
creditworthiness.  Defaults that are not cured 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.

     The  following  table shows the number of loans  insured,  related loans in
default,  percentage  of  loans  in  default  (default  rate  as  of  the  dates
indicated),  dollar amount of insured loans in default,  dollar amount of direct
risk  (gross of  reinsurance)  with  respect to insured  loans in  default,  and
reserves per delinquent loan: Default Statistics

                                       13
<PAGE>


                               DEFAULT STATISTICS
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                          ------------
                                                        1996       1995        1994       1993       1992
                                                        ----       ----        ----       ----       ----
<S>                                                   <C>        <C>        <C>        <C>        <C>
Number of insured loans in force ..................    62,334     49,791     41,358     30,497     20,604
Number of loans in default ........................       273        206        156        102         65
Percentage of loans in default (default rate) .....      0.44%      0.41%      0.38%      0.33%      0.32%
Dollar amount of insured loans in default (000's)..   $25,253    $19,907    $14,356    $ 9,177    $ 5,762
Dollar amount of direct risk with respect to
insured loans in default (000's) ..................   $ 5,770    $ 4,071    $ 2,827    $ 1,810    $ 1,147
Reserve per delinquent loan .......................   $23,097    $22,277    $20,281    $22,111    $19,061
</TABLE>

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.  Claims are
also affected by local housing prices, interest rates,  unemployment levels, the
housing  supply  and the  borrower's  desire to avoid  foreclosure.  During  the
default  period,  the Company works with the insured for possible early disposal
of underlying  properties  when the chance of the loan  reinstating  is minimal.
Such dispositions typically result in a reduced claim amount to the Company.

     Claim activity is not evenly spread through the coverage period. Relatively
few  claims  are  received  during  the first two years  following  issuance  of
insurance.  A  period  of  rising  claims  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 claims
received  has  historically  declined at a gradual  rate,  although  the rate of
decline  can be  affected  by  economic  and other  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 otherwise.

                                       14
<PAGE>

     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  good and
marketable  title to the  underlying  property  through  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 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.  An  average of about 12 months  elapses  from the date of default to a
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 15% to 30% 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 attempts to choose
the claim  settlement  option  which costs the least.  In  general,  the Company
settles claims by paying the coverage percentage 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, advances to
assist distressed  borrowers who have suffered a temporary economic setback, and
the use of new 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
has paid out only 73% of its potential exposure on claims paid through December
31, 1996.

                                       15
<PAGE>

LOSS RESERVES

     The Company  establishes  reserves to provide  for the  estimated  costs of
settling claims with respect to loans reported to be 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 which are not currently in default. Although the Company
believes that its overall  reserve  levels at December 31, 1996, are adequate to
meet its future  obligations,  due to the inherent  uncertainty of the reserving
process there can be no assurance that its reserves will prove to be adequate to
cover ultimate loss developments.

     In  determining  the  liability for unpaid  losses  related to  outstanding
defaults,  the Company  establishes loss reserves on a case-by-case  basis using
historical experience and by making various assumptions and judgements about the
ultimate  amount to be paid on loans in  default.  The amount  reserved  for any
particular  loan is  dependent  upon the status of the loan as  reported  by the
servicer of the insured loan. As the default  progresses  closer to foreclosure,
the  amount of loss  reserve  for that  particular  loan will be  increased,  in
stages,  to  approximately  120%  of  the  Company's  exposure,  which  includes
claims-related  expenses.  The  Company  periodically  reviews  and  adjusts its
reserve  estimates  to  address  changes  in  economic  conditions  as  well  as
developments in its loss experience.

     The Company also establishes reserves to provide for the estimated costs of
settling  claims,  including  legal and other  fees,  and  general  expenses  of
administering  the claims  settlement  process  ("loss  adjustment  expenses" or
"LAE")  and for  losses  and loss  adjustment  expenses  incurred  arising  from
defaults  which  have  occurred,  but which  have not yet been  reported  to the
insurer ("Incurred But Not Reported" or "IBNR").

     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,  especially in light of the rapidly changing  economic  conditions over
the past few  years in  certain  regions  of the  United  States.  In  addition,
economic  conditions  that have affected the development of the 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
the reserves will prove to 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.

                                       16
<PAGE>

     The following table represents a reconciliation of the beginning and ending
loss reserves (net of reinsurance) for the periods indicated.


          RECONCILIATION OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

                                              Year Ended December 31,
                                                 (in thousands)
                                       1996     1995     1994     1993     1992
                                       ----     ----     ----     ----     ----
Reserve for losses and LAE, net of
related reinsurancerecoverables, at
beginning of year .................. $ 3,703  $ 2,466  $ 1,805  $ 1,073  $   500

Add losses and LAE incurred in
respect of defaults occurring in:
     Current year (1) ..............   4,673    3,191    2,053    1,489      839
     Prior years (1) (2) ...........  (1,394)    (974)    (791)    (205)       8
                                     -------  -------  -------  -------  -------
Total incurred losses and LAE ......   3,279    2,217    1,262    1,284      847

Deduct losses and LAE paid in
respect of defaults occurring in:
    Current year ...................     167      216       86       95       73
    Prior years ....................     841      764      515      457      201
                                     -------  -------  -------  -------  -------
Total payments .....................   1,008      980      601      552      274

Reserve for losses and LAE,
net of the related reinsurance
recoverables, at end of year .......   5,974    3,703    2,466    1,805    1,073

Reinsurance recoverables on
unpaid losses and LAE, at the end
of year ............................     331      886      698      450      166
                                     -------  -------  -------  -------  -------
Reserve for unpaid losses and LAE,
before deduction ofreinsurance
recoverableson unpaid losses,
at end of year ..................... $ 6,305  $ 4,589  $ 3,164  $ 2,255  $ 1,239
                                     =======  =======  =======  =======  =======

------------------------------
(1) Includes  loss and LAE  reserves  relating to loans which are in default but
for which  default  notices have not been  received.
(2)  Indicates  a  cumulative  deficiency  (redundancy)in  loss  reserves at the
beginning   of   each   period.   Deficiencies   (redundancies)   result   fromu
nderestimating (overestimating) ultimate claim amounts.

     The top  section of  theabove  table shows  losses  incurred  on  insurance
policies  with  respect to  defaults  which  occurred  in the  current and prior
periods.  The amount of losses  incurred  relating to defaults  occurring in the
current period represents the estimated amount to be ultimately paid on defaults
occurring in that  period.  The amount of losses  incurred  relating to defaults
occurring in prior periods  represents an adjustment  made in the current period
for  defaults  which were  included in the loss  reserve at the end of the prior
period.

                                       17
<PAGE>

     The middle  section  of the above  table  shows  claims  paid on  insurance
policies with respect to defaults  which  occurred in the current  period and in
prior periods,  respectively.  Since it takes, on average, about 12 months for a
default which is not cured to eventually  develop into a paid claim, most losses
paid relate to defaults occurring in prior periods.


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























                                       18
<PAGE>

LENDER AND PRODUCT CHARACTERISTICS

     The following  table  reflects the percentage of direct gross risk in force
(as  determined  on the basis of  information  available on the date of mortgage
origination) by the categories indicated on December 31, 1996 and 1995:

Direct Risk in Force
                                                                 December 31,
                                                                 ------------
                                                              1996        1995
                                                              ----        ----
Product type:
Primary ...............................................       100.0%      100.0%
Pool ..................................................         0.0%        0.0%
                                                              -----       -----
Total .................................................       100.0%      100.0%

Direct Primary Risk in Force
                                                                 December 31,
                                                                 ------------
                                                              1996        1995
                                                              ----        ----

Direct Risk in Force (dollars in millions) ...........       $1,515       $1,091
Lender Concentration:
Top 10 lenders (by original applicant) ...............         23.4%       23.7%
LTV:
90.01% to 95.00% (1) .................................         49.4%       45.9%
90.00 and below ......................................         50.6%       54.1%
                                                              -----       -----
Total ................................................        100.0%      100.0%
                                                              =====       =====

Loan Type:
Fixed ................................................         85.6%       82.7%
ARM (positive amortization) (2) ......................         14.4%       17.3%
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 ...................................          5.6%        7.1%
Over 15 years ........................................         94.4%       92.9%
                                                              -----       -----
Total ................................................        100.0%      100.0%
                                                              =====       =====

Property Type:
Noncondominium (principally single-family detached) ..         94.3%       94.7%
Condominium ..........................................          5.7%        5.3%
                                                              -----       -----
Total ................................................        100.0%      100.0%
                                                              =====       =====
Occupancy Status:
Primary residence ....................................        100.0%      100.0%
Second home ..........................................          0.0%        0.0%
Nonowner occupied ....................................          0.0%        0.0%
                                                              -----       -----
Total ................................................        100.0%      100.0%
                                                              =====       =====
                                       19
<PAGE>


Mortgage Amount:
$199,000 or less .....................................         91.9%       93.3%
Over $199,000 ........................................          8.1%        6.7%
                                                              -----       -----
Total ................................................        100.0%      100.0%
                                                              =====       =====



(1)  Includes  97s,  representing  less than 1% of risk in force at December 31,
1996.

(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.  A large  number  of  loans  are  originated,
primarily  by  California  lenders,  with  amortization  for an  initial  period
followed by periods in which the borrower may choose to limit payment  increases
to 7.5% or to make full  payments.  Therefore,  these  loans are  treated by the
Company as having potential negative amortization.



     One of the most important  determinants  of claim incidence is the relative
amount of the borrower's equity in the home (which at the time of origination is
the down payment).  For the industry as a whole,  historical  evidence indicates
that  claim  incidence  on loans  having a LTV ratio in excess of 90% is greater
than the claim incidence on loans with LTV ratios equal to or less than 90%. The
Company  believes  that the  higher  premium  rates it charges on these high LTV
loans adequately reflects the additional risk.

     In 1995,  the  mortgage  insurance  industry  introduced  a 97% LTV product
("97s")  which was offered to low and moderate  income  borrowers  under certain
pilot programs.  The Company believes that these "affordable housing" loans have
higher risks than its other insured  business and has 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,  and, as of December 31,
1996, 97s constituted less than 1% of direct risk in force. The Company does not
routinely delegate the underwriting of its 97% LTV product.

                                       20
<PAGE>

     The Company generally insures only positively  amortizing ARMs with maximum
annual  and  lifetime  caps  of two  and six  percentage  points,  respectively.
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 the
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"  or
"potential" negative amortization.

     Historical  evidence  indicates  that higher priced  properties  experience
wider   fluctuations  in  value  than  moderately   priced   residences.   These
fluctuations  exist primarily  because there is a much 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.
The term "single-family"  applies to all one-to-four unit dwellings and includes
detached and attached  townhouse units with fee simple  ownership,  condominiums
and cooperatives.

     Loans on primary  residences  that were owner  occupied at the time of loan
origination  constituted  almost all of the Company's  risk in force at December
31, 1996. Because management believes that loans on nonowner occupied properties
represent  a  substantially  higher risk of claim  incidence  and are subject to
greater value  declines than loans on primary homes,  the Company  insures these
types of loans only on a case-by-case basis and only after stringent  management
review.

     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 2.4 years at December 31, 1996 and 2.3 years
at December 31, 1995  compared to an estimated  industry  average of just over 3
years at December 31, 1996.

                                       21
<PAGE>

     The  following  table  shows the  percentage  of direct risk in force as of
December 31, 1996 for policies written from 1988 through 1996 by the Company, as
well as the cumulative loss ratio (calculated as losses paid divided by premiums
written,  in each case for a particular  certificate  year) which has developed,
through  December 31, 1996, for the policies  written during the years indicated
and excludes the effects of reinsurance:


  Certificate                          Percent     Cumulative Ratio of Losses
       Year    Direct Risk in Force    of Total     Paid to Premiums Written(1)
       ----    --------------------    --------     ---------------------------
                   (in millions)
      1988             $ 2.2             0.2%                13.6
      1989               3.5             0.2                 22.7
      1990               6.4             0.4                 15.5
      1991              24.1             1.6                  9.6
      1992             106.9             7.1                  5.5
      1993             223.2            14.7                  2.8
      1994             252.7            16.7                  1.4
      1995             379.1            25.0                  1.3
      1996             517.3            34.1                  0.0
                       -----           -----
     Total           $1515.4          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.

