TITAN HOLDINGS INC, 10-K/A, 1997-11-14

TITAN HOLDINGS INC
10-K/A, 1997-11-14
SURETY INSURANCE

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
------------------------

FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

COMMISSION FILE NUMBER 0-22000

TITAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
TEXAS 74-2289827
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2700 N.E. LOOP 410, SUITE 500
SAN ANTONIO, TEXAS 78217
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (210) 527-2700

Securities Registered Pursuant to Section 12(b) of the Act: NONE

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

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

The aggregate market value of the common stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on March
21, 1997 as reported on the New York Stock Exchange, was approximately $111.3
million. Shares of common stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 21, 1997, the Registrant had outstanding 9,557,516 shares
of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
DOCUMENT FORM 10-K PART
-------- --------------
<C> <C>

Definitive Proxy Statement for 1997 Annual Part III
Meeting
</TABLE>

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<PAGE> 2

PART I

ITEM 1. BUSINESS

GENERAL

The Company, through its wholly-owned property and casualty insurance
subsidiaries, underwrites non-standard private passenger automobile insurance
for individuals in Michigan, Arizona, Texas, Colorado, Nevada and New Mexico and
property and casualty insurance for small to medium-sized public entities
nationwide. Non-standard automobile insurance is principally provided to
insureds who are unable to obtain standard insurance coverage because of their
driving record, other underwriting criteria or market conditions for standard
risks. The Company's public entity insurance program covers cities and counties
against unexpected and unintended personal injury and/or property damage as well
as against losses arising out of civil rights claims and workers compensation
coverage. The Company believes that its focus on specialty niche property and
casualty insurance combined with its underwriting and claims handling expertise
has enabled it to operate at an underwriting profit. Through a subsidiary, the
Company also offers premium financing to third-party insureds and, to a lesser
extent, public entities insured by the Company.

The following table sets forth the amounts and percentages of the Company's
insurance premiums written for the years presented by line of business.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
-------- ------- -------- ------- -------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Non-standard automobile................... $106,394 61.6% $ 80,607 58.2% $ 56,410 51.4%
Public entity............................. 61,208 35.4% 53,655 38.8% 47,423 43.2%
Other lines............................... 5,244 3.0% 4,173 3.0% 5,951 5.4%
-------- ----- -------- ----- -------- -----
Total................................... $172,846 100.0% $138,435 100.0% $109,784 100.0%
======== ===== ======== ===== ======== =====
</TABLE>

The Company's operations are conducted primarily through three principal
subsidiaries. Non-standard automobile insurance coverage is underwritten by both
TITAN Insurance Company and TITAN Indemnity Company, and public entity insurance
is underwritten by TITAN Indemnity Company. TITAN Indemnity Company is licensed
in 47 states and the District of Columbia and is rated "A-" by A.M. Best
Company. TITAN Insurance Company is licensed in Michigan and Arizona and is also
rated "A-" by A.M. Best Company. The Company offers premium financing through
Westchester Premium Acceptance Corporation and its subsidiary, which are
eligible to transact business in 37 states.

BUSINESS STRATEGY

The Company's principal strategy is to seek continued growth of its
non-standard automobile programs in existing markets as well as in additional
markets. The Company believes that the most effective and cost efficient way of
entering additional markets is through Direct Response Center (DRC) distribution
in large and mid-size markets, complemented by independent agent distribution
where appropriate. Large market DRC distribution combines aggressive media and
yellow page advertising campaigns and centralized call center sales operations
to generate business. Mid-size market DRC distribution utilizes the same
advertising approach but has sales calls directed to the retail locations rather
than the centralized call center. The Company believes that its DRC distribution
systems, for both large and mid-size markets, can ultimately enable it to
operate at a lower expense ratio with more favorable loss experience, through
"front line" underwriting and exclusive sales representation. A lower expense
ratio will, in turn, allow the Company to more effectively compete with larger
providers of non-standard automobile insurance. In 1996, the Company acquired
existing non-standard auto agencies in Nevada, Colorado and Texas and converted
them to TITAN DRC operations. In early 1997, the Company commenced underwriting
operations in New Mexico, with distribution through Tri-West Holdings, LLC,
("Tri-West"), an independent company that acquires agencies and operates DRCs
under contract with the Company. The Company has an option to purchase
Tri-West's New Mexico agency at a future date. The Company plans to continue its
expansion of the non-standard
<PAGE> 3

automobile program to other states through both large and mid-sized market DRCs,
in some cases through similar arrangements with Tri-West. In addition, the
Company plans to expand its non-standard auto program through independent agent
distribution and strategic alliances with standard or preferred insurers who
choose to place all or a portion of their non-standard risks with TITAN as a
by-product of their core operations.

The Company plans to expand its public entity program through further
penetration of markets currently serviced by the Company, expansion to other
states, expansion of products offered and continuation of the Company's focus on
small to medium-sized public entities as a niche market. In 1996, the Company
expanded its product line to offer workers compensation insurance to its
insureds in Pennsylvania, and has in place the structure to expand the workers
compensation program to additional states in 1997, although the majority of the
risk has been, and is expected to continue to be, ceded to third party
reinsurers. The Company also initiated property and liability insurance programs
for fire districts and private schools. Based upon the number of small to medium
sized cities, public entities and other similar type risks not insured by the
Company, the Company believes potential exists for growth in this business.

The Company's plans for expanding its premium financing program include
evaluating acquisition opportunities, acquisitions enhancing marketing efforts
in both current and expansion territories and developing strategic alliances
with "wholesalers" who provide the insurance coverages, typically financed by
the Company. To facilitate its expansion plans, the Company increased the amount
of available credit supporting its premium finance program from $15 million to
$25 million in 1996, and to $50 million upon its acquisition of Elite Premium
Services, Inc. in early 1997.

INSURANCE OPERATIONS

Non-Standard Automobile

Non-standard automobile insurance, written by both TITAN Insurance Company
and TITAN Indemnity Company, is collectively referred to as "TITAN Auto".

In April 1992, the Company acquired Imperial Midwest Insurance Company
("Imperial Midwest") to diversify its business. Imperial Midwest was originally
formed in 1990 to assume the non-standard private passenger automobile insurance
business of the Cadillac Insurance Company, Michigan's largest voluntary
underwriter of such insurance.

In order to diversify geographically, and as a result of its experience
gained in the non-standard automobile business in Michigan, TITAN Auto acquired
an existing five-location insurance agency in September 1994 in Phoenix, Arizona
and began distributing non-standard automobile insurance through these
locations, operating them as DRCs.

In July 1995, TITAN Auto acquired certain assets of Arlans Agency, Inc.
("Arlans"), the Company's largest producing agency in Michigan, which produced
approximately $3.9 million, or 7% of TITAN Auto's total Michigan non-standard
premiums written in 1994. At the time of the acquisition, Arlans had in excess
of 30 selling locations. The Company has since reduced the operation to twelve
locations through consolidation or closure of less profitable stores. TITAN Auto
now operates these locations as DRCs.

During 1996, TITAN Auto expanded its non-standard auto program to three new
states. Non-standard auto agencies were acquired in Nevada, Colorado and Texas.
Additionally, new DRC locations were added to existing TITAN Auto DRC operations
and new "start-up" DRC operations were commenced in San Antonio and several
smaller Texas cities.

In Michigan, TITAN Auto's independent agent and strategic alliance business
is written through approximately 1,600 insurance agencies with approximately
2,600 locations throughout the state. In 1996, the ten largest insurance
agencies were responsible for 27% of total Michigan premiums written by TITAN
Auto, and one agency (CSAC Agency) accounted for more than 5% of such premiums
(5.95%). In Arizona, the Company's independent agent business is written through
roughly 70 insurance agencies. None of the Company's Arizona independent agents
produce in excess of 5% of total Arizona premiums. In Arizona,

2
<PAGE> 4

Michigan, Nevada and Texas, TITAN Auto employs field marketing representatives
who are responsible for soliciting, training, reviewing and auditing independent
agent-produced business.

The following table sets forth the amount and percentages of non-standard
automobile premiums written through independent agencies and strategic alliances
and through DRCs, by state for the past three years:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
-------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Through independent
agencies and strategic
alliances:
Michigan............. $ 73,895 69.5% $65,308 81.0% $55,369 98.2%
Arizona.............. 6,172 5.8% 2,808 3.5% -- --
-------- ----- ------- ----- ------- -----
80,067 75.3% 68,116 84.5% 55,369 98.2%
-------- ----- ------- ----- ------- -----
Through DRCs:
Michigan............. 6,421 6.0% 2,077 2.6% -- --
Arizona.............. 14,702 13.8% 10,414 12.9% 1,041 1.8%
Nevada............... 1,280 1.2% -- -- -- --
Texas................ 1,781 1.7% -- -- -- --
Colorado............. 2,143 2.0% -- -- -- --
-------- ----- ------- ----- ------- -----
26,327 24.7% 12,491 15.5% 1,041 1.8%
-------- ----- ------- ----- ------- -----
Total........... $106,394 100.0% $80,607 100.0% $56,410 100.0%
======== ===== ======= ===== ======= =====
</TABLE>

Non-standard risks generally involve the potential for above-average loss
frequency. Exposure for underwriting losses, however, is lessened because
premiums usually are at higher rates than those charged for standard insurance
coverage. Although there are currently no policy limits for Michigan no-fault
personal injury protection, Michigan insurers are reinsured for losses in excess
of $250,000 by the Michigan Catastrophic Claims Association (the "MCCA"), a
state-mandated reinsurance association. Limits for Michigan no-fault personal
property protection are $1,000,000. Optional limits for bodily injury are
$100,000 per individual and $300,000 per accident, although 84% of TITAN Auto's
policies in Michigan are issued at minimum bodily injury limits of $20,000 per
individual and $40,000 per accident. In Arizona, Texas, Nevada and Colorado,
TITAN Auto principally offers the minimum statutory policy limits of $15,000 per
individual and $30,000 per accident. During 1996, TITAN Auto maintained
reinsurance through a commercial reinsurer for losses in any state in excess of
$300,000 per accident for the sum of all personal injury protection, personal
property protection, bodily injury and uninsured motorist claims. This retention
was increased to $500,000 effective January 1, 1997. TITAN Auto is also at risk
for physical damage losses, which typically do not exceed $40,000 and, on a
small number of Michigan and Arizona policies, for an additional $100,000 per
accident for out-of-state personal property damage. See "Reinsurance."

TITAN Auto emphasizes service, rate adequacy, strong claims controls and
the ability to respond quickly with needed rate changes. Rate adjustment
approvals in each state in which the Company writes non-standard automobile
insurance can be obtained at least every six months. TITAN Auto generally
adjusts its rates every 9 to 12 months in each market. See "Regulation."

Due to the purchasing habits of non-standard automobile insureds (for
example, insureds seeking the least expensive insurance which satisfies the
requirements of state laws to register a vehicle), policy renewal rates tend to
be low. The success of the Company's non-standard automobile insurance program,
therefore, depends in part on its ability to replace non-renewing insureds with
new policyholders through aggressive advertising and marketing efforts. TITAN
Auto's experience has been that a significant number of existing policyholders
allow their policies to lapse and then reapply for insurance as new
policyholders.

3
<PAGE> 5

Since TITAN Auto's inception in 1990, there has been limited competition in
the Michigan private passenger nonstandard automobile market. Currently, the
Company believes that TITAN Auto is the largest non-standard insurer in the
voluntary market, and the Company believes that, although several for-profit
insurers entered the market on a limited basis during 1996, the Michigan Auto
Insurance Placement Facility (the "Facility") is a prospective insured's most
likely alternative. The Facility is the State of Michigan's provider of
non-voluntary private passenger automobile insurance and is, the Company
believes, the largest underwriter for non-standard automobile insurance in
Michigan. It is structured as a joint underwriting association which provides
insurance coverage to all drivers who have been unable to obtain insurance in
the voluntary market. The financial results of the Facility are allocated to all
underwriters of automobile insurance in Michigan based upon premiums written.
See "Regulation." The Facility's policy administration and claims adjustment
services are currently provided by five of Michigan's seven largest automobile
insurance underwriters. According to information obtained from the Automobile
Insurance Plan Service Office ("AIPSO"), the Facility's private passenger
non-standard automobile premiums written were $179 million for its fiscal year
ended September 30, 1996. The Company believes that TITAN Insurance Company
competes effectively with the Facility by offering a higher level of service,
streamlining procedures, paying higher commissions to its agents and offering
more attractive payment plans.

Public Entity

The Company's Public Entity business is written by TITAN Indemnity Company
and is referred to as "TITAN Public Entity".

Since 1984, TITAN Public Entity has offered a program to insure public
entities, including municipalities, counties, school districts, housing
authorities, state-run utilities and other governmental entities. Types of
public entity liability insurance coverage provided by TITAN Public Entity
include general liability, automobile, law enforcement liability and public
officials errors and omissions. TITAN Public Entity also writes automobile
physical damage and property insurance coverages. During 1996, the Company began
offering private school and fire district insurance programs and introduced a
workers compensation program for its public entity insureds in Pennsylvania. The
Company plans to extend the workers compensation line of business to other
states in 1997 although the majority of this risk has been, and is expected to
continue to be, ceded to third party reinsurers. Also during 1996, the Company
introduced its Horizon program, which simplifies the insurance policy for
insureds and streamlines the underwriting and policy issuance processes. The
primary competition for the public entity program consists of managed pools,
which combine several municipalities under one risk management and insurance
program, and other commercial underwriters who have programs for public
entities.

