##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from             to                                           

Commission file number 0-22342





Triad Guaranty Inc.


(Exact name of registrant as specified in its charter)


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

Registrants telephone number, including area code:


(336) 723-1282


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


None


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


Title of Each Class


Common Stock, par value $.01 per share


þ o


o


þ o






|                                                                                    |  |                                               
|----------------------------------------------------------------------------------- |  | ----------------------------------------------
|Portions of the following documents are incorporated by                             |  | Part of this Form 10-K into which the document
|reference into this Form 10-K:                                                      |  | is incorporated by reference                  
|                                                                                    |  |                                               
|Triad Guaranty Inc.
    Proxy Statement for 2005 Annual Meeting
    of Stockholders |  | Part III                                      









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TABLE OF CONTENTS


|                                                                                 |  |                                                                                           |    |      |    | 
|-------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                                 |  |                                                                                           |    | Page |   
|                                                                                 |  |                                                                                           |    |      |   
|PART I                                                                          
|Item 1.                                                                          |  | Business                                                                                  |    |      | 2  | 
|Item 2.                                                                          |  | Properties                                                                                |    |      | 23 | 
|Item 3.                                                                          |  | Legal Proceedings                                                                         |    |      | 23 | 
|Item 4.                                                                          |  | Submission of Matters to a Vote of Security Holders                                       |    |      | 24 | 
|                                                                                
|PART II                                                                         
|Item 5.                                                                          |  | Market for the Registrants Common Stock and Related
    Stockholder Matters              |    |      | 24 | 
|Item 6.                                                                          |  | Selected Financial Data                                                                   |    |      | 25 | 
|Item 7.                                                                          |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations |    |      | 26 | 
|Item 7a.                                                                         |  | Quantitative and Qualitative Disclosures about Market Risks                               |    |      | 48 | 
|Item 8.                                                                          |  | Financial Statements and Supplementary Data                                               |    |      | 48 | 
|Item 9.                                                                          |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure  |    |      | 48 | 
|Item 9a.                                                                         |  | Controls and Procedures                                                                   |    |      | 48 | 
|                                                                                
|PART III                                                                        
|Item 10.                                                                         |  | Directors and Executive Officers of the Registrant                                        |    |      | 51 | 
|Item 11.                                                                         |  | Executive Compensation                                                                    |    |      | 51 | 
|Item 12.                                                                         |  | Security Ownership of Certain Beneficial Owners and Management                            |    |      | 51 | 
|Item 13.                                                                         |  | Certain Relationships and Related Transactions                                            |    |      | 51 | 
|Item 14.                                                                         |  | Principal Accountant Fees and Services                                                    |    |      | 51 | 
|                                                                                
|PART IV                                                                         
|Item 15.                                                                         |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                           |    |      | 51 | 
|Signatures                                                                       |  |                                                                                           | 52 |     
|Index to Consolidated Financial Statements and Financial
    Statement Schedules |  |                                                                                           | 54 |     





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PART I




|        |          
|------- | ---------
|Item 1. | Business.













Types of Mortgage Insurance Products




| |                  
| | -----------------
| | Primary Insurance



2



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| |               
| | --------------
| | Pool Insurance



3



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







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







Cancellation of Insurance




4



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Customers










5



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|                                   |  |              |    |   |      |  |    |  
|---------------------------------- |  | ------------ | -- | - | ---- |  | -- | -
|                                   |  | Percent of   |   
|                                   |  | Revenues For |   
|                                   |  | the Year     |   
|                                   |  | Ended        |   
|                                   |  | December 31  |   
|                                   |  |              |   
|Customer                           |  | 2004         |    |   | 2003 | 
|                                   |  |              |    |   |      | 
|Wells Fargo Home Mortgage, Inc.    |  |              | 16 | % |      |  | 13 | %
|Countrywide Credit Industries, Inc |  |              | 14 | % |      |  | 14 | %



Sales and Marketing








Contract Underwriting




6



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Competition and Market Share












Underwriting Practices






| |                       
| | ----------------------
| | Underwriting Personnel





7



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mortgage Lender. The Company reviews each lenders
    financial statements and management experience before issuing a
    master policy. The Company also tracks the historical risk
    performance, including loan level risk characteristics, of all
    significant customers that hold a master policy. This
    information is factored into determining the loan programs the
    Company approves for various lenders. The Company assigns
    delegated underwriting authority only to lenders with
    substantial financial resources and established records of
    originating good quality loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Purpose and Type of Loan. The Company analyzes five
    general characteristics of a loan to evaluate its level of risk:
    (i) LTV ratio; (ii) purpose of the loan;
    (iii) type of loan instrument; (iv) level of
    documentation; and, (v) type of property. Generally, the
    Company seeks loan types with proven track records for which an
    assessment of risk can be readily made and the premium received
    sufficiently offsets that risk. Loan types that do not have a
    proven track record are charged a higher premium, as are other
    loans which have been shown to carry higher risks, such as
    adjustable rate mortgages (ARMs), loans with limited
    or no documentation, and loans having higher LTV ratios. Certain
    categories of loans are not actively pursued by the Company
    because such loans have a disproportionate amount of risk,
    including scheduled negatively amortizing ARMs and investment
    properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Individual Loan and Borrower. Individual insurance
    applications are evaluated based on analysis of the
    borrowers ability and willingness to repay the mortgage
    loan and the characteristics and value of the mortgaged
    property. The analysis of the borrower includes reviewing the
    borrowers housing and total debt ratios as well as the
    borrowers Fair, Isaac and Co., Inc. (FICO)
    credit score, as reported by credit rating agencies. In addition
    to the borrowers willingness and ability to repay the
    loan, the Company believes that mortgage default risk is
    affected by a variety of other factors, including the
    borrowers employment status. Insured mortgage loans made
    to selfemployed borrowers are perceived by the Company to
    have higher risk of claim, all other factors being equal, than
    loans to borrowers employed by third parties. Individual
    insurance applications are reviewed by Triads underwriting
    personnel except for loans originated by lenders under delegated
    underwriting authority or through automated underwriting
    services provided by Fannie Mae and Freddie Mac. In the case of
    delegated underwriting, compliance with program parameters is
    monitored by periodic audits of delegated business. Through the
    automated underwriting services provided by Fannie Mae and
    Freddie Mac, lenders are able to obtain approval for mortgage
    guaranty insurance with any participating mortgage insurer.
    Triad works with both enterprises in offering insurance services
    through their systems while monitoring the risk quality of loans
    insured through such systems.
|
| |  | Geographic Selection of Risk. The Company places
    significant emphasis on the condition of the regional housing
    markets in determining marketing and underwriting policies.
    Using both internal and external data, the Companys risk
    management department continually monitors the economic
    conditions in the Companys active and potential markets.
    The Company may choose not to insure new loans in geographic
    areas where it believes it has a heavy concentration or a higher
    risk of loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Risk Dispersion. In the early years of the Company, only
    certain high quality loans with limited risk were accepted. As
    the Company developed expertise beyond that limited spectrum on
    the risk curve and with the advent of delegated underwriting,
    the Company gradually expanded the breadth of risk it viewed as
    acceptable. An example of this extension of acceptable risk was
    the initial expansion into the structured bulk marketplace in
    2001 in the prime jumbo loan segment. In 2003 and 2004, the
    Companys primary focus for structured bulk transactions
    has been the Alt-A segment. The Company has defined Alt-A in its
    flow business as individual loans having high credit quality
    (FICO scores greater than 620) and that have been underwritten
    with reduced or no documentation. For structured bulk
    transactions, Alt-A classification is based on the transaction
    as a whole rather than on an individual loan-by-loan
    characterization. Structured bulk transactions that the Company
    has defined as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

8



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Alt-A have high credit quality, but may include loans that vary
    from guidelines typical for Fannie Mae and Freddie Mac regarding
    one or more of the following characteristics: loan amount,
    documentation level, loan purpose, employment status, or
    occupancy. The loans in this category typically have higher
    risk; however, the Company has structured most of the bulk
    transactions entered into in the last two years with deductibles
    that put it in the second loss position to mitigate the risk
    associated with these loans. The marketplace has changed and
    many lenders are initiating programs that have reduced or no
    documentation requirements or other nonconforming loan
    characteristics. We have participated in certain of these
    programs through the flow channel.



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











9



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





| |                      
| | ---------------------
| | Other Risk Management







Financial Strength Rating






10



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Reinsurance










Defaults and Claims




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



11



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| |       
| | ------
| | Claims











12



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Loss Mitigation




Loss Reserves




Analysis of Direct Risk in Force






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





Risk in Force(1)


|                                          |  |             |       |  |      |   |       | 
|----------------------------------------- |  | ----------- | ----- |  | ---- | - | ----- | 
|                                          |  | December 31 |      
|                                          |  |             |      
|                                          |  | 2004        |       |  | 2003 |  
|                                          |  |             |       |  |      |  
|Direct Risk in Force(dollars in millions) |  |             |       |  |      |   |       | 
|Flow                                      |  | $           | 6,915 |  |      | $ | 6,411 | 
|Bulk                                      |  |             | 712   |  |      |   | 613   | 
|                                          |  |             |       |  |      |  
|Total                                     |  | $           | 7,627 |  |      | $ | 7,024 | 
|                                          |  |             |       |  |      |  
|Net Risk in Force(dollars in millions)    |  |             |       |  |      |   |       | 
|Flow                                      |  | $           | 6,337 |  |      | $ | 5,977 | 
|Bulk                                      |  |             | 712   |  |      |   | 613   | 
|                                          |  |             |       |  |      |  
|Total                                     |  | $           | 7,049 |  |      | $ | 6,590 | 
|                                          |  |             |       |  |      |  

13



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|                                                     |  |             |       |   |      |  |       |  
|---------------------------------------------------- |  | ----------- | ----- | - | ---- |  | ----- | -
|                                                     |  | December 31 |      
|                                                     |  |             |      
|                                                     |  | 2004        |       |   | 2003 | 
|                                                     |  |             |       |   |      | 
|Lender concentration (excludes bulk):                |  |             |       |   |      |  |       |  
|Top 10 lenders (by original applicant)               |  |             | 68.4  | % |      |  | 67.4  | %
|LTV:                                                 |  |             |       |   |      |  |       |  
|95.01% and above                                     |  |             | 9.5   | % |      |  | 8.2   | %
|90.01% to 95.00%                                     |  |             | 32.0  | % |      |  | 37.0  | %
|90.00% and below                                     |  |             | 58.5  | % |      |  | 54.8  | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 
|Loan Type:                                           |  |             |       |   |      |  |       |  
|Fixed                                                |  |             | 72.3  | % |      |  | 80.8  | %
|ARM (positive amortization)(2)                       |  |             | 27.7  | % |      |  | 19.2  | %
|ARM (potential negative amortization)(3)             |  |             | 0.0   | % |      |  | 0.0   | %
|ARM (scheduled amortization)(3)                      |  |             | 0.0   | % |      |  | 0.0   | %
|Other                                                |  |             | 0.0   | % |      |  | 0.0   | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 
|Mortgage Term:                                       |  |             |       |   |      |  |       |  
|15 years and under                                   |  |             | 6.0   | % |      |  | 7.2   | %
|Over 15 years                                        |  |             | 94.0  | % |      |  | 92.8  | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 
|Property Type:                                       |  |             |       |   |      |  |       |  
|Non-condominium (principally single-family detached) |  |             | 94.5  | % |      |  | 94.3  | %
|Condominium                                          |  |             | 5.5   | % |      |  | 5.7   | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 
|Occupancy Status:                                    |  |             |       |   |      |  |       |  
|Primary residence                                    |  |             | 88.7  | % |      |  | 92.1  | %
|Secondary home                                       |  |             | 3.7   | % |      |  | 2.6   | %
|Non-owner occupied                                   |  |             | 7.6   | % |      |  | 5.3   | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 
|Mortgage Amount:                                     |  |             |       |   |      |  |       |  
|$200,000 or less                                     |  |             | 66.0  | % |      |  | 69.5  | %
|Over $200,000                                        |  |             | 34.0  | % |      |  | 30.5  | %
|                                                     |  |             |       |   |      | 
|Total                                                |  |             | 100.0 | % |      |  | 100.0 | %
|                                                     |  |             |       |   |      | 






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



14



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15



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|                |  |               |         |  |          |                        |       |      |  |  |      |  |  |  |      | 
|--------------- |  | ------------- | ------- |  | -------- | ---------------------- | ----- | ---- |  |  | ---- |  |  |  | ---- | 
|                |  |               |         |  |          | Cumulative Loss Ratios |      
|                |  |               |         |  |          | as of December 31      |      
|Certificate     |  | Direct Risk   |         |  | Percent  |                        |       |      | 
|Year            |  | in Force      |         |  | of Total |                        |       | 2004 |  |  | 2003 | 
|                |  |               |         |  |          |                        |       |      |  |  |      | 
|                |  | (In millions) |         |  |          |                        |       |      | 
|1994 and before |  | $             | 27.1    |  |          |                        | 0.4   | %    |  |  |      |  |  |  |      | 
|1995            |  |               | 17.4    |  |          |                        | 0.2   |      |  |  | 12.7 |  |  |  | 12.5 | 
|1996            |  |               | 24.2    |  |          |                        | 0.3   |      |  |  | 13.6 |  |  |  | 13.1 | 
|1997            |  |               | 41.5    |  |          |                        | 0.5   |      |  |  | 9.6  |  |  |  | 9.0  | 
|1998            |  |               | 106.3   |  |          |                        | 1.4   |      |  |  | 6.0  |  |  |  | 5.4  | 
|1999            |  |               | 88.7    |  |          |                        | 1.2   |      |  |  | 7.8  |  |  |  | 6.1  | 
|2000            |  |               | 78.0    |  |          |                        | 1.0   |      |  |  | 27.8 |  |  |  | 19.6 | 
|2001            |  |               | 488.4   |  |          |                        | 6.4   |      |  |  | 15.9 |  |  |  | 7.7  | 
|2002            |  |               | 1,088.5 |  |          |                        | 14.3  |      |  |  | 10.2 |  |  |  | 2.9  | 
|2003            |  |               | 3,038.2 |  |          |                        | 39.8  |      |  |  | 1.2  |  |  |  | 0.0  | 
|2004            |  |               | 2,628.6 |  |          |                        | 34.5  |      |  |  | 0.0  |  |  |  |      | 
|                |  |               |         |  |          |                        |       |      |  |  |      | 
|Total           |  | $             | 7,626.9 |  |          |                        | 100.0 | %    |  |  |      |  |  |  |      | 
|                |  |               |         |  |          |                        |       |      |  |  |      | 





|                |       |      |      |      |      |  |      |      |  
|--------------- | ----- | ---- | ---- | ---- | ---- |  | ---- | ---- | -
|                |       | 2004 |      |      | 2003 | 
|                |       |      |      |      |      | 
|Flow            |       |      | 6.5  | %    |      |  | 4.5  | %   
|Structured bulk |       |      | 96.1 | %    |      |  | 87.3 | %   
|                | Total |      |      | 27.5 | %    |  |      | 17.1 | %

16



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| |                      
| | ---------------------
| | Geographic Dispersion



|               |       |  |      |              |   |                              |       |  |     |      |  
|-------------- | ----- |  | ---- | ------------ | - | ---------------------------- | ----- |  | --- | ---- | -
|Top Ten States |       |  |      | Top Ten MSAs |   |                             
|               |       |  |      |              |   |                             
|California     |       |  | 10.2 | %            |   | Chicago, IL                  |       |  | 4.1 | %   
|Florida        |       |  | 8.2  |              |   | Atlanta, GA                  |       |  | 2.8 |     
|Texas          |       |  | 8.1  |              |   | Phoenix/Mesa, AZ             |       |  | 2.7 |     
|Illinois       |       |  | 4.6  |              |   | Los Angeles/Long Beach, CA   |       |  | 2.5 |     
|Georgia        |       |  | 4.5  |              |   | Houston, TX                  |       |  | 2.2 |     
|North Carolina |       |  | 4.3  |              |   | New York, NY                 |       |  | 2.1 |     
|Arizona        |       |  | 4.0  |              |   | Riverside/San Bernardino, CA |       |  | 1.9 |     
|New York       |       |  | 3.9  |              |   | Dallas, TX                   |       |  | 1.6 |     
|New Jersey     |       |  | 3.8  |              |   | Las Vegas, NV                |       |  | 1.5 |     
|Pennsylvania   |       |  | 3.3  |              |   | Boston, MA                   |       |  | 1.5 |     
|               |       |  |      |              |   |                              |       | 
|               | Total |  |      | 54.9         | % |                              | Total |  |     | 22.9 | %
|               |       |  |      |              |   |                              |       | 



Investment Portfolio




Regulation




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





17



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18



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19



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



20



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21



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Web Site Access to Company Reports




Employees




Executive Officers




|                        |  |                                                                                                                          |  |     |    | 
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --- | -- | 
|Name                    |  | Position                                                                                                                 |  | Age |   
|                        |  |                                                                                                                          |  |     |   
|William T. Ratliff, III |  | Chairman of the Board of the Company and Triad                                                                           |  |     | 51 | 
|                       
|Darryl W. Thompson      |  | President, Chief Executive Officer, and Director of the Company
    and Triad                                            |  |     | 64 | 
|                       
|Ron D. Kessinger        |  | Senior Executive Vice President, Chief Operating Officer and
    Acting Chief Financial Officer of the Company and Triad |  |     | 50 | 
|                       
|Kenneth N. Lard         |  | Executive Vice President of the Company and Executive Vice
    President, Sales and Operations of Triad                  |  |     | 46 | 
|                       
|Earl F. Wall            |  | Senior Vice President, Secretary, and General Counsel of the
    Company and Triad                                       |  |     | 47 | 
|                       
|Kenneth C. Foster       |  | Senior Vice President, Risk Management of Triad                                                                          |  |     | 56 | 

William T. Ratliff, III


Darryl W. Thompson


22



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Ron D. Kessinger


Kenneth N. Lard


Earl F. Wall


Kenneth C. Foster






|        |            
|------- | -----------
|Item 2. | Properties.







|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.