                                       22
<PAGE>

GEOGRAPHIC DISPERSION

     The following tables reflect the percentage of direct risk in force, net of
reinsurance, on the Company's book of business (by location of property) for the
top ten states and the top twelve metropolitan  statistical areas ("MSAs") as of
December 31, 1996 and 1995:

<TABLE>
<CAPTION>


                Top Ten States                              Top Twelve MSAs
   ------------------------------------           ----------------------------------------
            December 31,  December 31,                         December 31,  December 31,
                1996         1995                                  1996         1995
                ----         ----                                  ----         ----

<S>            <C>           <C>         <C>                        <C>          <C>
Georgia         18.3%        17.2%       Chicago, IL                15.0%        15.8%
Illinois        15.9         16.8        Atlanta, GA                10.2          9.8
Florida          9.6          9.7        Minneapolis-St. Paul, MN    3.0          3.7
North Carolina   6.5          8.1        Charlotte-Gastonia, NC      2.4          3.0
Virginia         5.8          6.1        Augusta, GA                 2.1          2.0
Texas            4.8          3.4        San Francisco-Oakland, CA   1.8          2.0
Tennessee        4.5          5.0        Houston-Galveston, TX       1.7          1.5
Pennsylvania     4.5          3.8        Tampa-St. Petersburg, FL    1.7          1.8
California       4.1          3.8        Indianapolis, Indiana       1.6          1.6
South Carolina   3.5          4.1        Richmond, VA                1.5          1.4
               -----        -----
Total          77.5%         78.0%       Jacksonville, FL            1.5          1.6
               =====         =====
                                         Norfolk, VA                 1.4          1.6
                                                                    -----        -----
                                         Total                      43.9%        45.8%
                                                                    =====        =====
</TABLE>

     While the Company continues to diversify its risk in force  geographically,
a prolonged regional  recession,  particularly in its high concentration  areas,
such as the  Southeastern,  Middle Atlantic and upper  Mid-Western  states, or a
prolonged  national  economic  recession,   could  significantly  increase  loss
development.

     Effective  January 1, 1996,  the Company  made  substantial  changes in its
reinsurance  program,  eliminating  quota share  reinsurance on new business and
recapturing  substantial  portions  of its  coverage on renewal  business.  As a
result,  the  Company's  geographic  risk  concentration  in the top ten  states
increased  to 80.6% at January  1, 1996 from 78.0% at  December  31,  1995.  For
Georgia,  the Company's largest state risk concentration,  net risk in force was
21.2% at the beginning of 1996 due to the  recapture.  The Company's  geographic
risk  concentrations  have declined  steadily in 1996 following the commutation,
reducing risk concentration in the top ten states to 77.5% at December 31, 1996.

                                       23
<PAGE>

INVESTMENT PORTFOLIO

     Income  from  its  investment  portfolio  is one of the  Company's  primary
sources of cash flow to support its operations and claims payments. Triad has an
investment advisory agreement with CML for management of its portfolio.

     The Company  follows an investment  policy which  requires:  (i) 75% of its
investment  portfolio  (together  with cash  assets) to  consist  of cash,  cash
equivalents and debt securities  (including  redeemable preferred stocks) which,
at the date of purchase,  were rated investment grade by a nationally recognized
rating  agency  (e.g.,"BBB-"  or  better  by S&P) and  (ii) at least  50% of its
investment  portfolio  (together  with cash  assets) to  consist  of cash,  cash
equivalents and securities which, at the date of purchase, were rated one of the
two highest  investment  grades by a nationally  recognized  rating  agency.  At
December 31, 1996, the Company's  total  investment  portfolio had a fair market
value of $98.0 million and did not include any real estate or mortgage loans.

     Liquidity  is  sought  through  cash  equivalent  investments  and  through
diversification  and  investment  in  publicly  traded  securities.  The Company
attempts  to  maintain a level of  liquidity  and a duration  in its  investment
portfolio  consistent  with  its  business  outlook  and  the  expected  timing,
direction and degree of changes in interest  rates.  As of December 31, 1996, no
investment  in  the  securities  of any  single  issuer  (other  than  the  U.S.
government and its agencies) exceeded 2% of the Company's investment portfolio.

     The  Company's  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 the Company.

                                       24
<PAGE>







     The diversification of the Company's  investment  portfolio at December 31,
1996 is shown in the table below:

                      INVESTMENT PORTFOLIO DIVERSIFICATION

                                                 December 31, 1996
                                                 -----------------
                                   Amortized Cost    Market Value   Percent (1)
                                   --------------    ------------   -----------
Available-for-sale  securities:
Fixed maturity securities:
   U.S. government obligations ..... $ 9,311,329      $ 9,655,744       9.7%
   Mortgage-backed bonds ...........  16,545,818       16,249,638      17.3
   State and municipal bonds .......  45,087,458       45,960,016      47.1
   Industrial & miscellaneous ......  15,125,148       15,364,457      15.8
                                    ------------      -----------
       Total fixed maturities ......  86,069,753       87,229,855

   Equity securities................   6,267,076        7,494,817       6.6
                                    ------------      -----------
       Total available-for-sale
          securities................  92,336,829       94,724,672

   Short-term investments...........   3,302,125        3,302,125       3.5
                                    ------------      -----------     -----

                                    $ 95,638,954      $98,026,797     100.0%
                                    ============      ===========     ======
-------------------------------
(1) Percentage of amortized cost.

     The following table shows the scheduled  maturities at December 31, 1996 of
the fixed maturity securities held in the Company's investment portfolio:

                     INVESTMENT PORTFOLIO SCHEDULED MATURITY

                                                           December 31, 1996
                                                           -----------------
                                                     Carrying
                                                       Value            Percent
                                                       -----            -------
One year or less ................................   $   909,220           1.0%
After one year through five years ...............    18,532,049          21.3
After five years through ten years ..............    23,352,846          26.8
After ten years though twenty years .............    25,746,712          29.5
After twenty years ..............................     2,439,390           2.8
Mortgage-backed securities (1) ..................    16,249,638          18.6
                                                    -----------         -----
Total ...........................................   $87,229,855         100.0%
                                                    ===========         =====

(1)Substantially  all of these  securities  are  guaranteed  by U.S.  Government
Agencies.

                                       25
<PAGE>

     The following table shows the ratings of the Company's investment portfolio
as of December 31, 1996:

                       INVESTMENT PORTFOLIO BY S&P RATING

                                                          December 31,1996
                                                          ----------------
Rating(1)                                             Carrying Value   Percent
---------                                             --------------   -------
Fixed maturities:
     U.S. Treasury and U.S. agency bonds ..........      $25,905,383     29.7%
     AAA ..........................................       23,109,373     26.5
     AA ...........................................       15,300,384     17.6
     A ............................................       14,103,318     16.2
     BBB ..........................................        7,258,893      8.3
     BB ...........................................          988,627      1.1
     B ............................................          268,500      0.3
     NR ...........................................          295,377      0.3
                                                         -----------    -----
         Total fixed maturities ...................      $87,229,855    100.0%
                                                         ===========    =====

Equities:
     AA ...........................................      $ 1,079,802     14.4%
     A ............................................        5,975,140     79.7
     B ............................................          439,875      5.9
                                                         -----------    -----
          Total equities ..........................      $ 7,494,817    100.0%
                                                         ===========    =====
Total Portfolio ...................................      $94,724,672
                                                         ===========
-------------------------
(1)Current ratings assigned by S&P.

                                       26
<PAGE>

     The following table shows the results of the Company's investment portfolio
for the periods indicated:



                          INVESTMENT PORTFOLIO RESULTS
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                          -------------------------------------------------------------------------------
                                               1996            1995            1994             1993             1992
                                               ----            ----            ----             ----             ----
<S>                                       <C>              <C>             <C>              <C>              <C>
Average investments (1) (2) ...........   $ 89,577,031     $ 79,253,289    $ 73,774,699     $ 31,211,740     $ 15,540,667
Pre-tax net investment income .........   $  5,446,672     $  4,836,461    $  4,180,876     $  1,896,639     $  1,204,842
Effective pre-tax yield (2) ...........            6.1%             6.1%            5.7%             6.1%             7.8%
Pre-tax realized gain (loss) on sale of
 investments ..........................   $   (162,385)    $    172,992    $   (162,723)    $    (15,852)    $      4,941

</TABLE>

-------------------------
(1) Excludes the Company's  investment in Southwide Life Insurance Corp. for all
periods during which it was held.
(2) Based on historical cost adjusted for  amortization and accretion of premium
and discount.


REGULATION

DIRECT REGULATION

     The Company's insurance subsidiaries are subject to comprehensive, detailed
regulation,  principally for the protection of policyholders 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
by state,  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,  claims handling
practice,  reinsurance  requirements,  varying  degrees of control  over 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

                                       27
<PAGE>

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 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 its parent 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  Insurance Director and obtains the Director's prior approval.
In addition,  material  transactions  between Triad and its parent 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 Insurance 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.  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, 1996, Triad had statutory policyholders'
surplus of $57.1 million and statutory contingency reserve of $35.1 million.

     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  Insurance  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.  As a mortgage  guaranty
insurer,  Triad is required by Illinois  insurance laws to provide a contingency

                                       28
<PAGE>

reserve.  The contingency  reserve has the effect of reducing  statutory surplus
and restricting  dividends and other  distributions by Triad. As a result of the
deficit in statutory  earned  surplus  resulting  from the  contingency  reserve
requirements applicable to Triad under the insurance laws of Illinois, Triad may
not presently pay cash dividends to the Company.

     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 may also be considered.

     Triad is subject to examination of its affairs by the insurance departments
of each of the states in which it is licensed to transact business. The Illinois
Insurance Director  periodically  conducts a financial  examination of insurance
companies domiciled in Illinois. The most recent examination of Triad was issued
by the Illinois Insurance Department on September 6, 1995 and covered the period
January 1, 1991 through December 31, 1994. No material recommendations were made
as a result of this examination.

     TGAC was  organized  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 described above. To date
the Illinois Insurance Director has not conducted or scheduled an examination of
TGAC.

     A number of states  generally  limit the amount of insurance risk which may
be written by a private  mortgage  insurer to  twenty-five  times the  insurer's
total policyholders'  reserves.  Freddie Mac and Fannie Mae also limit a private
mortgage  insurer's  risk in force to  twenty-five  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

                                       29
<PAGE>

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 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/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, Freddie Mac and Fannie
Mae impose  requirements on private mortgage insurers in order for such insurers
to be eligible to insure  loans sold to such  agencies.  Freddie  Mac's  current
eligibility  requirements  impose  limitations  on the  type  of  risk  insured,
standards for the 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. Fannie Mae also has
eligibility requirements, although such requirements are not published. Triad is
an approved  mortgage  insurer for both Freddie Mac and Fannie Mae and meets all
eligibility requirements.

     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  claims-paying
ability  rating  of at least  "AA-"  from  S&P,  Fitch,  or Duff &  Phelps  or a
financial strength 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 claims-paying  ability rating of "AA" from S&P, Fitch,  and
Duff & Phelps. These ratings meet the eligibility requirements of Fannie Mae and
Freddie Mac. S&P, Fitch and Duff & Phelps include TGAC  operations and financial
position with those of Triad in rating Triad's claims-paying ability.

                                       30
<PAGE>

INDIRECT REGULATION

     The  Company,  Triad  and  TGAC  are also  indirectly,  but  significantly,
impacted by regulations  affecting purchasers of mortgage loans, such as Freddie
Mac and Fannie Mae, and regulations affecting  governmental insurers such as the
FHA as well as 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 cost to be financed by loans  insured by FHA, a significant
increase  from the previous 57% limit.  Also, in April 1994,  the  Department of
Housing and urban  Development  ("HUD") reduced the initial premium  (payable at
loan  origination)  for FHA insurance from 3.0% to 2.25%.  Effective  January 1,
1997, the maximum individual loan amount that the FHA could insure was increased
from $155,250 to $160,950.  The maximum individual loan amount the VA can insure
presently is $203,150. Legislation that increases the number of persons eligible
for FHA or VA mortgages could have an adverse effect on the Company's ability to
compete with the FHA or VA.

     In 1995,  Fannie Mae and Freddie Mac each  introduced  their own  automated
underwriting  system to be used by mortgage  originators  selling  mortgages  to
them. These systems,  which are provided as a service to the Company's  contract
underwriting  customers,  streamline the mortgage process and reduce costs. As a
result  of the  increased  acceptance  of these  products  in 1996 and for other
reasons,  the process by which mortgage originators sell loans to Fannie Mae and
Freddie Mac is  becoming  increasingly  automated,  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.

     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 of 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.

                                       31
<PAGE>

     Legislation  currently is being  considered in the Senate and House banking
committees  regarding  the  cancellation  of private  mortgage  insurance.  Such
legislation would require mortgage  servicers to inform consumers of their right
to cancel their private  mortgage  insurance once the home owner has achieved 20
percent equity in their home.  Among other options being proposed  regarding the
cancellation  of  mortgage  insurance  are  automatic  cancellation  of  private
mortgage insurance once the prescribed equity level of 20% has been achieved and
automatic  cancellation of private mortgage  insurance half-way through the term
of the loan.  The Company  does not expect to lose a  significant  amount of its
insurance in force if such proposals are adopted.  The Company  cannot  predict,
however, the financial burden associated with borrower notification or automatic
termination if any of the related costs are delegated to mortgage insurers.