The Company has had a renewal rate of 83% or better since 1992. The Company
attributes its high renewal rates to the level and quality of its customer
service and the specialized claims handling it provides to its insureds.
Additionally, the Company believes that its focus on the smaller rural and more
geographically dispersed insureds and its high level of service makes its public
entity insurance program less sensitive to price than the public entity business
of many of its competitors.

TITAN Public Entity employs 27 state managers who serve as field marketing
representatives and contract with over 1,200 local independent insurance agents
representing public entities. Typically, an independent agent represents only a
single city -- the one in which the agent is located.

While cities with populations under 10,000 have historically represented
the majority of the public entities insured by the Company, the upgrade of TITAN
Indemnity Company's A.M. Best rating to "A-" (Excellent) in November 1993 has
allowed the Company to attract more cities with populations of between 10,000
and 25,000 people. The Company also focuses on smaller counties (between 25,000
and 100,000 people), which have historically represented a large portion of the
Company's public entity program. The Company's public entity insureds also
include some larger cities, as well as schools, utility authorities and other
miscellaneous public entities.

4
<PAGE> 6

The following table sets forth the insurance coverages offered and the
premiums written and the percent of each total for the past three years:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Liability lines:
General liability............. $20,452 33.4% $18,913 35.3% $17,217 36.3%
Automobile liability.......... 16,453 26.9% 14,880 27.7% 14,179 29.9%
Law enforcement liability..... 6,333 10.3% 5,307 9.9% 4,471 9.4%
Public officials errors &
omissions.................. 4,698 7.7% 4,197 7.8% 3,731 7.9%
Workers compensation.......... 644 1.1% -- -- -- --
------- ----- ------- ----- ------- -----
Total liability
lines............... 48,580 79.4% 43,297 80.7% 39,598 83.5%
------- ----- ------- ----- ------- -----
Property lines:
Property and inland marine.... 7,373 12.0% 5,917 11.0% 4,153 8.8%
Automobile physical damage.... 5,255 8.6% 4,441 8.3% 3,672 7.7%
------- ----- ------- ----- ------- -----
Total property
lines............... 12,628 20.6% 10,358 19.3% 7,825 16.5%
------- ----- ------- ----- ------- -----
Total................. $61,208 100.0% $53,655 100.0% $47,423 100.0%
======= ===== ======= ===== ======= =====
</TABLE>

In 1996, the Company underwrote public entity insurance in 31 states. The
following table shows the amount and percent of total public entity premiums
written in the eight largest states for 1996 and their corresponding amounts for
the years indicated:

TITAN Public Entity's strategy has been to follow a practice of selective
underwriting during periods of intense competition. The Company believes that
there are few insurers which specialize in offering public entity programs,
especially with respect to small public entities. The Company believes that its
experience in public entity underwriting and claims adjustment enables it to
reduce its losses and loss adjustment expenses ("LAE") and gives it a
competitive advantage over companies that may decide to enter this market. The
Company also seeks to reduce underwriting losses by adherence to certain
underwriting standards. For example, the Company reduces its exposure to
hurricanes and similar risks by limiting total exposures by territory for any
public entity located within 50 miles of any coastline. All public entity
policies underwritten by the Company also include a pollution exclusion.
Additionally, the Company uses deductibles and reinsurance to help control its
loss exposure.

TITAN Public Entity offers primary liability policy limits up to $2,000,000
per occurrence, and excess aggregate limits of an additional $5,000,000 are
available. Most policies are underwritten at limits of either $500,000 or
$1,000,000, and the amount of excess aggregate limit policies underwritten has
not been significant. During 1996, the Company was reinsured for 50% of casualty
losses in excess of $500,000 per occurrence up to $1 million and for 97.5% of
losses in excess of $1 million, up to issued policy limits. Effective January 1,
1997, the Company increased its retention on losses in excess of $1 million to
20%, for such losses

5
<PAGE> 7

occurring under primary $2 million limit policies, with 100% reinsurance
coverage for casualty losses in excess of $2 million, up to issued policy
limits. TITAN Public Entity retains the first $500,000 per occurrence on
property insurance coverages. The Company's workers compensation program is
reinsured under both quota share and excess of loss reinsurance contracts,
resulting in a net retention of $300,000 per occurrence.

Premium Financing

Westchester Premium Acceptance Corporation ("WPAC") has provided premium
financing to TITAN Indemnity Company's public entity insureds since 1987 and to
third-party commercial insureds since 1991. WPAC has grown through acquisition
and by establishing relationships with over 300 agencies around the country,
although approximately 54% of the business in 1996 came from 16 agencies. The
majority of premiums financed for third-party insureds represent Texas business.
Lending operations are supported by WPAC's own capital base and are currently
leveraged through a $50 million bank revolving line of credit.

In February 1997, WPAC acquired Elite Premium Services, Inc. ("Elite") for
approximately $400,000 in cash and additional consideration to be determined as
a function of future amounts financed through sources provided by Elite. Elite
financed approximately $40 million in commercial premiums in 1996.

Premiums for property and casualty insurance are typically payable at the
time a policy is placed in force or renewed. WPAC's premium finance services
allow the insured to pay a portion of the premium when the policy is placed in
force and the balance in monthly installments over the life of the policy. WPAC
retains a contractual right to cancel the insurance policy and to receive the
unearned premium if a premium installment is not paid when due. In the event of
such cancellation, WPAC applies the unearned premium towards the payment
obligation of the insured. As part of its premium financing offered to
commercial third-party insureds, WPAC may advance funds for financed premiums to
independent insurance agencies who represent third-party insurers. If remittance
is not made by the agency to the third-party insurer, advances made by WPAC may
only be recoverable to the extent that the agency's receipt of such advances is
deemed to be received by the third-party insurer. Premium financing, which the
Company offers to its own public entity insureds, does not involve any credit
risk since no funds are advanced to outside parties and WPAC is entitled to
receive the unearned premiums on the financed policies.

The following table sets forth the amount and percentages of premiums
financed by the type of insured for the years presented:

Other Lines

Since September 1993, TITAN Indemnity Company has offered a program of
preferred personal lines automobile insurance to educational employees in
Minnesota. Under this program, TITAN Indemnity Company utilizes educators to
sell its insurance products to other educational employees. Premiums written for
the years ended December 31, 1996, 1995 and 1994 were $5.1 million, $3.2 million
and $1.2 million, respectively. In early 1997, the Company plans to execute a
transaction that will transfer existing loss reserves and unearned premiums and
cede 100% of future business, to a reinsurer, of its preferred automobile
insurance program.

TITAN Indemnity Company also had programs for surety and aviation insurance
which were discontinued in 1995 and 1993, respectively.

6
<PAGE> 8

REINSURANCE

Reinsurance involves an insurance company transferring or "ceding" all or a
portion of its exposure on insurance underwritten by it to another insurer (the
"Reinsurer"). The Reinsurer assumes a portion of the exposure in return for a
portion of the premium. The ceding of insurance does not legally discharge the
insurer from its primary liability for the full amount of the policies. If the
Reinsurer fails to meet its obligations under the reinsurance agreement, the
ceding company is still required to pay the loss.

Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten. The Company's reinsurance is primarily
ceded under an excess of loss basis, where only losses above a fixed amount are
reinsured. Some treaties allow the Company a participation in the reinsurers'
net profits. The Company's share of such profits is recognized to the extent
currently estimable. The Company recorded approximately $1.9 million in ceding
commission income pursuant to such contingent commission provisions during the
year ended December 31, 1994. The amounts recorded under such arrangements
during the years ended December 31, 1995 and 1996 were not material to the
Company's earnings. The Company also cedes the majority of its workers
compensation business on a quota share basis. The reinsurance programs renew
annually and are placed directly by the Company and through professional
national reinsurance intermediaries. Public entity reinsurance is placed with
Munich American Reinsurance Company (Munich) and General Reinsurance Corporation
(GenRe). Workers compensation reinsurance is placed with Munich and CNA
Reinsurance Company. Non-standard automobile reinsurance is also placed with
Munich, except for personal injury losses in excess of $250,000 per accident in
Michigan, which are reinsured by the MCCA. The MCCA is a state-mandated
association created under the Michigan no-fault law which by statute is funded
through charges to Michigan policyholders. As a result, TITAN Insurance Company
does not incur any net cost with respect to the MCCA other than any associated
loss adjustment expenses (LAE). The MCCA is not an insurance company, does not
file conventional statutory financial statements and is not rated by A.M. Best.
As a result, the Company is unable to fully evaluate the MCCA's ability to pay
reinsurance claims on the same basis as the Company's other reinsurers.

At December 31, 1996, the Company's net retentions per occurrence, after
reinsurance, were as follows for its significant lines of business:

<TABLE>
<CAPTION>
PRIMARY EXCESS
POLICIES POLICIES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Non-standard automobile.............................. $440,000 $ -- $440,000
Public entity:
Property........................................... 500,000 -- 500,000
Liability.......................................... 750,000 150,000 900,000
Workers compensation............................... 300,000 -- 300,000
</TABLE>

At January 1, 1997, retentions for both TITAN Auto and TITAN Public Entity
were increased, as previously discussed.

In addition, the Company purchases reinsurance for exposure to catastrophic
events (e.g., hurricanes, hailstorms, etc.), as well as for judgments in excess
of contractual policy limits.

In formulating reinsurance programs, the Company is selective in its choice
of reinsurers and considers numerous factors, the most important of which is the
financial stability of the reinsurer. At December 31, 1996, reinsurance was in
place with 29 domestic and 23 foreign reinsurers and the total amount
recoverable from such insurers, including prepaid reinsurance premiums, was
approximately $49.7 million. Of the total balance recoverable from reinsurers,
approximately $43.5 million (87.5%) is recoverable from the Michigan
Catastrophic Claims Association (which is not rated by A.M. Best Company), and
approximately $4.2 million (8.5%) is due from Munich American Reinsurance
Company (which is rated A+ by A.M. Best Company) The remaining balance of
approximately $2.0 million is due from 50 other reinsurers, none of which
individually comprise more than 2% of the total balance recoverable from
reinsurers. The remaining balance is primarily attributable to the discontinued
surety and aviation programs.

7
<PAGE> 9

RESERVES

Reserves for losses and LAE represent estimates of amounts needed in the
future to pay losses and the expenses related to the final settlement of such
losses, with respect to insured events that have occurred prior to the balance
sheet date. Insurance regulations and accounting rules require that reserves be
maintained for the payment of losses and LAE with respect to both reported and
incurred but not reported ("IBNR") claims under insurance policies issued by the
Company. Generally, reserves are established through an evaluation of each
individual claim. Reserves on reported losses are determined by evaluating the
type of loss, jurisdiction of the occurrence, knowledge of the circumstances
surrounding the claim, severity of injury or damage, potential for ultimate
exposure, estimate of liability on the part of the insured, past experience with
similar claims and the applicable policy provisions. Reserves for IBNR losses
are determined in part on the basis of statistical information utilizing the
Company's past experience as well as industry experience. The Company utilizes
independent actuaries to help establish its loss and LAE reserves. The Company
does not discount loss reserves for financial statement purposes. There are no
differences in the reserves for losses and LAE established under generally
accepted accounting principles and those established under statutory accounting
principles.

The period of time between the occurrence of an insured event and a final
settlement of a claim may be many years, and during this period it often becomes
necessary to adjust the claim estimates either upward or downward. Among the
classes of public entity insurance underwritten by the Company, the liability
claims historically tend to have longer time lapses between the occurrence of
the event, the reporting of the claim to the Company and the final settlement
than do the property claims. Public entity liability claims often involve third
parties filing suit against the public entity and therefore may result in
litigation. By comparison, non-standard automobile claims tend to be reported in
a relatively shorter period of time and settle in a shorter time frame with less
occurrence of litigation. The reserves with respect to public entity property
claims and non-standard automobile are therefore less likely to be adjusted than
the liability claims of the public entity lines.

The following table sets forth a reconciliation of beginning and ending
reserves as shown in the Company's consolidated financial statements for unpaid
losses and LAE for the years indicated.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year, gross.... $122,811 $ 98,405 $ 76,514
Reinsurance balances recoverable........................... (39,787) (32,275) (23,190)
-------- -------- --------
Reserves for losses and LAE at beginning of year, net...... 83,024 66,130 53,324
-------- -------- --------
Add:
Provision for losses and LAE occurring:
Current year.......................................... 90,565 71,278 51,534
Prior years........................................... 4,522 1,165 905
-------- -------- --------
95,087 72,443 52,439
-------- -------- --------
Less:
Loss and LAE payments for claims occurring during:
Current year.......................................... 41,060 27,152 17,015
Prior years........................................... 39,281 28,397 22,618
-------- -------- --------
80,341 55,549 39,633
-------- -------- --------
Reserves for losses and LAE at end of year, net............ 97,770 83,024 66,130
Reinsurance balances recoverable........................... 44,101 39,787 32,275
-------- -------- --------
Reserves for losses and LAE at end of year, gross.......... $141,871 $122,811 $ 98,405
======== ======== ========
</TABLE>

8
<PAGE> 10

discontinued its involvement in an aviation program in 1993 and a contract
surety program in 1995. Adverse development from these discontinued programs
totaled $1.4 million in 1996. Approximately, $1.1 million of the adverse
development related to the contract surety program. The nature of these claims
is such that the ultimate amount of the loss is not determined until after the
Company completes its obligation under the bond and the Company has exhausted
its avenues of subrogation recovery. The losses incurred during 1996 related to
certain claims settled at amounts in excess of the established reserve for
unpaid losses and loss expenses. The aviation program adverse development of
approximately $300,000 related to certain claims that were settled at amounts in
excess of established reserves. Public entity experienced adverse development
which totaled approximately $2.1 million on certain liability coverages related
to 1994. Michigan personal injury protection experienced approximately $0.9
million of adverse development in 1996 on 1995 claims, principally in connection
with known cases that developed additional severity. Management of the company
has since modified underwriting criteria for such coverages and adjusted its
reserving practices.