Patton v. Triad


23



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Broessel v. Triad




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



PART II




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



|               |  |      |       |  |      |   |       |      |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|               |  | 2004 |       |  | 2003 |  
|               |  |      |       |  |      |  
|               |  | High |       |  | Low  |   |       | High |  |   | Low   | 
|               |  |      |       |  |      |   |       |      |  |   |       | 
|First Quarter  |  | $    | 55.87 |  |      | $ | 49.50 |      |  | $ | 40.17 |  |  | $ | 31.13 | 
|Second Quarter |  | $    | 59.37 |  |      | $ | 52.53 |      |  | $ | 39.90 |  |  | $ | 34.80 | 
|Third Quarter  |  | $    | 59.09 |  |      | $ | 51.01 |      |  | $ | 49.00 |  |  | $ | 39.26 | 
|Fourth Quarter |  | $    | 60.80 |  |      | $ | 51.55 |      |  | $ | 51.22 |  |  | $ | 46.11 | 





24



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |            |  
|---------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------ | ------- | ---------- | ---- | - | ------- | ---------- | - | - | ------- | ---------- | - | ---- | ------ | ---------- | - | - | ------ | ---------- | -
|                                                                 |                                     | Year Ended December 31                           |        
|                                                                 |                                     |                                                  |        
|                                                                 |                                     | 2004                                             |         |            | 2003 |   |         | 2002       |   |   | 2001    |            |   | 2000 |       
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|                                                                 |                                     | (Dollars in thousands, except per share amounts) |        
|Income Statement Data(for period ended):                         |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|Premiums written:                                                |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Direct                              |                                                  | $       | 176,696    |      |   | $       | 154,046    |   |   | $       | 124,214    |   |      | $      | 95,551     |   |   | $      | 76,867     |  
|                                                                 | Ceded                               |                                                  |         | (35,365    | )    |   |         | (27,310    | ) |   |         | (18,345    | ) |      |        | (10,553    | ) |   |        | (4,985     | )
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|                                                                 |                                     | $                                                | 141,331 |            |      | $ | 126,736 |            |   | $ | 105,869 |            |   | $    | 84,998 |            |   | $ | 71,882 |           
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|Earned premiums                                                  |                                     | $                                                | 140,992 |            |      | $ | 119,732 |            |   | $ | 105,067 |            |   | $    | 84,356 |            |   | $ | 71,843 |           
|Net investment income                                            |                                     |                                                  | 19,754  |            |      |   | 17,082  |            |   |   | 16,099  |            |   |      | 14,765 |            |   |   | 12,645 |           
|Net realized gains (losses)                                      |                                     |                                                  | 504     |            |      |   | 3,029   |            |   |   | (2,519  | )          |   |      | 297    |            |   |   | 286    |           
|Other income                                                     |                                     |                                                  | 16      |            |      |   | 24      |            |   |   | 72      |            |   |      | 1,892  |            |   |   | 37     |           
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|                                                                 | Total revenues                      |                                                  |         | 161,266    |      |   |         | 139,867    |   |   |         | 118,719    |   |      |        | 101,310    |   |   |        | 84,811     |  
|Net losses and loss adjustment expenses                          |                                     |                                                  | 35,864  |            |      |   | 23,833  |            |   |   | 14,063  |            |   |      | 9,019  |            |   |   | 7,587  |           
|Interest expense on debt                                         |                                     |                                                  | 2,772   |            |      |   | 2,772   |            |   |   | 2,771   |            |   |      | 2,771  |            |   |   | 2,770  |           
|Amortization of deferred acquisition cost                        |                                     |                                                  | 14,256  |            |      |   | 18,112  |            |   |   | 13,742  |            |   |      | 11,712 |            |   |   | 8,211  |           
|Other operating expenses (net of acquisition cost deferred)      |                                     |                                                  | 26,483  |            |      |   | 22,776  |            |   |   | 22,900  |            |   |      | 18,136 |            |   |   | 16,008 |           
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|Income before income taxes                                       |                                     |                                                  | 81,891  |            |      |   | 72,374  |            |   |   | 65,243  |            |   |      | 59,672 |            |   |   | 50,235 |           
|Income taxes                                                     |                                     |                                                  | 23,474  |            |      |   | 21,283  |            |   |   | 20,140  |            |   |      | 18,413 |            |   |   | 15,237 |           
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|Net income                                                       |                                     | $                                                | 58,417  |            |      | $ | 51,091  |            |   | $ | 45,103  |            |   | $    | 41,259 |            |   | $ | 34,998 |           
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|Basic earnings per share                                         |                                     | $                                                | 4.04    |            |      | $ | 3.57    |            |   | $ | 3.21    |            |   | $    | 3.05   |            |   | $ | 2.63   |           
|Diluted earnings per share                                       |                                     | $                                                | 3.98    |            |      | $ | 3.52    |            |   | $ | 3.15    |            |   | $    | 2.95   |            |   | $ | 2.55   |           
|Weighted average common and common share equivalents outstanding |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Basic                               |                                                  |         | 14,458,453 |      |   |         | 14,322,216 |   |   |         | 14,060,420 |   |      |        | 13,545,725 |   |   |        | 13,321,901 |  
|                                                                 | Diluted                             |                                                  |         | 14,681,228 |      |   |         | 14,509,538 |   |   |         | 14,331,581 |   |      |        | 13,977,435 |   |   |        | 13,726,088 |  
|Balance Sheet Data(at year end):                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Total assets                        |                                                  | $       | 672,035    |      |   | $       | 575,579    |   |   | $       | 482,886    |   |      | $      | 396,455    |   |   | $      | 328,377    |  
|                                                                 | Total invested assets               |                                                  | $       | 480,488    |      |   | $       | 413,527    |   |   | $       | 344,581    |   |      | $      | 277,200    |   |   | $      | 232,025    |  
|                                                                 | Losses and loss adjustment expenses |                                                  | $       | 34,042     |      |   | $       | 27,186     |   |   | $       | 21,360     |   |      | $      | 17,991     |   |   | $      | 14,987     |  
|                                                                 | Unearned premiums                   |                                                  | $       | 15,942     |      |   | $       | 15,630     |   |   | $       | 8,539      |   |      | $      | 7,650      |   |   | $      | 6,933      |  
|                                                                 | Long-term debt                      |                                                  | $       | 34,493     |      |   | $       | 34,486     |   |   | $       | 34,479     |   |      | $      | 34,473     |   |   | $      | 34,467     |  
|                                                                 | Stockholders equity                |                                                  | $       | 437,343    |      |   | $       | 369,930    |   |   | $       | 309,407    |   |      | $      | 246,070    |   |   | $      | 199,831    |  
|Statutory Ratios(1):                                             |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Loss ratio                          |                                                  |         | 25.4       | %    |   |         | 19.9       | % |   |         | 13.4       | % |      |        | 10.7       | % |   |        | 10.6       | %
|                                                                 | Expense ratio                       |                                                  |         | 29.4       | %    |   |         | 33.0       | % |   |         | 38.0       | % |      |        | 39.9       | % |   |        | 37.4       | %
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|                                                                 | Combined ratio                      |                                                  |         | 54.8       | %    |   |         | 52.9       | % |   |         | 51.4       | % |      |        | 50.6       | % |   |        | 48.0       | %
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|GAAP Ratios:                                                     |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Loss ratio                          |                                                  |         | 25.4       | %    |   |         | 19.9       | % |   |         | 13.4       | % |      |        | 10.7       | % |   |        | 10.6       | %
|                                                                 | Expense ratio                       |                                                  |         | 28.8       | %    |   |         | 32.3       | % |   |         | 34.6       | % |      |        | 35.1       | % |   |        | 33.7       | %
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|                                                                 | Combined ratio                      |                                                  |         | 54.2       | %    |   |         | 52.2       | % |   |         | 48.0       | % |      |        | 45.8       | % |   |        | 44.3       | %
|                                                                 |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |       
|Other Statutory Data(dollars in millions)(1):                    |                                     |                                                  |         |            |      |   |         |            |   |   |         |            |   |      |        |            |   |   |        |           
|                                                                 | Direct insurance in force           |                                                  | $       | 36,827.0   |      |   | $       | 31,747.8   |   |   | $       | 25,379.1   |   |      | $      | 21,726.0   |   |   | $      | 15,123.5   |  
|                                                                 | Direct risk in force (gross)        |                                                  | $       | 7,627.0    |      |   | $       | 7,024.0    |   |   | $       | 5,790.9    |   |      | $      | 4,581.5    |   |   | $      | 3,760.0    |  
|                                                                 | Risk-to-capital                     |                                                  |         | 14.0:1     |      |   |         | 15.3:1     |   |   |         | 15.5:1     |   |      |        | 15.0:1     |   |   |        | 14.8:1     |  






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

25



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##### 





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





Critical Accounting Estimates








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





26



---



##### 







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









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



Overview










27



---



##### 





Consolidated Results of Operations




|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |       |      |  |  |       |      | 
|------------------------------------------------------------ | -------------- | ---- | ------- | ------- | ---- | - | ------- | ----------------------- |  | - | ----------- | ------- |  | ------- | ----- | ---- |  |  | ----- | ---- | 
|                                                             |                |      |         |         |      |   |         | Favorable/(Unfavorable) | 
|                                                             |                |      |         |         |      |   |         |                         | 
|                                                             |                |      |         |         |      |   |         | %                       |  |   | %           |        
|                                                             |                |      |         |         |      |   |         | Change 2004             |  |   | Change 2003 |        
|                                                             |                | 2004 |         |         | 2003 |   |         | 2002                    |  |   | vs 2003     |         |  | vs 2002 |      
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      
|Earned premiums                                              |                | $    | 140,992 |         |      | $ | 119,732 |                         |  | $ | 105,067     |         |  |         | 17.8  | %    |  |  | 14.0  | %   
|Net investment income                                        |                |      | 19,754  |         |      |   | 17,082  |                         |  |   | 16,099      |         |  |         | 15.6  |      |  |  | 6.1   |     
|Net realized investment gains (losses)                       |                |      | 504     |         |      |   | 3,029   |                         |  |   | (2,519      | )       |  |         | (83.4 | )    |  |  | 220.2 |     
|Other income                                                 |                |      | 16      |         |      |   | 24      |                         |  |   | 72          |         |  |         | (33.3 | )    |  |  | (66.7 | )   
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      
|                                                             | Total revenues |      |         | 161,266 |      |   |         | 139,867                 |  |   |             | 118,719 |  |         |       | 15.3 |  |  |       | 17.8 | 
|Net losses and loss adjustment expenses                      |                |      | 35,864  |         |      |   | 23,833  |                         |  |   | 14,063      |         |  |         | (50.5 | )    |  |  | (69.5 | )   
|Interest expense on debt                                     |                |      | 2,772   |         |      |   | 2,772   |                         |  |   | 2,771       |         |  |         |      |      |  |  |      |     
|Amortization of deferred policy acquisition costs            |                |      | 14,256  |         |      |   | 18,112  |                         |  |   | 13,742      |         |  |         | 21.3  |      |  |  | (31.8 | )   
|Other operating expenses (net of acquisition costs deferred) |                |      | 26,483  |         |      |   | 22,776  |                         |  |   | 22,900      |         |  |         | (16.3 | )    |  |  | 0.5   |     
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      
|Income before income taxes                                   |                |      | 81,891  |         |      |   | 72,374  |                         |  |   | 65,243      |         |  |         | 13.1  |      |  |  | 10.9  |     
|Income taxes                                                 |                |      | 23,474  |         |      |   | 21,283  |                         |  |   | 20,140      |         |  |         | (10.3 | )    |  |  | (5.7  | )   
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      
|Net income                                                   |                | $    | 58,417  |         |      | $ | 51,091  |                         |  | $ | 45,103      |         |  |         | 14.3  | %    |  |  | 13.3  | %   
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      
|Diluted earnings per share                                   |                | $    | 3.98    |         |      | $ | 3.52    |                         |  | $ | 3.15        |         |  |         | 13.1  | %    |  |  | 11.7  | %   
|                                                             |                |      |         |         |      |   |         |                         |  |   |             |         |  |         |      





2004 Compared to 2003




28



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##### 







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











|                             |       |             |      |     |      |  |     |     |  
|---------------------------- | ----- | ----------- | ---- | --- | ---- |  | --- | --- | -
|                             |       | Year Ended  |     
|                             |       | December 31 |     
|                             |       |             |     
|                             |       | 2004        |      |     | 2003 | 
|                             |       |             |      |     |      | 
|Flow business                |       |             | 4.8  | %   |      |  | 5.0 | %  
|Structured bulk transactions |       |             | 11.3 | %   |      |  | 4.4 | %  
|                             | Total |             |      | 6.0 | %    |  |     | 4.9 | %

29



---



##### 









|                |       |      |      |      |      |  |      |      |  
|--------------- | ----- | ---- | ---- | ---- | ---- |  | ---- | ---- | -
|                |       | 2004 |      |      | 2003 | 
|                |       |      |      |      |      | 
|Flow            |       |      | 69.0 | %    |      |  | 52.3 | %   
|Structured bulk |       |      | 61.0 | %    |      |  | 38.7 | %   
|                | Total |      |      | 67.6 | %    |  |      | 50.7 | %





|                                 |  |      |      |            |      |  |      |      |  |  |      |   |  |  |      |  
|-------------------------------- |  | ---- | ---- | ---------- | ---- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                 |  |      |      | Structured |     
|                                 |  | Flow |      |            | Bulk | 
|                                 |  |      |      |            |      | 
|                                 |  | 2004 |      |            | 2003 |  |      | 2004 |  |  | 2003 |  
|                                 |  |      |      |            |      |  |      |      |  |  |      |  
|Credit score less than 575       |  |      | 0.7  | %          |      |  | 0.8  | %    |  |  | 1.4  | % |  |  | 4.1  | %
|Credit score between 575 and 619 |  |      | 4.7  | %          |      |  | 4.6  | %    |  |  | 3.9  | % |  |  | 8.5  | %
|Credit score greater than 619    |  |      | 94.6 | %          |      |  | 94.6 | %    |  |  | 94.7 | % |  |  | 87.4 | %





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



30



---



##### 







|                                                                                                                                                                                            |  |      |      |   |      |  |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                                                                                                                                                                                            |  | 2004 |      |   | 2003 | 
|                                                                                                                                                                                            |  |      |      |   |      | 
|Premium cede rate (ceded premiums written as a percentage of
    direct premiums written)                                                                                                   |  |      | 20.0 | % |      |  | 17.7 | %
|Captive reinsurance premium cede rate (ceded premiums written
    under captive reinsurance arrangements as a percentage of direct
    premiums written)                                    |  |      | 18.0 | % |      |  | 15.4 | %
|Average captive premium cede rate (ceded premiums written under
    captive reinsurance arrangements as a percentage of direct
    premiums written under captive reinsurance arrangements) |  |      | 36.9 | % |      |  | 35.2 | %













31



---



##### 









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



|                    |                          |       |   |        |        |  |   |        |        | 
|------------------- | ------------------------ | ----- | - | ------ | ------ |  | - | ------ | ------ | 
|                    |                          | 2004  |   |        | 2003   | 
|                    |                          |       |   |        |        | 
|Direct Losses Paid: |                          |       |   |        |        |  |   |       
|                    | Flow business            |       | $ | 23,533 |        |  | $ | 15,496 |       
|                    | Structured bulk business |       |   | 4,802  |        |  |   | 2,045  |       
|                    |                          |       |   |        |        | 
|                    |                          | Total |   | $      | 28,335 |  |   | $      | 17,541 | 
|                    |                          |       |   |        |        | 





|                                                       |                                                 |                                    |        |        |        |   |        |        |        | 
|------------------------------------------------------ | ----------------------------------------------- | ---------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                       |                                                 | 2004                               |        |        | 2003   |  
|                                                       |                                                 |                                    |        |        |        |  
|Flow business:                                         |                                                 |                                    |        |        |        |   |        |       
|                                                       | Reserves for reported defaults                  |                                    | $      | 26,031 |        |   | $      | 20,247 |       
|                                                       | Reserves for defaults incurred but not reported |                                    |        | 3,418  |        |   |        | 2,960  |       
|                                                       |                                                 |                                    |        |        |        |  
|                                                       |                                                 | Total flow                         |        |        | 29,449 |   |        |        | 23,207 | 
|Structured bulk business:                              |                                                 |                                    |        |        |        |   |        |       
|                                                       | Reserves for reported defaults                  |                                    |        | 4,185  |        |   |        | 3,521  |       
|                                                       | Reserves for defaults incurred but not reported |                                    |        | 311    |        |   |        | 360    |       
|                                                       |                                                 |                                    |        |        |        |  
|                                                       |                                                 | Total structured bulk transactions |        |        | 4,496  |   |        |        | 3,881  | 
|Reserve for loss adjustment expenses                   |                                                 |                                    | 97     |        |        |   | 98     |       
|                                                       |                                                 |                                    |        |        |        |  
|Total reserves for losses and loss adjustment expenses |                                                 | $                                  | 34,042 |        |        | $ | 27,186 |       
|                                                       |                                                 |                                    |        |        |        |  



32



---



##### 







|            |                          |      |  |      |      |  |  |      |  
|----------- | ------------------------ | ---- |  | ---- | ---- |  |  | ---- | -
|            |                          | 2004 |  |      | 2003 | 
|            |                          |      |  |      |      | 
|Loss Ratio: |                          |      |  |      |      |  |  |     
|            | Flow business            |      |  | 27.1 | %    |  |  | 18.9 | %
|            | Structured bulk business |      |  | 18.9 | %    |  |  | 25.4 | %
|            | Total                    |      |  | 25.4 | %    |  |  | 19.9 | %





|                 |                           |                     |  |       |       |  |  |       |       | 
|---------------- | ------------------------- | ------------------- |  | ----- | ----- |  |  | ----- | ----- | 
|                 |                           | 2004                |  |       | 2003  | 
|                 |                           |                     |  |       |       | 
|Loans in Default |                           |                     |  |       |       |  |  |      
|                 | Flow business             |                     |  | 3,739 |       |  |  | 3,053 |      
|                 | Structured bulk business: |                     |  |       |       |  |  |       |      
|                 |                           | With deductibles    |  |       | 410   |  |  |       | 17    | 
|                 |                           | Without deductibles |  |       | 1,296 |  |  |       | 1,172 | 
|                 | Total structured bulk     |                     |  | 1,706 |       |  |  | 1,189 |      
|                 | Total                     |                     |  | 5,445 |       |  |  | 4,242 |      