                                       32
<PAGE>

EMPLOYEES

     As of December 31, 1996,  the Company  employed 105 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                43
                                 the Company and Triad

Darryl W. Thompson               President, Chief Executive              56
                                 Officer and Director of the
                                 Company and Triad

David W. Whitehurst              Executive Vice President,               47
                                 Chief Financial Officer,
                                 Treasurer and Director of the
                                 Company; Vice President
                                 and Director of Triad

John H. Williams                 Executive Vice President and            49
                                 Director of Triad

Ron D. Kessinger                 Executive Vice President and            42
                                 Director of Triad

Earl F. Wall                     Vice President, Secretary and           39
                                 General Counsel of the
                                 Company and Triad

Henry B. Freeman                 Vice President and Director             47
                                 of Triad

Michael R. Oswalt                Vice President and Controller,         35
                                 and Principal Accounting Officer
                                 of the Company and Triad

                                       33
<PAGE>

     WILLIAM T.  RATLIFF,  III has 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.  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 1995.  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  trained  and  worked  as an  educator,
counselor and organizational consultant.

     DARRYL W. THOMPSON has 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.

     DAVID W.  WHITEHURST  has been Executive Vice  President,  Chief  Financial
Officer,  Treasurer  and a Director  of the Company  since  1993,  and served as
Secretary of the Company from 1993 until 1996.  Mr.  Whitehurst  has also been a
Vice President and Director of Triad since 1989, Executive Vice President of CIC
since 1995 (Vice President from 1990 to 1995),  was Chief  Financial  Officer of
CIC from 1990 through  1995,  was  Executive  Vice  President of Southwide  Life
Insurance  Corp. from 1992 until 1996 and has been a director of New South since
1989. Since January 1997, Mr. Whitehurst has been the President, Treasurer and a
Director  of  Southland  National  Insurance  Corp.  and its  subsidiaries.  Mr.
Whitehurst  joined  CML in 1989  and  served  as Vice  President  of CML and its
affiliates  until 1992,  when he began  devoting  all of his time to CIC and its
affiliates. Mr. Whitehurst is a certified public accountant.

     JOHN H. WILLIAMS has been  Executive Vice President and a Director of Triad
since its  inception in 1987.  From 1986 to 1987,  Mr.  Williams was employed by
Triad Life Insurance  Company to develop and organize Triad.  From 1978 to 1985,
Mr.  Williams was employed by MGIC,  most recently  serving as Vice President of
Secondary Market Trading.

     RON D. KESSINGER has been Executive Vice President of Insurance  Operations
of Triad since June 1996 and 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 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.

                                       34
<PAGE>




     EARL F. WALL has been Vice  President  and  General  Counsel of Triad since
January 1996 and Secretary  since June 1996.  Mr. Wall has been Vice  President,
Secretary and General  Counsel of the Company since September 1996. 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.

     HENRY B. FREEMAN has been Vice President of Risk  Management of Triad since
its  inception  in 1987.  From 1981 to 1987,  Mr.  Freeman was  employed by Home
Guaranty  Insurance  Corporation,  where he  performed  underwriting  and claims
management services.

     MICHAEL R. OSWALT has been Vice  President  and  Controller  of the Company
since March 1994, Vice President of Triad since December 1994, and Controller of
Triad  since June 1996.  Mr.  Oswalt  previously  served as Vice  President  and
Controller of CIC and Southwide  Life Insurance  Corp.  from February 1994 until
June 1996.  From  January  1993 to February  1994,  Mr.  Oswalt was  employed by
Complete Health Services,  Inc. where he performed internal audit services. From
1991 to 1993, Mr. Oswalt was employed by Arthur  Andersen & Co. Prior to joining
Arthur Andersen & Co., Mr. Oswalt was employed by Deloitte & Touche from 1988 to
1991. Mr. Oswalt is a certified public accountant.

     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
six underwriting offices located throughout the country comprising approximately
27,578 square feet under leases expiring between 1997 and 1999 and which require
annual lease payments of $435,295 in 1997. With respect to all  facilities,  the
Company  has,  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.

                                       35
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

     The Company and its  subsidiaries,  in common with other  private  mortgage
insurers,  are subject to litigation  in the normal course of their  businesses.
There  is  no  litigation   currently   pending   against  the  Company  or  its
subsidiaries.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

                                       36
<PAGE>



                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
         AND RELATED STOCKHOLDER MATTERS.

     The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock MarketSM under the symbol "TGIC".  At December 31, 1996,  6,645,361
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  (closing  prices prior to June
28,1996 have been restated to reflect a three-for-two stock split on that date).


                                   1996                     1995
                                   ----                     ----
                             High         Low          High       Low
    First Quarter.........  21 1/3       17 2/3       11          8 1/2
    Second Quarter........  24 1/2       20           14          10 1/2
    Third Quarter.........  29 1/2       23 1/4       17 1/2      13 2/3
    Fourth Quarter........  33 1/2       27 1/4       18 1/3      16 3/4


     As of March 4, 1997 the number of  stockholders of record of Company Common
Stock  was  approximately  163.  In  addition,  there  were an  estimated  2,100
beneficial owners of shares held by brokers and fiduciaries.

     In order to maintain a  risk-to-capital  ratio preferred by rating agencies
and due to regulatory dividend restrictions applicable to Triad, the Company has
no present intention to pay dividends.

                                       37
<PAGE>
ITEM 6, SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                      Year Ended December 31
                                                    --------------------------------------------------------
                                                       1996        1995        1994        1993        1992
                                                       ----        ----        ----        ----        ----
                                                         (Dollars in thousands, except per share amounts)
<S>                                                 <C>         <C>         <C>         <C>         <C>
Income Statement Data (for period ended):
Premiums written:
  Direct ........................................   $ 26,152    $ 18,890    $ 16,172    $ 13,522    $  9,198
  Assumed .......................................         26          34          38         222         215
  Ceded .........................................     (2,217)     (3,924)     (4,034)     (3,926)     (2,599)
                                                   ---------   ---------   ---------   ---------   ---------
                                                    $ 23,961    $ 15,000    $ 12,176    $  9,818    $  6,814
                                                   =========   =========   =========   =========   =========
Earned premiums .................................   $ 24,727    $ 15,478    $ 10,999    $  7,911    $  5,058
Net investment income ...........................      5,447       4,836       4,181       1,897       1,205
Realized investments gains (losses) .............       (162)        173        (163)        (16)          5
Other income ....................................          0           1           5          14          53
                                                   ---------   ---------   ---------   ---------   ---------
  Total revenues ................................     30,012      20,488      15,022       9,806       6,321

Net losses and loss adjustment expenses .........      3,279       2,217       1,262       1,284         847
Amortization of deferred policy acquisition cost.      3,235       2,289       1,726       1,533         852
Other operating expenses (net of acquisition cost
 deferred).......................................      7,259       4,753       3,658       2,371       2,083
                                                   ---------   ---------   ---------   ---------   ---------
Income before income taxes ......................     16,239      11,229       8,376       4,618       2,539
Income Taxes ....................................      5,042       3,470       2,594       1,251         816
                                                   ---------   ---------   ---------   ---------   ---------
Net income ......................................   $ 11,197    $  7,759    $  5,782    $  3,367    $  1,723
                                                   =========   =========   =========   =========   =========
  Primary earnings per share (1).................   $   1.69    $   1.17    $   0.87    $   1.02    $   0.66
  Fully diluted earnings per share (1)...........   $   1.63    $   1.15    $   0.87    $   1.02    $   0.66
                                                   =========   =========   =========   =========   =========
Weighted average common and common share
equivalents outstanding (1)
  Primary .......................................   6,638,927   6,628,409   6,651,482   3,293,349   2,625,000
  Fully diluted .................................   6,888,925   6,753,722   6,653,595   3,293,349   2,625,000

Balance Sheet Data ( at year end):
  Total assets ..................................   $ 112,403   $  99,017   $  86,664   $  78,634   $  30,754
  Total invested assets .........................   $  98,027   $  85,978   $  75,364   $  70,800   $  25,538
  Losses and loss adjustment expenses ...........   $   6,305   $   4,589   $   3,164   $   2,255   $   1,239
  Unearned premiums .............................   $   8,216   $   9,086   $   9,893   $   8,774   $   6,067
  Stockholders' equity ..........................   $  91,680   $  80,441   $  70,108   $  64,726   $  21,410
Statutory Ratios (2):
  Loss ratio ....................................       16.0%       14.3%       11.5%       16.2%       16.8%
  Expense ratio .................................       49.6%       59.1%       61.8%       49.1%       55.2%
                                                    ---------   ---------   ---------   ---------   ---------
  Combined ratio ................................       65.6%       73.4%       73.3%       65.3%       72.0%
                                                    =========   =========   =========   =========   =========
GAAP Ratios:
  Loss ratio ....................................       13.3%       14.3%       11.5%       16.2%       16.8%
  Expense ratio .................................       43.8%       46.9%       44.2%       39.8%       43.1%
                                                    ---------   ---------   ---------   ---------   ---------
  Combined ratio ................................       57.1%       61.2%       55.7%       56.0%       59.9%
                                                    =========   =========   =========   =========   =========

Other Statutory Data (dollars in millions) (2):
Direct insurance in force .......................   $ 6,556.3   $ 5,080.3   $ 4,111.4   $ 2,967.8   $ 1,966.6
Direct risk in force (gross) ....................   $ 1,515.4   $ 1,090.6   $   814.1   $   569.8   $   378.5
Risk-to-capital .................................      15.8:1      11.1:1       8.9:1       6.5:1      14.0:1

<FN>
(1)Periods  prior to June 28, 1996 have been restated to reflect a three-for-two
stock split on that date.
(2)Based  on  statutory  accounting  practices  and  derived  from  consolidated
statutory financial statements of Triad
</FN>
</TABLE>
                                       38
<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION.


RESULTS OF OPERATIONS

1996 COMPARED TO 1995

     Net income  for 1996  increased  44.3% to $11.2  million  compared  to $7.8
million in 1995. This  improvement is attributable to a 59.8% increase in earned
premiums,  a 12.6% increase in net investment  income, an improved expense ratio
and a continuing low loss ratio.

     Net income per share on a fully diluted basis  increased 41.5% to $1.63 for
1996  compared  to $1.15 per share in 1995.  Operating  earnings  per share on a
fully  diluted  basis were $1.64 for 1996  compared  to $1.13 per share in 1995.
Operating earnings exclude realized investment losses of approximately  $162,000
in 1996 and realized investment gains of approximately $173,000 in 1995.

     New insurance  written was $2.2 billion in 1996 compared to $1.6 billion in
1995, an increase of 36.4%. New insurance written was $557 million in the fourth
quarter  of 1996  compared  to $479  million  in the same  period  of 1995.  The
increase  in new  insurance  written  in 1996  is the  result  of the  continued
penetration  of Triad's  products in the  marketplace  coupled  with a favorable
interest rate environment for much of 1996, which caused both refinance and home
buying activities to remain strong for the year.  Refinance  activity  accounted
for 16.9% of new insurance written in 1996 compared to 9.3% for 1995.

     According to industry data,  Triad's share of total new mortgage  insurance
written increased to 1.7% (1.9% in the fourth quarter) for 1996 compared to 1.5%
for all of  1995.  This  increase  is  primarily  the  result  of the  Company's
geographic  expansion into new  territories and the success of a marketing focus
on larger, national mortgage lenders.

     Total direct  premiums  written were $26.2 million for 1996, an increase of
38.4%  compared to $18.9 million in 1995.  Contributing  to this growth were the
strong mortgage market, the Company's  continued expansion into new territories,
the secondary  mortgage market  requirements  for deeper coverages and increased
renewal premium due to the growth of our monthly premium product. Offsetting the
growth  somewhat was the decrease in Triad's  persistency  rate,  reflecting the
1996  increase  in  refinancing  activity.  Persistency,  or the  percentage  of
insurance  remaining in force from one year prior, was 85.3% in 1996 compared to
86.4% in 1995.

     Sales under the Company's  monthly premium plan  represented  approximately
93.0% of new insurance  written in 1996  compared to 82.6% in 1995.  The monthly
product  spreads the  collection  of premiums  over 12 equal  monthly  payments,
rather than one payment received in advance as on annual premium plans. However,
renewal premiums on monthly premium plans are greater than the renewal premiums

                                       39

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


on a comparable  annual  premium plan.  While in the short term monthly  premium
plans  decrease the level of written  premium,  management  expects the ultimate
level of written premium on monthly premium plans to exceed the level of written
premium  produced by  comparable  annual  premium  plans as long as  persistency
remains  strong.  In 1996,  Triad  introduced a variation of the monthly premium
plan in which the borrower  does not pay any mortgage  insurance  premium at the
time of the  mortgage  loan  closing.  This  deferred  monthly  premium  product
decreases the amount of cash  required from the borrower at closing,  therefore,
making home ownership more affordable.  Management  believes that the percentage
of new insurance  written under monthly premium plans will remain at or slightly
above the current level.

     Net premiums written  increased by 59.7% to $24.0 million for 1996 compared
to $15.0 million for 1995.  Earned premiums  increased 59.8% to $24.7 million in
1996.  This  increase  in written  and earned  premium  is  attributable  to the
increase in new insurance written,  continued strong persistency and a change in
the Company's reinsurance program for 1996.