The following table summarizes, by net reserves and ceded reserves, and by
reported reserves and IBNR reserves, the ending reserves as shown in the
Company's consolidated financial statements for unpaid losses and LAE for the
years indicated.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
IN THOUSANDS
<S> <C> <C> <C>
Reported reserves, net...................................... $ 72,544 $ 62,532 $50,075
IBNR reserves, net.......................................... 25,226 20,492 16,055
-------- -------- -------
Total reserves, net....................................... 97,770 83,024 66,130
-------- -------- -------
Reported reserves, ceded.................................... 22,906 21,503 17,658
IBNR reserves, ceded........................................ 21,195 18,284 14,617
-------- -------- -------
Total reserves, ceded.................................. 44,101 39,787 32,275
-------- -------- -------
Total reserves, gross.................................. $141,871 $122,811 $98,405
======== ======== =======
</TABLE>

The following table presents the development of the net liability for
unpaid losses and LAE for the Company from 1986 until 1996. The top line of the
table shows the estimated net reserves for unpaid losses and LAE at the balance
sheet date for each of the indicated years. These figures represent the
estimated amount of unpaid losses and LAE for claims arising in all prior years
that were unpaid at the balance sheet date, including losses that had been
incurred but not yet reported, net of reinsurance ceded. The portion of the
table labeled "Cumulative paid as of" shows the net cumulative payments for
losses and LAE made in succeeding years for losses incurred prior to the balance
sheet date. The next portion of the table shows the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The final portion of the table reconciles the net liability for
1994 through 1996 to the gross liability recorded on the Company's consolidated
balance sheet and re-estimates the gross liability for 1994 and 1995 at the end
of 1996. The estimates change as payments are made and more information becomes
known about the frequency and severity of claims for individual years.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability -- end of year........... $ 97.8 $ 83.0 $ 66.1 $53.3 $46.8 $37.3 $38.5 $43.2 $35.6 $13.7 $ 6.3
Cumulative paid as of:
One year later....................... 39.3 28.4 22.4 19.7 12.0 13.0 13.8 7.6 4.3 0.7
Two years later...................... 46.4 37.1 31.1 22.6 20.9 24.4 17.9 6.8 1.6
Three years later.................... 44.6 38.4 27.7 27.5 29.7 24.5 9.8 2.3
Four years later..................... 42.0 29.4 29.9 34.7 27.6 11.8 2.8
Five years later..................... 30.7 31.2 36.2 31.3 12.8 3.4
Six years later...................... 31.9 36.8 28.4 13.4 3.7
Seven years later.................... 37.0 28.7 13.6 4.0
Eight years later.................... 28.9 13.7 4.0
Nine years later..................... 13.8 4.1
Ten years later...................... 4.1
</TABLE>

9
<PAGE> 11
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Re-estimated net liability as of:
End of year.......................... 97.8 83.0 66.1 53.3 46.8 37.3 38.5 43.2 35.6 13.7 6.3
One year later....................... 87.6 67.3 54.3 47.4 36.6 38.9 42.5 34.3 15.0 5.4
Two years later...................... 72.0 55.6 48.6 34.8 37.2 42.1 35.2 14.1 5.3
Three years later.................... 56.0 48.2 34.5 34.9 40.0 35.1 14.0 4.0
Four years later..................... 48.9 33.2 34.9 38.6 33.6 13.9 3.8
Five years later..................... 33.8 34.0 38.5 33.1 14.0 3.9
Six years later...................... 34.6 38.5 33.1 13.8 3.9
Seven years later.................... 39.0 33.3 13.9 4.1
Eight years later.................... 33.7 14.1 4.1
Nine years later..................... 14.2 4.1
Ten years later...................... 4.1
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Net cumulative (deficiency)
redundancy........................... $ -- $ (4.6) $ (5.9) $(2.7) $(2.1) $ 3.5 $ 3.9 $ 4.2 $ 1.9 $(0.5) $ 2.2
====== ====== ====== ===== ===== ===== ===== ===== ===== ===== =====
Gross liability -- end of year......... $141.9 $122.8 $ 98.4
Reinsurance recoverable................ 44.1 39.8 32.3
------ ------ ------
Net liability -- end of year........... 97.8 83.0 66.1
====== ------ ------
Gross re-estimated liability........... 121.1 107.9
------ ------
Re-estimated recoverable............... 33.5 35.9
------ ------
Net re-estimated liability............. 87.6 72.0
------ ------
Gross cumulative redundancy
(deficiency)......................... $ 1.7 $ (9.5)
====== ======
</TABLE>

A cumulative redundancy or deficiency represents the aggregate change in
the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
The Company's 1994 gross cumulative deficiency of $9.5 million relates primarily
to Titan Auto Michigan personal injury losses in excess of $250,000 per
accident, which are reimbursed by the MCCA. Since MCCA reinsurance premiums are
established by the MCCA based on its aggregate experience on losses assumed from
all Michigan insurers, such deficiency has no material impact on the Company's
future reinsurance costs or access to reinsurance markets. It should be
emphasized that the table presents a run-off of the liability rather than
accident or policy year loss development. Therefore, each amount in the table
includes the effects of changes in reserves for all prior years. Conditions and
trends that have affected development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.

INVESTMENTS

The Company's investment objectives are to maximize total rate of return
after federal income taxes, but, at the same time, to protect and enhance
statutory policyholders' surplus on a long-term basis and to maintain adequate
liquidity for insurance operations. The Company's current investment policy
prohibits investment in non-investment grade fixed maturities (including
high-yield "junk bonds"), and limits total investments in equity securities and
mortgage notes receivable to 10% and 15%, respectively, of total consolidated
investments. The Company also complies with applicable laws and regulations
which further restrict the type, quality and concentration of investments. In
general, these laws and regulations permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities and real
estate mortgages.

The Company's investment policy is recommended to the Board of Directors by
its Investment Committee and is reviewed on a regular basis. Pursuant to this
investment policy, the Company's investments are currently concentrated in fixed
maturities, which are considered to be either available for sale or held to
maturity, based upon the Company's intent at the time of purchase. Fixed
maturities considered available for sale are marked to market and fixed
maturities held to maturity are carried at amortized cost. As of

10
<PAGE> 12

December 31, 1996, the balance of fixed maturity investments designated as held
to maturity has decreased by $3.8 million to $16.1 million due to the call of
certain of these investments by the issuers during 1996, and to a lesser extent,
due to amortization of the historical cost. The Company does not use any
material swaps, options, futures or forward contracts to hedge or enhance its
investment portfolio.

The Company's investment portfolio (other than its mortgage notes
receivable and premium finance contracts) is managed by Lyon Securities, Inc.,
Dallas, Texas, a firm controlled by one of the Company's outside directors, on a
discretionary basis subject to guidelines established by the Company's
investment policy. The Company's mortgage notes receivable portfolio contains
mortgage loans on commercial properties primarily located in Texas. The largest
mortgage note receivable outstanding at December 31, 1996 was approximately
$992,000.

The table below sets forth investment results for the periods indicated.
Average invested assets in the table below represents the average of the
aggregate invested amount at the end of each calendar month during the year.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Average invested assets..................................... $204,891 $159,960 $127,284
Net investment income....................................... 12,866 10,161 7,576
Average yield............................................... 6.3% 6.4% 6.0%
Average tax-equivalent yield................................ 6.8% 6.9% 6.4%
</TABLE>

COMPETITION

The Company operates in a highly competitive industry and faces competition
from domestic and foreign insurers, many of which are larger and have greater
financial resources available than the Company, have higher A.M. Best ratings
and/or offer more diversified insurance coverages. The Company's Michigan non-
standard automobile program faces competition from the Facility, which the
Company believes is the largest underwriter of non-standard automobile insurance
in the state, and a limited number of for-profit insurers who entered the market
in 1996. The Company's non-standard auto programs in Arizona, Texas, Colorado
and Nevada face competition from a number of insurers, most of whom have been in
the market longer than TITAN Auto.

The Company's public entity program faces competition from public entity
pools, which are individual programs whereby public entities typically
self-insure themselves on a collective basis, and other commercial underwriters.
Competition is based on many factors, including overall financial strength of
the insurer, A.M. Best ratings, premiums charged, policy terms and conditions,
services offered, reputation, agent compensation and experience. There can be no
assurance that the Company will not face increased competition from other
insurance companies or that the Company's existing public entity insureds will
not self-insure individually or in pools.

REGULATION

The Company's insurance subsidiaries are subject to regulation, primarily
by the insurance regulatory authorities of the states of their domestication.
TITAN Indemnity Company is domesticated in Texas and TITAN Insurance Company is
domesticated in Michigan. Each of the subsidiaries is also subject to regulation
by other jurisdictions in which it is licensed. The insurance laws and
regulations, as well as the level of supervisory authority that may be exercised
by the various state insurance departments, vary by jurisdiction, but generally
grant broad powers to supervisory agencies or state regulators to examine and
supervise insurance companies and insurance holding companies with respect to
every significant aspect of the conduct of the insurance business, including the
establishment of premium rates. These laws and regulations generally require
insurance companies to maintain minimum standards of business conduct and
solvency, meet certain financial tests (including maximum premium to surplus
ratios), file certain reports with regulatory authorities, including information
concerning their capital structure, ownership and financial condition, and
require prior

11
<PAGE> 13

approval of certain changes in control of domestic insurance companies and their
direct and indirect parents and the payment of extraordinary dividends and
distributions. In addition, these laws and regulations require approval for
certain intercompany transfers of assets and certain transactions between
insurance companies and their direct and indirect parents and affiliates, and
generally require that all such transactions have terms no less favorable than
terms that would result from transactions between parties negotiating at arm's
length. Further, many states have enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators have
the power to reduce, or to disallow increases in, premium rates. These laws may
adversely affect the ability of an insurer to earn a profit on its underwriting
operations. In general, such laws and regulations are for the protection of
policyholders.

Most states have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the rates
are inadequate, excessive or unfairly discriminatory. Rates, which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk. The Company is permitted to file rates for non-standard
automobile policies which are usually higher than those charged for standard
risks, reflecting the higher probability of loss. Rate changes for the Company's
existing nonstandard automobile programs can be effected at least every six
months. Several states have recently adopted laws or their legislatures are
considering proposed laws which, among other things, limit the ability of
insurance companies to effect rate increases or to cancel, reduce or non-renew
insurance coverage with respect to existing policies, particularly private
passenger automobile insurance. The rates currently filed by the Company for its
public entity program generally allow a plus or minus 25% deviation from the
applicable standard rates.

All insurance companies must file quarterly and annual statements with
certain regulatory agencies and are subject to regular and special examinations
by those agencies. The last regulatory examination of TITAN Indemnity Company
was completed by the Texas Department of Insurance in 1992 covering the two and
one-half year period ended June 30, 1992. The last regulatory examination of
TITAN Insurance Company was completed by the Michigan Insurance Bureau in 1995
covering the four-year period ended December 31, 1994. No material deficiencies
were found during these regulatory examinations. In addition, both insurance
subsidiaries were the subject of a market conduct examination by the Arizona
Department of Insurance for the period 1990 through August 1995 and TITAN
Indemnity Company underwent a market conduct examination for the year 1995. No
material deficiencies were found during the market conduct examination.

In some instances, various states routinely require deposits of assets for
the protection of policyholders either in those states or for all policyholders.
As of December 31, 1996, securities representing approximately $9 million, or 4%
of the carrying value of the Company's total investments, were on deposit with
various state treasurers or custodians. Such deposits must consist of securities
which comply with the standards that the particular state has established.

The Company and its subsidiaries are also subject to state laws regulating
insurance holding company systems. Most states have enacted legislation or
adopted administrative regulations affecting insurance holding companies and the
acquisition of control of insurance companies, as well as transactions between
insurance companies and persons controlling them. The nature and extent of such
legislation and regulations currently in effect vary from state to state.
However, most states require administrative approval of the acquisition of
voting securities of an insurer domiciled in such state or an entity controlling
an insurer domiciled in such state if, as a result of the acquisition such
person would acquire control over the insurer. The acquisition of 10% or more of
the outstanding shares of voting securities is generally presumed to be the
acquisition of "control" for the purpose of the holding company statutes and
requires not only the filing of detailed information concerning the acquiring
parties and the plan of acquisition, but also administrative approval prior to
the acquisition. In many states the insurance authority may find that "control"
in fact does or does not exist in circumstances in which a person owns or
controls either a lesser or a greater amount of securities.

Most states have enacted legislation that requires each insurance company
in a holding company system to register with the insurance regulatory authority
of its state of domicile and furnish financial and other

12
<PAGE> 14

information concerning the operations of companies within the holding company
system. All transactions within a holding company system affecting insurers must
be fair and reasonable and the insurer's policyholders' surplus following any
transaction must be both reasonable in relation to its outstanding liabilities
and adequate for its needs. Approval of applicable regulators is required prior
to the consummation of certain transactions affecting insurance subsidiaries of
the holding company system.