33



---



##### 





2003 Compared to 2002






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





|                             |  |             |     |   |      |  |     |  
|---------------------------- |  | ----------- | --- | - | ---- |  | --- | -
|                             |  | Year Ended  |    
|                             |  | December 31 |    
|                             |  |             |    
|                             |  | 2003        |     |   | 2002 | 
|                             |  |             |     |   |      | 
|Flow business                |  |             | 5.0 | % |      |  | 4.3 | %
|Structured bulk transactions |  |             | 4.4 | % |      |  | 0.3 | %
|Total                        |  |             | 4.9 | % |      |  | 3.7 | %



|                |  |      |      |   |      |  |      |  
|--------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                |  | 2003 |      |   | 2002 | 
|                |  |      |      |   |      | 
|Flow            |  |      | 52.3 | % |      |  | 64.3 | %
|Structured bulk |  |      | 38.7 | % |      |  | 44.9 | %
|Total           |  |      | 50.7 | % |      |  | 60.9 | %



34



---



##### 





|                                 |  |      |      |            |      |  |      |      |  |  |      |   |  |  |      |  
|-------------------------------- |  | ---- | ---- | ---------- | ---- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                 |  |      |      | Structured |     
|                                 |  | Flow |      |            | Bulk | 
|                                 |  |      |      |            |      | 
|                                 |  | 2003 |      |            | 2002 |  |      | 2003 |  |  | 2002 |  
|                                 |  |      |      |            |      |  |      |      |  |  |      |  
|Credit score less than 575       |  |      | 0.8  | %          |      |  | 0.7  | %    |  |  | 4.1  | % |  |  | 3.2  | %
|Credit score between 575 and 619 |  |      | 4.6  | %          |      |  | 4.4  | %    |  |  | 8.5  | % |  |  | 10.0 | %
|Credit score greater than 619    |  |      | 94.6 | %          |      |  | 94.9 | %    |  |  | 87.4 | % |  |  | 86.8 | %



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





|                                                                                                                                                                                            |  |      |      |   |      |  |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                                                                                                                                                                                            |  | 2003 |      |   | 2002 | 
|                                                                                                                                                                                            |  |      |      |   |      | 
|Premium cede rate (ceded premiums written as a percentage of
    direct premiums written)                                                                                                   |  |      | 17.7 | % |      |  | 14.8 | %
|Captive reinsurance premium cede rate (ceded premiums written
    under captive reinsurance arrangements as a percentage of direct
    premiums written)                                    |  |      | 15.4 | % |      |  | 12.7 | %
|Average captive premium cede rate (ceded premiums written under
    captive reinsurance arrangements as a percentage of direct
    premiums written under captive reinsurance arrangements) |  |      | 35.2 | % |      |  | 35.8 | %









35



---



##### 









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



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



|                                                       |                                                 |                                    |        |        |        |   |        |        |        | 
|------------------------------------------------------ | ----------------------------------------------- | ---------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                       |                                                 | 2003                               |        |        | 2002   |  
|                                                       |                                                 |                                    |        |        |        |  
|Flow business:                                         |                                                 |                                    |        |        |        |   |        |       
|                                                       | Reserves for reported defaults                  |                                    | $      | 20,247 |        |   | $      | 17,362 |       
|                                                       | Reserves for defaults incurred but not reported |                                    |        | 2,960  |        |   |        | 2,602  |       
|                                                       |                                                 |                                    |        |        |        |  
|                                                       |                                                 | Total flow                         |        |        | 23,207 |   |        |        | 19,964 | 
|Structured bulk business:                              |                                                 |                                    |        |        |        |   |        |       
|                                                       | Reserves for reported defaults                  |                                    |        | 3,521  |        |   |        | 970    |       
|                                                       | Reserves for defaults incurred but not reported |                                    |        | 360    |        |   |        | 327    |       
|                                                       |                                                 |                                    |        |        |        |  
|                                                       |                                                 | Total structured bulk transactions |        |        | 3,881  |   |        |        | 1,297  | 
|Reserve for loss adjustment expenses                   |                                                 |                                    | 98     |        |        |   | 99     |       
|                                                       |                                                 |                                    |        |        |        |  
|Total reserves for losses and loss adjustment expenses |                                                 | $                                  | 27,186 |        |        | $ | 21,360 |       
|                                                       |                                                 |                                    |        |        |        |  



|            |                          |      |  |      |      |  |  |      |  
|----------- | ------------------------ | ---- |  | ---- | ---- |  |  | ---- | -
|            |                          | 2003 |  |      | 2002 | 
|            |                          |      |  |      |      | 
|Loss Ratio: |                          |      |  |      |      |  |  |     
|            | Flow business            |      |  | 18.9 | %    |  |  | 13.9 | %
|            | Structured bulk business |      |  | 25.4 | %    |  |  | 9.8  | %
|            | Total                    |      |  | 19.9 | %    |  |  | 13.4 | %

36



---



##### 











Significant Customers




Financial Position






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



37



---



##### 







|                                  |                    |           |         |         |      |   |         |         |   |   |         |         |  
|--------------------------------- | ------------------ | --------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                  |                    | DAC Asset |        
|                                  |                    |           |        
|                                  |                    | 2004      |         |         | 2003 |   |         | 2002    |  
|                                  |                    |           |         |         |      |   |         |         |  
|Balance  beginning of year       |                    | $         | 29,363  |         |      | $ | 28,997  |         |   | $ | 25,943  |        
|Costs capitalized                 |                    |           | 17,346  |         |      |   | 18,478  |         |   |   | 16,795  |        
|Amortization  normal             |                    |           | (12,194 | )       |      |   | (12,569 | )       |   |   | (11,115 | )      
|Amortization  dynamic adjustment |                    |           | (2,062  | )       |      |   | (5,543  | )       |   |   | (2,626  | )      
|                                  |                    |           |         |         |      |   |         |         |  
|                                  | Total amortization |           |         | (14,256 | )    |   |         | (18,112 | ) |   |         | (13,741 | )
|                                  |                    |           |         |         |      |   |         |         |  
|Balance  end of year             |                    | $         | 32,453  |         |      | $ | 29,363  |         |   | $ | 28,997  |        
|                                  |                    |           |         |         |      |   |         |         |  
|Annual Persistency                |                    |           | 67.6    | %       |      |   | 50.7    | %       |   |   | 60.9    | %      
|                                  |                    |           |         |         |      |   |         |         |  





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







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



38



---



##### 











39



---



##### 





|                          |                                               |                     |  |         |       |  |  |         |       | 
|------------------------- | --------------------------------------------- | ------------------- |  | ------- | ----- |  |  | ------- | ----- | 
|                          |                                               | 2004                |  |         | 2003  | 
|                          |                                               |                     |  |         |       | 
|Total business:           |                                               |                     |  |         |       |  |  |        
|                          | Number of insured loans in force              |                     |  | 266,574 |       |  |  | 236,234 |      
|                          | Number of loans in default                    |                     |  | 5,445   |       |  |  | 4,242   |      
|                          | Percentage of loans in default (default rate) |                     |  | 2.04    | %     |  |  | 1.80    | %    
|Flow business:            |                                               |                     |  |         |       |  |  |        
|                          | Number of insured loans in force              |                     |  | 212,596 |       |  |  | 205,033 |      
|                          | Number of loans in default                    |                     |  | 3,739   |       |  |  | 3,053   |      
|                          | Percentage of loans in default                |                     |  | 1.76    | %     |  |  | 1.49    | %    
|Structured bulk business: |                                               |                     |  |         |       |  |  |        
|                          | Number of insured loans in force              |                     |  | 53,978  |       |  |  | 31,201  |      
|                          | Number of loans in default                    |                     |  | 1,706   |       |  |  | 1,189   |      
|                          |                                               | With deductibles    |  |         | 410   |  |  |         | 17    | 
|                          |                                               | Without deductibles |  |         | 1,296 |  |  |         | 1,172 | 
|                          | Percentage of loans in default*               |                     |  | 3.16    | %     |  |  | 3.81    | %    
|Alt-A business**:         |                                               |                     |  |         |       |  |  |        
|                          | Number of insured loans in force              |                     |  | 62,944  |       |  |  | 35,328  |      
|                          | Number of loans in default                    |                     |  | 1,920   |       |  |  | 1,335   |      
|                          | Percentage of loans in default                |                     |  | 3.05    | %     |  |  | 3.78    | %    






|   |                                                                         
|-- | ------------------------------------------------------------------------
|*  | Calculated based on total number of loans in default                    
|  
|** | Alt-A is included in flow and structured bulk business amounts
    above



Investment Portfolio




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



40



---



##### 





|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |         |         |  |       |      |      | 
|-------------------------- | --------------------------- | ----------------------------------- | ------- | ------- | ----------------- |  | ----- | ------ | ---- | - | ------- | ------- | ------- |  | ----- | ---- | ---- | 
|                           |                             | December 31, 2004                   |         |         | December 31, 2003 | 
|                           |                             |                                     |         |         |                   | 
|                           |                             | Amount                              |         |         | Percent           |  |       | Amount |      |   | Percent |        
|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |        
|Fixed maturity securities: |                             |                                     |         |         |                   |  |       |        |      |   |         |         |         |  |       |     
|                           | U.S. government obligations |                                     | $       | 12,728  |                   |  |       | 2.7    | %    |   | $       | 15,623  |         |  |       | 3.8  | %   
|                           | Mortgage-backed bonds       |                                     |         | 80      |                   |  |       | 0.0    |      |   |         | 99      |         |  |       | 0.0  |     
|                           | State and municipal bonds   |                                     |         | 415,250 |                   |  |       | 86.4   |      |   |         | 330,228 |         |  |       | 79.9 |     
|                           | Corporate bonds             |                                     |         | 26,063  |                   |  |       | 5.4    |      |   |         | 29,147  |         |  |       | 7.0  |     
|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |        
|                           |                             | Total fixed maturities              |         |         | 454,121           |  |       |        | 94.5 |   |         |         | 375,097 |  |       |      | 90.7 | 
|Equity securities          |                             |                                     | 10,272  |         |                   |  | 2.2   |        |      |   | 12,771  |         |         |  | 3.1   |     
|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |        
|                           |                             | Total available-for-sale securities |         |         | 464,393           |  |       |        | 96.7 |   |         |         | 387,868 |  |       |      | 93.8 | 
|Short-term investments     |                             |                                     | 16,095  |         |                   |  | 3.3   |        |      |   | 25,659  |         |         |  | 6.2   |     
|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |        
|                           |                             | $                                   | 480,488 |         |                   |  | 100.0 | %      |      | $ | 413,527 |         |         |  | 100.0 | %   
|                           |                             |                                     |         |         |                   |  |       |        |      |   |         |        





|                                               |  |          |       |  |                 |  |      |  
|---------------------------------------------- |  | -------- | ----- |  | --------------- |  | ---- | -
|                                               |  | Carrying |       |  | % of Total      | 
|Name of Creditor                               |  | Value    |       |  | Invested Assets | 
|                                               |  |          |       |  |                 | 
|Atlanta, Georgia Airport                       |  | $        | 6,948 |  |                 |  | 1.50 | %
|Federal National Mortgage Association          |  |          | 5,507 |  |                 |  | 1.19 | %
|Port of Seattle, Washington                    |  |          | 5,158 |  |                 |  | 1.11 | %
|AAM/ZAZOVE Institutional Income Fund           |  |          | 5,029 |  |                 |  | 1.08 | %
|Denver, Colorado City and County Airport       |  |          | 4,285 |  |                 |  | 0.92 | %
|Cook County, Illinois                          |  |          | 4,248 |  |                 |  | 0.91 | %
|Charlotte, North Carolina Airport              |  |          | 4,215 |  |                 |  | 0.91 | %
|State of Nevada Water Pollution Control        |  |          | 4,075 |  |                 |  | 0.88 | %
|University of Texas                            |  |          | 4,047 |  |                 |  | 0.87 | %
|Chicago, Illinois OHare International Airport |  |          | 3,949 |  |                 |  | 0.85 | %



41



---



##### 





|                                              |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                              |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                                              |  |      |         |   |      |   |         |      | 
|Average investments at cost or amortized cost |  | $    | 428,233 |   |      | $ | 363,810 |      |  | $ | 303,508 |  
|Pre-tax net investment income                 |  | $    | 19,754  |   |      | $ | 17,082  |      |  | $ | 16,099  |  
|Effective pre-tax yield                       |  |      | 4.6     | % |      |   | 4.7     | %    |  |   | 5.3     | %
|Tax-equivalent yield-to-maturity              |  |      | 7.0     | % |      |   | 7.1     | %    |  |   | 7.9     | %
|Pre-tax realized investment gain (loss)       |  | $    | 504     |   |      | $ | 3,029   |      |  | $ | (2,519  | )





| |                            
| | ---------------------------
| | Unrealized Gains and Losses



|                           |                             |                            |                  |         |            |         |       |            |        |        |       |      |      |      |        |         |         |         | 
|-------------------------- | --------------------------- | -------------------------- | ---------------- | ------- | ---------- | ------- | ----- | ---------- | ------ | ------ | ----- | ---- | ---- | ---- | ------ | ------- | ------- | ------- | 
|                           |                             | Cost or                    |                  |         | Gross      |         |       | Gross      |        |        |      
|                           |                             | Amortized                  |                  |         | Unrealized |         |       | Unrealized |        |        | Fair  |     
|                           |                             | Cost                       |                  |         | Gains      |         |       | Losses     |        |        | Value |     
|                           |                             |                            |                  |         |            |         |       |            |        |        |       |     
|Fixed maturity securities: |                             |                            |                  |         |            |         |       |            |        |        |       |      |      |      |        |        
|                           | U.S. government obligations |                            | $                | 12,873  |            |         | $     | 66         |        |        | $     | (211 | )    |      | $      | 12,728  |        
|                           | Mortgage-backed bonds       |                            |                  | 73      |            |         |       | 7          |        |        |       |     |      |      |        | 80      |        
|                           | State and municipal bonds   |                            |                  | 399,329 |            |         |       | 16,157     |        |        |       | (236 | )    |      |        | 415,250 |        
|                           | Corporate bonds             |                            |                  | 23,157  |            |         |       | 2,906      |        |        |       |     |      |      |        | 26,063  |        
|                           |                             |                            |                  |         |            |         |       |            |        |        |       |     
|                           |                             | Subtotal, fixed maturities |                  |         | 435,432    |         |       |            | 19,136 |        |       |      | (447 | )    |        |         | 454,121 |        
|Equity securities          |                             |                            | 8,626            |         |            |         | 1,779 |            |        |        | (133  | )    |      |      | 10,272 |        
|                           |                             |                            |                  |         |            |         |       |            |        |        |       |     
|                           |                             |                            | Total securities |         | $          | 444,058 |       |            | $      | 20,915 |       |      | $    | (580 | )      |         | $       | 464,393 | 
|                           |                             |                            |                  |         |            |         |       |            |        |        |       |     





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



42



---



##### 





|                  |                                |                        |   |         |                   |  |  |        |       |   |         |         |         |  |  |      |       |  
|----------------- | ------------------------------ | ---------------------- | - | ------- | ----------------- |  |  | ------ | ----- | - | ------- | ------- | ------- |  |  | ---- | ----- | -
|                  |                                | December 31, 2004      |   |         | December 31, 2003 | 
|                  |                                |                        |   |         |                   | 
|                  |                                | Amount                 |   |         | Percent           |  |  | Amount |       |   | Percent |        
|                  |                                |                        |   |         |                   |  |  |        |       |   |         |        
|Fixed Maturities: |                                |                        |   |         |                   |  |  |        |       |   |         |         |         |  |  |     
|                  | U.S. treasury and agency bonds |                        | $ | 12,808  |                   |  |  | 2.8    | %     |   | $       | 15,722  |         |  |  | 4.2  | %    
|                  | AAA                            |                        |   | 337,958 |                   |  |  | 74.4   |       |   |         | 256,291 |         |  |  | 68.3 |      
|                  | AA                             |                        |   | 53,285  |                   |  |  | 11.7   |       |   |         | 50,428  |         |  |  | 13.4 |      
|                  | A                              |                        |   | 33,530  |                   |  |  | 7.4    |       |   |         | 35,937  |         |  |  | 9.6  |      
|                  | BBB                            |                        |   | 12,680  |                   |  |  | 2.8    |       |   |         | 10,347  |         |  |  | 2.8  |      
|                  | BB                             |                        |   | 254     |                   |  |  | 0.1    |       |   |         | 2,204   |         |  |  | 0.7  |      
|                  | B                              |                        |   | 205     |                   |  |  | 0.0    |       |   |         | 1,669   |         |  |  | 0.4  |      
|                  | CCC and lower                  |                        |   | 215     |                   |  |  | 0.1    |       |   |         | 525     |         |  |  | 0.1  |      
|                  | Not rated                      |                        |   | 3,186   |                   |  |  | 0.7    |       |   |         | 1,974   |         |  |  | 0.5  |      
|                  |                                |                        |   |         |                   |  |  |        |       |   |         |        
|                  |                                | Total fixed maturities |   | $       | 454,121           |  |  |        | 100.0 | % |         | $       | 375,097 |  |  |      | 100.0 | %
|                  |                                |                        |   |         |                   |  |  |        |       |   |         |        
|Equities:         |                                |                        |   |         |                   |  |  |        |       |   |         |         |         |  |  |     
|                  | AAA                            |                        | $ | 0       |                   |  |  | 0.0    | %     |   | $       | 0       |         |  |  | 0.0  | %    
|                  | AA                             |                        |   | 2,242   |                   |  |  | 21.8   |       |   |         | 3,279   |         |  |  | 25.7 |      
|                  | A                              |                        |   | 5,429   |                   |  |  | 52.9   |       |   |         | 4,640   |         |  |  | 36.3 |      
|                  | BBB                            |                        |   | 514     |                   |  |  | 5.0    |       |   |         | 523     |         |  |  | 4.1  |      
|                  | BB                             |                        |   | 0       |                   |  |  | 0.0    |       |   |         | 0       |         |  |  | 0.0  |      
|                  | B                              |                        |   | 1,760   |                   |  |  | 17.1   |       |   |         | 2,427   |         |  |  | 19.0 |      
|                  | C                              |                        |   | 0       |                   |  |  | 0.0    |       |   |         | 153     |         |  |  | 1.2  |      
|                  | Not rated                      |                        |   | 327     |                   |  |  | 3.2    |       |   |         | 1,749   |         |  |  | 13.7 |      
|                  |                                |                        |   |         |                   |  |  |        |       |   |         |        
|                  |                                | Total equities         |   | $       | 10,272            |  |  |        | 100.0 | % |         | $       | 12,771  |  |  |      | 100.0 | %
|                  |                                |                        |   |         |                   |  |  |        |       |   |         |        