     Effective  January  1,  1996,  the  Company   eliminated  its  quota  share
reinsurance on new business,  recaptured substantial portions of its quota share
coverage on renewal  business and secured excess of loss  reinsurance to protect
against  catastrophic  losses.  These changes  reduced the Company's quota share
cede rate to 5.3% of direct  premium  written in 1996 compared to 20.8% in 1995.
Premiums ceded under the Company's quota share  reinsurance  agreements for 1996
totaled $1.4 million  compared to $3.9 million in 1995. Had the Company retained
its quota share  reinsurance  in 1996 and  maintained a cede rate  comparable to
1995, the Company's net written premium would have increased approximately 38.0%
rather than the 59.7% noted above.

     Total direct  insurance in force  reached $6.6 billion at December 31, 1996
compared to $5.1 billion the previous year, an increase of 29.1%.

     In keeping with the Company's  established  risk strategy,  the Company has
not  aggressively  solicited  mortgage  insurance under lender  guidelines which
allow relaxed credit standards, reduced borrower-paid down payment (e.g. 97% LTV
loans) and expanded underwriting ratios. These products, especially popular with
borrowers with weak credit  histories,  have  generally  resulted in undesirable
loss ratios. Management believes that successful long term home ownership is not
necessarily  being  promoted by many of these  programs.  The  Company  does not
routinely delegate the underwriting of its 97% LTV product.

     The Company's delegated  underwriting program accounted for 38.0% (37.4% in
the fourth quarter) of commitments  received in 1996 compared to 25.1% (33.7% in
the fourth  quarter)  in 1995.  This  program has allowed the Company to serve a
greater number of the larger, well established  mortgage  originators.  Mortgage
originators  who participate in the Company's  delegated  program are allowed to
issue a  certificate  of insurance on the loans they  underwrite but must follow


                                       40

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED

strict  criteria  regarding  property  type and minimum  credit  standards.  The
Company  also  performs  extensive  post-issuance  quality  control  reviews  of
certificates issued through each approved mortgage originator under the program.

     In the fourth  quarter of 1996,  Triad  introduced a new product in which a
certificate  of insurance is issued based on a borrower's  credit  score.  Under
this new product, if a borrower has a predetermined  minimum credit score, Triad
will issue a certificate of insurance  without the usual  underwriting  process.
Management expects the percentage of commitments processed through the Company's
delegated  underwriting program to decrease slightly in 1997 as a result of this
new product.

     Net investment income for 1996 was $5.4 million, a 12.6% increase over $4.8
million in 1995.  This  increase  resulted  from the growth in average  invested
assets of $10.3  million to $89.6  million at December  31,  1996.  The yield on
average  invested  assets was 6.1% for both 1996 and 1995. The  portfolio's tax-
equivalent  yield was 7.7% in 1996 and 7.5% in 1995.  This  yield  reflects  the
Company's investment strategy to emphasize tax-preferred  securities which yield
lower pre-tax rates than similar fully-taxable securities.  Approximately 53% or
$46 million of the Company's  fixed maturity  portfolio at December 31, 1996 was
comprised of state and municipal tax-preferred securities.

     In 1996,  the Company  reported  realized  investment  losses of  $162,000,
resulting  primarily from closing  transactions in connection with the Company's
program of selling  short-term  covered  calls.  This  compares  to  $173,000 of
investment gains in 1995 realized primarily from the sale of equity securities.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 13.3% for 1996 compared to 14.3% for 1995.  The loss ratio was 14.3% for the
1996 fourth quarter compared to 18.3% for the same period of 1995. The favorable
loss ratio  reflects  the low level of  delinquencies  compared to the number of
insured loans and the fact that 71% of the insurance in force was  originated in
the last 36 months.  Management believes, based upon its experience and industry
data,  that  claims  incidence  for it and other  private  mortgage  insurers is
generally  highest in the third  through  sixth  years  after loan  origination.
Although the claims  experience on new insurance  written in previous  years has
been quite  favorable,  the Company expects its incurred losses to increase as a
greater amount of its insurance in force reaches its  anticipated  highest claim
frequency  years.  Due to the inherent  uncertainty  of future  premium  levels,
losses,  economic  conditions  and other  factors  that impact  earnings,  it is
impossible  to predict  with any degree of  certainty  the impact of such higher
claims frequencies on future earnings.

     During periods of  significant  refinancing  activity,  it is possible that
policies on stronger  loans may lapse and that weaker loans may remain in force,


                                       41

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


thus  potentially  increasing  the loss  ratio on  older  business.  Substantial
increases  in  production  of new business  during these  periods can offset the
increased loss ratio on the older business.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased  by 47.9% in 1996 to $3.3  million  compared to $2.2  million in 1995,
reflecting  the increase in the  Company's  insurance in force and the resulting
recognition  of a greater amount of insurance in force reaching its higher claim
frequency  years.  A decrease in  reinsurance  recoveries,  attributable  to the
Company's restructuring of its reinsurance program for 1996, also contributed to
the increase in net losses and loss adjustment expenses.

     Amortization  of deferred  policy  acquisition  costs increased by 41.3% to
$3.2  million  in 1996  compared  to $2.3  million  for 1995.  The  increase  in
amortization  reflects a growing balance of deferred policy acquisition costs to
amortize as the Company builds its total insurance in force.

     Other  operating  expenses  increased to $7.3 million for 1996  compared to
$4.8 million for 1995.  This increase in expenses is primarily  attributable  to
personnel, facilities and equipment costs required to support Triad's geographic
expansion  and  increased   production   coupled  with  a  reduction  in  ceding
commissions  earned  following  changes in the  Company's  reinsurance  program.
Ceding  commissions  paid to the  Company are  reported as a reduction  in other
operating expenses and decreased to $572,000 in 1996 compared to $1.5 million in
1995.

     The Company's expense ratio (ratio of underwriting expenses to net premiums
written)  for 1996 was 43.8%  compared to 46.9% for 1995.  Contributing  to this
improvement was the higher level of written premiums for 1996 offset somewhat by
the increase in expenses.

     The  effective  tax rate for all of 1996 was  31.0%  compared  to 30.9% for
1995. In 1996, the Company began a phase-in of the 35% Federal  statutory income
tax rate  applicable to companies  with annual taxable income above $10 million.
Management expects the Company's  effective tax rate to remain about the same or
increase  slightly  as long as yields from new funds  invested in  tax-preferred
securities remain favorable in relation to fully taxable securities.


1995 COMPARED TO 1994

     Net  income  for 1995  increased  34.2% to $7.8  million  compared  to $5.8
million in 1994. This improvement was attributable to a 40.7% increase in earned
premiums, a 15.7% increase in net investment income, a continuing low loss ratio
and $173,000 in realized  investment gains,  offset by a slightly higher expense
ratio in 1995.


                                       42

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


     Net income per share on a fully diluted basis was $1.15 for 1995,  compared
to $0.87 per share in 1994.  The  Company's  operating  earnings  per share on a
fully diluted basis were $1.13 for 1995 and $0.89 for 1994.  Operating  earnings
per share exclude realized  investment  gains of approximately  $173,000 in 1995
and realized investment losses of $163,000 in 1994.

     New  insurance  written  was $1.6  million  for both  1995  and  1994.  New
insurance  written in 1995 was driven by new home  sales as  refinance  activity
declined. Refinance activity accounted for 9.3% of new insurance written in 1995
compared to 14.6% in 1994.

     Total direct  premiums  written were $18.9 million for 1995, an increase of
16.8% over 1994.  Contributing to this growth were the strong  mortgage  market,
the  Company's  expansion  into new  territories,  the  movement by consumers to
higher  premium   products  in  early  1995,  the  secondary   mortgage   market
requirements for deeper coverages and Triad's  continued high persistency  rate.
Persistency  improved  to 86.4%  in 1995  compared  to  85.8% in 1994.  Improved
persistency  combined with higher  production in recent years contributed to the
increase in renewal premiums in 1995.

     The rising interest rates experienced in the first half of 1995 resulted in
increased  sales of higher  premium  products,  such as coverages for adjustable
rate mortgages,  higher loan-to-value  mortgages and longer term mortgages.  The
result was a greater  level of written  premium for the amount of new  insurance
written,  partially  offset by the effects of  increasing  production of monthly
premium plans.  Sales under the Company's monthly premium plan represented 82.6%
of new insurance written in 1995 compared to 34.8% in 1994.

     Premiums ceded under the Company's quota share  reinsurance  agreements for
1995 totaled $3.9 million,  representing a slight  decrease from $4.0 million in
1994. The ratio of premiums ceded to total direct written premiums  decreased to
20.8% in 1995  compared  to 24.9% in 1994.  The  Company  ceded only 9.9% of new
insurance written in 1995 compared to 20.9% of 1994 new insurance written.

     Net premiums written  increased by 23.2% to $15.0 million for 1995 compared
to $12.2 million for 1994. Continued  improvement in persistency,  the Company's
continued  geographic expansion and a reduction in the reinsurance cede rate all
contributed  to this  growth,  which was  offset  somewhat  by the  increase  in
production of the Company's  monthly  premium plan.  Earned  premiums  increased
40.7% to $15.5  million in 1995.  Total direct  insurance in force  reached $5.1
billion at December  31, 1995  compared to $4.1 billion the  previous  year,  an
increase of 23.6%.

     Net investment income for 1995 was $4.8 million, a 15.7% increase over $4.2
million in 1994. This increase  resulted from average invested assets increasing
by $6.1  million to $79.3  million at December  31,  1995.  The yield on average
invested assets  increased to 6.1% for 1995 compared to 5.7% for 1994 reflecting
the Company's investments in higher yielding intermediate term investments.

                                       43

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED



     In 1995,  the  Company  reported  realized  investment  gains  of  $173,000
primarily  from the sale of equity  securities.  This  compares  to  $163,000 of
realized  investment  losses  in  1994  resulting  primarily  from  the  sale of
approximately $7 million in lower yielding short-term U.S. Treasury securities.

     The  Company's  loss ratio was 14.3% for 1995  compared  to 11.5% for 1994.
While the  Company  experienced  an  increase  in its loss  ratio,  paid  losses
continue to remain low at 6.3% and 5.5% for the years  ending  December 31, 1995
and 1994,  respectively.  The  favorable  loss ratio  reflects  the low level of
delinquencies  compared to the number of insured  loans and the fact that 82% of
the insurance in force was originated in 1993, 1994 and 1995.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased  by 75.7% in 1995 to $2.2  million  compared to $1.3  million in 1994.
This increase in 1995 reflects the increase in the Company's  insurance in force
and the resulting recognition of a greater amount of insurance in force reaching
its higher claim frequency years.

     Amortization  of deferred  policy  acquisition  costs increased by 32.6% to
$2.3  million  in 1995  compared  to $1.7  million  for 1994.  The  increase  in
amortization  reflects a growing balance of deferred policy acquisition costs to
amortize as the Company builds its total insurance in force.

     Other  operating   expenses,   before  deducting   ceding   commissions  of
approximately $1.5 million for both 1995 and 1994, increased to $6.3 million for
1995 compared to $5.1 million for 1994.  This increase in expenses was primarily
attributable to costs incurred in expanding into new territories, an increase in
the number of sales and support personnel, and growth in renewal commissions not
deferred.

     The expense  ratio for 1995 was 46.9%  compared to 44.2% for 1994.  Factors
contributing  to this increase  include the growth in costs  associated with the
Company's  expansion  into new  territories,  an increase in  personnel  and the
effects of the monthly premium product in 1995.

     The effective tax rate for 1995 was 30.9%  compared to 31.0% in 1994.  This
decrease reflected an increasing investment in tax-preferred securities.


LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  sources of operating  funds  consist  primarily of premiums
written and  investment  income.  Operating  funds are applied  primarily to the
payment of claims and expenses.

                                       44

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


     The Company generated positive cash flow from operating activities for 1996
and 1995 of $12.5 and $6.5 million,  respectively.  The significant  increase in
the Company's operating cash flow is attributable to growth in insurance written
and the restructuring of its reinsurance agreements effective January 1, 1996.

     The  Company's  business  does not routinely  require  significant  capital
expenditures. 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 parent  company's cash flow is dependent on cash dividends and revenues
from  management  fees from Triad.  The insurance  laws of the State of Illinois
impose certain  restrictions on dividends from Triad. These restrictions,  based
on statutory  accounting  practices,  include requirements that dividends may be
paid only out of statutory earned surplus and limit the amount of dividends that
may be paid without prior approval of the Illinois Insurance Department. Because
of Triad's rapid growth in written  premiums and the  requirement to add amounts
to the statutory  contingency  reserve equal to at least 50% of earned  premiums
(which reduces statutory earned surplus),  Triad reported a deficit in statutory
earned  surplus  of $1.3  and $2.5  million  at  December  31,  1996  and  1995,
respectively.  Accordingly,  Triad may not presently  pay cash  dividends to the
parent company. The Illinois Insurance Department permits expenses of the parent
company to be charged to Triad in the form of management fees.