The Company's insurance subsidiaries are authorized to transact business on
an admitted basis in 47 states and the District of Columbia. These jurisdictions
require insurers doing business in the jurisdiction to participate in their
respective guaranty funds. Insurers authorized to transact business in such
jurisdictions are required to cover losses of insolvent insurers and generally
can be assessed from 1% to 2% of premiums written in that jurisdiction each year
to pay the claims of insolvent insurers. Since the likelihood and amount of any
particular assessment cannot be estimated until after an insolvency has
occurred, ultimate liabilities for assessments may not be fully reflected on the
books of the insurers. Insurance companies must also participate in automobile
insurance plans and other specialized insurance coverage plans (windstorm, etc.)
mandated by some states in which they sell insurance. For example, in Michigan,
the Facility is structured as a joint underwriting association which provides
insurance coverage to all drivers who have been unable to obtain insurance in
the voluntary market. The net costs of the Facility are allocated to all
underwriters of automobile insurance in Michigan based upon premiums written.
The Company accrued approximately $1,200,000, $721,000 and $740,000 for the
above funds and plans in 1996, 1995 and 1994, respectively.

In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners (the "NAIC") enacted a model law (the
"Model Law") to implement Risk-Based Capital ("RBC") requirements for insurance
companies. The Model Law became effective with respect to property and casualty
insurance companies as of year-end 1994. The requirements are designed to assess
capital adequacy and to raise the level of protection that statutory surplus
provides for policyholders. The Model Law measures three major areas of risk
facing property and casualty insurers: (i) underwriting risks, which encompass
the risk of adverse loss developments and inadequate pricing; (ii) declines in
asset values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required by the Model
Law will be subject to varying degrees of regulatory action, depending on the
level of capital inadequacy. The Model Law establishes various levels of
regulatory action. Based upon the 1996 statutory financial statements for the
Company's insurance subsidiaries, each insurance subsidiary's statutory surplus
exceeds all regulatory action levels established by the NAIC.

The extent of regulatory intervention and action increases as the ratio of
an insurer's statutory surplus to its Authorized Control Level ("ACL"), as
calculated under the Model Law, decreases. The first action level, the Company
Action Level, requires an insurer to submit a plan of corrective actions to the
insurance regulators if statutory surplus falls below 200% of the ACL amount.
The second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance regulators
to perform an examination or other analysis and issue a corrective order if
statutory surplus falls below 150% of the ACL amount. The Authorized Control
Level, the third action level, allows the regulators to rehabilitate or
liquidate an insurer in addition to the aforementioned actions if statutory
surplus falls below the ACL amount. The fourth action level is the Mandatory
Control Level which requires the regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70% of the ACL amount.

The NAIC has also developed an Insurance Regulatory Information System
("IRIS") to assist state insurance departments in identifying companies which
may be developing performance or solvency problems, as signaled by significant
changes in the companies' operations. Such changes may not necessarily result
from any problems with an insurance company, but may merely indicate changes in
certain ratios outside the ranges defined as normal by the NAIC. When an
insurance company has four or more ratios falling outside "normal ranges", state
regulators may investigate to determine the reasons for the variance and whether
corrective action is warranted. For the year ended December 31, 1996, TITAN
Insurance Company had one test that fell outside of the usual value ranges. This
test regards the change in policyholders' surplus from December 31, 1995 to
December 31, 1996, which test fell higher than the usual value range as a result
of a contribution to surplus made in 1996. For the year ended December 31, 1996,
TITAN Indemnity Company had one test that fell outside the usual value ranges as
well. This test regards the change in net premiums written from 1995 to

13
<PAGE> 15

1996, which test fell higher than the usual value ranges because of TITAN
Indemnity Company's growth in the public entity program and non-standard
automobile program for Texas, Colorado and Nevada.

Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. From time to time, there have been various proposed
federal measures which might have significantly affected the Company's insurance
business, including, among other proposals, the revocation of the antitrust
exemption provided by the McCarran-Ferguson Act. The economic and competitive
effects of any proposals upon the Company would depend upon the final form such
legislation might take.

The principal source of cash available to TITAN Holdings, Inc. is dividends
from its insurance subsidiaries. The payment of dividends to TITAN Holdings,
Inc. by its insurance subsidiaries is subject to state regulation. No state
insurance laws or regulations restrict dividend payments by TITAN Holdings, Inc.
The ability of the Company's insurance subsidiaries to declare dividends is
governed by the insurance laws of both Texas and Michigan. The Michigan
Insurance Code states that absent prior approval of dividends by the state
commissioner, "shareholder dividends shall be declared or paid only from earned
surplus," and limits the amount of dividends that insurance companies can pay in
any twelve month period to the greater of their statutory net income (exclusive
of net realized gains or losses on investments) for the preceding year or 10% of
the insurer's surplus as regards policyholders as of the preceding year end.
Under its certificate of authority, TITAN Insurance Company is not permitted to
pay or declare dividends if its gross premiums written over any twelve month
period exceed 300% of its policyholders' surplus. Dividend payments from TITAN
Indemnity Company are regulated by the insurance laws of the State of Texas.
Under the Texas Insurance Code, an insurer may pay dividends only out of
"surplus profits arising from its business." The Texas Insurance Code limits the
amount of dividends that insurance companies can pay in any twelve-month period,
absent regulatory approval, to the greater of their statutory net income for the
preceding year or 10% of the insurer's surplus as regards policyholders as of
the 31st day of December of the preceding year. Insurance regulators have broad
powers to prevent reduction of policyholders' surplus to inadequate levels, and
there is no assurance that dividends of the maximum amounts calculated under any
applicable formula would be permitted. During 1996, the dividend limitations for
Titan Indemnity Company and Titan Insurance Company, without prior approval,
were approximately $5.9 million and $7.2 million, respectively. Titan Indemnity
Company did not pay any dividends to its parent, Titan Holdings, Inc. during
1996. Titan Insurance Company paid dividends of $3.5 million to its parent,
Titan Indemnity Company, during 1996.

The Company's premium financing program is also subject to certain laws
governing the operation of such premium finance companies. These laws pertain to
such matters as books and records that must be kept, forms, licensing, fees and
charges. For example, in Texas, the maximum late payment fee WPAC may charge is
5% of the amount of the overdue payment.

LEGISLATION

From time to time, new regulations and legislation are proposed to limit
damage awards, to control plaintiffs' counsel fees, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms and to impose new taxes and assessments. It is not
possible to predict whether, in what form or in what jurisdictions, any of these
proposals might be adopted, or the effect, if any, on the Company.

The insurance industry is under continuous review by both state and federal
legislatures. From time to time, various regulatory and legislative changes have
been proposed in the insurance industry, some of which could have an effect on
insurers or reinsurers. For example, California adopted Proposition 103, which
was an attempt on the part of that state to limit amounts which may be charged
to insureds for certain categories of property and casualty insurance. Although
Michigan recently considered and rejected a similar proposition, Michigan may
reconsider such proposition and other states may adopt similar propositions.
Other proposals that have in the past been or are at present being considered
are the possible introduction of federal regulation in addition to, or in lieu
of, the current system of state regulation of insurers. Current and proposed
federal measures which may also significantly affect the insurance industry
include minimum solvency requirements

14
<PAGE> 16

and removal of barriers preventing banks from engaging in the insurance
business. The Company is unable to predict whether any of these proposals will
be adopted, the form in which any such proposals would be adopted or the impact,
if any, such adoption would have on the Company, although such impact could be
material.

EMPLOYEES

As of December 31, 1996, the Company and its subsidiaries had 630 employees
which included 7 executive officers. The Company is not a party to any
collective bargaining agreement and has not experienced work stoppages or
strikes as a result of labor disputes. The Company considers relations with its
employees to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark E. Watson, Jr......................... 61 Chairman, Chief Executive Officer and President
Thomas E. Mangold.......................... 41 Executive Vice President, Chief Operating
Officer, and Director
Michael W. Grandstaff...................... 36 Senior Vice President, Treasurer and Chief
Financial Officer
Mark E. Watson, III........................ 32 Senior Vice President, General Counsel and
Secretary and Director
Michael Arledge............................ 45 Senior Vice President, TITAN Indemnity Company
Merle Harris............................... 36 Vice President, Westchester Premium Acceptance
Corporation
B.G. Porter................................ 32 Vice President of Planning & Development
</TABLE>

Mark E. Watson, Jr. founded the company in 1983 and has served as Chairman
of the Board of Directors, Chief Executive Officer and President of the Company
since that time. Mr. Watson received his Bachelor of Science degree in Finance
from the University of Notre Dame.

Thomas E. Mangold has served as a Director of the Company since 1992. He
has served as President of TITAN Insurance Company (formerly known as Imperial
Midwest Insurance Company), since its formation in 1990 and Executive Vice
President and Chief Operating Officer of TITAN Holdings since 1996. From 1987 to
1989, Mr. Mangold served as President of First Security Insurance Group and from
1981 to 1986 as Vice President of Delaney Intermediaries, a reinsurance
intermediary. Mr. Mangold received his Bachelor of Science degree and commission
in the U.S. Naval Reserves from the United States Merchant Marine Academy.

Michael W. Grandstaff has served as Senior Vice President and Chief
Financial Officer of the Company since 1996 and Treasurer of TITAN Insurance
Company since 1992. He was Chief Accounting Officer of the Company from 1995 to
1996. From 1983 to 1990, Mr. Grandstaff, a Certified Public Accountant, served
in various finance-related capacities in both public accounting and the
insurance industry. Mr. Grandstaff received both his Bachelor of Business
Administration in Accounting and Master of Business Administration degrees from
Michigan State University.

Mark E. Watson III has served as Senior Vice President of the Company since
1995 and as a Vice President of the Company from 1991 to 1995. He was elected to
the Company's Board of Directors in February, 1997. He has served as General
Counsel and Secretary of the Company since 1993. From 1989 to 1991, Mr. Watson
was an associate with the law firm of Kroll & Tract, New York, New York. Mr.
Watson received his Bachelor of Business Administration degree in finance from
Southern Methodist University and his Juris Doctor degree from the University of
Texas, School of Law. Mr. Watson is the son of Mark E. Watson, Jr.

15
<PAGE> 17

Michael Arledge has served as Senior Vice President since 1995 and as Vice
President of TITAN Indemnity Company since 1991. From 1989 to 1991, Mr. Arledge
was Vice President of Public Entity National Company (PENCO). From 1984 to 1989
Mr. Arledge was Vice President -- Underwriting and Marketing for the Company.
Mr. Arledge received his Bachelor of Science degree in Business Administration
from the University of Texas at San Antonio.

Merle Harris has served as Vice President of Westchester Premium Acceptance
Corporation since 1994. From 1992 to 1994, Mr. Harris served as Premium Finance
Manager of Elton George & Co. and from 1990 to 1992 as Premium Finance Manager
for an affiliate of GAINSCO, Inc. Mr. Harris attended Dallas Baptist University.

B.G. Porter has served as Vice President of Planning and Development since
joining the Company in 1995. Prior to that time, Mr. Porter was an associate in
the Texas office of McKinsey and Company, Inc, an international management
consulting firm. Mr. Porter received his Bachelor of Arts degree with Honors in
Political Science from Stanford University. He received his Master of Business
Administration degree from Harvard Business School.

ITEM 2. PROPERTIES

In June 1994, the Company acquired a 102,079 square foot office building in
San Antonio, Texas, which serves as its headquarters. The Company presently
occupies approximately one-third of the available office space, with the
remainder leased to third parties. The Company also owns a 27,630 square foot
retail center adjacent to the home office building in San Antonio, Texas. The
majority of this facility is utilized by the Company and the remainder is
leased.

The company leases approximately 30,000 square feet of office space in
Troy, Michigan under a lease expiring in 1998. The Company also leases smaller
facilities for all of its wholly-owned DRCs and its regional offices in Phoenix,
Arizona and St. Louis Park, Minnesota.

ITEM 3. LEGAL PROCEEDINGS

The liquidator of the estate of Millers National Insurance Company filed a
lawsuit against the Company arising out of a 1992 stock purchase agreement under
which the Company purchased 812,421 shares (restated for a stock split and two
stock dividends) of its own Common Stock, then held by the liquidator, from the
liquidator for $3.7 million. The liquidator claims that the Company intended to
make a public offering of its Common Stock and misled the liquidator into
thinking that no such offer was under consideration; and that if the liquidator
knew that a public offering was intended, the liquidator would have negotiated a
more favorable selling price for the Common Stock in question. The Company has
denied this claim and intends to defend the proceeding vigorously.

The Company is routinely engaged in litigation in the normal course of its
business, including defending claims for punitive damages. The insurance
companies defend third-party claims brought against their insureds, as well as
defend themselves against first-party and coverage claims. Additionally,
contingencies may arise from insurance regulatory matters and regulatory
litigation matters.

The Company believes the resolution of the above claims and lawsuits will
not have a material adverse effect on its financial condition or results of
operations.

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

Not applicable.

16
<PAGE> 18

PART II

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

On March 23, 1994, the Company's common stock commenced trading on the New
York Stock Exchange ("NYSE") under the symbol TH. Prior to such date, the
Company's common stock traded on the NASDAQ National Market System ("NASDAQ")
under the symbol TITN, since the Company's initial public offering on July 8,
1993.

The following table sets forth the high and low sale prices for the common
stock for the indicated periods as reported by the NYSE. The table also
indicates cash dividends as declared by the Company. Common stock prices and
dividends declared have been restated to reflect the Company's 5% stock
dividends to shareholders of record as of May 13, 1996 and June 1, 1995.