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



43



---



##### 











| |                                
| | -------------------------------
| | Realized Losses and Impairments





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Approximately $192,000 was a write-down on preferred stock in an
    international airline for which the value had fluctuated below
    80% of amortized cost for over a year. The write-down resulted
    from our assessment that the security was other-than-temporarily
    impaired because of a reduction in credit quality by rating
    agencies. We later sold this security in 2004 and realized a
    small gain. The circumstances surrounding this impairment did
    not impact other securities in our portfolio.                                                                
|
| |  | Approximately $176,000 was a write-down on common stock of a
    pharmaceutical company for which the value had fluctuated below
    80% of amortized cost after the company had to cease sales of
    one of its major products due to alleged health risks. Rating
    agencies then reduced the credit ratings for this company. We
    sold this security in the fourth quarter following the
    write-down at an amount that approximated its carrying value
    after the write-down. The circumstances surrounding this
    impairment did not impact other securities in our portfolio.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Approximately $216,000 was a write-down on common stock of an
    automobile manufacturer for which the value had fluctuated below
    85% of amortized cost for more than six months. Our assessment
    deemed that the security would not significantly recover in
    value over our anticipated holding period. This security was
    later sold at an amount that approximated its carrying value
    after the write-down. The circumstances surrounding this
    impairment did not impact other securities in our portfolio.
|
| |  | Approximately $173,000 was a write-down on common stock of an
    energy provider for which the value had fluctuated below 85% of
    amortized cost for more than six months. Our assessment deemed
    that the security would not significantly recover in value over
    our anticipated holding period. The circumstances surrounding
    this impairment did not impact other securities in our portfolio.                                                                                                                     
|
| |  | Approximately $175,000 was a write-down on a bond issue
    collateralized by high-yield securities that continued to
    experience excessive defaults on its underlying securities. The
    circumstances surrounding this impairment did not impact other
    securities in our portfolio.                                                                                                                                                                                                                                        
|
| |  | Approximately $165,000 was a write-down on common stock of a
    pharmaceutical company for which patents on various products
    were expiring. The market value of the equity had fluctuated
    below 55% of its cost. We subsequently sold these securities at
    an amount that approximated its carrying value after                                                                                                                                                                                                          

44



---



##### 



| |  |                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------
| |  | the write-down. The circumstances surrounding this impairment
    did not impact other securities in our portfolio.

Liquidity and Capital Resources


















45



---



##### 







Off Balance Sheet Arrangements and Aggregate Contractual
Obligations






|                                                                                       |  |       |        |                        |        |   |        |       |  |       |        |  |           |         |       |  |  |   |        | 
|-------------------------------------------------------------------------------------- |  | ----- | ------ | ---------------------- | ------ | - | ------ | ----- |  | ----- | ------ |  | --------- | ------- | ----- |  |  | - | ------ | 
|                                                                                       |  |       |        | Payments Due By Period |        |   |       
|                                                                                       |  |       |        |                        |        |   |       
|                                                                                       |  |       |        | Less Than              |        |   | 1  3  |       |  | 3  5 |        |  | More Than |        
|Contractual Obligations                                                                |  | Total |        |                        | 1 Year |   |        | Years |  |       | Years  |  |           | 5 Years |      
|                                                                                       |  |       |        |                        |        |   |        |       |  |       |        |  |           |         |      
|Long-term debt                                                                         |  | $     | 35,000 |                        |        | $ |       |       |  | $     |       |  |           | $       |      |  |  | $ | 35,000 | 
|Operating leases                                                                       |  |       | 10,618 |                        |        |   | 2,015  |       |  |       | 2,924  |  |           |         | 2,265 |  |  |   | 3,414  | 
|Other long-term liabilities reflected on the Registrants
    balance sheet under GAAP |  |       | 34,042 |                        |        |   | 23,829 |       |  |       | 10,213 |  |           |         |      |  |  |   |       | 
|                                                                                       |  |       |        |                        |        |   |        |       |  |       |        |  |           |         |      
|Total                                                                                  |  | $     | 79,660 |                        |        | $ | 25,844 |       |  | $     | 13,137 |  |           | $       | 2,265 |  |  | $ | 38,414 | 
|                                                                                       |  |       |        |                        |        |   |        |       |  |       |        |  |           |         |      



Market Risk Exposure




46



---



##### 



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






| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest rates may increase or decrease from their current
    levels;                                                                                                                                                                                                                                                                           
|
| |  | housing prices may increase or decrease from their current
    levels;                                                                                                                                                                                                                                                                           
|
| |  | housing transactions requiring mortgage insurance may decrease
    for many reasons including changes in interest rates or economic
    conditions or alternative credit enhancement products;                                                                                                                                                   
|
| |  | our market share may change as a result of changes in
    underwriting criteria or competitive products or rates;                                                                                                                                                                                                                                
|
| |  | the amount of insurance written could be adversely affected by
    changes in federal housing legislation, including changes in the
    Federal Housing Administration loan limits and coverage
    requirements of Freddie Mac and Fannie Mae (Government Sponsored
    Enterprises);                                                           
|
| |  | our financial condition and competitive position could be
    affected by legislation or regulation impacting the mortgage
    guaranty industry or the Government Sponsored Entities,
    specifically, and the financial services industry in general;                                                                                         
|
| |  | rating agencies may revise methodologies for determining our
    financial strength ratings and may revise or withdraw the
    assigned ratings at any time;                                                                                                                                                                                     
|
| |  | decreases in persistency, which are affected by loan
    refinancings in periods of low interest rates, may have an
    adverse effect on earnings;                                                                                                                                                                                              
|
| |  | the amount of insurance written and the growth in insurance in
    force or risk in force as well as our performance may be
    adversely impacted by the competitive environment in the private
    mortgage insurance industry, including the type, structure, and
    pricing of our products and services and our competitors;               
|
| |  | if we fail to properly underwrite mortgage loans under contract
    underwriting service agreements, we may be required to assume
    the costs of repurchasing those loans;                                                                                                                                                                     
|
| |  | with consolidation occurring among mortgage lenders and our
    concentration of insurance in force generated through
    relationships with significant lender customers, our margins may
    be compressed and the loss of a significant customer may have an
    adverse effect on our earnings;                                              
|
| |  | our performance may be impacted by changes in the performance of
    the financial markets and general economic conditions;                                                                                                                                                                                                                      
|
| |  | economic downturns in regions where our risk is more
    concentrated could have a particularly adverse effect on our
    financial condition and loss development;                                                                                                                                                                              
|
| |  | revisions in risk-based capital rules by the Office of Federal
    Housing Enterprise Oversight for Fannie Mae and Freddie Mac
    could severely limit our ability to compete against various
    types of credit protection counterparties, including
    AAA rated private mortgage insurers;                                               
|
| |  | changes in the eligibility guidelines of Fannie Mae or Freddie
    Mac could have an adverse effect on the Company;                                                                                                                                                                                                                              
|
| |  | proposed regulation by the Department of Housing and Urban
    Development to exclude packages of real estate settlement
    services, which may include any required mortgage insurance
    premium paid at closing, from the anti-referral provisions of
    the Real Estate Settlement Procedures Act could adversely affect
    our earnings.

47



---



##### 







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





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





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





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

Conclusions Regarding the Effectiveness of Disclosure
Controls and Procedures






Changes in Internal Control over Financial Reporting




Managements Annual Report on Internal Control over
Financial Reporting




48



---



##### 











49



---



##### 



Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting




Managements Annual Report on Internal
Control over Financial Reporting,














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





50



---



##### 





|           |                   
|---------- | ------------------
|Item 9(b). | Other Information.



PART III




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









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





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





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





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



PART IV




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



















51



---



##### 



SIGNATURES






| |    |                       
| | -- | ----------------------
| | By | /s/ Darryl W. Thompson

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



|                                                     |  |                                                                                                 |  | 
|---------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | 
|Signature                                            |  | Title                                                                                          
|                                                     |  |                                                                                                
|                                                    
|/s/ William T Ratliff, IIIWilliam
    T Ratliff, III |  | Chairman of the Board                                                                          
|                                                    
|/s/ Darryl W. ThompsonDarryl
    W. Thompson         |  | President, Chief Executive Officer, and Director                                               
|                                                    
|/s/ Ron D. KessingerRon
    D. Kessinger             |  | Senior Executive Vice President, Chief Operating Officer and
    Acting Chief Financial Officer
|                                                    
|/s/ Kenneth S. DwyerKenneth
    S. Dwyer             |  | Vice President, and Chief Accounting Officer                                                   
|                                                    
|/s/ David W. WhitehurstDavid
    W. Whitehurst       |  | Director                                                                                       
|                                                    
|/s/ Robert T. DavidRobert
    T. David               |  | Director                                                                                       
|                                                    
|/s/ Michael A. F. RobertsMichael
    A. F. Roberts   |  | Director                                                                                       
|                                                    
|/s/ Richard S. SwansonRichard
    S. Swanson         |  | Director                                                                                       
|                                                    
|/s/ Glenn T. Austin, Jr.Glenn
    T. Austin, Jr.     |  | Director                                                                                       

52



---



##### 



ANNUAL REPORT ON FORM 10-K


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


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES


INDEX TO EXHIBITS


CONSOLIDATED FINANCIAL STATEMENTS


FINANCIAL STATEMENT SCHEDULES


CERTAIN EXHIBITS


YEAR ENDED DECEMBER 31, 2004


TRIAD GUARANTY INC.


WINSTONSALEM, NORTH CAROLINA


53



---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


AND FINANCIAL STATEMENT SCHEDULES


(Item 15(a) 1 and 2)


|                                                                                                                                     |                                                                                     |      |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                                                                     |                                                                                     | Page |   
|                                                                                                                                     |                                                                                     |      |   
|Consolidated Financial Statements                                                                                                    |                                                                                     |      |    |   
|Report of Independent Auditors                                                                                                       |                                                                                     |      | 57 |   
|Consolidated Balance Sheets at December 31, 2004 and 2003                                                                            |                                                                                     |      | 58 |   
|Consolidated Statements of Income for each of the three years in
    the period ended December 31, 2004                              |                                                                                     |      | 59 |   
|Consolidated Statements of Changes in Stockholders Equity
    for each of the three years in the period ended
    December 31, 2004 |                                                                                     |      | 60 |   
|Consolidated Statements of Cash Flows for each of the three
    years in the period ended December 31, 2004                          |                                                                                     |      | 61 |   
|Notes to Consolidated Financial Statements                                                                                           |                                                                                     |      | 62 |   
|Financial Statement Schedules                                                                                                        |                                                                                     |      |    |   
|Schedules at and for each of the three years in the period ended
    December 31, 2004                                               |                                                                                     |      |    |   
|                                                                                                                                     | Schedule I  Summary of Investments 
    Other Than Investments in Related Parties |      |    | 77 | 
|                                                                                                                                     | Schedule II  Condensed Financial Information of
    Registrant                     |      |    | 78 | 
|                                                                                                                                     | Schedule IV  Reinsurance                                                           |      |    | 83 | 



54



---



##### 



INDEX TO EXHIBITS


(Item 15(a) 3)


|        |     |                        |  |                                                                                                                                                                                                                                                                                                                                               
|------- | --- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |                       
|Number  |     | Description of Exhibit
|        |     |                       
|        | 3   | .1                     |  | Certificate of Incorporation of the Registrant, as amended(5)
    (Exhibit 3.1)                                                                                                                                                                                                                                                               
|        | 3   | .2                     |  | By-Laws of the Registrant as amended March 21, 2003
    (Exhibit 3.2(c)) (10)                                                                                                                                                                                                                                                                 
|        | 4   | .1                     |  | Form of Common Stock certificate(1) (Exhibit 4(a))                                                                                                                                                                                                                                                                                            
|        | 4   | .2                     |  | Indenture Between Triad Guaranty Inc. and Bankers
    Trust Co.(6) (Exhibit 4.2)                                                                                                                                                                                                                                                             
|        | 10  | .1                     |  | 1993 Long-Term Stock Incentive Plan(1)(3) (Exhibit 10(a))                                                                                                                                                                                                                                                                                     
|        | 10  | .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  | .11                    |  | Employment Agreement between the Registrant and Ron D.
    Kessinger(2)(3) (Exhibit 10.11)                                                                                                                                                                                                                                                    
|        | 10  | .16                    |  | Economic Value Added Incentive Bonus Program (Senior
    Management)(4) (Exhibit 10.16)                                                                                                                                                                                                                                                       
|        | 10  | .17                    |  | Amendment to Employment Agreement between the Registrant and
    Darryl W. Thompson(3)(4) (Exhibit 10.17)                                                                                                                                                                                                                                     
|        | 10  | .20                    |  | Amendment to Employment Agreement between the Registrant and Ron
    D. Kessinger(3)(4) (Exhibit 10.20)                                                                                                                                                                                                                                       
|        | 10  | .21                    |  | Excess of Loss Reinsurance Agreement between Triad Guaranty
    Insurance Corporation, Capital Mortgage Reinsurance Company, and
    Federal Insurance Company.(7) (Exhibit 10.21)                                                                                                                                                            
|        | 10  | .22                    |  | Excess of Loss Reinsurance Agreement between Triad Guaranty
    Insurance Corporation and Ace Capital Mortgage Reinsurance
    Company.(8) (Exhibit 10.22)                                                                                                                                                                                    
|        | 10  | .23                    |  | Employment Agreement between the Registrant and Earl F.
    Wall(3)(9) (Exhibit 10.23)                                                                                                                                                                                                                                                        
|        | 10  | .25                    |  | Employment Agreement between the Registrant and Kenneth N.
    Lard(3) (Exhibit 10.25)                                                                                                                                                                                                                                                        
|        | 10  | .26                    |  | Employment Agreement between the Registrant and Kenneth C.
    Foster(3) (Exhibit 10.26)                                                                                                                                                                                                                                                      
|        | *10 | .27                    |  | Consulting Agreement between the Registrant, Triad Guaranty
    Insurance Corporation, Triad Guaranty Assurance Company and
    Collateral Mortgage, Ltd. Providing advice and counsel regarding
    the investment strategy and tactics of Conning Asset Management
    Company, the Registrants new investment advisor. (Exhibit
    10.27)
|        | *10 | .28                    |  | Administrative Services Agreement between the Registrant, Triad
    Guaranty Insurance Corporation, Collateral Mortgage, Ltd.,
    Collat, Inc., and New South Federal Savings Bank (Exhibit 10.28)                                                                                                                                           
|        | 21  | .1                     |  | Subsidiaries of the Registrant(7) (Exhibit 21.1)                                                                                                                                                                                                                                                                                              
|        | *23 | .1                     |  | Consent of Ernst & Young LLP (Exhibit 23.1)                                                                                                                                                                                                                                                                                                   
|        | *31 | .1                     |  | Chief Executive Officer Sarbanes-Oxley Act Section 302
    Certification dated March 11, 2005, for the Triad Guaranty
    Inc.s Annual report on Form 10-K for the year ended
    December 31, 2004                                                                                                                                          
|        | *31 | .2                     |  | Acting Chief Financial Officer Sarbanes-Oxley Act
    Section 302 Certification dated March 11, 2005, for
    the Triad Guaranty Inc.s Annual report on Form 10-K
    for the year ended December 31, 2004                                                                                                                                   
|        | *32 | .1                     |  | Chief Executive Officer Sarbanes-Oxley Act Section 906
    Certification dated March 11, 2005, for the Triad Guaranty
    Inc.s Annual report on Form 10-K for the year ended
    December 31, 2004                                                                                                                                          
|        | *32 | .2                     |  | Acting Chief Financial Officer Sarbanes-Oxley Act
    Section 906 Certification dated March 11, 2005, for
    the Triad Guaranty Inc.s Annual report on Form 10-K
    for the year ended December 31, 2004                                                                                                                                   

55



---



##### 








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



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



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

56



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















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





57



---



##### 



TRIAD GUARANTY INC.