     Consolidated  invested  assets  were $98.0  million at December  31,  1996,
including  a total of $94.7  million  in fixed  maturity  securities  and equity
securities  classified as  available-for-sale.  Net unrealized  investment gains
totaled $2.4 million at December 31, 1996,  $1.2 million on both fixed  maturity
securities and equity securities.

     Approximately  18.6% or  $16.2  million  of the  Company's  fixed  maturity
portfolio  at December  31, 1996 was  composed  of  mortgage-backed  securities,
substantially all of which are guaranteed by U.S. Government  Agencies.  Certain
mortgage-backed securities are subject to significant prepayment risk due to the
fact that, in periods of declining interest rates,  mortgages may be repaid more
rapidly  than  scheduled as borrowers  refinance  higher rate  mortgages to take
advantage of lower rates. As a result, holders of mortgage-backed securities may
receive large  prepayments on their investments which must be reinvested at then
current rates.

     Included in the  Company's  fixed  maturity  portfolio  of mortgage  backed
securities   at  December  31,  1996  was  $5.4  million   invested  in  planned
amortization class ("PAC")  collateralized  mortgage obligations ("CMOs").  PACs
are  tranches of CMOs  specifically  designed to amortize in a more  predictable
manner and to protect against prepayments as interest rates decline. In periods

                                       45

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


of  declining  interest  rates,  prepayments  are first  applied to the  non-PAC
tranches of the CMO, creating improved call protection for the PAC tranche. Only
after all non-PAC tranches have been paid off are prepayments applied to the PAC
tranche. In periods of increasing interest rates,  prepayments are first applied
to the PAC tranche,  thus reducing  extension  risk for PACs. As a result,  PACs
have a more stable cash flow than most other  mortgage  securities  because they
have better call  protection  and less extension  risk.  All principal  balances
invested  in CMOs  by the  Company  are  U.S.  Government  agency  sponsored  or
guaranteed.

     The Company's loss reserves  increased to $6.3 million at December 31, 1996
compared to $4.6  million at  December  31,  1995.  This growth is the result of
increases in new  insurance  written and the maturing of the  Company's  risk in
force.  Consistent with industry practices,  the Company does not establish loss
reserves for future  claims on insured loans which are not currently in default.
The  Company's  reserves per  delinquent  loan were $23,000 at December 31, 1996
compared to $22,000 at December 31, 1995. The Company's  delinquency  ratio, the
ratio of delinquent  insured loans to total insured loans, was 0.44% at December
31, 1996 compared to 0.41% at December 31, 1995.

     The Company's unearned premium reserve of $8.2 million at December 31, 1996
decreased from $9.1 million at December 31, 1995.  This decline is  attributable
to the increased production of the monthly premium product which produces little
unearned  premium  compared to annual and single  premium  products.  Also,  the
Company  experienced a higher level of refinance  activity in 1996 whereby older
annual premium policies were replaced by monthly premium policies resulting in a
decline in the unearned premium reserve.

     Total stockholders'  equity increased to $91.7 million at December 31, 1996
from $80.4 million at December 31, 1995. This increase  resulted from net income
of $11.2 million and from additional  paid-in capital of $205,000 resulting from
the exercise of employee stock options.  The increase was partially  offset by a
decrease  in  net   unrealized   gains  on   invested   assets   classified   as
available-for-sale of $163,000 (net of income tax).

     Triad's total statutory  policyholders'  surplus increased to $57.1 million
at December 31, 1996 from $56.0  million at December  31,  1995,  an increase of
$1.1 million.  This increase is primarily  derived from  statutory net income of
$13.4 million and unrealized gains on invested assets of $1.0 million, offset by
an increase in the  contingency  reserve of $12.8  million.  Triad's  deficit in
statutory  earned  surplus was $1.3 million at December 31, 1996,  compared to a
deficit of $2.5 million at December  31, 1995,  reflecting a growth in statutory
net income greater than the increase in the contingency  reserve. The balance in
the contingency reserve was $35.1 million at December 31, 1996 compared to $22.3
million at December 31, 1995.



                                       46

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


     The Company  currently has no plans for significant  capital  expenditures.
However,  Triad  continues  to upgrade  and  enhance  its  computer  systems and
technological capabilities.

     As part of the Company's  efforts to increase its focus on larger  national
lenders,  Triad is currently  developing a mortgage insurance program that would
enable  the  Company  to better  meet the needs and  requirements  of the larger
national  lenders.  The program,  which will be marketed  beginning in the first
quarter of 1997,  increases the lender's share of the risk of loss on an insured
book of business and provides for a fee to the lender for this  increased  risk.
While the impact of this product to Triad cannot be  predicted  with  certainty,
management believes that successful  marketing and acceptance of this product by
national lenders could provide  significant  growth  opportunities  for Triad in
1997. Loans insured under this program must meet Triad's underwriting and credit
standards.

     The  Company's  ability to write  insurance  depends on the adequacy of its
capital in relation to risk in force.  A  significant  reduction of capital or a
significant  increase  in  risk  may  impair  the  Company's  ability  to  write
additional insurance. Freddie Mac and Fannie Mae require the Company to maintain
a  risk-to-capital  ratio of no more  than  25-to-1.  A number  of  states  also
generally limit the Company's  risk-to-capital  ratio to 25-to-1. As of December
31, 1996 Triad's  risk-to-capital  ratio was  15.8-to-1,  and as of December 31,
1995 was  11.1-to-1,  as compared to  20.3-to-1  for the  industry as a whole at
December 31, 1995, the latest industry data available.  The 1996 increase is due
to increased  production  and the  elimination  of  substantial  portions of the
Company's quota share reinsurance as of January 1, 1996. Management believes its
risk-to-capital ratio can increase up to the current  industry  level without an
adverse effect on its claims-paying ability ratings.

     In January  1997,  Standard & Poor's  Corporation  ("S&P")  raised  Triad's
claims-paying ability rating to "AA" from "AA-".


NEW ACCOUNTING STANDARDS

     In  October  1995,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 123, "Accounting for Stock-Based Compensation",  which provides an
alternative to APB Opinion No. 25,  "Accounting  for Stock Issued to Employees",
in accounting for stock-based  compensation  issued to employees.  The statement
encourages  but does not require the  recognition  of  compensation  expense for
stock-based  awards based on the award's  fair value.  The Company has chosen to
continue to account for  stock-based  awards in accordance  with APB Opinion No.
25.


                                       47

<PAGE>

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


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  from their  current  levels;  housing
transactions  and mortgage  issuance  may  decrease  for many reasons  including
changes in interest rates or economic conditions; the Company's market share may
change as a result of changes in underwriting  criteria or competitive  products
or rates;  the amount of new  insurance  written could be 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; the Company's  performance may be impacted by changes in the performance of
the financial  markets and general economic  conditions.  Economic  downturns in
regions where Triad's risk is more concentrated  could have a particular adverse
affect on Triad's financial condition and loss development.  Accordingly, actual
results  may differ  from  those set forth in the  forward  looking  statements.
Attention is also directed to other risk factors set forth in documents filed by
the Company with the Securities and Exchange Commission.


                                       48

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH
         ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information  regarding  directors and nominees for directors of the Company
is included in the  Company's  Proxy  Statement  for the 1997 Annual  Meeting of
Stockholders, and is hereby incorporated by reference.

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

ITEM 11. EXECUTIVE COMPENSATION.

     This  information is included in the Company's Proxy Statement for the 1997
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 the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, and is hereby incorporated by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     This  information is included in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, and is hereby incorporated by reference.

                                       49
<PAGE>

                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT
          SCHEDULES, AND REPORTS ON FORM 8-K.


         (a) (1) and (2) The response to this portion of Item 14 is submitted as
             a separate section of this report.

         (a)(3) Listing of  Exhibits--  The  response to this portion of Item 14
             is submitted as a separate section of this report.

         (b) Reports on Form 8-K.

                 No  reports on form 8-K were filed  during  the  quarter  ended
                 December 31, 1996.

         (c) Exhibits-- The response to this portion of Item 14 is submitted as
             a separate section of this report.

         (d) Financial  Statement  Schedules--  The response to this portion of
             Item 14 is submitted as a separated section of this report.

                                       50
<PAGE>



                                   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 20th day of
March, 1997.

                                       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 20th day of March,  1997 by the  following
persons on behalf of the Registrant in the capacities indicated.

                                               SIGNATURE TITLE

/s/ William T. Ratliff, III
---------------------------
William T. Ratliff, III        Chairman of the Board

/s/ Darryl W. Thompson
---------------------------
Darryl W. Thompson             President, Chief Executive Officer and Director

/s/ David W. Whitehurst
---------------------------
David W. Whitehurst            Executive Vice President, Chief Financial
                               Officer, Treasurer and Director

/s/ Michael R. Oswalt
---------------------------
Michael R. Oswalt              Vice President and Controller, Principal
                               Accounting Officer

/s/ Robert T. David
---------------------------
Robert T. David                Director

/s/ Raymond H. Elliott
---------------------------
Raymond H. Elliott             Director

                                       51
<PAGE>


                           ANNUAL REPORT ON FORM 10-K

                 ITEM 8, ITEM 14(a)(1) and (2), (3), (c) and (d)

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                INDEX TO EXHIBITS

                              FINANCIAL STATEMENTS

                          FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          YEAR ENDED DECEMBER 31, 1996

                               TRIAD GUARANTY INC.

                          WINSTON-SALEM, NORTH CAROLINA











                                       52
<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                              (Item 14(a) 1 and 2)


CONSOLIDATED FINANCIAL STATEMENTS                                       PAGE
---------------------------------                                       ----
Report of Independent Auditors ......................................    56

Consolidated Balance Sheets at December 31, 1996 and 1995............  57 - 58

Consolidated Statements of Income for each of the three
   years in the period ended December 31, 1996.......................    59

Consolidated Statements of Changes in Stockholders'
   Equity for each of the three years in the period
   ended December 31, 1996...........................................    60

Consolidated Statements  of Cash Flows for each
   of the three  years in the  period ended December 31, 1996........    61

Notes to Consolidated Financial Statements...........................  62 - 76


FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedules  at and for each of the three years in the period  ended  December 31,
1996

   Schedule I - Summary of investments - other than investments
       in related parties............................................    77

   Schedule II - Condensed financial information of Registrant.......  78 - 81

   Schedule IV - Reinsurance.........................................    82


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.




                                       53
<PAGE>

                                INDEX TO EXHIBITS
                                 (ITEM 14(A) 3)


EXHIBIT
NUMBER     DESCRIPTION OF EXHIBIT
------     ----------------------
   3.1     Certificate of Incorporation of the Registrant (1) (Exhibit 3(a))

   3.2     By-Laws of the Registrant (1) (Exhibit 3(b))

   4.1     Form of Common Stock certificate (1) (Exhibit 4(a))

  10.1     1993 Long-Term Stock Incentive Plan (1)(3) (Exhibit 10(a))

  10.2     Proportional Reinsurance Agreement between Triad Guaranty Insurance
           Corporation and PMI Mortgage Insurance Co. (1) (Exhibit 10(b))

  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. (1) (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)

  10.8     Employment Agreement between the Registrant and John H. Williams
           (2)(3) (Exhibit 10.8)

  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)

  10.13    Proportional Reinsurance Agreement between Triad Guaranty Insurance
           Corporation and PMI Mortgage Insurance Co. (4) (Exhibit 10.13)

  10.14    Quota Share Reinsurance Agreement between Triad Guaranty Insurance
           Corporation and Axa Reassurance SA (4) (Exhibit 10.14)

  10.15    Excess of Loss Reinsurance Agreement between Triad Guaranty Insurance
           Corporation and Aon Re Inc. (5) (Exhibit 10.15)

* 10.16    Economic Value Added Incentive Bonus Program (Senior Management)
           (Exhibit 10.16)

                                       54
<PAGE>


* 10.17    Amendment to Employment Agreement between the Registrant and Darryl
           W. Thompson (3) (Exhibit 10.17)

* 10.18    Amendment to Employment Agreement between the Registrant and John H.
           Williams (3)(Exhibit 10.18)

* 10.19    Amendment to Employment Agreement between the Registrant and Henry B.
           Freeman (3)(Exhibit 10.19)

* 10.20    Amendment to Employment Agreement between the Registrant and Ron D.
           Kessinger (3)(Exhibit 10.20)

* 11.1     Statement Re Computation of Net Income per share (Exhibit 11.1)

* 21.1     Subsidiaries of the Registrant (Exhibit 21.1)

* 23.1     Consent of Ernst & Young LLP (Exhibit 23.1)

* 27.1     Financial Data Schedule (Exhibit 27.1)


-----------------

*    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 1994 Form 10-K.

(5)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1995 Form 10-K.