<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
---- --- ---------
<S> <C> <C> <C>
1996
First Quarter............................................... 13 21/64 12 9/64 $0.0714
Second Quarter.............................................. 16 3/8 12 47/64 0.0714
Third Quarter............................................... 15 1/4 13 5/8 0.0800
Fourth quarter.............................................. 16 1/2 14 1/4 0.0800
1995
First Quarter............................................... 9 17/32 8 39/64 0.0635
Second Quarter.............................................. 11 43/64 8 61/64 0.0635
Third Quarter............................................... 15 11 5/16 0.0714
Fourth quarter.............................................. 14 7/8 12 3/8 0.0714
</TABLE>

As of March 21, 1997, there were approximately 1,000 registered holders and
in excess of 2,800 individual holders of the common stock, holding 9,557,516
shares.

17
<PAGE> 19

ITEM 6. SELECTED FINANCIAL DATA

TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Premiums written........................ $172,846 $138,435 $109,784 $94,994 $72,524
Premiums earned......................... 152,452 118,219 90,786 69,407 46,402
Net investment income................... 12,866 10,161 7,576 5,470 4,421
Total revenues and other
income........................ 174,296 131,842 100,661 82,477 56,406
Losses and loss expenses................ 95,087 72,443 52,439 39,822 26,838
Total expenses.......................... 153,597 116,556 87,814 72,350 50,699
Net income.............................. $ 14,181 $ 10,570 $ 9,063 $ 6,734 $ 4,041
-------- -------- -------- ------- -------
Weighted average shares
outstanding(1)....................... 9,613 7,928 7,793 5,928 5,157
Net income per share(1)................. $ 1.48 $ 1.33 $ 1.16 $ 1.13 $ 0.78
-------- -------- -------- ------- -------
Cash dividends per share(1)............. $ .303 $ .270 $ .240 $ .113 --
Loss ratio.............................. 62.4% 61.3% 57.7% 57.4% 57.8%
GAAP Expense ratio...................... 30.2% 32.0% 35.0% 35.7% 40.2%
GAAP Combined ratio..................... 92.6% 93.3% 92.7% 93.1% 98.0%
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments..................... $224,793 $193,858 $132,479 $125,128 $ 98,214
Total assets.......................... 361,955 307,087 219,898 189,603 144,845
Reserve for unpaid losses and loss
expenses........................... 141,871 122,811 98,405 76,514 60,717
Unearned premiums..................... 55,333 45,178 35,219 32,255 27,428
Notes payable and capitalized lease
obligations........................ 24,024 12,319 2,614 3,193 6,763
Shareholders' equity.................. 111,868 100,484 66,555 66,054 29,833
Book value per share(1)............... $ 11.75 $ 10.60 $ 8.61 $ 8.36 $ 7.22
Statutory policyholders' surplus...... $ 80,325 $ 58,812 $ 41,321 $ 36,891 $ 20,238
Net premiums written to policyholders'
surplus............................ 2.02x 2.16x 2.40x 1.95x 2.74x
</TABLE>

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

(1) Prior amounts have been restated for the effects of 5% stock dividends
effective May 13, 1996 and June 1, 1995.

18
<PAGE> 20

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

GENERAL

TITAN Holdings, Inc. ("Holdings" or "the Company") operates specialty
property and casualty insurance companies and related service companies. Through
its insurance subsidiaries (TITAN Indemnity Company and TITAN Insurance
Company), Holdings provides non-standard automobile insurance in six states and
property and casualty insurance for small to medium-sized cities, towns,
counties and other public entities nationwide. Another wholly-owned subsidiary,
Westchester Premium Acceptance Corporation, provides commercial property and
casualty premium financing. The Company refers to its non-standard personal
lines automobile insurance program collectively as "TITAN Auto" and the Public
Entity program as "TITAN Public Entity".

Public entity insurance is somewhat seasonal in that public entities tend
to purchase insurance to coincide with the start of their fiscal years
(typically January, July or October). This allows the public entity to "lock-in"
its insurance expense for the fiscal year consistent with a recently-established
budget. Therefore, these months have historically produced the majority of
public entity premiums written. This seasonality has no material effect on
premiums earned. Non-standard automobile insurance does not tend to be highly
seasonal.

All prior period earnings per share data have been restated to reflect 5%
stock dividends effected May 13, 1996 and June 1, 1995.

The following section contains forward-looking statements regarding premium
growth and other matters, which involve risks and uncertainties that may affect
the Company's actual results of operations. The following important factors,
among others, could cause actual results to differ materially from those set
forth in the forward-looking statements: claims frequency, claims severity,
severe adverse weather conditions, economics, competitive pricing and the
regulatory environment in which the Company operates.

RESULTS OF OPERATIONS

Premiums Written

Premium writings for the past two calendar years have increased
approximately 25% annually. For the year ended December 31, 1996 premiums
written totaled $172.8 million versus $138.4 million in 1995 and $109.8 million
in 1994. The increase in premiums written is primarily attributable to TITAN
Auto. For the three years ended December 31, 1996, 1995 and 1994, TITAN Auto
premiums written were $106.4 million, $80.6 million and $56.4 million,
respectively, representing growth of 32% in 1996 and 43% in 1995. TITAN Public
Entity accounted for $61.2 million in premiums written in 1996 versus $53.7
million in 1995 and $47.4 million in 1994 representing increases of 14% and 13%
respectively. The growth in Titan Auto and Titan Public Entity premiums written
is due primarily to growth in volume rather than price. Routine Titan Auto rate
increases in certain markets in 1996 gave rise to an increase in total average
premium of approximately 3% in 1996 over 1995. Titan Public Entity overall
average premiums were reduced by roughly 2% in 1996 over 1995.

During 1996, TITAN Auto's operations in Michigan and Arizona provided for a
majority of the increase in non-standard automobile premiums written. Michigan
premiums written increased 19% to $80.3 million in 1996 versus a 22% increase in
1995 to $67.4 million from $55.4 million in 1994. Arizona premiums written
totaled $20.9 million in 1996, $13.2 million in 1995 and $1.0 million in 1994.
The Arizona operations commenced in September of 1994 and in two full years of
operation, 1996 versus 1995, premium writings increased by 58%. During 1996,
TITAN Auto began underwriting operations, through acquisitions of independent
insurance agencies which the Company converted into direct response centers, in
Nevada (in the second quarter of 1996), Colorado and Texas (both in the third
quarter of 1996) which accounted for $1.3 million, $2.1 million and $1.8
million, respectively in premiums written. In January 1997, TITAN Auto commenced
underwriting operations in New Mexico through Tri-West Holdings Inc.,
("Tri-West"), an independent company that acquires agencies and operates DRCs
under contract with the Company. Tri-West

19
<PAGE> 21

writes New Mexico business exclusively for TITAN Auto and TITAN Auto has
acquired an option to purchase Tri-West's New Mexico operation at a future time.
TITAN Auto anticipates writing business in Indiana through Tri-West beginning
May 1, 1997 and expects to enter other states through Tri-West in 1997 and
beyond.

The Company attributes the growth in Michigan to an increase in its agency
force to in excess of 1,600 independent licensed agencies. In addition, TITAN
Auto has formed strategic alliances with certain distributors of standard or
preferred automobile insurance products in Michigan in 1996, which collectively
contributed $9.0 million in premiums written. Management believes that TITAN
Auto continues to be the largest voluntary writer of private passenger
non-standard automobile insurance in the state of Michigan. Competition within
Michigan has increased and the Company anticipates the competition to continue,
which could negatively impact future growth in Michigan. The increase in TITAN
Auto's Arizona premium writings is primarily attributable to the continued
success of marketing through direct response centers. The Company anticipates
continued growth for TITAN Auto through increased marketing for existing DRCs,
independent agency expansion, new strategic alliances and future geographic
expansion.

TITAN Public Entity's consistent growth continued in 1996 as premiums
written increased 14% to $61.2 million. For the year ended 1995 premiums written
increased 13% to $53.7 million compared to $47.4 million in 1994. The increase
resulted principally from states where additional state managers have been
deployed to expand market coverage. In 1996, a new program, Horizon, was
introduced providing a single, comprehensive package of coverages which
simplifies the insurance policy for insureds and streamlines the underwriting
and policy issuance processes. To further enhance TITAN Public Entity, the
Company, in 1996, began offering a program to private schools and fire districts
throughout the country and workers compensation insurance to its insureds in
Pennsylvania. In 1996, workers compensation premiums written were not material
to the Company and the majority of risk exposure associated with this line of
coverage is ceded to a third party reinsurer. This workers compensation program
will be expanded in 1997 to other states, but the Company expects to continue to
cede the majority of this risk and does not anticipate the workers' compensation
program to require material capital support in the near term. TITAN Public
Entity anticipates moderate growth in 1997 as the Company continues to be
selective with its underwriting decisions in a highly competitive and price
sensitive market.

Premiums Ceded

Premiums ceded represent the cost of reinsurance purchased by the Company
which generally is a function of the amount of premiums written and the level of
risk transferred to the reinsurer. Premiums ceded as a percent of premiums
written for the years ended December 31, 1996, 1995 and 1994 were 6.1%, 8.0% and
9.6%, respectively. The reductions in reinsurance costs are attributable to the
proportional increase in TITAN Auto's operations, which have lower reinsurance
costs due to relatively low policy limits. The reductions in reinsurance costs
are also attributable to a reduction in the Michigan Catastrophic Claims
Association ("MCCA") assessment rate in early 1996 and a reduction in TITAN
Public Entity's reinsurance premium rates associated with continued favorable
experience and the Company increasing its net retentions. At the renewal of the
public entity's casualty reinsurance contract effective January 1, 1996, the
Company increased its net retention from $500,000 to $750,000 per occurrence for
casualty risks, and effective April 1, 1996 the Company increased its net
retention on public entity property risks from $200,000 to $500,000 per
occurrence. As the Company has increased its retention of losses under its
excess of loss reinsurance agreements, the Company's retention of loss
adjustment expenses has also increased. Under Titan Public Entity's casualty
reinsurance contract, allocated loss adjustment expenses incurred in settling
ceded losses are shared with the reinsurers in the same proportion as each party
participated in the loss settlement. Under Titan Public Entity's property excess
reinsurance, the sum of each claim's loss plus allocated loss adjustment expense
determines whether the claim has exceeded Titan's retention and so will be
reinsured under the excess of loss contract. Thus, as Titan's loss retentions
have increased, the amounts of both ceded losses and ceded allocated loss
adjustment expenses have decreased. Reinsurance costs for both TITAN Auto and
TITAN Public Entity were reduced in 1995 compared to 1994 for the same reasons
noted above.

20
<PAGE> 22

The Company expects premiums ceded as a percent of premiums written to
continue to decline because of the growth in Titan Auto, increased retention and
further reductions in the MCCA assessment rate.

Premiums Earned

Premiums earned are the result of net premiums written which are recognized
as income on a pro rata basis over the terms of the respective insurance
policies issued. Premiums earned increased approximately 30% for the second
consecutive year to $152.5 in 1996 compared to $118.2 million in 1995 and $90.8
million in 1994. TITAN Auto earned premium increased to $93.9 million in 1996
versus $69.1 million in 1995 and $47.3 million in 1994. TITAN Public Entity
earned premium for the three years ended 1996, 1995 and 1994 was $54.2 million,
$44.9 million and $39.4 million, respectively. The increase in premiums earned
is attributable to the overall increase in premiums written and reduced amounts
ceded.

Fee and Ceding Commission Income

TITAN Auto's operations generate certain policy and installment billing
fees which comprise the majority of fee and ceding commission income. Ceding
commissions received from reinsurers represent the reimbursement of policy
acquisition expenses or profit commissions based on loss experience. The
increase in fee and ceding commission income of approximately $4.7 million, to
$8.1 million in 1996, stems primarily from increased policy fee income
associated with the growth in TITAN Auto's operations. The increase experienced
in 1996 over 1995 is more significant than the increase in 1995 over 1994 due to
the expansion of TITAN Auto's operations in 1996 into Arizona, Nevada, Texas and
Colorado, where policy fees are more significant. TITAN Auto premiums written
outside of Michigan exceeded $26 million in 1996 compared to approximately $13
million in 1995.

The Company expects fee income to continue to increase in conjunction with
the growth and expansion of its auto program into additional states.

Net Investment Income

Net investment income increased 27% in 1996 to $12.9 million from $10.2
million in 1995, versus a 34% increase in 1995 from $7.6 million in 1994. The
increases in investment income for both 1996 and 1995 relate to a larger base of
invested assets associated with cash provided by operations and, in the case of
1995, proceeds from the Company's November 1995 stock offering. The increase in
1995 was also attributable to a slight increase in the average yield of the
Company's investment portfolio. The average yield of the investment portfolio
for 1996, 1995 and 1994, was approximately 6.3%, 6.4% and 6.0%, respectively.

The Company's invested assets are held primarily in fixed maturities and
since 1994 interest rates have not significantly impacted the yield of the fixed
maturity portfolio as a result of its relatively short duration. In 1996 the
duration of the portfolio was 3.5 years compared to 3.0 years in 1995 and 3.3
years in 1994.

Interest income from premium finance contracts increased to $2.5 million in
1996 from $1.6 million in 1995 and $0.9 million in 1994. Such increases are
substantially attributable to increases in the amounts of premiums financed.
During 1996 premiums financed increased 66% to $51.7 million versus $31.1
million in 1995 and $19.2 million in 1994. The Company recognizes interest
income on premium finance contracts on a level yield method over the life of the
financed policy and accordingly the cancellation of a financed insurance policy
has no impact on earnings.

Combined Ratio

The combined ratio is a measure of an insurance company's profitability
from underwriting, and it has two components: a loss ratio and an expense ratio.
On a GAAP basis, losses and loss expenses are expressed as a percentage of
premiums earned ("loss ratio") and underwriting expenses are also expressed as a
percentage of premiums earned ("expense ratio"). A combined ratio under 100%
indicates an underwriting profit while a combined ratio over 100% indicates an
underwriting loss.