CONSOLIDATED BALANCE SHEETS


|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                   |                                                                                                                                                                                       | December 31                                                             |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |        
|                                                                                                   |                                                                                                                                                                                       | 2004                                                                    |         |         | 2003    |  
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|                                                                                                   |                                                                                                                                                                                       | (In thousands, except                                                   |        
|                                                                                                   |                                                                                                                                                                                       | share data)                                                             |        
|ASSETS                                                                                            
|Invested assets:                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |   |         |        
|                                                                                                   | Securities available-for-sale, at fair value:                                                                                                                                         |                                                                         |         |         |         |   |         |         |        
|                                                                                                   |                                                                                                                                                                                       | Fixed maturities (amortized cost: 2004  $435,432;
    2003  $359,885) |         | $       | 454,121 |   |         | $       | 375,097 | 
|                                                                                                   |                                                                                                                                                                                       | Equity securities (cost: 2004  $8,626;
    2003  $10,769)             |         |         | 10,272  |   |         |         | 12,771  | 
|                                                                                                   | Short-term investments                                                                                                                                                                |                                                                         |         | 16,095  |         |   |         | 25,659  |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|                                                                                                   |                                                                                                                                                                                       |                                                                         | 480,488 |         |         |   | 413,527 |        
|Cash                                                                                               |                                                                                                                                                                                       |                                                                         | 6,865   |         |         |   | 973     |        
|Real estate                                                                                        |                                                                                                                                                                                       |                                                                         | 211     |         |         |   | 146     |        
|Accrued investment income                                                                          |                                                                                                                                                                                       |                                                                         | 6,229   |         |         |   | 4,575   |        
|Deferred policy acquisition costs                                                                  |                                                                                                                                                                                       |                                                                         | 32,453  |         |         |   | 29,363  |        
|Property and equipment, at cost less accumulated depreciation
    (2004  $15,172; 2003  $11,867) |                                                                                                                                                                                       |                                                                         | 8,945   |         |         |   | 9,369   |        
|Prepaid federal income tax                                                                         |                                                                                                                                                                                       |                                                                         | 119,132 |         |         |   | 98,124  |        
|Income taxes recoverable                                                                           |                                                                                                                                                                                       |                                                                         | 977     |         |         |   |        |        
|Reinsurance recoverable                                                                            |                                                                                                                                                                                       |                                                                         | 1,164   |         |         |   | 881     |        
|Other assets                                                                                       |                                                                                                                                                                                       |                                                                         | 15,571  |         |         |   | 18,621  |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|Total assets                                                                                       |                                                                                                                                                                                       | $                                                                       | 672,035 |         |         | $ | 575,579 |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|                                                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                              
|Liabilities:                                                                                       |                                                                                                                                                                                       |                                                                         |         |         |         |   |         |        
|                                                                                                   | Losses and loss adjustment expenses                                                                                                                                                   |                                                                         | $       | 34,042  |         |   | $       | 27,186  |        
|                                                                                                   | Unearned premiums                                                                                                                                                                     |                                                                         |         | 15,942  |         |   |         | 15,629  |        
|                                                                                                   | Amounts payable to reinsurer                                                                                                                                                          |                                                                         |         | 4,467   |         |   |         | 3,243   |        
|                                                                                                   | Current taxes payable                                                                                                                                                                 |                                                                         |         |        |         |   |         | 6       |        
|                                                                                                   | Deferred income taxes                                                                                                                                                                 |                                                                         |         | 137,925 |         |   |         | 115,459 |        
|                                                                                                   | Unearned ceding commission                                                                                                                                                            |                                                                         |         | 200     |         |   |         | 669     |        
|                                                                                                   | Long-term debt                                                                                                                                                                        |                                                                         |         | 34,493  |         |   |         | 34,486  |        
|                                                                                                   | Accrued interest on debt                                                                                                                                                              |                                                                         |         | 1,275   |         |   |         | 1,275   |        
|                                                                                                   | Accrued expenses and other liabilities                                                                                                                                                |                                                                         |         | 6,348   |         |   |         | 7,696   |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|Total liabilities                                                                                  |                                                                                                                                                                                       |                                                                         | 234,692 |         |         |   | 205,649 |        
|Commitments and contingencies (Notes 5, 7, and
    14)                                             |                                                                                                                                                                                       |                                                                         |         |         |         |   |         |        
|Stockholders equity:                                                                              |                                                                                                                                                                                       |                                                                         |         |         |         |   |         |        
|                                                                                                   | Preferred stock, par value $.01 per share 
    authorized 1,000,000 shares, no shares issued and
    outstanding                                                                     |                                                                         |         |        |         |   |         |        |        
|                                                                                                   | Common stock, par value $.01 per share 
    authorized 32,000,000 shares, issued and outstanding
    14,631,678 shares at December 31, 2004, and 14,438,637
    at December 31, 2003 |                                                                         |         | 146     |         |   |         | 144     |        
|                                                                                                   | Additional paid-in capital                                                                                                                                                            |                                                                         |         | 94,852  |         |   |         | 87,513  |        
|                                                                                                   | Accumulated other comprehensive income, net of income tax
    liability of $7,117 at December 31, 2004, and $6,025 at
    December 31, 2003                                           |                                                                         |         | 13,218  |         |   |         | 11,190  |        
|                                                                                                   | Deferred compensation                                                                                                                                                                 |                                                                         |         | (1,501  | )       |   |         | (1,128  | )      
|                                                                                                   | Retained earnings                                                                                                                                                                     |                                                                         |         | 330,628 |         |   |         | 272,211 |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|Total stockholders equity                                                                         |                                                                                                                                                                                       |                                                                         | 437,343 |         |         |   | 369,930 |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  
|Total liabilities and stockholders equity                                                         |                                                                                                                                                                                       | $                                                                       | 672,035 |         |         | $ | 575,579 |        
|                                                                                                   |                                                                                                                                                                                       |                                                                         |         |         |         |  



58



---



##### 



TRIAD GUARANTY INC.


CONSOLIDATED STATEMENTS OF INCOME


|                                                                              |                                                              |                                   |         |            |         |   |         |            |         |   |         |            |         |  
|----------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------- | ------- | ---------- | ------- | - | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                                              |                                                              | Year Ended December 31            |        
|                                                                              |                                                              |                                   |        
|                                                                              |                                                              | 2004                              |         |            | 2003    |   |         | 2002       |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              |                                                              | (In thousands, except share data) |        
|Revenue:                                                                      |                                                              |                                   |         |            |         |   |         |            |         |   |         |           
|                                                                              | Premiums written:                                            |                                   |         |            |         |   |         |            |         |   |         |            |        
|                                                                              |                                                              | Direct                            |         | $          | 176,696 |   |         | $          | 154,046 |   |         | $          | 124,214 |  
|                                                                              |                                                              | Ceded                             |         |            | (35,365 | ) |         |            | (27,310 | ) |         |            | (18,345 | )
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              | Net premiums written                                         |                                   |         | 141,331    |         |   |         | 126,736    |         |   |         | 105,869    |        
|                                                                              | Change in unearned premiums                                  |                                   |         | (339       | )       |   |         | (7,004     | )       |   |         | (802       | )      
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|Earned premiums                                                               |                                                              |                                   | 140,992 |            |         |   | 119,732 |            |         |   | 105,067 |           
|Net investment income                                                         |                                                              |                                   | 19,754  |            |         |   | 17,082  |            |         |   | 16,099  |           
|Net realized investment gains (losses)                                        |                                                              |                                   | 504     |            |         |   | 3,029   |            |         |   | (2,519  | )         
|Other income                                                                  |                                                              |                                   | 16      |            |         |   | 24      |            |         |   | 72      |           
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              |                                                              |                                   | 161,266 |            |         |   | 139,867 |            |         |   | 118,719 |           
|Losses and expenses:                                                          |                                                              |                                   |         |            |         |   |         |            |         |   |         |           
|                                                                              | Net losses and loss adjustment expenses                      |                                   |         | 35,864     |         |   |         | 23,833     |         |   |         | 14,063     |        
|                                                                              | Interest expense on debt                                     |                                   |         | 2,772      |         |   |         | 2,772      |         |   |         | 2,771      |        
|                                                                              | Amortization of deferred policy acquisition costs            |                                   |         | 14,256     |         |   |         | 18,112     |         |   |         | 13,742     |        
|                                                                              | Other operating expenses (net of acquisition costs deferred) |                                   |         | 26,483     |         |   |         | 22,776     |         |   |         | 22,900     |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              |                                                              |                                   | 79,375  |            |         |   | 67,493  |            |         |   | 53,476  |           
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|Income before income taxes                                                    |                                                              |                                   | 81,891  |            |         |   | 72,374  |            |         |   | 65,243  |           
|Income taxes:                                                                 |                                                              |                                   |         |            |         |   |         |            |         |   |         |           
|                                                                              | Current                                                      |                                   |         | 2,295      |         |   |         | 716        |         |   |         | 667        |        
|                                                                              | Deferred                                                     |                                   |         | 21,179     |         |   |         | 20,567     |         |   |         | 19,473     |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              |                                                              |                                   | 23,474  |            |         |   | 21,283  |            |         |   | 20,140  |           
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|Net income                                                                    |                                                              | $                                 | 58,417  |            |         | $ | 51,091  |            |         | $ | 45,103  |           
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|Earnings per common and common equivalent share:                              |                                                              |                                   |         |            |         |   |         |            |         |   |         |           
|                                                                              | Basic                                                        |                                   | $       | 4.04       |         |   | $       | 3.57       |         |   | $       | 3.21       |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              | Diluted                                                      |                                   | $       | 3.98       |         |   | $       | 3.52       |         |   | $       | 3.15       |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|Shares used in computing earnings per common and common
    equivalent share: |                                                              |                                   |         |            |         |   |         |            |         |   |         |           
|                                                                              | Basic                                                        |                                   |         | 14,458,453 |         |   |         | 14,322,216 |         |   |         | 14,060,420 |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        
|                                                                              | Diluted                                                      |                                   |         | 14,681,228 |         |   |         | 14,509,538 |         |   |         | 14,331,581 |        
|                                                                              |                                                              |                                   |         |            |         |   |         |            |        



59



---



##### 



TRIAD GUARANTY INC.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         |        |       | 
|---------------------------- | ----------------------------------------------------------- | --------------------------------- | --- | ---------- | ------- | ----------- | ------ | ------------- | - | - | ------------ | - | ----- | -------- | ------ | ------ | ----- | - | ------- | ------ | - | - | ------- | ------ | ----- | 
|                             |                                                             |                                   |     |            |         | Accumulated |        |               |   |   |              |   |      
|                             |                                                             |                                   |     | Additional |         |             | Other  |               |   |   |              |   |       |         
|                             |                                                             | Common                            |     |            | Paid-In |             |        | Comprehensive |   |   | Deferred     |   |       | Retained |        |        |      
|                             |                                                             | Stock                             |     |            | Capital |             |        | Income        |   |   | Compensation |   |       | Earnings |        |        | Total |  
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|                             |                                                             | (In thousands, except share data) |    
|Balance at December 31, 2001 |                                                             | $                                 | 137 |            |         | $           | 69,058 |               |   | $ | 975          |   |       | $        | (117   | )      |       | $ | 176,017 |        |   | $ | 246,070 |       
|                             | Net income                                                  |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        |       |       |   |         | 45,103 |   |   |         | 45,103 |      
|                             | Other comprehensive income  net of tax:                    |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         |        |      
|                             |                                                             | Change in unrealized gain         |     |            |        |             |        |               |  |   |              |   | 7,659 |          |        |        |      |   |         |        |  |   |         |        | 7,659 | 
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|                             | Comprehensive income                                        |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         | 52,762 |      
|                             | Issuance of common stock under stock incentive plan         |                                   |     | 5          |         |             |        | 5,684         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 5,689  |      
|                             | Tax effect of exercise of non-qualified stock options       |                                   |     |           |         |             |        | 4,494         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 4,494  |      
|                             | Net issuance of restricted stock under stock incentive plan |                                   |     |           |         |             |        | 933           |   |   |              |  |       |          |        | (933   | )     |   |         |       |   |   |         |       |      
|                             | Amortization of deferred compensation                       |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        | 392    |       |   |         |       |   |   |         | 392    |      
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|Balance at December 31, 2002 |                                                             |                                   | 142 |            |         |             | 80,169 |               |   |   | 8,634        |   |       |          | (658   | )      |       |   | 221,120 |        |   |   | 309,407 |       
|                             | Net income                                                  |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        |       |       |   |         | 51,091 |   |   |         | 51,091 |      
|                             | Other comprehensive income  net of tax:                    |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         |        |      
|                             |                                                             | Change in unrealized gain         |     |            |        |             |        |               |  |   |              |   | 2,556 |          |        |        |      |   |         |        |  |   |         |        | 2,556 | 
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|                             | Comprehensive income                                        |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         | 53,647 |      
|                             | Issuance of common stock under stock incentive plan         |                                   |     | 2          |         |             |        | 4,051         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 4,053  |      
|                             | Tax effect of exercise of non-qualified stock options       |                                   |     |           |         |             |        | 2,133         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 2,133  |      
|                             | Net issuance of restricted stock under stock incentive plan |                                   |     |           |         |             |        | 1,160         |   |   |              |  |       |          |        | (1,160 | )     |   |         |       |   |   |         |       |      
|                             | Amortization of deferred compensation                       |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        | 690    |       |   |         |       |   |   |         | 690    |      
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|Balance at December 31, 2003 |                                                             |                                   | 144 |            |         |             | 87,513 |               |   |   | 11,190       |   |       |          | (1,128 | )      |       |   | 272,211 |        |   |   | 369,930 |       
|                             | Net income                                                  |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        |       |       |   |         | 58,417 |   |   |         | 58,417 |      
|                             | Other comprehensive income  net of tax:                    |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         |        |      
|                             |                                                             | Change in unrealized gain         |     |            |        |             |        |               |  |   |              |   | 2,028 |          |        |        |      |   |         |        |  |   |         |        | 2,028 | 
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|                             | Comprehensive income                                        |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |   |         |        |   |   |         | 60,445 |      
|                             | Issuance of common stock under stock incentive plan         |                                   |     | 2          |         |             |        | 3,739         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 3,741  |      
|                             | Tax effect of exercise of non-qualified stock options       |                                   |     |           |         |             |        | 1,995         |   |   |              |  |       |          |        |       |       |   |         |       |   |   |         | 1,995  |      
|                             | Net issuance of restricted stock under stock incentive plan |                                   |     |           |         |             |        | 1,605         |   |   |              |  |       |          |        | (1,605 | )     |   |         |       |   |   |         |       |      
|                             | Amortization of deferred compensation                       |                                   |     |           |         |             |        |              |   |   |              |  |       |          |        | 1,232  |       |   |         |       |   |   |         | 1,232  |      
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  
|Balance at December 31, 2004 |                                                             | $                                 | 146 |            |         | $           | 94,852 |               |   | $ | 13,218       |   |       | $        | (1,501 | )      |       | $ | 330,628 |        |   | $ | 437,343 |       
|                             |                                                             |                                   |     |            |         |             |        |               |   |   |              |   |       |          |        |        |       |  



60



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##### 



TRIAD GUARANTY INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                      |                                                                         |                        |         |          |      |   |         |          |   |   |         |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------- | ------- | -------- | ---- | - | ------- | -------- | - | - | ------- | ------- | -
|                                                                                      |                                                                         | Year Ended December 31 |        
|                                                                                      |                                                                         |                        |        
|                                                                                      |                                                                         | 2004                   |         |          | 2003 |   |         | 2002     |  
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|                                                                                      |                                                                         | (In thousands)         |        
|Operating activities                                                                  |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|Net income                                                                            |                                                                         | $                      | 58,417  |          |      | $ | 51,091  |          |   | $ | 45,103  |        
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|                                                                                      | Loss and unearned premium reserves                                      |                        |         | 7,169    |      |   |         | 12,916   |   |   |         | 4,258   |  
|                                                                                      | Accrued expenses and other liabilities                                  |                        |         | (1,348   | )    |   |         | 215      |   |   |         | (2,624  | )
|                                                                                      | Current taxes payable                                                   |                        |         | (6       | )    |   |         | (592     | ) |   |         | 558     |  
|                                                                                      | Income taxes recoverable                                                |                        |         | (977     | )    |   |         |         |   |   |         |        |  
|                                                                                      | Amounts due to/from reinsurer                                           |                        |         | 941      |      |   |         | (743     | ) |   |         | 492     |  
|                                                                                      | Accrued investment income                                               |                        |         | (1,654   | )    |   |         | (1,487   | ) |   |         | 108     |  
|                                                                                      | Policy acquisition costs deferred                                       |                        |         | (17,346  | )    |   |         | (18,478  | ) |   |         | (16,795 | )
|                                                                                      | Amortization of policy acquisition costs                                |                        |         | 14,256   |      |   |         | 18,112   |   |   |         | 13,742  |  
|                                                                                      | Net realized investment (gains) losses                                  |                        |         | (504     | )    |   |         | (3,029   | ) |   |         | 2,519   |  
|                                                                                      | Provision for depreciation                                              |                        |         | 3,319    |      |   |         | 2,941    |   |   |         | 2,778   |  
|                                                                                      | Accretion of discount on investments                                    |                        |         | (836     | )    |   |         | (3,212   | ) |   |         | (4,601  | )
|                                                                                      | Deferred income taxes                                                   |                        |         | 21,179   |      |   |         | 20,567   |   |   |         | 19,473  |  
|                                                                                      | Prepaid federal income taxes                                            |                        |         | (21,008  | )    |   |         | (20,338  | ) |   |         | (15,167 | )
|                                                                                      | Unearned ceding commission                                              |                        |         | (469     | )    |   |         | (717     | ) |   |         | (938    | )
|                                                                                      | Other assets                                                            |                        |         | 3,050    |      |   |         | (1,450   | ) |   |         | (1,318  | )
|                                                                                      | Other operating activities                                              |                        |         | 4,735    |      |   |         | 3,518    |   |   |         | (636    | )
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|Net cash provided by operating activities                                             |                                                                         |                        | 68,918  |          |      |   | 59,314  |          |   |   | 46,952  |        
|Investing activities                                                                  |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|Securities available-for-sale:                                                        |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|                                                                                      | Purchases  fixed maturities                                            |                        |         | (153,262 | )    |   |         | (186,509 | ) |   |         | (94,889 | )
|                                                                                      | Sales and maturities  fixed maturities                                 |                        |         | 77,961   |      |   |         | 117,908  |   |   |         | 59,696  |  
|                                                                                      | Purchases  equities                                                    |                        |         | (809     | )    |   |         | (2,044   | ) |   |         | (2,160  | )
|                                                                                      | Sales and maturities  equities                                         |                        |         | 2,674    |      |   |         | 1,525    |   |   |         | 1,797   |  
|Net change in short-term investments                                                  |                                                                         |                        | 9,564   |          |      |   | 9,644   |          |   |   | (16,564 | )      
|Purchases of property and equipment                                                   |                                                                         |                        | (2,895  | )        |      |   | (3,151  | )        |   |   | (1,141  | )      
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|Net cash used in investing activities                                                 |                                                                         |                        | (66,767 | )        |      |   | (62,627 | )        |   |   | (53,261 | )      
|Financing activities                                                                  |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|Proceeds from exercise of stock options                                               |                                                                         |                        | 3,741   |          |      |   | 4,053   |          |   |   | 5,689   |        
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|Net cash provided by financing activities                                             |                                                                         |                        | 3,741   |          |      |   | 4,053   |          |   |   | 5,689   |        
|Net change in cash                                                                    |                                                                         |                        | 5,892   |          |      |   | 740     |          |   |   | (620    | )      
|Cash at beginning of year                                                             |                                                                         |                        | 973     |          |      |   | 233     |          |   |   | 853     |        
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|Cash at end of year                                                                   |                                                                         | $                      | 6,865   |          |      | $ | 973     |          |   | $ | 233     |        
|                                                                                      |                                                                         |                        |         |          |      |   |         |          |  
|Supplemental schedule of cash flow information                                        |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|Cash paid during the period for:                                                      |                                                                         |                        |         |          |      |   |         |          |   |   |         |        
|                                                                                      | Income taxes and United States Mortgage Guaranty Tax and Loss
    Bonds |                        | $       | 23,692   |      |   | $       | 21,588   |   |   | $       | 16,024  |  
|                                                                                      | Interest                                                                |                        | $       | 2,765    |      |   | $       | 2,765    |   |   |         | 2,765   |  