                                       55
<PAGE>
                         Report of Independent Auditors


Board of Directors
Triad Guaranty Inc.


We have audited the accompanying  consolidated  balance sheets of Triad Guaranty
Inc.  and  subsidiaries  as of  December  31,  1996 and  1995,  and the  related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for each of the three years in the period ended  December 31, 1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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.  and  subsidiaries  at  December  31, 1996 and 1995,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1996 in  conformity  with  generally  accepted
accounting principles.

                                                  Ernst & Young LLP


January 21, 1997

                                       56
<PAGE>


                               Triad Guaranty Inc.

                           Consolidated Balance Sheets



                                                             December 31
                                                          1996          1995
                                                          ----          ----

Assets
Invested assets:
 Securities available-for-sale, at fair value:
   Fixed maturities (amortized cost: 1996-
     $86,069,753; 1995-$73,704,771) ..............   $ 87,229,855   $ 76,093,199
   Equity securities (cost: 1996-$6,267,076;
     1995-$5,392,760).............................      7,494,817      5,659,026
   Short-term investments ........................      3,302,125      4,226,207
                                                     ------------   ------------
                                                       98,026,797     85,978,432

Cash .............................................        360,586        199,241
Accrued investment income ........................      1,126,642        895,657
Deferred policy acquisition costs ................     10,198,397      7,576,684
Property and equipment, at cost less accumulated
   depreciation (1996-$956,538; 1995-$562,485) ...      1,705,389      1,340,052
Prepaid reinsurance premiums .....................        300,200      2,039,240
Reinsurance recoverable ..........................        153,274        271,106
Other assets .....................................        531,238        716,837
                                                     ------------   ------------
Total assets .....................................   $112,402,523   $ 99,017,249
                                                     ============   ============

                                       57
<PAGE>

                                                               December 31
                                                            1996         1995
                                                            ----         ----

Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses .................. $  6,305,397  $ 4,589,103
  Unearned premiums ..................................    8,216,478    9,086,274
  Amounts payable to reinsurer .......................        1,993       71,437
  Current taxes payable ..............................        1,596       39,931
  Deferred income taxes ..............................    4,276,081    2,708,572
  Unearned ceding commission .........................       80,573      620,115
  Accrued expenses and other liabilities .............    1,840,369    1,460,475
                                                        -----------  -----------
Total liabilities ....................................   20,722,487   18,575,907

Commitments and contingencies (Note 5 and 7)

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
   10,000,000 shares, 6,645,361 issued and
   outstanding shares at December 31, 1996 and
   4,418,939 at December 31, 1995 ....................       66,453       44,189
    Additional paid-in capital .......................   59,346,832   59,141,808
 Unrealized gain on available-for-sale securities, net
   of income tax liability of $823,287 at December 31,
   1996 and $889,387 at December 31, 1995 ............    1,568,800    1,732,209
 Retained earnings ...................................   30,697,951   19,523,136
                                                       ------------  -----------
 Total stockholders' equity ..........................   91,680,036   80,441,342
                                                       ------------  -----------
 Total liabilities and stockholders' equity .......... $112,402,523  $99,017,249
                                                       ============  ===========

                            See accompanying notes.


                                       58
<PAGE>



                               Triad Guaranty Inc.

                        Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                 Year ended December 31
                                                          1996           1995            1994
                                                          ----           ----            ----
<S>                                                  <C>             <C>             <C>
Revenue:
    Premiums written:
     Direct ........................................ $ 26,151,650    $ 18,889,933    $ 16,172,354
     Assumed .......................................       26,222          33,891          37,753
     Ceded .........................................   (2,216,417)     (3,923,625)     (4,034,036)
                                                     ------------    ------------    ------------
    Net premiums written ...........................   23,961,455      15,000,199      12,176,071
    Change in unearned premiums ....................      766,286         477,841      (1,177,376)
                                                     ------------    ------------    ------------
Earned premiums ....................................   24,727,741      15,478,040      10,998,695

Net investment income ..............................    5,446,672       4,836,461       4,180,876
Net realized investment (losses) gains .............     (162,385)        172,992        (162,723)
Other income .......................................         --               261           5,111
                                                     ------------    ------------    ------------
                                                       30,012,028      20,487,754      15,021,959
Losses and expenses:
    Losses and loss adjustment expenses ............    3,444,354       2,691,608       1,610,625
    Reinsurance recoveries .........................     (165,224)       (474,822)       (348,602)
                                                     -------------   -------------   ------------
Net losses and loss adjustment expenses ............    3,279,130       2,216,786       1,262,023

Amortization of deferred policy acquisition costs ..    3,234,876       2,289,121       1,725,902
Other operating expenses (net of acquisition
   costs deferred) .................................    7,259,271       4,752,934       3,658,258
                                                     ------------   -------------   -------------
                                                       13,773,277       9,258,841       6,646,183
                                                     ------------   -------------   -------------
Income before income taxes .........................   16,238,751      11,228,913       8,375,776

Income taxes:
   Current .........................................      (37,292)         38,717          15,815
   Deferred ........................................    5,079,077       3,431,304       2,578,098
                                                     -------------   ------------    ------------
                                                        5,041,785       3,470,021       2,593,913
                                                     -------------   ------------    ------------
   Net income ...................................... $ 11,196,966    $  7,758,892    $  5,781,863
                                                     ============    ============    ============


Earnings per common and common equivalent share:
      Primary ...................................... $       1.69    $       1.17    $       0.87
      Fully diluted ................................         1.63            1.15            0.87
                                                     ============    ============    ============
Shares used in computing earnings per common
   and common equivalent share:
      Primary ......................................    6,638,927       6,628,409       6,651,482
      Fully diluted ................................    6,888,925       6,753,722       6,653,595
                                                     ============    ============    ============
</TABLE>
                             See accompanying notes

                                       59
<PAGE>


                               Triad Guaranty Inc.

           Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
                                                                     Unrealized
                                                                     Gain (Loss)
                                                       Additional   on Available-
                                           Common       Paid-In       for-Sale        Retained        Deferred
                                           Stock        Capital      Securities       Earnings      Compensation      Total
                                           -----        -------      ----------       --------      ------------      -----
<S>                                      <C>         <C>             <C>            <C>              <C>          <C>
Balance at December 31, 1993 ..........  $ 44,355    $ 59,281,834    $    (5,849)   $  5,982,381     $(576,791)   $ 64,725,930
 Net income ...........................      --             --              --         5,781,863          --         5,781,863
  Adjustment to beginning balance for
   change in accounting method net
   of income tax liability of $907 ....      --             --             1,761          --              --             1,761
 Change in unrealized loss ............      --             --          (628,789)         --              --          (628,789)
  Amortization of deferred
   compensation .......................      --             --              --            --           427,252         427,252
 Retirement of common stock ...........      (166)       (199,824)          --            --              --          (199,990)
                                         --------    ------------    -----------    ------------     ---------    ------------
Balance at December 31, 1994 ..........    44,189      59,082,010       (632,877)     11,764,244      (149,539)     70,108,027
 Net income ...........................      --             --             --          7,758,892            --       7,758,892
 Amortization of deferred
   compensation .......................      --             --             --             --           149,539         149,539
 Tax benefit on restricted stock ......      --            59,798          --             --              --            59,798
 Change in unrealized (loss) gain .....      --             --         2,365,086          --              --         2,365,086
                                         --------    ------------    -----------    ------------     ---------    ------------
Balance at December 31, 1995 ..........    44,189      59,141,808      1,732,209      19,523,136          --        80,441,342
 Net income ...........................      --             --             --         11,196,966          --        11,196,966
    Issuance of 11,316 shares of
   common stock under stock
   option plans .......................       113         205,536          --             --              --           205,649
 Three-for-two stock split effected
    in the form of a 50% stock
    dividend ..........................    22,151          --              --            (22,151)         --              --
 Retirement of common stock ...........       --             (512)         --             --              --              (512)
 Change in unrealized gain ............       --           --           (163,409)         --              --          (163,409)
                                         --------    ------------    -----------    ------------     ---------    -------------
Balance at December 31, 1996 ..........  $ 66,453    $ 59,346,832    $ 1,568,800    $ 30,697,951     $    --      $ 91,680,036
                                         ========    ============    ===========    ============     =========    ============
</TABLE>

                            See accompanying notes.

                                       60
<PAGE>

                               Triad Guaranty Inc.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                      Year ended December 31
                                                               1996            1995            1994
                                                               ----            ----            ----
<S>                                                       <C>             <C>             <C>
Net income ............................................   $ 11,196,966    $  7,758,892    $  5,781,863
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Loss and unearned premium reserves ...............        846,498         618,079       2,027,848
     Accrued expenses and other liabilities ...........        362,459         229,364          34,898
     Current taxes payable ............................        (38,335)         26,118         (13,187)
     Amounts due to/from reinsurer ....................      1,787,428         125,574        (200,179)
     Accrued investment income ........................       (230,985)       (104,490)       (180,268)
     Policy acquisition costs deferred ................     (5,856,589)     (3,994,830)     (3,660,581)
     Amortization of policy acquisition costs .........      3,234,876       2,289,121       1,725,902
     Net realized investment (gains) losses ...........        162,385        (172,992)        162,723
     Provision for depreciation .......................        394,282         329,758         190,475
     Amortization of bond discount ....................       (591,336)       (555,771)       (462,350)
     Amortization of deferred compensation ............           --           149,539         427,252
     Deferred income taxes ............................      1,573,810         170,955       1,035,946
     Unearned ceding commission .......................       (539,542)        (86,623)        (14,585)
     Other assets .....................................        171,949        (291,593)       (178,853)
                                                          ------------    ------------    ------------
Net cash provided by operating activities .............     12,473,866       6,491,101       6,676,904
Investing activities:
Securities available-for-sale:
   Purchases - fixed maturities .......................    (19,823,655)    (16,552,078)     (4,855,661)
   Sales  - fixed maturities ..........................      8,036,070      12,960,894       6,852,379
   Purchases - equities ...............................     (2,732,179)     (2,222,254)       (370,545)
   Sales - equities ...................................      1,838,226       1,781,793         320,984
Securities held-to-maturity:
   Purchases ..........................................           --              --       (13,620,269)
   Sales ..............................................           --              --           306,472
   Maturities .........................................           --              --         4,184,053
   Purchases of property and equipment ................       (760,202)       (467,526)       (896,571)
                                                          ------------    ------------    ------------
   Net cash used in investing activities ..............    (13,441,740)     (4,499,171)     (8,079,158)

Financing activities
   Proceeds from exercise of stock options ............        205,649            --              --
   Retirement of common stock .........................           (512)           --          (199,990)
                                                          ------------    ------------    ------------
   Net cash provided by (used in) financing activities         205,137            --          (199,990)
                                                          ------------    ------------    ------------
Net change in cash and short-term investments .........       (762,737)      1,991,930      (1,602,244)
Cash and short-term investments at beginning of year ..      4,425,448       2,433,518       4,035,762
                                                          ------------    ------------    ------------
Cash and short-term investments at end of year ........   $  3,662,711    $  4,425,448    $  2,433,518
                                                          ============    ============    ============

Supplemental  schedule of cash flow  information:
Cash paid during the period for income taxes and
   United States Mortgage Guaranty Tax and Loss Bonds .   $  3,348,000    $  3,260,349    $  1,545,000
                                                          ============    ============    ============
</TABLE>

                            See accompanying notes.

                                       61
<PAGE>
                               Triad Guaranty Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 1996


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 to protect the lender  against  loss from  defaults on low down  payment
residential mortgage loans.

BASIS OF PRESENTATION

The  accompanying  financial  statements  have been prepared in conformity  with
generally  accepted  accounting  principles,  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   subsidiaries,   Triad  Guaranty  Insurance  Corporation
("Triad") and Triad  Guaranty  Assurance  Corporation  ("TGAC"),  a wholly-owned
subsidiary of Triad Guaranty Insurance Corporation. All significant intercompany
accounts and transactions have been eliminated.

USE OF ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles 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.

                                       62
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



1.  ACCOUNTING POLICIES (CONTINUED)

Investments

Financial  Accounting  Standards Board ("FASB")  Statement 115,  "Accounting for
Certain Investments in Debt and Equity  Securities",  was adopted by the Company
as of January  1, 1994.  Under  Statement  115,  securities  are  classified  as
available-for-sale,  held-to-maturity,  or  trading.  Securities  classified  as
available-for-sale  are carried at fair value and unrealized gains and losses on
such securities are reported as a separate  component of  stockholders'  equity.
Securities  classified  as  held-to-maturity  are carried at cost,  adjusted for
amortization  of premium or discount.  The Company does not have any  securities
classified as trading.

In 1995, the Company reclassified its entire fixed maturity investment portfolio
as  available-for-sale.  As a result, fixed maturities with an amortized cost of
$61,707,011  previously  classified as  held-to-maturity  were  reclassified  as
available-for-sale.  This transfer  resulted in an unrealized  gain of $532,792.
This change in the reporting  classification of investments had no effect on net
income.  This  reclassification  of investments  was made to provide  management
greater  flexibility  in managing  the  investment  portfolio  on a total return
basis.