21
<PAGE> 23

The Company's overall GAAP combined ratio decreased to 92.6% in 1996 from
93.3% in 1995 and 92.7% in 1994. Overall the loss ratio component has increased
slightly to 62.4% in 1996 from 61.3% in 1995 and 57.7% in 1994 while the overall
expense ratio component has decreased steadily to 30.2% in 1996 from 32.0% in
1995 and 35.0% in 1994.

TITAN Auto's overall GAAP combined ratio increased somewhat for the year
ended December 31, 1996 to 88.8% from 87.6% in 1995 due to an increase in the
expense ratio component in 1996 to 30.1% from 28.8% in 1995. The slight increase
in the expense ratio relates primarily to the development of DRCs and the
associated advertising costs not initially offset by premium volume.
Additionally, an increased proportion of corporate service costs were attributed
to TITAN Auto in 1996 in connection with its extensive strategic development.
TITAN Auto's loss ratio component remained constant in 1996 versus 1995 at
approximately 58.8%. For the year ended 1995, compared to 1994, TITAN Auto's
expense ratio decreased to 28.8% versus 33.3%. Such decrease stems primarily
from the growth of TITAN Auto's Arizona operation. The Arizona operation
generates significant policy fee income, consistent with the market, and this
fee income is reflected as an offset to the expense ratio. Accordingly, the
Arizona business is underwritten at a higher loss ratio relative to the Michigan
market. The 1995 loss ratio increased to 58.8% compared to 56.3% in 1994.

TITAN Public Entity's overall GAAP combined ratio remained fairly constant
in 1996 at 96.4% compared to 96.6% in 1995 as an increase in the loss ratio was
offset by improvement in the expense ratio. TITAN Public Entity's loss ratio in
1996 of 65.8% compared to 61.9% of a year ago was affected by development on
prior accident years and the severe winter storms in the northeast United States
in early 1996. The development on prior accident years relates to certain claims
ultimately settled at amounts in excess of established loss reserves. Such
development is limited to select liability lines of coverage and certain
territories within public entity. Management of the Company has since modified
underwriting criteria for such coverages and adjusted its reserving practices.
The improvement in the expense ratio in 1996 to 30.6% from 34.7% in 1995 is due
to the realignment of corporate service costs in 1996 and to reinsured losses
incurred in 1995 that reduced the Company's profit commission from its reinsurer
in 1995. During 1995 TITAN Public Entity's loss ratio increased to 61.9% from
60% in 1994, primarily due to increased claim frequency.

For the years ended December 31, 1996, 1995, and 1994, total loss and loss
adjustment expense recoveries under the Company's reinsurance contracts exceeded
total ceded earned premiums for those years. This trend, which the Company
expects to continue, is principally attributable to Titan Auto's ceded loss
experience with the MCCA. Depending on the MCCA's overall loss experience with
all participating Michigan insurers, aggregate negative results may result in
higher assessments being made on the Company by the MCCA in the future. MCCA
assessments, however, are passed on by participating Michigan insurers to
Michigan policyholders through a uniform rate per earned car year. The Company's
assessment rate is not based on its own loss experience to the MCCA, but rather
the aggregate loss experience of all participating Michigan insurers. Premiums
ceded under Titan's Public Entity program during the three year period ended
December 31, 1996 have exceeded loss recoveries from the reinsurers during the
period. Such underwriting profits to the public entity program's reinsurers may
result in lower future reinsurance rates should this experience continue.

The Company's strategic plan includes initiatives to further reduce
operating expenses, primarily as they relate to TITAN Auto. Accordingly, the
Company anticipates continued improvement in the expense ratio. This will enable
the Company to underwrite TITAN Auto at a somewhat higher loss ratio and become
more competitive in the marketplace while continuing its focus on profitability.

Agents' Commissions

Commissions paid to independent insurance agents represent the Company's
most significant policy acquisition cost. The Company's trend of reducing this
cost continued in 1996, evidenced by the fact that agents' commissions, as a
percentage of premiums earned decreased to 11.8% in 1996 from 14.1% in 1995 and
17.3% in 1994. Such decreases relate primarily to the expansion of TITAN Auto's
DRC operations which are not subject to commission expense. The decline in
agents' commissions, as a percentage of premiums earned, however, has generally
been offset by additional policy acquisition costs associated with direct
response center operations, and the Company expects this trend to continue in
the near future. Over time, however, the

22
<PAGE> 24

Company expects to realize economies of scale, whereby reductions in agents'
commissions are not fully offset by additional direct response center policy
acquisition costs.

Discontinued Programs

The Company discontinued its involvement in an aviation program in 1993
and, effective January 1995, ceased its involvement in a contract surety
program. In 1996, 1995 and 1994, the Company incurred underwriting losses of
approximately $1.4 million, $1.2 million and $1.1 million, respectively, as a
result of adverse development from these programs.

In early 1997, the Company plans to execute a transaction that will
transfer existing loss reserves and unearned premiums and cede 100% of future
business, to a reinsurer, of its preferred automobile insurance program offered
to educators in Minnesota. The educators program was not material to the Company
in 1996, 1995 or 1994 and will not be significant in 1997.

Amortization of Intangibles

During 1996, intangible assets were capitalized as a result of acquisitions
of independent insurance agencies in Texas, Colorado and Nevada. Intangible
assets were also capitalized from 1992 through 1995 in connection with the
Company's acquisition of TITAN Insurance Company and in 1994 and 1995 in
connection with the acquisition of independent insurance agencies in Arizona and
Michigan. Amortization of these amounts was $2.2 million, $1.2 million and
$510,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 unamortized costs were $21.2 million that relate to these
acquisitions and will be amortized to future periods.

Net Income

Net income increased $3.6 million or 34% to $14.2 million from $10.6
million in 1995, versus a $1.5 million or 16% increase in 1995 over $9.1 million
in 1994. On an operating basis, excluding the effects of net after-tax realized
gains (losses), net operating income increased $3.0 million to $13.6 million
from $10.6 million in 1995 versus a $1.4 million increase over $9.2 million in
1994.

Net income per share in 1996 was $1.48 versus $1.33 in 1995 on
approximately 21% more weighted average shares outstanding in 1996 compared to
1995. Net income per share was $1.16 in 1994 on approximately an equal amount of
shares outstanding compared to 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company's insurance subsidiaries receive substantial cash from premiums
and, to a lesser extent, investment income. The principal cash outflows are for
the payment of claims, reinsurance premiums, policy acquisition costs and other
operating expenses. Net cash provided by operating activities was $31.0 million
in 1996 versus $36.3 million in 1995 and $22.2 million in 1994. The decrease in
1996 relates primarily to an elevated level of losses paid in 1996 compared to
1995 associated with the growth in TITAN Auto's operations and the
proportionally shorter loss payout period relative to TITAN Public Entity
operations.

Net cash provided by financing activities includes borrowings under the
Company's and WPAC's credit facility. In August of 1996 Holdings borrowed $10
million to increase the statutory surplus of the insurance companies and
borrowed $2 million at various intervals throughout 1996 for working capital
purposes. Under the Company's premium finance program, WPAC funds full term
insurance premiums on behalf of insureds, who then repay WPAC on a monthly basis
with principal and interest payments. During 1996, WPAC funded $51.7 million in
insurance premiums and received principal payments on premium finance contracts
totaling $41.1 million. To finance the difference, WPAC increased its
outstanding borrowings from $7 million to $15.8 million. Financing activities in
1995 included net proceeds from Holdings common stock offering of $20.7 million
through which $11.5 million of debt was repaid, borrowings under Holdings'
credit facility of $21.5 million ($20 million increased the statutory surplus of
the insurance companies) and $4 million of borrowings under WPAC's facility.

In July 1996, Holdings and WPAC entered into a $55 million credit facility
with a group of banks, increasing the limit of the $45 million credit facility
originally executed in August 1995. The 1996 credit facility includes a $10
million revolving line of credit ($2 million outstanding) until July 30, 2001
for

23
<PAGE> 25

Holdings' working capital purposes, a $20 million term loan ($20 million
outstanding) utilized by the insurance companies to increase underwriting
capacity, and a $25 million revolving credit facility available until July 30,
1997 for WPAC's premium finance operations. Management, in 1997, will evaluate
the insurance companies' underwriting leverage ratio (net to premiums written as
a function of statutory surplus) and evaluate whether additional financing is
required to increase underwriting capacity. During 1997 management expects to
utilize a portion of Holdings' $10 million revolving line of credit as necessary
for working capital purposes. The term loan is payable in $4 million increments
annually through 2001. The debt service in 1997, under the term loan, is
anticipated to be repaid through dividends from the insurance companies to
Holdings. WPAC's facility extends through July 30, 1997 at which time WPAC
intends to renegotiate the line of credit for another year. In February 1997,
WPAC acquired Elite Premium Services, Inc. ("Elite") for approximately $400,000
in cash and additional consideration to be determined as a function of future
amounts financed through sources provided by Elite. Concurrent with the
purchase, WPAC extended the limit of its facility to $50 million. At the date of
purchase, WPAC increased its borrowings by approximately $11.5 million for
finance contracts acquired from Elite. All other terms remained the same.

The Company's insurance subsidiaries are subject to state insurance laws
that restrict their ability to pay dividends. In 1997 Holdings could receive up
to approximately $8.0 million in dividends without regulatory approval. Based on
the current working capital of Holdings, management anticipates the payment of
the dividends available without regulatory approval from the insurance companies
to help meets its current liquidity needs, including its debt service
obligations under the credit facility.

In 1996, cash used by investing activities included TITAN Auto's purchase
of certain net assets of independent insurance agencies of approximately $2.6
million in addition to approximately $6.7 million in contingent consideration
paid related to the initial purchase of TITAN Insurance Company. The Company
will make one final payment of contingent consideration in 1997 in the amount of
approximately $2.5 million in connection with the purchase of Titan Insurance
Company, which has been accrued for in full. In addition, TITAN Indemnity
Company expended approximately $4.1 million on capital improvements to its home
office building. The Company now occupies approximately one-third of the home
office building, replacing previous facilities which were leased by the Company.
Future capital improvements are anticipated to be insignificant to TITAN
Indemnity Company.

IMPACT OF INFLATION

The Company's operations, like those of other property and casualty
insurers, are susceptible to the effects of inflation, as premiums are
established before the ultimate amount of losses and loss adjustment expenses
("LAE") are known. Although management attempts to consider the potential
effects of inflation while setting premiums, for competitive reasons such
premiums may not fully compensate the Company for the effects of inflation.
Public entity premium rates, by the nature of their derivation, generally
respond to the effects of inflation since they are based in part upon a
municipality's annual budget, which itself is susceptible to the effects of
inflation. The Company also attempts to consider the impact of inflation on the
payment of future losses and LAE when establishing reserves for unpaid losses
and LAE. In addition, inflation may affect the rate of return and the market
value of the Company's investment portfolio.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock. FAS 128 simplifies the
computation of earnings per share previously required by APB Opinion No. 15,
"Earnings per Share," replacing primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. FAS 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. FAS 128 requires
restatement of all prior-period EPS data presented. The Company will adopt FAS
128 in the first quarter of 1997.

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<PAGE> 26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TITAN HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
ASSETS

Investments:
Fixed maturities available for sale, at market value
(amortized cost: $145,990 and $112,309)................ $145,531 $112,990
Fixed maturities held to maturity, at amortized cost
(market value: $16,104 and $19,982).................... 16,114 19,871
Equity securities available for sale, at market value
(cost: $17,088 and $15,489)........................... 16,479 14,679
Short-term investments, at cost which approximates market
value.................................................. 270 4,898
Cash...................................................... 3,682 11,008
Premium finance contracts................................. 23,469 12,858
Mortgage notes receivable................................. 15,935 12,281
Other invested assets, net................................ 3,313 5,273
-------- --------
Total investments................................. 224,793 193,858
Receivables:
Premiums due from agents and policyholders................ 21,848 15,958
Amounts due from reinsurers............................... 47,393 42,589
Other..................................................... 4,917 2,984
Deferred tax assets, net.................................... 4,427 4,586
Property and equipment, at cost less accumulated
depreciation and amortization of $4,804 and $4,249........ 18,852 11,083
Deferred policy acquisition costs........................... 12,498 10,086
Other assets................................................ 6,032 5,174
Goodwill and non-competition agreements, net................ 21,195 20,769
-------- --------
$361,955 $307,087
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Reserve for unpaid losses and loss expenses............... $141,871 $122,811
Unearned premiums......................................... 55,333 45,178
Notes payable and capitalized lease obligations........... 24,024 12,319
Note payable -- premium finance subsidiary................ 15,750 7,000
Other liabilities......................................... 13,109 19,295
-------- --------
Total liabilities................................. 250,087 206,603
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000 shares;
no shares issued or outstanding........................ -- --
Common stock, $.01 par value. Authorized 40,000 shares;
issued and outstanding: 1996 -- 9,521 shares;
1995 -- 9,027 shares................................... 95 90
Additional paid-in capital................................ 62,141 54,274
Retained earnings......................................... 50,054 46,137
Net unrealized loss on investments, net of deferred tax
benefit of $227 and $9................................. (422) (17)
-------- --------
Total shareholders' equity........................ 111,868 100,484
-------- --------
$361,955 $307,087
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