61



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##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004




|   |                    
|-- | -------------------
|1. | Accounting Policies



| |                   
| | ------------------
| | Nature of Business





| |                      
| | ---------------------
| | Basis of Presentation





| |              
| | -------------
| | Consolidation





| |                 
| | ----------------
| | Use of Estimates





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







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





62



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##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                       
| | ----------------------
| | Property and Equipment





| |                                          
| | -----------------------------------------
| | Loss and Loss Adjustment Expense Reserves





| |            
| | -----------
| | Reinsurance





| |             
| | ------------
| | Income Taxes





63



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##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Income Recognition







| |                      
| | ---------------------
| | Significant Customers





| |              
| | -------------
| | Stock Options

Accounting for Stock Issued to Employees,




|                                  |         |      |        |      |      |   |        |      |  |   |        |      | 
|--------------------------------- | ------- | ---- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                  |         | 2004 |        |      | 2003 |   |        | 2002 | 
|                                  |         |      |        |      |      |   |        |      | 
|Net income  as reported          |         | $    | 58,417 |      |      | $ | 51,091 |      |  | $ | 45,103 |     
|Net income  pro forma            |         | $    | 57,915 |      |      | $ | 50,434 |      |  | $ | 44,261 |     
|Earnings per share  as reported: |         |      |        |      |      |   |        |      |  |   |        |     
|                                  | Basic   |      | $      | 4.04 |      |   | $      | 3.57 |  |   | $      | 3.21 | 
|                                  | Diluted |      | $      | 3.98 |      |   | $      | 3.52 |  |   | $      | 3.15 | 
|Earnings per share  pro forma:   |         |      |        |      |      |   |        |      |  |   |        |     
|                                  | Basic   |      | $      | 4.01 |      |   | $      | 3.52 |  |   | $      | 3.15 | 
|                                  | Diluted |      | $      | 3.94 |      |   | $      | 3.48 |  |   | $      | 3.09 | 



| |                   
| | ------------------
| | Earnings Per Share



64



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##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                     
| | --------------------
| | Comprehensive Income



|                                                                          |                                       |      |        |      |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------- | ------------------------------------- | ---- | ------ | ---- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                          |                                       | 2004 |        |      | 2003 |   |        | 2002   |  
|                                                                          |                                       |      |        |      |      |   |        |        |  
|Unrealized gains arising during the period, before taxes                  |                                       | $    | 3,624  |      |      | $ | 6,964  |        |   | $ | 9,265  |       
|Income taxes                                                              |                                       |      | (1,268 | )    |      |   | (2,439 | )      |   |   | (3,243 | )     
|                                                                          |                                       |      |        |      |      |   |        |        |  
|Unrealized gains arising during the period, net of taxes                  |                                       |      | 2,356  |      |      |   | 4,525  |        |   |   | 6,022  |       
|                                                                          |                                       |      |        |      |      |   |        |        |  
|Less reclassification adjustment:                                         |                                       |      |        |      |      |   |        |        |   |   |        |       
|                                                                          | Gains (losses) realized in net income |      |        | 504  |      |   |        | 3,029  |   |   |        | (2,519 | )
|                                                                          | Income taxes                          |      |        | (176 | )    |   |        | (1,060 | ) |   |        | 882    |  
|                                                                          |                                       |      |        |      |      |   |        |        |  
|Reclassification adjustment for gains (losses) realized in net
    income |                                       |      | 328    |      |      |   | 1,969  |        |   |   | (1,637 | )     
|                                                                          |                                       |      |        |      |      |   |        |        |  
|Other comprehensive income                                                |                                       | $    | 2,028  |      |      | $ | 2,556  |        |   | $ | 7,659  |       
|                                                                          |                                       |      |        |      |      |   |        |        |  



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements







65



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##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                  
| | -----------------
| | Reclassifications





|   |            
|-- | -----------
|2. | Investments



|                               |                            |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |        |         | 
|------------------------------ | -------------------------- | ------------------- | ------- | ------ | ---------- | - | ------ | ---------- | ------ | - | ---------- | --- | --- | - | ------- | ------ | ------- | 
|                               |                            | Cost or             |         |        | Gross      |   |        | Gross      |        |   |           
|                               |                            | Amortized           |         |        | Unrealized |   |        | Unrealized |        |   |           
|                               |                            | Cost                |         |        | Gains      |   |        | Losses     |        |   | Fair Value |    
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|At December 31, 2004           |                            |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |       
|Available-for-sale securities: |                            |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |       
|                               | Fixed maturity securities: |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |        |        
|                               |                            | Corporate           |         | $      | 23,157     |   |        | $          | 2,906  |   |            | $   |    |   |         | $      | 26,063  | 
|                               |                            | U.S. Government     |         |        | 12,873     |   |        |            | 67     |   |            |     | 212 |   |         |        | 12,728  | 
|                               |                            | Mortgage-backed     |         |        | 73         |   |        |            | 7      |   |            |     |    |   |         |        | 80      | 
|                               |                            | State and municipal |         |        | 399,329    |   |        |            | 16,157 |   |            |     | 236 |   |         |        | 415,250 | 
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|Total                          |                            |                     | 435,432 |        |            |   | 19,137 |            |        |   | 448        |     |     |   | 454,121 |       
|                               | Equity securities          |                     |         | 8,626  |            |   |        | 1,779      |        |   |            | 133 |     |   |         | 10,272 |        
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|Total                          |                            | $                   | 444,058 |        |            | $ | 20,916 |            |        | $ | 581        |     |     | $ | 464,393 |       
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|At December 31, 2003           |                            |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |       
|Available-for-sale securities: |                            |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |       
|                               | Fixed maturity securities: |                     |         |        |            |   |        |            |        |   |            |     |     |   |         |        |        
|                               |                            | Corporate           |         | $      | 25,951     |   |        | $          | 3,367  |   |            | $   | 171 |   |         | $      | 29,147  | 
|                               |                            | U.S. Government     |         |        | 15,477     |   |        |            | 238    |   |            |     | 92  |   |         |        | 15,623  | 
|                               |                            | Mortgage-backed     |         |        | 89         |   |        |            | 10     |   |            |     |    |   |         |        | 99      | 
|                               |                            | State and municipal |         |        | 318,368    |   |        |            | 12,284 |   |            |     | 424 |   |         |        | 330,228 | 
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|Total                          |                            |                     | 359,885 |        |            |   | 15,899 |            |        |   | 687        |     |     |   | 375,097 |       
|                               | Equity securities          |                     |         | 10,769 |            |   |        | 2,084      |        |   |            | 82  |     |   |         | 12,771 |        
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    
|Total                          |                            | $                   | 370,654 |        |            | $ | 17,983 |            |        | $ | 769        |     |     | $ | 387,868 |       
|                               |                            |                     |         |        |            |   |        |            |        |   |            |    

66



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                      |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |   |        |        |        |   |     |     |     | 
|------------------------------------- | ------------------- | ------------------- | ----- | ----- | ----------------- | - | --- | ----- | -- | - | ---------- | ----- | ------ | ----- | --- | --- | ---------- | - | ------ | ------ | ------ | - | --- | --- | --- | 
|                                      |                     | Less Than 12 Months |       |       | 12 Months or More |   |     | Total |   
|                                      |                     |                     |       |       |                   |   |     |       |   
|                                      |                     | Fair                |       |       | Unrealized        |   |     | Fair  |    |   | Unrealized |       |        | Fair  |     |     | Unrealized |  
|Description of Securities             |                     | Value               |       |       | Losses            |   |     | Value |    |   | Losses     |       |        | Value |     |     | Losses     |  
|                                      |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |  
|Fixed maturities:                     |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |   |        |        |        |   |     |    
|                                      | U.S. Government     |                     | $     | 970   |                   |   | $   | 31    |    |   | $          | 2,815 |        |       | $   | 181 |            |   | $      | 3,785  |        |   | $   | 212 |    
|                                      | State and municipal |                     |       | 6,539 |                   |   |     | 42    |    |   |            | 7,858 |        |       |     | 194 |            |   |        | 14,397 |        |   |     | 236 |    
|                                      |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |  
|                                      |                     | Subtotal            |       |       | 7,509             |   |     |       | 73 |   |            |       | 10,673 |       |     |     | 375        |   |        |        | 18,182 |   |     |     | 448 | 
|Equity securities                     |                     |                     | 1,319 |       |                   |   | 133 |       |    |   |           |       |        |       |    |     |            |   | 1,319  |        |        |   | 133 |    
|                                      |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |  
|Total temporarily impaired securities |                     | $                   | 8,828 |       |                   | $ | 206 |       |    | $ | 10,673     |       |        | $     | 375 |     |            | $ | 19,501 |        |        | $ | 581 |    
|                                      |                     |                     |       |       |                   |   |     |       |    |   |            |       |        |       |     |     |            |  





|          |                                    |                    |         |         |       |   |         |         | 
|--------- | ---------------------------------- | ------------------ | ------- | ------- | ----- | - | ------- | ------- | 
|          |                                    | Available-for-Sale |        
|          |                                    |                    |        
|          |                                    | Amortized          |         |         | Fair  |  
|          |                                    | Cost               |         |         | Value |  
|          |                                    |                    |         |         |       |  
|Maturity: |                                    |                    |         |         |       |   |         |        
|          | One year or less                   |                    | $       | 4,284   |       |   | $       | 4,312   | 
|          | After one year through five years  |                    |         | 8,940   |       |   |         | 9,406   | 
|          | After five years through ten years |                    |         | 60,899  |       |   |         | 63,401  | 
|          | After ten years                    |                    |         | 361,236 |       |   |         | 376,922 | 
|          | Mortgage-backed securities         |                    |         | 73      |       |   |         | 80      | 
|          |                                    |                    |         |         |       |  
|Total     |                                    | $                  | 435,432 |         |       | $ | 454,121 |        
|          |                                    |                    |         |         |       |  

67



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                            |                        |     |    |      |   |       |      |       |   |        |     |        |  
|------------------------------ | -------------------------- | ---------------------- | --- | -- | ---- | - | ----- | ---- | ----- | - | ------ | --- | ------ | -
|                               |                            | Year Ended December 31 |    
|                               |                            |                        |    
|                               |                            | 2004                   |     |    | 2003 |   |       | 2002 |      
|                               |                            |                        |     |    |      |   |       |      |      
|Securities available-for-sale: |                            |                        |     |    |      |   |       |      |       |   |        |    
|                               | Fixed maturity securities: |                        |     |    |      |   |       |      |       |   |        |     |       
|                               |                            | Gross realized gains   |     | $  | 626  |   |       | $    | 4,579 |   |        | $   | 1,833  |  
|                               |                            | Gross realized losses  |     |    | (146 | ) |       |      | (885  | ) |        |     | (3,948 | )
|                               | Equity securities:         |                        |     |    |      |   |       |      |       |   |        |     |       
|                               |                            | Gross realized gains   |     |    | 416  |   |       |      | 101   |   |        |     | 15     |  
|                               |                            | Gross realized losses  |     |    | (435 | ) |       |      | (742  | ) |        |     | (576   | )
|Covered call options:          |                            |                        |     |    |      |   |       |      |       |   |        |    
|                               | Gross realized gains       |                        |     | 43 |      |   |       | 4    |       |   |        | 189 |       
|                               | Gross realized losses      |                        |     |   |      |   |       | (28  | )     |   |        | (32 | )     
|                               |                            |                        |     |    |      |   |       |      |      
|Net realized gains (losses)    |                            | $                      | 504 |    |      | $ | 3,029 |      |       | $ | (2,519 | )  
|                               |                            |                        |     |    |      |   |       |      |      





|                      |                                 |                        |        |        |      |   |        |        |  |   |        |        | 
|--------------------- | ------------------------------- | ---------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                      |                                 | Year Ended December 31 |       
|                      |                                 |                        |       
|                      |                                 | 2004                   |        |        | 2003 |   |        | 2002   | 
|                      |                                 |                        |        |        |      |   |        |        | 
|Income:               |                                 |                        |        |        |      |   |        |        |  |   |        |       
|                      | Fixed maturities                |                        | $      | 19,829 |      |   | $      | 16,929 |  |   | $      | 15,809 | 
|                      | Preferred stocks                |                        |        | 385    |      |   |        | 368    |  |   |        | 438    | 
|                      | Common stocks                   |                        |        | 176    |      |   |        | 197    |  |   |        | 179    | 
|                      | Cash and short-term investments |                        |        | 135    |      |   |        | 263    |  |   |        | 270    | 
|                      |                                 |                        |        |        |      |   |        |        | 
|                      |                                 |                        | 20,525 |        |      |   | 17,757 |        |  |   | 16,696 |       
|Expenses              |                                 |                        | 771    |        |      |   | 675    |        |  |   | 597    |       
|                      |                                 |                        |        |        |      |   |        |        | 
|Net investment income |                                 | $                      | 19,754 |        |      | $ | 17,082 |        |  | $ | 16,099 |       
|                      |                                 |                        |        |        |      |   |        |        | 



68



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                  
|-- | ---------------------------------
|3. | Deferred Policy Acquisition Costs



|                                     |                                 |                        |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------ | ------------------------------- | ---------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                     |                                 | Year Ended December 31 |       
|                                     |                                 |                        |       
|                                     |                                 | 2004                   |        |        | 2003 |   |        | 2002   | 
|                                     |                                 |                        |        |        |      |   |        |        | 
|Balance at beginning of year         |                                 | $                      | 29,363 |        |      | $ | 28,997 |        |  | $ | 25,944 |       
|Acquisition costs deferred:          |                                 |                        |        |        |      |   |        |        |  |   |        |       
|                                     | Sales compensation              |                        |        | 7,340  |      |   |        | 7,038  |  |   |        | 6,291  | 
|                                     | Underwriting and issue expenses |                        |        | 10,006 |      |   |        | 11,440 |  |   |        | 10,504 | 
|                                     |                                 |                        |        |        |      |   |        |        | 
|                                     |                                 |                        | 17,346 |        |      |   | 18,478 |        |  |   | 16,795 |       
|Amortization of acquisition expenses |                                 |                        | 14,256 |        |      |   | 18,112 |        |  |   | 13,742 |       
|                                     |                                 |                        |        |        |      |   |        |        | 
|Net increase                         |                                 |                        | 3,090  |        |      |   | 366    |        |  |   | 3,053  |       
|                                     |                                 |                        |        |        |      |   |        |        | 
|Balance at end of year               |                                 | $                      | 32,453 |        |      | $ | 29,363 |        |  | $ | 28,997 |       
|                                     |                                 |                        |        |        |      |   |        |        | 



|   |                                                
|-- | -----------------------------------------------
|4. | Reserve for Losses and Loss Adjustment Expenses



|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |   |   |        |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                                                                                |                                        | 2004 |        |        | 2003 |   |        | 2002   |  
|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |  
|Reserve for losses and loss adjustment expenses at
    January 1, net of reinsurance recoverables                                                               |                                        | $    | 27,183 |        |      | $ | 21,355 |        |   | $ | 17,981 |       
|Incurred losses and loss adjustment expenses net of reinsurance
    recoveries (principally in respect of default notices
    received in):                     |                                        |      |        |        |      |   |        |        |   |   |        |       
|                                                                                                                                                                | Current year                           |      |        | 25,942 |      |   |        | 24,376 |   |   |        | 18,504 |  
|                                                                                                                                                                | Deficiency (redundancy) on prior years |      |        | 9,922  |      |   |        | (543   | ) |   |        | (4,441 | )
|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |  
|Total incurred losses and loss adjustment expenses                                                                                                              |                                        |      | 35,864 |        |      |   | 23,833 |        |   |   | 14,063 |       
|Loss and loss adjustment expense payments net of reinsurance
    recoveries (principally in respect of default notices
    received in):                        |                                        |      |        |        |      |   |        |        |   |   |        |       
|                                                                                                                                                                | Current year                           |      |        | 2,033  |      |   |        | 3,652  |   |   |        | 2,053  |  
|                                                                                                                                                                | Prior years                            |      |        | 26,974 |      |   |        | 14,353 |   |   |        | 8,636  |  
|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |  
|Total loss and loss adjustment expense payments                                                                                                                 |                                        |      | 29,007 |        |      |   | 18,005 |        |   |   | 10,689 |       
|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |  
|Reserve for losses and loss adjustment expenses at
    December 31, net of reinsurance recoverables of $2, $3, and
    $5 in 2004, 2003, and 2002, respectively |                                        | $    | 34,040 |        |      | $ | 27,183 |        |   | $ | 21,355 |       
|                                                                                                                                                                |                                        |      |        |        |      |   |        |        |  





69



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |            
|-- | -----------
|5. | Commitments



|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 2,015  | 
|2006       |  |   | 1,616  | 
|2007       |  |   | 1,308  | 
|2008       |  |   | 1,144  | 
|2009       |  |   | 1,121  | 
|Thereafter |  |   | 3,414  | 
|           |  |   |       
|           |  | $ | 10,618 | 
|           |  |   |       





|   |                     
|-- | --------------------
|6. | Federal Income Taxes



|                                             |                     |      |        |        |      |   |        |        |   |   |        |        |  
|-------------------------------------------- | ------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                             |                     | 2004 |        |        | 2003 |   |        | 2002   |  
|                                             |                     |      |        |        |      |   |        |        |  
|Income tax computed at statutory rate        |                     | $    | 28,662 |        |      | $ | 25,331 |        |   | $ | 22,835 |       
|(Decrease) increase in taxes resulting from: |                     |      |        |        |      |   |        |        |   |   |        |       
|                                             | Tax-exempt interest |      |        | (6,048 | )    |   |        | (4,730 | ) |   |        | (3,933 | )
|                                             | Other               |      |        | 860    |      |   |        | 682    |   |   |        | 1,238  |  
|                                             |                     |      |        |        |      |   |        |        |  
|Income tax expense                           |                     | $    | 23,474 |        |      | $ | 21,283 |        |   | $ | 20,140 |       
|                                             |                     |      |        |        |      |   |        |        |  