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 primarily on a specific  identification basis and
are included in net income.  Short-term  investments  are defined as  short-term
highly liquid investments both readily  convertible to known amounts of cash and
having maturities of three 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  generally  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.

                                       63
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



1.  ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

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

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
which are not currently in default.  Loss reserves are established by management
using  historical  experience  and by making various  assumptions  and judgments
about the  ultimate  amount to be paid on loans in default.  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,  claim
reimbursement and reserves related to reinsurance  business are accounted for on
a basis  consistent  with those used in  accounting  for the  original  policies
issued and the terms of the reinsurance contracts. The Company receives a ceding
commission in connection with ceded reinsurance. 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.  The reinsurance  treaties provide for
profit  commissions on ceded reinsurance based on the loss ratio associated with
the business ceded.

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


                                       64
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



1.  ACCOUNTING POLICIES (CONTINUED)

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,  and
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.

INCOME RECOGNITION

The Company  writes  policies  that are  guaranteed  renewable  contracts at the
borrower's option on single premium,  annual premium, and monthly premium bases.
For annual payment policies, the first year premium exceeds the renewal premium.
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 are earned when received.

STOCK OPTIONS

The Company  grants stock options for a fixed number of shares to employees 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 in accordance with
APB  Opinion  No.  25,   "Accounting  for  Stock  Issued  to  Employees",   and,
accordingly, recognizes no compensation expense for the stock option grants.

EARNINGS PER SHARE

Primary and fully diluted  earnings per share are based on the weighted  average
daily number of shares outstanding.  For both primary and fully diluted earnings
per  share,   computation  of  the  weighted  average  daily  number  of  shares
outstanding includes common stock equivalents.  Common stock equivalents include
stock options that have a dilutive effect on earnings per share.

THREE-FOR-TWO STOCK SPLIT

The Company had a  three-for-two  stock split in 1996 in the form of a 50% stock
dividend.  All earnings per share amounts and stock option  information prior to
the stock split have been restated to reflect post-split amounts.

                                       65
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



2.  INVESTMENTS

The amortized cost and the fair value of investments are as follows:
<TABLE>
<CAPTION>
                                                                Gross          Gross
                                 Amortized      Unrealized    Unrealized        Fair
                                    Cost           Gains        Losses         Value
                                    ----           -----        ------         -----
<S>                               <C>           <C>           <C>           <C>
At December 31, 1996:
 Available-for-sale securities:
   Fixed maturity securities:
    Corporate .................   $14,620,814   $   427,065   $   200,114   $14,847,765
    U.S. Government ...........     9,311,329       360,899        16,484     9,655,744
    Mortgage-backed ...........    16,545,818        84,823       381,003    16,249,638
    State and municipal .......    45,087,458     1,005,494       132,936    45,960,016
    Public utilities ..........       504,334        12,358          --         516,692
                                  -----------   -----------   -----------   -----------
Total .........................    86,069,753     1,890,639       730,537    87,229,855
Equity securities .............     6,267,076     1,294,831        67,090     7,494,817
                                  -----------   -----------   -----------   -----------
Total .........................   $92,336,829   $ 3,185,470   $   797,627   $94,724,672
                                  ===========   ===========   ===========   ===========

At December 31, 1995:
 Available-for-sale securities:
   Fixed maturity securities:
    Corporate .................   $15,644,995   $   742,246   $   145,726   $16,241,515
    U.S. Government ...........     7,989,398       701,442         4,924     8,685,916
    Mortgage-backed ...........    22,185,406       258,557       171,479    22,272,484
    State and municipal .......    27,379,579       998,293        14,025    28,363,847
    Public utilities ..........       505,393        24,044          --         529,437
                                  -----------   -----------   -----------   -----------
Total .........................    73,704,771     2,724,582       336,154    76,093,199
Equity securities .............     5,392,760       483,481       217,215     5,659,026
                                  -----------   -----------   -----------   -----------
Total .........................   $79,097,531   $ 3,208,063   $   553,369   $81,752,225
                                  ===========   ===========   ===========   ===========
</TABLE>
                                       66
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



2.  INVESTMENTS (CONTINUED)

The amortized  cost and estimated  fair value of  investments  in fixed maturity
securities, at December 31, 1996 are summarized by stated maturity as follows:

                                                  Available-for-Sale

                                                 Amortized       Fair
                                                   Cost         Value
                                                   ----         -----
        Maturity:
         One year or less ....................   $   893,996   $   909,220
         After one year through five years...     17,881,055    18,532,049
         After five years through ten years...    22,790,389    23,352,846
         After ten years .....................    27,958,495    28,186,102
         Mortgage-backed securities ..........    16,545,818    16,249,638
                                                 -----------   -----------
        Total ................................   $86,069,753   $87,229,855
                                                 ===========   ===========


Realized gains and losses on sales of investments are as follows:

                                             Year ended December 31
                                          1996        1995         1994
                                          ----        ----         ----
      Securities available-for-sale:
         Fixed maturity securities:
         Gross realized gains .....   $  28,425    $ 131,968    $    --
         Gross realized losses ....     (48,112)    (202,123)    (190,264)
      Equity securities:
         Gross realized gains .....      86,607      208,061       24,244
         Gross realized losses ....    (106,244)      (7,372)     (31,073)
      Other investments:
         Gross realized gains .....      30,509       96,056      109,340
         Gross realized losses ....    (153,570)     (53,598)     (74,970)
                                      ---------    ---------    ---------
      Net realized gains (losses) .   $(162,385)   $ 172,992    $(162,723)
                                      =========    =========    =========


Net unrealized gain (loss) on fixed maturity securities changed by $(1,228,326),
$6,689,443,  and  $(5,158,970)  in  1996,  1995  and  1994,  respectively;   the
corresponding  amounts  for  equity  securities  were  $961,475,  $495,328,  and
$(222,766).

                                       67
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



2.  INVESTMENTS (CONTINUED)

Major  categories  of the  Company's  net  investment  income are  summarized as
follows:

                                                Year ended December 31
                                        1996             1995            1994
                                        ----             ----            ----
Income:
 Fixed maturities ..............      $5,260,073      $4,677,448      $4,038,291
 Preferred stocks ..............          37,858          11,417          27,591
 Common stocks .................         236,715         234,249         258,744
 Short-term investments ........           6,118          27,153          20,795
 Cash ..........................         116,343         125,934          76,346
                                      ----------      ----------      ----------
                                       5,657,107       5,076,201       4,421,767
Expenses .......................         210,435         239,740         240,891
                                      ----------      ----------      ----------
Net investment income ..........      $5,446,672      $4,836,461      $4,180,876
                                      ==========      ==========      ==========

At December 31, 1996 and 1995,  investments with an amortized cost of $6,214,410
and $6,167,722,  respectively,  were on deposit with state insurance departments
to satisfy regulatory requirements.

3.  DEFERRED POLICY ACQUISITION COSTS

An analysis of deferred policy acquisition costs is as follows:

                                                 Year ended December 31
                                             1996          1995         1994
                                             ----          ----         ----
Balance at beginning of year .........   $ 7,576,684   $ 5,870,975   $ 3,936,296
Acquisition costs deferred:
    Sales compensation ...............     2,766,809     1,995,312     1,695,010
    Underwriting and issue expenses ..     3,089,780     1,999,518     1,965,571
                                         -----------   -----------   -----------
                                           5,856,589     3,994,830     3,660,581
Amortization of acquisition expenses .     3,234,876     2,289,121     1,725,902
                                         -----------   -----------   -----------
Net increase .........................     2,621,713     1,705,709     1,934,679
                                         -----------   -----------   -----------
Balance at end of year ...............   $10,198,397   $ 7,576,684   $ 5,870,975
                                         ===========   ===========   ===========

                                       68
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



4.  RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity  for the reserve for unpaid  losses and loss  adjustment  expenses  for
1996, 1995 and 1994 are summarized as follows:

                                            1996          1995          1994
                                            ----          ----          ----
Reserve for losses and loss
  adjustment expenses at January 1,
  net of reinsurance recoverables
  of $885,852, $697,393, and ,
  $450,763 in 1996, 1995, and 1994
  respectively .........................$ 3,703,251   $ 2,466,461   $ 1,804,574
Incurred losses and loss adjustment
  expenses net of reinsurance
  recoveries (principally in respect
  of default notices occurring in):
      Current year .....................  4,673,130     3,190,786     2,053,023
      Redundancy on prior years ........ (1,394,000)     (974,000)     (791,000)
                                         -----------   -----------   -----------
Total incurred losses and loss
  adjustment expenses ..................  3,279,130     2,216,786     1,262,023

Loss and loss adjustment expense
  payments net of reinsurance recoveries
  (principally in respect of default
  notices occurring in):
      Current year .....................    166,717       215,996        85,136
      Prior years ......................    841,000       764,000        515,000
                                         -----------   -----------   -----------
Total loss and loss adjustment expense
   payments ............................  1,007,717       979,996       600,136
                                         -----------   -----------   -----------

Reserve for losses and loss adjustment
  expenses at December 31, net of
  reinsurance recoverables of $330,733,
  $885,852, and $697,393 in 1996, 1995
  and 1994, respectively ...............$ 5,974,664   $ 3,703,251   $ 2,466,461
                                         ===========   ===========   ===========

The foregoing reconciliation shows a redundancy in reserves has emerged for each
of the years presented.  These redundancies  resulted  principally from settling
case-basis  reserves for amounts less than expected or reducing incurred but not
reported reserves on default notices occurring in prior years.

                                       69
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


5.  COMMITMENTS

     The Company leases certain office  facilities and equipment under operating
leases. Rental expense for all leases was $609,215,  $512,692,  and $354,149 for
1996, 1995 and 1994, respectively.  Future minimum payments under noncancellable
operating leases at December 31, 1996 are as follows:

          1997                    $   520,642
          1998                        494,067
          1999                        465,767
          2000                        376,906
          2001                        249,821
          Thereafter                  118,965
                                  -----------
                                  $ 2,226,168
                                  ===========

6.  FEDERAL INCOME TAXES

Triad purchases  ten-year  non-interest  bearing United States Mortgage Guaranty
Tax and Loss Bonds in lieu of paying federal income taxes.  At December 31, 1996
and 1995,  Triad was  obligated to purchase  $335,408 and $0,  respectively,  of
United States Mortgage Guaranty Tax and Loss Bonds.

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

                                              1996         1995         1994
                                              ----         ----         ----

Income tax computed at statutory rate ... $ 5,683,563  $ 3,817,830  $ 2,847,764
Increase (decrease) in taxes
  resulting from:
    Tax-exempt interest .................    (751,407)    (352,486)    (266,372)
    Other ...............................     109,629        4,677       12,521
                                          -----------  -----------  -----------
Income tax expense ...................... $ 5,041,785  $ 3,470,021  $ 2,593,913
                                          ===========  ===========  ===========

                                       70
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



6.  FEDERAL INCOME TAXES  (CONTINUED)

The tax effects of temporary  differences that give rise to significant portions
of deferred  tax assets and deferred  tax  liabilities  at December 31, 1996 and
1995 are presented below:

                                                       1996            1995
                                                       ----            ----
  Deferred tax liabilities:
  Statutory contingency reserve ..............     $10,708,063     $ 6,635,584
  Deferred policy acquisition costs ..........       3,518,447       2,576,071
  Prepaid reinsurance premiums ...............         159,792         717,407
  Amounts payable to reinsurer ...............         169,947         312,661
  Fixed maturities ...........................         168,895         122,937
  Unrealized investment gain .................         823,287         889,387
  Other ......................................         223,621         186,796
                                                   -----------     -----------
  Total deferred tax liabilities .............      15,772,052      11,440,843

  Deferred tax assets:
  United States Mortgage Guaranty Tax and
     Loss Bonds ..............................       9,994,366       6,646,366
  Unearned premiums ..........................         706,015       1,196,605
  Unearned ceding commission .................          27,798         210,839
  Losses and loss adjustment expenses ........         602,109         424,433
  Other ......................................         165,683         254,028
                                                   -----------     -----------
  Total deferred tax assets ..................      11,495,971       8,732,271
                                                   -----------     -----------
  Net deferred tax liability .................     $ 4,276,081     $ 2,708,572
                                                   ===========     ===========

7.  INSURANCE IN FORCE, DIVIDEND RESTRICTION AND STATUTORY RESULTS

Approximately  50% of Triad's net risk in force is  concentrated  in four states
including  18% in  Georgia,  16% in  Illinois,  10% in  Florida  and 6% in North
Carolina. 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 for Triad.