25
<PAGE> 27

TITAN HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Revenues and other income:
Premiums written......................................... $172,846 $138,435 $109,784
Premiums ceded........................................... (10,595) (11,111) (10,502)
-------- -------- --------
Net premiums written............................. 162,251 127,324 99,282
Increase in unearned premiums............................ (9,799) (9,105) (8,496)
-------- -------- --------
Premiums earned.................................. 152,452 118,219 90,786
Fee and ceding commission income......................... 8,095 3,423 2,546
Net investment income.................................... 12,866 10,161 7,576
Net realized gains (losses).............................. 883 39 (247)
-------- -------- --------
Total revenues and other income.................. 174,296 131,842 100,661
-------- -------- --------
Expenses:
Losses and loss expenses................................. 95,087 72,443 52,439
Agents' commissions...................................... 17,914 16,697 15,694
Other operating expenses................................. 40,596 27,416 19,681
-------- -------- --------
Total expenses................................... 153,597 116,556 87,814
-------- -------- --------
Income before income tax expense................. 20,699 15,286 12,847
-------- -------- --------
Income tax expense (benefit):
Current.................................................. 6,140 4,939 4,566
Deferred................................................. 378 (223) (782)
-------- -------- --------
Total income tax expense......................... 6,518 4,716 3,784
-------- -------- --------
Net income....................................... $ 14,181 $ 10,570 $ 9,063
======== ======== ========
Net income per share....................................... $ 1.48 $ 1.33 $ 1.16
======== ======== ========
Weighted average shares outstanding........................ 9,613 7,928 7,793
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

26
<PAGE> 28

TITAN HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) TOTAL
--------------- PAID-IN RETAINED ON TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS STOCK EQUITY
------ ------ ---------- -------- ----------- -------- -------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... 7,164 $72 $31,212 $34,278 $ 492 $ -- $ 66,054
Net income..................... -- -- -- 9,063 -- -- 9,063
Net unrealized loss............ -- -- -- -- (5,283) -- (5,283)
Dividends ($0.24 per share) to
shareholders................. -- -- -- (1,873) -- -- (1,873)
Purchase of treasury stock, at
cost......................... -- -- -- -- -- (1,406) (1,406)
Retirement of treasury stock... (152) (2) (1,404) -- -- 1,406 --
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1994......................... 7,012 70 29,808 41,468 (4,791) -- 66,555

Effect of stock dividend at
June 1, 1995................. 351 3 3,809 (3,812) -- -- --
Net income..................... -- -- -- 10,570 -- -- 10,570
Net unrealized gain............ -- -- -- -- 4,774 -- 4,774
Common stock issued............ 1,664 17 20,657 -- -- -- 20,674
Dividends ($0.27 per share) to
shareholders................. -- -- -- (2,089) -- -- (2,089)
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1995......................... 9,027 90 54,274 46,137 (17) -- 100,484

Effect of stock dividend at May
13, 1996..................... 451 4 7,384 (7,388) -- -- --
Net income..................... -- -- -- 14,181 -- -- 14,181
Net unrealized loss............ -- -- -- -- (405) -- (405)
Common stock issued............ 43 1 483 -- -- -- 484
Dividends ($0.30 per share) to
shareholders................. -- -- -- (2,876) -- -- (2,876)
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1996......................... 9,521 $95 $62,141 $50,054 $ (422) $ -- $111,868
===== === ======= ======= ======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE> 29

TITAN HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 14,181 $ 10,570 $ 9,063
Adjustments to reconcile net income to net cash provided
by operating activities:
Receivables............................................ (12,627) (10,974) (12,530)
Deferred income taxes.................................. 378 (223) (782)
Deferred policy acquisition costs...................... (2,412) (1,469) (2,209)
Reserve for unpaid losses and loss expenses............ 19,060 24,406 21,891
Unearned premiums...................................... 10,155 9,959 2,964
Depreciation and amortization.......................... 1,329 1,137 776
Other.................................................. 972 2,860 3,012
-------- -------- --------
Net cash provided by operating activities......... 31,036 36,266 22,185
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed maturities, available for sale......... (90,897) (43,152) (27,574)
Purchases of fixed maturities, held to maturity........... -- (20,435) --
Purchases of equity securities............................ (11,193) (12,148) (9,661)
Purchases of short-term investments....................... (6,100) (52,935) (3,722)
Premium finance contracts funded.......................... (51,709) (31,092) (19,197)
Mortgage notes funded..................................... (4,978) (3,622) (5,768)
Proceeds from fixed maturities, available for sale:
Sales before maturity.................................. 43,094 16,867 23,482
At maturity............................................ 13,825 5,970 2,600
Proceeds from fixed maturities, held to maturity, called
by issuer.............................................. 3,500 515 --
Proceeds from sales of equity securities.................. 10,214 11,903 6,539
Proceeds from sales and maturities of short-term
investments............................................ 10,728 49,403 7,557
Principal payments on premium finance contracts........... 41,098 27,233 16,417
Payable for securities.................................... -- (2,967) 2,967
Businesses acquired in purchase transactions net of cash
acquired, and contingent consideration paid............ (9,251) (6,234) (4,232)
Purchases of property and equipment....................... (9,464) (4,125) (5,179)
Other..................................................... 4,708 (2,178) (1,218)
-------- -------- --------
Net cash used by investing activities............. (56,425) (66,997) (16,989)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings.................................. 12,000 21,500 --
Net proceeds from borrowings -- premium finance
subsidiary............................................. 8,750 4,000 2,665
Repayments of borrowings.................................. (295) (11,795) (281)
Proceeds from sale of common stock, net................... 484 20,674 --
Payment of dividends...................................... (2,876) (2,089) (1,873)
Purchase of treasury stock................................ -- -- (1,406)
-------- -------- --------
Net cash provided (used) by financing activities....... 18,063 32,290 (895)
-------- -------- --------
Net (decrease) increase in cash........................ (7,326) 1,559 4,301
Cash:
Beginning of year......................................... 11,008 9,449 5,148
-------- -------- --------
End of year............................................... $ 3,682 $ 11,008 $ 9,449
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

28
<PAGE> 30

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. GENERAL

TITAN Holdings, Inc. ("Holdings") operates specialty property and casualty
insurance companies and related service companies. Through its insurance
subsidiaries (TITAN Indemnity Company and TITAN Insurance Company), Holdings,
provides non-standard automobile insurance in six states and property and
casualty insurance for small to medium-sized cities, towns, counties and other
public entities nationwide. Another wholly-owned subsidiary (Westchester Premium
Acceptance Corporation) provides commercial property and casualty premium
financing.

For the year ended December 31, 1996, non-standard automobile and public
entity represented 62% and 35% of total premiums written, respectively. Premium
writings are also concentrated as 76% of non-standard automobile premiums
written are from Michigan and 79% of public entity premiums come from eight
states.

In November 1995, a stock offering was completed for 1,643,600 shares at
$13.50 per share which resulted in net proceeds of $20,449,000 (after offering
expenses). The proceeds of this offering were principally used to increase the
underwriting capacity of TITAN Indemnity Company and TITAN Insurance Company, to
repay debt and for working capital purposes.

The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

B. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Holdings and
the following subsidiaries:

TITAN Indemnity Company:

TITAN Indemnity Company ("TITAN Indemnity"), a wholly-owned subsidiary of
Holdings, is a Texas domiciled property and casualty insurer, admitted as an
insurer in 47 states and the District of Columbia. TITAN Indemnity underwrites
insurance for public entities nationwide and non-standard private passenger
automobile insurance in Texas, Colorado, Nevada and New Mexico.

TITAN Insurance Company:

TITAN Insurance Company ("TITAN Insurance"), a wholly-owned subsidiary of
TITAN Indemnity, is a Michigan domiciled property and casualty insurer, also
admitted as an insurer in Arizona. TITAN Insurance underwrites nonstandard
private passenger automobile insurance in Michigan and Arizona.

Westchester Premium Acceptance Corporation:

Westchester Premium Acceptance Corporation ("WPAC"), a wholly-owned
subsidiary of TITAN Indemnity, is a Texas corporation, eligible to transact
premium finance business in 37 states.

All significant intercompany transactions and balances have been eliminated
in consolidation.

C. INVESTMENTS

Holdings' fixed maturities are considered to be either available for sale
or held to maturity, based upon management's intent at the time of purchase.
Fixed maturities categorized as available for sale are marked to market, with
the resulting adjustments, net of deferred income taxes, reported as a component
of shareholders'

29
<PAGE> 31

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equity until realized. Fixed maturities categorized as held to maturity are
carried at amortized cost without recognition of gains or losses that are deemed
to be temporary because Holdings has both the intent and ability to hold these
investments until they mature. All equity securities are available for sale and
marked to market. Realized gains and losses on investments are credited/charged
to income and are determined on a "first-in, first-out" basis.

Mortgage notes receivable and premium finance contracts are carried at
unpaid balances. Management, considering current information and events
regarding the borrowers' ability to repay their obligations, considers a loan to
be impaired when it is probable that Holdings will be unable to collect all
amounts due according to the original contractual terms of the note agreement.
When a loan, in management's judgment, becomes impaired, interest income is
subsequently recognized only to the extent of cash payments received.

Management maintains allowances for mortgage notes receivable and premium
finance contracts at a level which management believes is adequate to absorb
potential losses in the portfolios. The allowances are based on an evaluation of
the notes, past loss experience, current economic conditions, volume, growth and
other relevant factors.

D. RESERVE FOR UNPAID LOSSES AND LOSS EXPENSES

The reserve for unpaid losses and loss expenses is undiscounted and
represents case-basis estimates of reported losses and estimates based on
certain actuarial assumptions regarding the past experience of unreported
losses. Estimated amounts of salvage and subrogation are deducted from the
reserve for unpaid losses and loss expenses. Management believes that the
reserve for unpaid losses and loss expenses is adequate to cover the ultimate
liability. However, such estimate may be more or less than the amount ultimately
paid when the claims are finally settled.

E. REVENUE RECOGNITION

Insurance premium income is recognized on a pro rata basis over the
respective terms of the policies. Policy acquisition costs net of ceding
commissions are similarly deferred and amortized to income.

Reinsurance arrangements are short-duration prospective contracts for which
prepaid reinsurance premiums are amortized ratably over the related policy terms
based on the estimated ultimate amounts to be paid. Premiums ceded for contracts
with retrospective adjustment features are calculated based upon the related
estimated incurred losses and loss expenses including a provision for unreported
losses.

Premium finance investment income is recognized under the level yield
method over the term of the underlying insurance policy or until the policy is
cancelled.

F. PROPERTY AND EQUIPMENT

Property and equipment stated at cost, less accumulated depreciation,
consist primarily of a home office building and adjacent plaza (purchased in
1994), furniture and equipment. Equipment under capital lease obligations is
stated at the present value of the minimum lease payments at the beginning of
the lease term. Depreciation and amortization is primarily computed using the
straight-line method over the estimated useful lives or lease terms, ranging
from 3 to 10 years for equipment and 39 years for the home office building.

G. INCOME TAXES

Holdings accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
Holdings' financial statements or federal tax returns. In estimating future tax
consequences, Holdings generally considers all expected future events other than
enactments of changes in the tax laws or rates.

30
<PAGE> 32

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

H. GOODWILL AND NON-COMPETITION AGREEMENTS

The excess of cost over net assets purchased relating to business
acquisitions are being amortized on a straight-line basis over periods ranging
from 7 to 25 years and the amounts capitalized relative to non-competition
agreements are being amortized on a straight-line basis over their respective
terms. The carrying value of goodwill and non-competition agreements is
evaluated periodically in relation to the operating performance and future
undiscounted net cash flows to the related business. Based on its most recent
analysis, Holdings believes no material impairment of goodwill and
non-competition agreements exists at December 31, 1996.

Through its wholly-owned subsidiaries, Holdings has also acquired the net
assets of independent insurance agencies. The results of operations of these
agencies have been included in the accompanying consolidated financial
statements since the date of these acquisitions.

I. CASH EQUIVALENTS

Holdings considers all certificates of deposit, United States government
securities and commercial paper with original maturities of three months or less
to be cash equivalents. At December 31, 1996 and 1995, there were no investments
in cash equivalents.

J. NET INCOME PER SHARE

Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (relating
to stock options and warrants) outstanding during the year, calculated on a
daily basis. The weighted average number of shares outstanding for all periods
presented has been retroactively adjusted for the effects of 5% stock dividends
effected on May 13, 1996 and June 1, 1995.

K. STOCK COMPENSATION PLANS

Holdings adopted Statement of Financial Accounting Standard No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," and has elected to continue
utilizing the intrinsic value method required under provisions of APB Opinion
No. 25 (APB 25) and related Interpretations in measuring stock-based
compensation for employees. In addition, SFAS 123 requires Holdings to make pro
forma disclosures of net income and net income per share as if the fair value
method of accounting for stock based compensation had been applied. See note 14
to the consolidated financial statements. The disclosure provisions of SFAS 123
are effective for options granted in fiscal years beginning in 1995.

L. FINANCIAL STATEMENT PRESENTATION

Certain amounts in the consolidated financial statements for prior years
have been reclassified to conform with the current year's presentation.