70



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                                     |      |         |         |      |   |         |        | 
|------------------------------ | ----------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------ | 
|                               |                                     | 2004 |         |         | 2003 |  
|                               |                                     |      |         |         |      |  
|Deferred tax liabilities       |                                     |      |         |         |      |   |         |       
|                               | Contingency loss reserve deduction  |      | $       | 118,903 |      |   | $       | 98,493 | 
|                               | Deferred policy acquisition costs   |      |         | 11,359  |      |   |         | 10,277 | 
|                               | Unrealized investment gain          |      |         | 7,117   |      |   |         | 6,025  | 
|                               | Other                               |      |         | 3,144   |      |   |         | 3,078  | 
|                               |                                     |      |         |         |      |  
|Total deferred tax liabilities |                                     |      | 140,523 |         |      |   | 117,873 |       
|Deferred tax assets            |                                     |      |         |         |      |   |         |       
|                               | Unearned premiums                   |      |         | 1,216   |      |   |         | 1,202  | 
|                               | Losses and loss adjustment expenses |      |         | 820     |      |   |         | 655    | 
|                               | Other                               |      |         | 562     |      |   |         | 557    | 
|                               |                                     |      |         |         |      |  
|Total deferred tax assets      |                                     |      | 2,598   |         |      |   | 2,414   |       
|                               |                                     |      |         |         |      |  
|Net deferred tax liability     |                                     | $    | 137,925 |         |      | $ | 115,459 |       
|                               |                                     |      |         |         |      |  





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





|                              |  |      |           |  |      |   |           | 
|----------------------------- |  | ---- | --------- |  | ---- | - | --------- | 
|                              |  | 2004 |           |  | 2003 |  
|                              |  |      |           |  |      |  
|Net risk                      |  | $    | 7,049,102 |  |      | $ | 6,590,222 | 
|                              |  |      |           |  |      |  
|Statutory capital and surplus |  | $    | 135,662   |  |      | $ | 128,212   | 
|Contingency reserve           |  |      | 369,484   |  |      |   | 302,740   | 
|                              |  |      |           |  |      |  
|Total                         |  | $    | 505,146   |  |      | $ | 430,952   | 
|                              |  |      |           |  |      |  
|Risk-to-capital ratio         |  |      | 14.0 to 1 |  |      |   | 15.3 to 1 | 
|                              |  |      |           |  |      |  



71



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                           
|-- | --------------------------
|8. | Related Party Transactions





|   |                      
|-- | ---------------------
|9. | Employee Benefit Plan





|    |            
|--- | -----------
|10. | Reinsurance





|                        |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                        |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                        |  |      |        |   |      |   |        |      | 
|Earned premiums ceded   |  | $    | 35,392 |   |      | $ | 27,226 |      |  | $ | 18,260 |  
|Losses ceded            |  |      | (2     | ) |      |   | 1      |      |  |   | 1      |  
|Earned premiums assumed |  |      | 1      |   |      |   | 2      |      |  |   | 4      |  
|Losses assumed          |  |      | (14    | ) |      |   | (2     | )    |  |   | (1     | )







72



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                               
|--- | ------------------------------
|11. | Long-Term Stock Incentive Plan





|     |                                |           |  |           |              |           |         |                |  |  |   |       | 
|---- | ------------------------------ | --------- |  | --------- | ------------ | --------- | ------- | -------------- |  |  | - | ----- | 
|     |                                |           |  |           |              | Weighted- |        
|     |                                | Number of |  |           |              |           | Average |               
|     |                                | Shares    |  |           | Option Price |           |         | Exercise Price | 
|     |                                |           |  |           |              |           |         |                | 
|2002 |                                |           |  |           |              |           |         |                |  |  |   |      
|     | Outstanding, beginning of year |           |  | 1,308,774 |              |           | $       | 4.58-49.08     |  |  | $ | 20.71 | 
|     | Granted                        |           |  | 88,640    |              |           |         | 32.96-47.60    |  |  |   | 40.48 | 
|     | Exercised                      |           |  | 444,349   |              |           |         | 4.58-41.94     |  |  |   | 12.80 | 
|     | Canceled                       |           |  | 2,760     |              |           |         | 29.65-39.49    |  |  |   | 35.92 | 
|     | Outstanding, end of year       |           |  | 950,305   |              |           |         | 4.58-49.08     |  |  |   | 25.94 | 
|     | Exercisable, end of year       |           |  | 804,652   |              |           |         | 4.58-49.08     |  |  |   | 23.91 | 
|2003 |                                |           |  |           |              |           |         |                |  |  |   |      
|     | Outstanding, beginning of year |           |  | 950,305   |              |           |         | 4.58-49.08     |  |  |   | 25.94 | 
|     | Granted                        |           |  | 73,500    |              |           |         | 33.18-47.01    |  |  |   | 34.57 | 
|     | Exercised                      |           |  | 244,156   |              |           |         | 5.33-39.49     |  |  |   | 16.60 | 
|     | Canceled                       |           |  | 20,939    |              |           |         | 28.00-39.49    |  |  |   | 33.03 | 
|     | Outstanding, end of year       |           |  | 758,710   |              |           |         | 4.58-49.08     |  |  |   | 29.58 | 
|     | Exercisable, end of year       |           |  | 657,748   |              |           |         | 4.58-49.08     |  |  |   | 28.44 | 
|2004 |                                |           |  |           |              |           |         |                |  |  |   |      
|     | Outstanding, beginning of year |           |  | 758,710   |              |           |         | 4.58-49.08     |  |  |   | 29.58 | 
|     | Granted                        |           |  | 29,750    |              |           |         | 53.61-73.74    |  |  |   | 55.67 | 
|     | Exercised                      |           |  | 163,342   |              |           |         | 4.58-49.08     |  |  |   | 22.90 | 
|     | Canceled                       |           |  | 6,336     |              |           |         | 29.65-53.61    |  |  |   | 41.24 | 
|     | Outstanding, end of year       |           |  | 618,782   |              |           |         | 5.96-73.74     |  |  |   | 32.48 | 
|     | Exercisable, end of year       |           |  | 558,074   |              |           |         | 5.96-53.61     |  |  |   | 31.20 | 

73



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|            |         |           |                |   |               |           |  |   |           |           |  |             |     |  |       |  |         |  |  |   |       | 
|----------- | ------- | --------- | -------------- | - | ------------- | --------- |  | - | --------- | --------- |  | ----------- | --- |  | ----- |  | ------- |  |  | - | ----- | 
|Outstanding |         |           | Exercisable    |  
|            |         |           |                |  
|            |         | Weighted- |                |   | Weighted-     |           |  |   |           | Weighted- | 
|            |         | Average   |                |   | Average       |           |  |   |           | Average   | 
|Number of   |         |           | Exercise       |   |               | Remaining |  |   | Number of |           |  | Exercisable |    
|Shares      |         |           | Exercise Price |   |               | Price     |  |   | Life      |           |  | Shares      |     |  | Price | 
|            |         |           |                |   |               |           |  |   |           |           |  |             |     |  |       | 
|            | 41,646  |           |                | $ | 5.96 - 14.81  |           |  | $ | 9.13      |           |  |             | 0.7 |  |       |  | 41,646  |  |  | $ | 9.13  | 
|            | 62,084  |           |                |   | 17.00 - 22.50 |           |  |   | 19.74     |           |  |             | 2.5 |  |       |  | 62,084  |  |  |   | 19.74 | 
|            | 179,984 |           |                |   | 23.24 - 29.65 |           |  |   | 25.99     |           |  |             | 4.7 |  |       |  | 179,984 |  |  |   | 25.99 | 
|            | 76,427  |           |                |   | 30.00 - 37.75 |           |  |   | 33.59     |           |  |             | 7.5 |  |       |  | 57,594  |  |  |   | 33.65 | 
|            | 165,566 |           |                |   | 39.00 - 41.94 |           |  |   | 39.40     |           |  |             | 5.7 |  |       |  | 151,363 |  |  |   | 39.38 | 
|            | 87,575  |           |                |   | 47.01 - 53.61 |           |  |   | 49.90     |           |  |             | 5.5 |  |       |  | 65,403  |  |  |   | 49.36 | 
|            | 5,500   |           |                |   | 57.30 - 73.74 |           |  |   | 64.77     |           |  |             | 9.8 |  |       |  |        |  |  |   |      | 
|            |         |           |                |   |               |           |  |   |           |           |  |             |     |  |       | 
|            | 618,782 |           |                |   |               |           |  |   | 32.48     |           |  |             | 5.0 |  |       |  | 558,074 |  |  |   | 31.20 | 
|            |         |           |                |   |               |           |  |   |           |           |  |             |     |  |       | 



Accounting for Stock-Based
Compensation,




|                             |  |                  |       |  |                  |   |       |      |  |   |       |  |  |      |       |  |      |   |       |  |  |   |       | 
|---------------------------- |  | ---------------- | ----- |  | ---------------- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|                             |  | Weighted-Average |       |  | Weighted-Average |  
|                             |  | Exercise Price   |       |  | Fair Value       |  
|                             |  |                  |       |  |                  |  
|Type of Option               |  | 2004             |       |  | 2003             |   |       | 2002 |  |   | 2004  |  |  | 2003 |       |  | 2002 |  
|                             |  |                  |       |  |                  |   |       |      |  |   |       |  |  |      |       |  |      |  
|Stock Price = Exercise Price |  | $                | 54.02 |  |                  | $ | 34.57 |      |  | $ | 40.48 |  |  | $    | 25.89 |  |      | $ | 15.77 |  |  | $ | 13.21 | 
|Stock Price < Exercise Price |  | $                | 73.74 |  |                  | $ |      |      |  | $ |      |  |  | $    | 21.84 |  |      | $ |      |  |  | $ |      | 



|                            |  |      |        |  |      |   |        |      |  |   |        | 
|--------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                            |  | 2004 |        |  | 2003 |   |        | 2002 | 
|                            |  |      |        |  |      |   |        |      | 
|Number of shares granted    |  |      | 30,100 |  |      |   | 35,160 |      |  |   | 23,580 | 
|Weighted-average fair value |  | $    | 53.88  |  |      | $ | 33.33  |      |  | $ | 39.57  | 

74



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |               
|--- | --------------
|12. | Long-term Debt





|    |                                    
|--- | -----------------------------------
|13. | Fair Value of Financial Instruments



|                                             |  |          |         |  |            |   |          |       |  |   |            |  |  |   |         | 
|-------------------------------------------- |  | -------- | ------- |  | ---------- | - | -------- | ----- |  | - | ---------- |  |  | - | ------- | 
|                                             |  | 2004     |         |  | 2003       |  
|                                             |  |          |         |  |            |  
|                                             |  | Carrying |         |  |            |   | Carrying |       |  |  
|                                             |  | Value    |         |  | Fair Value |   |          | Value |  |   | Fair Value | 
|                                             |  |          |         |  |            |   |          |       |  |   |            | 
|Financial Assets                             |  |          |         |  |            |   |          |       |  |   |            |  |  |   |         | 
|Fixed maturity securities available-for-sale |  | $        | 454,121 |  |            | $ | 454,121  |       |  | $ | 375,097    |  |  | $ | 375,097 | 
|Equity securities available-for-sale         |  |          | 10,272  |  |            |   | 10,272   |       |  |   | 12,771     |  |  |   | 12,771  | 
|Financial Liabilities                        |  |          |         |  |            |   |          |       |  |   |            |  |  |   |         | 
|Long-term debt                               |  |          | 34,493  |  |            |   | 39,315   |       |  |   | 34,486     |  |  |   | 38,037  | 









|    |              
|--- | -------------
|14. | Contingencies





|    |                                   
|--- | ----------------------------------
|15. | Unaudited Quarterly Financial Data



75



---



##### 



TRIAD GUARANTY INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |  |              |        |  |        |   |        |       |  |   |        |  |  |      |        |  |  |   |         | 
|------------------------------- |  | ------------ | ------ |  | ------ | - | ------ | ----- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------- | 
|                                |  | 2004 Quarter |        |  |       
|                                |  |              |        |  |       
|                                |  | First        |        |  | Second |   |        | Third |  |   | Fourth |  |  | Year |       
|                                |  |              |        |  |        |   |        |       |  |   |        |  |  |      |       
|Net premiums written            |  | $            | 32,346 |  |        | $ | 34,277 |       |  | $ | 36,316 |  |  | $    | 38,392 |  |  | $ | 141,331 | 
|Earned premiums                 |  |              | 33,812 |  |        |   | 34,183 |       |  |   | 35,819 |  |  |      | 37,178 |  |  |   | 140,992 | 
|Net investment income           |  |              | 4,586  |  |        |   | 4,598  |       |  |   | 5,255  |  |  |      | 5,315  |  |  |   | 19,754  | 
|Net losses incurred             |  |              | 8,883  |  |        |   | 7,701  |       |  |   | 9,234  |  |  |      | 10,046 |  |  |   | 35,864  | 
|Underwriting and other expenses |  |              | 10,218 |  |        |   | 10,872 |       |  |   | 11,062 |  |  |      | 11,359 |  |  |   | 43,511  | 
|Net income                      |  |              | 14,044 |  |        |   | 14,375 |       |  |   | 14,796 |  |  |      | 15,202 |  |  |   | 58,417  | 
|Basic earnings per share        |  |              | 0.97   |  |        |   | 0.99   |       |  |   | 1.02   |  |  |      | 1.05   |  |  |   | 4.04    | 
|Diluted earnings per share      |  |              | 0.96   |  |        |   | 0.98   |       |  |   | 1.00   |  |  |      | 1.03   |  |  |   | 3.98    | 

|                                |  |              |        |  |        |   |        |       |  |   |        |  |  |      |        |  |  |   |         | 
|------------------------------- |  | ------------ | ------ |  | ------ | - | ------ | ----- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------- | 
|                                |  | 2003 Quarter |        |  |       
|                                |  |              |        |  |       
|                                |  | First        |        |  | Second |   |        | Third |  |   | Fourth |  |  | Year |       
|                                |  |              |        |  |        |   |        |       |  |   |        |  |  |      |       
|Net premiums written            |  | $            | 28,140 |  |        | $ | 31,381 |       |  | $ | 33,119 |  |  | $    | 34,096 |  |  | $ | 126,736 | 
|Earned premiums                 |  |              | 28,132 |  |        |   | 28,266 |       |  |   | 30,323 |  |  |      | 33,011 |  |  |   | 119,732 | 
|Net investment income           |  |              | 4,333  |  |        |   | 4,333  |       |  |   | 4,230  |  |  |      | 4,186  |  |  |   | 17,082  | 
|Net losses incurred             |  |              | 5,265  |  |        |   | 5,380  |       |  |   | 6,053  |  |  |      | 7,135  |  |  |   | 23,833  | 
|Underwriting and other expenses |  |              | 9,952  |  |        |   | 9,886  |       |  |   | 11,535 |  |  |      | 12,287 |  |  |   | 43,660  | 
|Net income                      |  |              | 12,352 |  |        |   | 12,631 |       |  |   | 12,547 |  |  |      | 13,561 |  |  |   | 51,091  | 
|Basic earnings per share        |  |              | 0.87   |  |        |   | 0.88   |       |  |   | 0.87   |  |  |      | 0.94   |  |  |   | 3.57    | 
|Diluted earnings per share      |  |              | 0.86   |  |        |   | 0.87   |       |  |   | 0.86   |  |  |      | 0.93   |  |  |   | 3.52    | 

76



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##### 



SCHEDULE I


SUMMARY OF INVESTMENTS  OTHER THAN INVESTMENTS IN
RELATED PARTIES


TRIAD GUARANTY INC.


December 31, 2004


|                                                            |                 |                              |         |         |         |   |           |                  |         |   |         |         |         | 
|----------------------------------------------------------- | --------------- | ---------------------------- | ------- | ------- | ------- | - | --------- | ---------------- | ------- | - | ------- | ------- | ------- | 
|                                                            |                 | Cost or                      |         |         |         |   | Amount at |                 
|                                                            |                 | Amortized                    |         |         | Fair    |   |           | Which Shown      |        
|Type of Investment                                          |                 | Cost                         |         |         | Value   |   |           | in Balance Sheet |        
|                                                            |                 |                              |         |         |         |   |           |                  |        
|                                                            |                 | (In thousands)               |        
|Fixed maturity securities, availableforsale:              |                 |                              |         |         |         |   |           |                  |         |   |         |        
|                                                            | Bonds:          |                              |         |         |         |   |           |                  |         |   |         |         |        
|                                                            |                 | U.S. Government obligations  |         | $       | 12,873  |   |           | $                | 12,728  |   |         | $       | 12,728  | 
|                                                            |                 | Mortgagebacked securities   |         |         | 73      |   |           |                  | 80      |   |         |         | 80      | 
|                                                            |                 | State and municipal bonds    |         |         | 399,329 |   |           |                  | 415,250 |   |         |         | 415,250 | 
|                                                            |                 | Corporate bonds              |         |         | 23,157  |   |           |                  | 26,063  |   |         |         | 26,063  | 
|                                                            |                 |                              |         |         |         |   |           |                  |        
|                                                            | Total           |                              |         | 435,432 |         |   |           | 454,121          |         |   |         | 454,121 |        
|                                                            |                 |                              |         |         |         |   |           |                  |        
|Equity securities, availableforsale:                      |                 |                              |         |         |         |   |           |                  |         |   |         |        
|                                                            | Common stocks:  |                              |         |         |         |   |           |                  |         |   |         |         |        
|                                                            |                 | Bank, trust, and insurance   |         |         | 511     |   |           |                  | 903     |   |         |         | 903     | 
|                                                            |                 | Public utilities             |         |         | 175     |   |           |                  | 305     |   |         |         | 305     | 
|                                                            |                 | Industrial and miscellaneous |         |         | 2,781   |   |           |                  | 3,699   |   |         |         | 3,699   | 
|                                                            | Preferred stock |                              |         | 5,159   |         |   |           | 5,365            |         |   |         | 5,365   |        
|                                                            |                 |                              |         |         |         |   |           |                  |        
|                                                            | Total           |                              |         | 8,626   |         |   |           | 10,272           |         |   |         | 10,272  |        
|                                                            |                 |                              |         |         |         |   |           |                  |        
|Short-term investments                                      |                 |                              | 16,095  |         |         |   | 16,095    |                  |         |   | 16,095  |        
|                                                            |                 |                              |         |         |         |   |           |                  |        
|Total investments other than investments in related parties |                 | $                            | 460,153 |         |         | $ | 480,488   |                  |         | $ | 480,488 |        
|                                                            |                 |                              |         |         |         |   |           |                  |        

77



---



##### 



SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT


CONDENSED BALANCE SHEETS


TRIAD GUARANTY INC.