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, 1996 and 1995,  as presented
below, was computed by applying the various percentage settlement options to the
insurance in force  amounts  based on the original  insured  amount of the loan.
Triad's ratio is as follows:

                                       71
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)




7.  INSURANCE IN FORCE, DIVIDEND RESTRICTION AND STATUTORY RESULTS (CONTINUED)

                                             1996             1995
                                             ----             ----

        Net risk ....................   $1,452,824,414   $  869,650,148
                                        ==============   ==============

        Statutory capital and surplus   $   57,070,475   $   55,951,158
           Contingency reserve ......       35,072,109       22,297,737
                                        --------------   --------------
        Total .......................   $   92,142,584   $   78,248,895
                                        ==============   ==============

        Risk-to-capital ratio .......        15.8 to 1        11.1 to 1
                                        ==============   ==============

Triad and TGAC are each required under the Illinois  Insurance Code (the "Code")
to  maintain  minimum  statutory  capital and  surplus of  $5,000,000.  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.  Net income as determined in accordance
with statutory accounting practices was $13,369,769,  $9,337,430, and $6,196,417
for the years ended December 31, 1996, 1995 and 1994, respectively.  At December
31,  1996,  none of the  Company's  equity can be paid out in  dividends  to the
stockholders  because the earned surplus of Triad, on a statutory  basis,  was a
deficit of $1,347,326.  This deficit is principally  the result of providing for
the statutory contingency reserve.

8.  RELATED PARTY TRANSACTIONS

The Company and Triad pay affiliated companies for management,  investment,  and
other services. The total expense incurred for such items was $303,555, $438,200
and $430,004 in 1996, 1995 and 1994, respectively.  Management believes that the
expenses  incurred for such  services  approximate  costs that the Company would
have incurred if those services had been provided by unaffiliated third parties.

                                       72
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



9.  EMPLOYEE BENEFIT PLAN

Substantially  all 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  contributed  $123,699,  $81,675,  and
$41,779 for the years ended December 31, 1996, 1995 and 1994,  respectively,  to
the plan.

10. REINSURANCE

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

Effective  January 1, 1996,  Triad  eliminated  quota share  reinsurance  on new
business  and  recaptured  substantial  portions  of  its  coverage  on  renewal
business. At the date of recapture,  Triad received approximately $1,100,000 and
re-established  reserves,  unearned premiums and deferred  acquisition costs for
the  previously  ceded  business  with no net effect on income.  Also  effective
January  1,  1996,  Triad  obtained  $25,000,000  in excess of loss  reinsurance
designed to provide  reinsurance  protection in the event of catastrophic levels
of losses.

Reinsurance  activity  for the  years  ended  December  31,  1996 and 1995 is as
follows:

                                               1996         1995
                                               ----         ----
               Earned premiums ceded ....   $2,319,927   $4,252,954
               Losses ceded .............      165,224      474,822
               Earned premiums assumed...       29,012       32,475
               Losses assumed ...........       99,910       41,447


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.

                                       73
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



11. LONG-TERM STOCK INCENTIVE PLAN

In August 1993 the Company  adopted the 1993 Long-Term Stock Incentive Plan (the
"Plan").  Under the Plan,  directors,  officers and 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 1,050,000 shares.

Summarized below is information  concerning the issuance of stock options,  with
all  shares  and  weighted-average  exercise  prices  restated  to  reflect  the
three-for-two stock split in 1996:
                                                                     Weighted-
                                                                      Average
                                      Number of       Option         Exercise
                                       Shares          Price           Price
                                       ------          -----           -----
1994
  Outstanding, beginning of year ...   283,500    $10.67 - $13.87      $ 12.49
  Granted ..........................     1,500         11.83             11.83
  Exercised ........................      --             --               --
  Outstanding, end of year .........   285,000      10.67 - 13.87        12.48
  Exercisable, end of year .........   190,500      10.67 - 13.87        12.48

1995
  Granted ..........................   113,925       9.17 - 17.83        11.69
  Exercised ........................      --              --              --
  Outstanding, end of year .........   398,925       9.17 - 17.83        12.26
  Exercisable, end of year .........   319,475       9.17 - 13.87        12.33

1996
  Granted ..........................   119,627      17.67 - 30.25        22.94
  Exercised ........................    16,974      10.67 - 13.87        12.11
  Forfeited ........................     4,731      11.92 - 22.97        19.12
  Outstanding, end of year .........   496,847       9.17 - 30.25        14.77
  Exercisable, end of year .........   369,117       9.17 - 22.97        13.08

                                       74
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

At December 31, 1996, 972,276 shares of the Company's common stock were reserved
and 475,429  shares were  available  for issuance  under the Plan.  The weighted
average  remaining  contractual life of the options  outstanding at December 31,
1996 is 7.5 years.

The  options  issued  under  the Plan in 1995 and 1996 vest  over  three  years.
Certain of the options  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.

In 1993,  60,750 shares of restricted  stock awards were granted without payment
to executive  officers of the Company.  One-half of the restricted  stock awards
became vested and were  transferred  on January 1, 1995 and the remainder of the
restricted stock awards became vested and transferred on January 1, 1996.

The fair value of options  granted in 1995 and 1996 have been  estimated  at the
date of grant using a  Black-Scholes  pricing model.  The effect of applying the
fair  value  method  of FASB  Statement  No.  123,  Accounting  for  Stock-Based
Compensation  to the  Company's  stock-based  awards  results  in net income and
earnings per share that are not  materially  different  from  reported  amounts;
therefore, Statement 123 pro forma disclosures are not made.

12. UNAUDITED QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited  quarterly results of operations for
the years ended December 31, 1996 and 1995 (in thousands except per share data):

                                       1996 Quarter
                             ----------------------------------
                             First    Second    Third    Fourth     Year
                             -----    ------    -----    ------     ----

Net premiums written ...   $ 5,073   $ 5,559   $ 6,684   $ 6,645   $23,961
Earned premiums ........     5,479     5,763     6,513     6,973    24,728
Net investment income...     1,279     1,364     1,368     1,435     5,446
Net losses incurred ....       653       614     1,013       999     3,279
Underwriting and other
   expenses ............     2,387     2,590     2,658     2,859    10,494
Net income .............     2,549     2,652     2,889     3,107    11,197
Primary EPS ............      .39       .40       .42       .45      1.69
Fully diluted EPS ......      .38       .39       .42       .45      1.63

                                       75
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)




12. UNAUDITED QUARTERLY FINANCIAL DATA (CONTINUED)

                                       1995 Quarter
                             ----------------------------------
                             First    Second    Third    Fourth     Year
                             -----    ------    -----    ------     ----
Net premiums written ...   $ 2,952   $ 3,733   $ 3,997   $ 4,318   $15,000
Earned premiums ........     3,448     3,639     3,971     4,420    15,478
Net investment income...     1,199     1,142     1,224     1,271     4,836
Net losses incurred ....       428       418       561       810     2,217
Underwriting and other
   expenses ............     1,728     1,704     1,717     1,893     7,042
Net income .............     1,732     1,936     2,005     2,086     7,759
Primary EPS ............      .26       .29       .30       .31      1.17
Fully diluted EPS ......      .26       .29       .30       .31      1.15


                                       76
<PAGE>
                                   Schedule I
       Summary of Investments- Other Than Investments in Related Parties
                              Triad Guaranty Inc.
                               December 31, 1996

                                                                       Amount at
                                                                         Which
                                                                        Shown in
                                                   Amortized   Market    Balance
Type of Investment                                    Cost      Value     Sheet
------------------                                    ----      -----     -----
                                                        (dollars in thousands)
Fixed maturity securities, available-for-sale:
  Bonds:
     U.S. Government obligations .................   $ 9,311   $ 9,656   $ 9,656
     Mortgage-backed securities ..................    16,546    16,250    16,250
     State and municipal bonds ...................    45,088    45,960    45,960
     Corporate bonds .............................    14,621    14,848    14,848
     Public utilities ............................       504       516       516
                                                      ------    ------    ------
   Total .........................................    86,070    87,230    87,230
                                                      ------    ------    ------

Equity securities, available-for-sale:
   Common stocks:
       Public utilities ..........................       632       693       693
       Industrial & miscellaneous ................     4,585     5,734     5,734
   Preferred Stock ...............................     1,050     1,068     1,068
                                                       ------    ------    -----
    Total ........................................     6,267     7,495     7,495
                                                       ------    ------    -----
Short-term investments ...........................     3,302     3,302     3,302
                                                       ------    ------    -----
Total investments other than investments in
related parties ..................................   $95,639   $98,027   $98,027
                                                     =======   =======   =======

                                       77
<PAGE>
          Schedule II - Condensed Financial Information of Registrant
                            Condensed Balance Sheets
                              Triad Guaranty Inc.
                                (Parent Company)

                                                               December 31
                                                            1996         1995
                                                            ----         ----
                                                          (dollars in thousands)

Assets:
   Investment in subsidiaries ......................       $91,136       $79,963
   Cash and short-term investments .................           534           312
   Deferred income taxes ...........................             0           151
   Other assets ....................................            16            36
                                                           -------       -------
   Total assets ....................................       $91,686       $80,462
                                                           =======       =======

Liabilities and stockholders' equity:
Liabilities:
   Current taxes payable ...........................       $     1       $     1
   Accrued expenses and other liabilities ..........             5            20
                                                           -------       -------
   Total liabilities ...............................             6            21

Stockholders' equity:
   Common stock ....................................            66            44
   Additional paid-in capital ......................        59,347        59,142
   Unrealized gain on invested assets
   (all fromsubsidiaries) ..........................         1,569         1,732
   Retained earnings ...............................        30,698        19,523
                                                           -------       -------
Total stockholders' equity .........................        91,680        80,441
                                                           -------       -------
Total liabilities and stockholders' equity .........       $91,686       $80,462
                                                           =======       =======


                  See notes to condensed financial statements


                                       78
<PAGE>

          Schedule II - Condensed Financial Information of Registrant
                         Condensed Statements of Income
                              Triad Guaranty Inc.
                                (Parent Company)

                                                    Year Ended December 31
                                                 1996        1995         1994
                                                 ----        ----         ----
                                                      (dollars in thousands)
Revenues:
   Net investment income ...................  $     17    $     14    $     17
                                                ------       -----       -----
                                                    17          14          17
                                                ------       -----       -----
Expenses:
   Operating expenses ......................         6         152         433
                                                ------       -----       -----
                                                     6         152         433
                                                ------       -----       -----
Income (loss) before federal
  income taxes and equity in
  undistributed income of subsidiaries .....        11        (138)       (416)

Federal income tax expense (benefit) .......       151          22        (109)
                                                ------       -----       -----
Income (loss) before equity in
  undistributed incomeofsubsidiaries .......      (140)       (160)       (307)
Equity in undistributed income of
  subsidiaries..............................    11,337       7,919       6,088
                                                ------       -----       -----
Net income .................................  $ 11,197    $  7,759    $  5,781
                                              ========    ========    ========

                  See notes to condensed financial statements

                                       79
<PAGE>

Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
Triad Guaranty Inc.
(Parent Company)

<TABLE>
<CAPTION>
                                                                       Year Ended December 31
                                                                    1996       1995         1994
                                                                    ----       ----         ----
                                                                  (dollars in thousands)
<S>                                                             <C>         <C>         <C>
 Net income .................................................   $  11,197   $  7,759    $   5,781
 Adjustments to reconcile net income to net cash provided
   by (used in) operating activities:
    Equity in undistributed income of subsidiaries ..........    (11,337)     (7,919)     (6,088)
    Amortization of deferred compensation ...................          0         149         428
    Decrease (Increase) in other assets .....................         20         (14)          6
    Decrease (increase) in deferred income taxes ............        151          21        (113)
    (Decrease) increase in current tax payable ..............       --            (3)          4
    Decrease in accrued expenses and other liabilities ......        (15)        (18)       (180)
                                                                --------    --------    --------
Net cash provided by (used in) operating activities .........         16         (25)       (162)

Financing Activities
    Proceeds from exercise of stock options .................        206        --          --
    Retirement of common stock ..............................       --          --          (200)
                                                                --------    --------    --------
Net cash provided by (used in) financing activities .........        206        --          (200)
                                                                --------    --------    --------
Increase (decrease) in cash and short-term investments ......        222         (25)       (362)
Cash and short-term investments at beginning of year ........        312         337         699
                                                                --------    --------    --------
Cash and short-term investments at end of year ..............   $    534    $    312    $    337
                                                                ========    ========    ========
</TABLE>


                  See notes to condensed financial statements.

                                       80
<PAGE>


          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.





                                       81
<PAGE>

                           Schedule IV - Reinsurance

                              Triad Guaranty Inc.
                       Mortgage Insurance Premium Earned
                  Years Ended December 31, 1996, 1995 and 1994



                        Ceded To      Assumed                  Percentage of
            Gross       Other      From Other        Net      Amount Assumed
            Amount     Companies     Companies      Amount         to Net
            ------     ---------     ---------      ------         ------
                             (dollars in thousands)
1996....   $27,019        $2,320      $  29         $24,728         0.1%
1995....   $19,699        $4,253      $  32         $15,478         0.2%
1994....   $15,044        $4,092      $  47         $10,999         0.4%



                                     82