(Parent Company)


|                                           |                                        |                |         |         |      |   |         |         |  
|------------------------------------------ | -------------------------------------- | -------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                                           |                                        | December 31    |        
|                                           |                                        |                |        
|                                           |                                        | 2004           |         |         | 2003 |  
|                                           |                                        |                |         |         |      |  
|                                           |                                        | (In thousands) |        
|ASSETS:                                   
|                                           | Fixed maturities, available-for-sale   |                | $       | 24,069  |      |   | $       | 16,745  |  
|                                           | Equity securities, available-for-sale  |                |         | 513     |      |   |         | 521     |  
|                                           | Notes receivable from subsidiary       |                |         | 25,000  |      |   |         | 25,000  |  
|                                           | Investment in subsidiary               |                |         | 421,259 |      |   |         | 358,302 |  
|                                           | Short-term investments                 |                |         | 842     |      |   |         | 2,564   |  
|                                           | Cash                                   |                |         | 1,736   |      |   |         | 1,272   |  
|                                           | Accrued investment income              |                |         | 1,482   |      |   |         | 1,308   |  
|                                           | Income taxes recoverable               |                |         | 1,139   |      |   |         |        |  
|                                           | Other assets                           |                |         | 1,251   |      |   |         | 428     |  
|                                           |                                        |                |         |         |      |  
|Total assets                               |                                        | $              | 477,291 |         |      | $ | 406,140 |        
|                                           |                                        |                |         |         |      |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY:     
|Liabilities:                               |                                        |                |         |         |      |   |         |        
|                                           | Long-term debt                         |                | $       | 34,493  |      |   | $       | 34,486  |  
|                                           | Accrued interest on long-term debt     |                |         | 1,275   |      |   |         | 1,275   |  
|                                           | Deferred income taxes                  |                |         | 4,110   |      |   |         | 449     |  
|                                           | Accrued expenses and other liabilities |                |         | 70      |      |   |         |        |  
|                                           |                                        |                |         |         |      |  
|Total liabilities                          |                                        |                | 39,948  |         |      |   | 36,210  |        
|Stockholders equity:                      |                                        |                |         |         |      |   |         |        
|                                           | Common stock                           |                |         | 146     |      |   |         | 144     |  
|                                           | Additional paid-in capital             |                |         | 94,852  |      |   |         | 87,513  |  
|                                           | Accumulated other comprehensive income |                |         | 13,218  |      |   |         | 11,190  |  
|                                           | Deferred compensation                  |                |         | (1,501  | )    |   |         | (1,128  | )
|                                           | Retained earnings                      |                |         | 330,628 |      |   |         | 272,211 |  
|                                           |                                        |                |         |         |      |  
|Total stockholders equity                 |                                        |                | 437,343 |         |      |   | 369,930 |        
|                                           |                                        |                |         |         |      |  
|Total liabilities and stockholders equity |                                        | $              | 477,291 |         |      | $ | 406,140 |        
|                                           |                                        |                |         |         |      |  



78



---



##### 



SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT


CONDENSED STATEMENTS OF INCOME


TRIAD GUARANTY INC.


(Parent Company)


|                                                                                               |                                    |                        |        |       |      |   |        |       |  |   |        |        |  
|---------------------------------------------------------------------------------------------- | ---------------------------------- | ---------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ------ | -
|                                                                                               |                                    | Year Ended December 31 |       
|                                                                                               |                                    |                        |       
|                                                                                               |                                    | 2004                   |        |       | 2003 |   |        | 2002  | 
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|                                                                                               |                                    | (In thousands)         |       
|Revenues:                                                                                      |                                    |                        |        |       |      |   |        |       |  |   |        |       
|                                                                                               | Net investment income              |                        | $      | 3,251 |      |   | $      | 3,120 |  |   | $      | 3,170  |  
|                                                                                               | Realized investment gains (losses) |                        |        | 142   |      |   |        | 486   |  |   |        | (1,168 | )
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|                                                                                               |                                    |                        | 3,393  |       |      |   | 3,606  |       |  |   | 2,002  |       
|Expenses:                                                                                      |                                    |                        |        |       |      |   |        |       |  |   |        |       
|                                                                                               | Interest on long-term debt         |                        |        | 2,772 |      |   |        | 2,772 |  |   |        | 2,771  |  
|                                                                                               | Operating expenses                 |                        |        | 1,230 |      |   |        | 752   |  |   |        | 885    |  
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|                                                                                               |                                    |                        | 4,002  |       |      |   | 3,524  |       |  |   | 3,656  |       
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|Income (loss) before federal income taxes and equity in
    undistributed income of subsidiary |                                    |                        | (609   | )     |      |   | 82     |       |  |   | (1,654 | )     
|Income taxes:                                                                                  |                                    |                        |        |       |      |   |        |       |  |   |        |       
|                                                                                               | Current                            |                        |        | 28    |      |   |        |      |  |   |        |       |  
|                                                                                               | Deferred                           |                        |        |      |      |   |        | 142   |  |   |        | (176   | )
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|                                                                                               |                                    |                        | 28     |       |      |   | 142    |       |  |   | (176   | )     
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|Loss before equity in undistributed income of subsidiary                                       |                                    |                        | (637   | )     |      |   | (60    | )     |  |   | (1,478 | )     
|Equity in undistributed income of subsidiary                                                   |                                    |                        | 59,054 |       |      |   | 51,151 |       |  |   | 46,581 |       
|                                                                                               |                                    |                        |        |       |      |   |        |       | 
|Net income                                                                                     |                                    | $                      | 58,417 |       |      | $ | 51,091 |       |  | $ | 45,103 |       
|                                                                                               |                                    |                        |        |       |      |   |        |       | 



79



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##### 



SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT


CONDENSED STATEMENTS OF CASH FLOWS


TRIAD GUARANTY INC.


(Parent Company)


|                                                                                                |                                                  |                        |        |         |         |   |        |         |         |   |        |         |        |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | - | ------ | ------- | ------ | -
|                                                                                                |                                                  | Year Ended December 31 |       
|                                                                                                |                                                  |                        |       
|                                                                                                |                                                  | 2004                   |        |         | 2003    |   |        | 2002    |        
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|                                                                                                |                                                  | (In thousands)         |       
|Operating Activities:                                                                           |                                                  |                        |        |         |         |   |        |         |         |   |        |        
|Net income                                                                                      |                                                  | $                      | 58,417 |         |         | $ | 51,091 |         |         | $ | 45,103 |        
|Adjustments to reconcile net income to net cash provided by
    (used in) operating activities: |                                                  |                        |        |         |         |   |        |         |         |   |        |        
|                                                                                                | Equity in undistributed income of subsidiary     |                        |        | (59,054 | )       |   |        | (51,151 | )       |   |        | (46,581 | )     
|                                                                                                | Accrued investment income                        |                        |        | (174    | )       |   |        | (14     | )       |   |        | (33     | )     
|                                                                                                | Other assets                                     |                        |        | (823    | )       |   |        | (78     | )       |   |        | (230    | )     
|                                                                                                | Deferred income taxes                            |                        |        | 3,596   |         |   |        | 142     |         |   |        | (176    | )     
|                                                                                                | Current taxes                                    |                        |        | (1,139  | )       |   |        | (52     | )       |   |        | (18     | )     
|                                                                                                | Accretion of discount on investments             |                        |        | (61     | )       |   |        | (91     | )       |   |        | (98     | )     
|                                                                                                | Amortization of deferred compensation            |                        |        | 1,232   |         |   |        | 690     |         |   |        | 392     |       
|                                                                                                | Amortization of debt issue costs                 |                        |        | 7       |         |   |        | 7       |         |   |        | 6       |       
|                                                                                                | Realized investment (gains) losses on securities |                        |        | (142    | )       |   |        | (486    | )       |   |        | 1,168   |       
|                                                                                                | Other liabilities                                |                        |        | 70      |         |   |        |        |         |   |        |        |       
|                                                                                                | Other operating activities                       |                        |        | (1      | )       |   |        | (2      | )       |   |        | 188     |       
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|Net cash provided by (used in) operating activities                                             |                                                  |                        | 1,928  |         |         |   | 56     |         |         |   | (279   | )      
|Investing Activities:                                                                           |                                                  |                        |        |         |         |   |        |         |         |   |        |        
|                                                                                                | Fixed maturities:                                |                        |        |         |         |   |        |         |         |   |        |         |       
|                                                                                                |                                                  | Purchases              |        |         | (10,246 | ) |        |         | (14,468 | ) |        |         | (8,600 | )
|                                                                                                |                                                  | Sales and maturities   |        |         | 3,319   |   |        |         | 11,748  |   |        |         | 4,258  |  
|                                                                                                | Equity Securities:                               |                        |        |         |         |   |        |         |         |   |        |         |       
|                                                                                                |                                                  | Purchases              |        |         |        |   |        |         |        |   |        |         | (250   | )
|                                                                                                |                                                  | Sales                  |        |         |        |   |        |         | 256     |   |        |         | 2      |  
|                                                                                                | Change in short-term investments                 |                        |        | 1,722   |         |   |        | (569    | )       |   |        | (776    | )     
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|Net cash used in investing activities                                                           |                                                  |                        | (5,205 | )       |         |   | (3,033 | )       |         |   | (5,366 | )      
|Financing Activities:                                                                           |                                                  |                        |        |         |         |   |        |         |         |   |        |        
|                                                                                                | Proceeds from exercise of stock options          |                        |        | 3,741   |         |   |        | 4,053   |         |   |        | 5,689   |       
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|Net cash provided by financing activities                                                       |                                                  |                        | 3,741  |         |         |   | 4,053  |         |         |   | 5,689  |        
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|Increase in cash                                                                                |                                                  |                        | 464    |         |         |   | 1,076  |         |         |   | 44     |        
|Cash at beginning of year                                                                       |                                                  |                        | 1,272  |         |         |   | 196    |         |         |   | 152    |        
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        
|Cash at end of year                                                                             |                                                  | $                      | 1,736  |         |         | $ | 1,272  |         |         | $ | 196    |        
|                                                                                                |                                                  |                        |        |         |         |   |        |         |        



80



---



##### 



SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT


TRIAD GUARANTY INC.


(Parent Company)


SUPPLEMENTARY NOTES




|   |                                                          
|-- | ---------------------------------------------------------
|1. | Basis of Presentation and Significant Accounting Policies





|   |                     
|-- | --------------------
|2. | Nature of Operations





|   |            
|-- | -----------
|3. | Investments



|                           |                   |           |        |        |            |   |     |            |  |   |       |    |  |   |        |        | 
|-------------------------- | ----------------- | --------- | ------ | ------ | ---------- | - | --- | ---------- |  | - | ----- | -- |  | - | ------ | ------ | 
|                           |                   | Cost or   |        |        | Gross      |   |     | Gross      |  |   |      
|                           |                   | Amortized |        |        | Unrealized |   |     | Unrealized |  |   | Fair  |   
|At December 31, 2004       |                   | Cost      |        |        | Gains      |   |     | Losses     |  |   | Value |   
|                           |                   |           |        |        |            |   |     |            |  |   |       |   
|Fixed maturity securities: |                   |           |        |        |            |   |     |            |  |   |       |    |  |   |        |       
|                           | Corporate         |           | $      | 1,140  |            |   | $   | 49         |  |   | $     |   |  |   | $      | 1,189  | 
|                           | U.S. Government   |           |        | 250    |            |   |     |           |  |   |       | 13 |  |   |        | 237    | 
|                           | Municipal         |           |        | 21,767 |            |   |     | 885        |  |   |       | 9  |  |   |        | 22,643 | 
|                           |                   |           |        |        |            |   |     |            |  |   |       |   
|Total                      |                   |           | 23,157 |        |            |   | 934 |            |  |   | 22    |    |  |   | 24,069 |       
|                           | Equity securities |           |        | 500    |            |   |     | 13         |  |   |       |   |  |   |        | 513    | 
|                           |                   |           |        |        |            |   |     |            |  |   |       |   
|Total                      |                   | $         | 23,657 |        |            | $ | 947 |            |  | $ | 22    |    |  | $ | 24,582 |       
|                           |                   |           |        |        |            |   |     |            |  |   |       |   

81



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##### 



SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT


TRIAD GUARANTY INC.


(Parent Company)


SUPPLEMENTARY NOTES


|                           |                   |           |        |        |            |   |     |            |  |   |       |   |  |   |        |        | 
|-------------------------- | ----------------- | --------- | ------ | ------ | ---------- | - | --- | ---------- |  | - | ----- | - |  | - | ------ | ------ | 
|                           |                   | Cost or   |        |        | Gross      |   |     | Gross      |  |   |      
|                           |                   | Amortized |        |        | Unrealized |   |     | Unrealized |  |   | Fair  |  
|At December 31, 2003       |                   | Cost      |        |        | Gains      |   |     | Losses     |  |   | Value |  
|                           |                   |           |        |        |            |   |     |            |  |   |       |  
|Fixed maturity securities: |                   |           |        |        |            |   |     |            |  |   |       |   |  |   |        |       
|                           | Corporate         |           | $      | 2,410  |            |   | $   | 234        |  |   | $     | 1 |  |   | $      | 2,643  | 
|                           | U.S. Government   |           |        | 250    |            |   |     |           |  |   |       | 7 |  |   |        | 243    | 
|                           | Municipal         |           |        | 13,365 |            |   |     | 499        |  |   |       | 5 |  |   |        | 13,859 | 
|                           |                   |           |        |        |            |   |     |            |  |   |       |  
|Total                      |                   |           | 16,025 |        |            |   | 733 |            |  |   | 13    |   |  |   | 16,745 |       
|                           | Equity securities |           |        | 500    |            |   |     | 21         |  |   |       |  |  |   |        | 521    | 
|                           |                   |           |        |        |            |   |     |            |  |   |       |  
|Total                      |                   | $         | 16,525 |        |            | $ | 754 |            |  | $ | 13    |   |  | $ | 17,266 |       
|                           |                   |           |        |        |            |   |     |            |  |   |       |  



|                      |                                 |                        |       |       |      |   |       |       |  |   |       |       | 
|--------------------- | ------------------------------- | ---------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                      |                                 | Year Ended December 31 |      
|                      |                                 |                        |      
|                      |                                 | 2004                   |       |       | 2003 |   |       | 2002  | 
|                      |                                 |                        |       |       |      |   |       |       | 
|Income:               |                                 |                        |       |       |      |   |       |       |  |   |       |      
|                      | Fixed maturities                |                        | $     | 1,017 |      |   | $     | 889   |  |   | $     | 918   | 
|                      | Equity securities               |                        |       | 36    |      |   |       | 36    |  |   |       | 51    | 
|                      | Cash and short-term investments |                        |       | 6     |      |   |       | 26    |  |   |       | 28    | 
|                      | Note receivable from subsidiary |                        |       | 2,225 |      |   |       | 2,225 |  |   |       | 2,225 | 
|                      |                                 |                        |       |       |      |   |       |       | 
|                      |                                 |                        | 3,284 |       |      |   | 3,176 |       |  |   | 3,222 |      
|Expenses              |                                 |                        | 33    |       |      |   | 56    |       |  |   | 52    |      
|                      |                                 |                        |       |       |      |   |       |       | 
|Net investment income |                                 | $                      | 3,251 |       |      | $ | 3,120 |       |  | $ | 3,170 |      
|                      |                                 |                        |       |       |      |   |       |       | 



|   |     
|-- | ----
|4. | Debt



82



---



##### 



SCHEDULE IV  REINSURANCE


TRIAD GUARANTY INC.


MORTGAGE INSURANCE PREMIUM EARNED


Years Ended December 31, 2004, 2003 and 2002


|     |  |                |         |          |           |   |         |            |  |            |        |           |  |         |         |  |  |  |     |  
|---- |  | -------------- | ------- | -------- | --------- | - | ------- | ---------- |  | ---------- | ------ | --------- |  | ------- | ------- |  |  |  | --- | -
|     |  |                |         |          |           |   |         |            |  | Percentage |       
|     |  |                |         | Ceded To |           |   | Assumed |            |  |            |        | of Amount | 
|     |  | Gross          |         |          | Other     |   |         | From Other |  |            | Net    |           |  | Assumed |        
|     |  | Amount         |         |          | Companies |   |         | Companies  |  |            | Amount |           |  | to Net  |        
|     |  |                |         |          |           |   |         |            |  |            |        |           |  |         |        
|     |  | (In thousands) |        
|2004 |  | $              | 176,383 |          |           | $ | 35,392  |            |  | $          | 1      |           |  | $       | 140,992 |  |  |  | 0.0 | %
|     |  |                |         |          |           |   |         |            |  |            |        |           |  |         |        
|2003 |  | $              | 146,955 |          |           | $ | 27,226  |            |  | $          | 3      |           |  | $       | 119,732 |  |  |  | 0.0 | %
|     |  |                |         |          |           |   |         |            |  |            |        |           |  |         |        
|2002 |  | $              | 123,324 |          |           | $ | 18,261  |            |  | $          | 4      |           |  | $       | 105,067 |  |  |  | 0.0 | %
|     |  |                |         |          |           |   |         |            |  |            |        |           |  |         |        

83