31
<PAGE> 33

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVESTMENTS

A. INVESTMENT INCOME

Major categories of investment income are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
Fixed maturities, available for sale................... $ 6,963 $ 5,542 $4,725
Fixed maturities, held to maturity..................... 950 366 --
Equity securities...................................... 949 823 983
Short-term investments and cash and cash equivalents... 696 1,044 510
Premium finance contracts.............................. 2,517 1,551 880
Mortgage notes receivable.............................. 1,785 1,091 680
Other invested assets.................................. 53 111 173
------- ------- ------
Total investment income...................... 13,913 10,528 7,951
Less investment expenses............................... 1,047 367 375
------- ------- ------
Net investment income........................ $12,866 $10,161 $7,576
======= ======= ======
</TABLE>

B. REALIZED AND NET UNREALIZED GAINS AND LOSSES ON INVESTMENTS

Realized gains (losses) and changes in net unrealized losses are as
follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------ -------
IN THOUSANDS
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities, available for sale................... $ 231 $ 42 $ (304)
Fixed maturities, held to maturity (called by
issuer)............................................. (14) (8) --
Equity securities...................................... 643 5 55
------- ------ -------
Net realized gains (losses).................... $ 860 $ 39 $ (249)
======= ====== =======
(Increase) decrease in net unrealized losses:
Fixed maturities, available for sale................... $(1,140) $4,461 $(4,754)
Fixed maturities, held to maturity..................... (121) 111 --
Equity securities and other invested assets............ 516 1,518 (2,101)
------- ------ -------
Total (increase) decrease in net unrealized
losses....................................... $ (745) $6,090 $(6,855)
======= ====== =======
</TABLE>

32
<PAGE> 34

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

C. SUMMARY OF INVESTMENTS

The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agencies and
authorities........................... $ 92,551 $110 $ 976 $ 91,685
States and political subdivisions........ 39,446 452 132 39,766
Collateralized mortgage obligations...... 9,239 72 35 9,276
Corporate securities..................... 4,754 70 20 4,804
-------- ---- ------ --------
Total fixed maturities, available
for sale....................... $145,990 $704 $1,163 $145,531
======== ==== ====== ========
</TABLE>

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agencies and
authorities............................ $ 4,048 $-- $12 $ 4,036
States and political subdivisions......... 12,066 46 44 12,068
------- --- --- -------
Total fixed maturities, held to
maturity........................ $16,114 $46 $56 $16,104
======= === === =======
</TABLE>

The amortized cost and estimated market values of investments in fixed
maturities, at December 31, 1995 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agencies and
authorities........................... $ 60,503 $ 262 $216 $ 60,549
States and political subdivisions........ 38,179 648 150 38,677
Collateralized mortgage obligations...... 6,949 89 94 6,944
Corporate securities..................... 6,678 178 36 6,820
-------- ------ ---- --------
Total fixed maturities, available
for sale....................... $112,309 $1,177 $496 $112,990
======== ====== ==== ========
</TABLE>

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agencies and
authorities......................... $ 7,565 $ 63 $-- $ 7,628
States and political subdivisions...... 12,306 67 19 12,354
------- ---- --- -------
Total fixed maturities, held to
maturity..................... $19,871 $130 $19 $19,982
======= ==== === =======
</TABLE>

33
<PAGE> 35

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and estimated market values of fixed maturities, at
December 31, 1996, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because some borrowers have the right to
prepay obligations with or without prepayment penalties.

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
IN THOUSANDS
<S> <C> <C>
Available for sale
Due in one year or less................................... $ 10,360 $ 10,384
Due after one year through five years..................... 73,007 72,803
Due after five years through ten years.................... 44,368 43,964
Due after ten years....................................... 9,016 9,104
Collateralized mortgage obligations....................... 9,239 9,276
-------- --------
$145,990 $145,531
======== ========
</TABLE>

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
IN THOUSANDS
<S> <C> <C>
Held to Maturity
Due in one year or less................................... $ 2,103 $ 2,112
Due after one year through five years..................... 6,444 6,434
Due after five years through ten years.................... 1,451 1,455
Due after ten years....................................... 6,116 6,103
------- -------
$16,114 $16,104
======= =======
</TABLE>

At December 31, 1996, approximately 95% of the fixed maturity portfolio was
rated A- or above by Moody's Investors Services, Inc. or Standard and Poor's
Corporation.

Gross realized gains and losses on sales of fixed maturities, available for
sale, are as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1995 1994
---- ---- -----
IN THOUSANDS
<S> <C> <C> <C>
Gross realized gains........................................ $284 $296 $ 24
Gross realized losses....................................... 53 254 328
---- ---- -----
Net realized gains (losses)....................... $231 $ 42 $(304)
==== ==== =====
</TABLE>

Gross realized losses on fixed maturities, held to maturity, that were
called by issuers, were $14,000 and $8,000 in 1996 and 1995 respectively.

The cost and estimated market values of investments in equity securities at
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Common stocks............................ $ 3,442 $ 71 $426 $ 3,087
Nonredeemable preferred stocks........... 13,646 107 361 13,392
------- ---- ---- -------
Total equity securities........ $17,088 $178 $787 $16,479
======= ==== ==== =======
</TABLE>

34
<PAGE> 36

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The cost and estimated market values of investments in equity securities at
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Common stocks............................ $ 4,935 $ 58 $590 $ 4,403
Nonredeemable preferred stocks........... 10,554 127 405 10,276
------- ---- ---- -------
Total equity securities........ $15,489 $185 $995 $14,679
======= ==== ==== =======
</TABLE>

D. PREMIUM FINANCE CONTRACTS

Premium finance contracts consist of loans made on insurance policies
issued by the following insurers:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Other insurers.............................................. $20,743 $10,437
TITAN Indemnity Company..................................... 2,726 2,421
------- -------
Total premium finance contracts, net.............. $23,469 $12,858
======= =======
</TABLE>

Premium finance contracts require principal and interest payments over
terms that coincide with the terms or the underlying insurance policy and are
secured by the unearned premium reserve related to the financed policies. The
insured's coverage can be canceled by contractual right if the insured fails to
make timely payments under its premium finance contract and the unearned premium
proceeds from the canceled policy can be used to pay off the unpaid principal
balance of the premium finance contract. At December 31, 1996 and 1995, total
premium finance contracts are net of an allowance for doubtful accounts of
approximately $127,000 and $157,000, respectively.

WPAC offers premium financing to third-party insureds and may advance funds
for financed premiums to independent agents who represent third-party insurers.
If remittance is not made by the agency to the third-party insurer, advances
made by WPAC may only be recoverable to the extent the agent's receipt of such
advances is deemed to be received by the third-party insurer. Premium financing
which WPAC offers to TITAN Indemnity Company's public entity insureds does not
involve any credit risk since no funds are advanced to outside parties and WPAC
is entitled to receive the unearned premiums on the financed policies upon
cancellation.

35
<PAGE> 37

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

E. MORTGAGE NOTES RECEIVABLE

Mortgage notes receivable are principally first liens on commercial
properties. There have been no foreclosures nor are any of the notes subject to
delinquent interest.

A summary of mortgage notes receivable, by location, is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Bexar County, Texas......................................... $ 7,534 $ 6,816
Dallas County, Texas........................................ 6,292 5,072
Travis County, Texas........................................ 992 --
Bell County, Texas.......................................... 128 --
Arizona..................................................... 721 --
Colorado.................................................... 388 393
------- -------
Total mortgage notes receivable............................. 16,055 12,281
Loan loss reserve........................................... (120) --
------- -------
Total mortgage notes receivable, net.............. $15,935 $12,281
======= =======
</TABLE>

F. RESTRICTIONS

At December 31, 1996, TITAN Indemnity and TITAN Insurance (the "insurance
companies") had investments with a carrying value of $9,042,000 on deposit with
various state insurance departments as a requirement of doing business in such
states.

3. REINSURANCE

In the ordinary course of business, the insurance companies reinsure
certain risks with other insurance organizations to provide greater
diversification of risk and minimize exposure on larger risks. Although
reinsurance agreements contractually obligate the insurance companies'
reinsurers to reimburse the insurance companies for their proportionate share of
losses, they do not discharge the primary liability of the insurance companies.
The insurance companies are contingently at risk for the ceded amount of
reserves for unpaid losses and loss expenses and unearned premiums in the event
the assuming insurance organizations are unable to meet their contractual
obligations.

The insurance companies are currently reinsured under separate treaties for
their different lines of business, resulting in the following net retentions per
occurrence:

TITAN Insurance collects and remits a mandatory statutory assessment from
its Michigan non-standard automobile policyholders in order to obtain
reimbursement for personal injury protection on losses (exclusive of loss
expenses) in excess of $250,000 from the Michigan Catastrophic Claims
Association (the "MCCA").

36
<PAGE> 38

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Holdings reflects amounts related to ceded unpaid losses and loss expenses
as amounts due from reinsurers and amounts related to ceded unearned premiums as
prepaid reinsurance premiums in its consolidated financial statements.

The amounts due from reinsurers and prepaid reinsurance premiums at
December 31, 1996 totaled $49,665,000 with two reinsurers (the MCCA and Munich
American Reinsurance Company) accounting for approximately 96% of the balance.
On a continual basis, Holdings conducts a review of its reinsurers considering a
number of factors, the most critical of which is their financial stability. As a
result of such reviews, Holdings reevaluates its position with reinsurers with
respect to existing and future reinsurance.

Amounts due from reinsurers consist of amounts related to the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
IN THOUSANDS
<S> <C> <C>
Paid losses and loss expenses............................... $ 2,697 $ 1,942
Unpaid losses and loss expenses............................. 44,101 39,787
Other....................................................... 595 860
------- -------
Total............................................. $47,393 $42,589
======= =======
</TABLE>

Ceded premiums earned and reinsurance recoveries on losses and loss
expenses are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
IN THOUSANDS
<S> <C> <C> <C>
Ceded premiums earned............................... $ 10,240 $ 10,266 $16,022
Reinsurance recoveries on losses and loss
expenses.......................................... 10,488 14,748 18,260
</TABLE>

37
<PAGE> 39

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An analysis of net premiums written is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
IN THOUSANDS
<S> <C> <C> <C>
Direct:
Non-standard automobile........................... $104,613 $ 80,607 $56,410
Public entity..................................... 61,130 53,569 47,316
Other............................................. 5,238 4,173 5,940
Assumed............................................. 1,865 86 118
Ceded:
Non-standard automobile........................... (4,313) (5,531) (5,409)
Public entity..................................... (5,483) (5,092) (4,087)
Other............................................. (799) (488) (1,006)
-------- -------- -------
Net premiums written...................... $162,251 $127,324 $99,282
======== ======== =======
Percentage of premiums assumed to net premiums
written........................................... 1.15% 0.10% 0.10%
======== ======== =======
</TABLE>

4. INCOME TAXES

Holdings files a consolidated federal income tax return. The differences
between the statutory tax rate and the "effective" tax rate are summarized
below:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35% 35% 34%
Non-taxable investment income............................... (3) (5) (5)
Other....................................................... (1) 1 --
--- --- ---
Actual "effective" rate........................... 31% 31% 29%
=== === ===
</TABLE>

The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
IN THOUSANDS
<S> <C> <C>
Deferred tax assets:
Discounting of reserve for unpaid losses and loss expenses
for tax purposes....................................... $5,665 $4,720
Unearned premium deductions for tax purposes.............. 3,705 2,933
Net unrealized losses on investments...................... 227 9
Other..................................................... 285 564
------ ------
Total deferred tax assets......................... 9,882 8,226
------ ------
Deferred tax liabilities:
Net deferred policy acquisition costs..................... 4,374 3,429
Interest on contingent consideration...................... 919 --
Other..................................................... 162 211
------ ------
Total deferred tax liabilities.................... 5,455 3,640
------ ------
Deferred tax assets, net.......................... $4,427 $4,586
====== ======
</TABLE>

38
<PAGE> 40

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management of Holdings believes that a valuation allowance with respect to
the realization of the total deferred tax assets is not necessary due to the
reversal of the gross deferred tax liability and the application of the
carryback provisions under the Internal Revenue Code. Holdings has not incurred
a loss for financial reporting purposes or federal income tax purposes since
inception, and management believes the existing net deductible temporary
differences will reverse during periods in which net taxable income is
generated. Accordingly, management believes it is more likely than not that
Holdings will fully realize total deferred tax assets, but management cannot
assure that Holdings will generate net income or any specific level of income in
future years.

Total federal income tax payments of $8,112,000, $4,243,000 and $4,965,000
were made during 1996, 1995 and 1994, respectively.

At December 31, 1996, current income taxes receivable of $1,602,000 are
included in other receivables and at December 31, 1995, current income taxes
payable of $460,000 are included in other liabilities.

5. STATUTORY INSURANCE ACCOUNTING PRINCIPLES

TITAN Indemnity and TITAN Insurance are required to prepare financial
statements with their domiciliary states of Texas and Michigan, respectively, in
accordance with statutory insurance accounting principles ("SAP") prescribed or
permitted by these states. The insurance companies are not utilizing any
material accounting methods that are permitted by state insurance agencies which
are not prescribed statutory accounting practices. The accounting principles
used to prepare statutory basis financial statements differ from GAAP.

A reconciliation of statutory policyholders' surplus at December 31, 1996
and 1995 and statutory net income for the years ended December 31, 1996, 1995
and 1994 of the insurance companies (as filed with their respective insurance
regulatory authorities) to the amounts shown in the accompanying consolidated
financial statements are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
Statutory policyholders' surplus............................ $ 80,325 $ 58,812
Assets non-admitted for SAP............................... 17,809 19,545
Deferred policy acquisition costs capitalized for GAAP.... 12,498 10,086
Deferred income taxes recorded for GAAP................... 4,494 4,568
Liabilities required for SAP in excess of those required
for GAAP............................................... 8,439 4,920
-------- --------
Shareholders' equity of insurance company
subsidiaries based on GAAP........................ 123,565 97,931
(Deficit) equity attributable to non-insurance company
parent and subsidiaries, net of consolidating
entries................................................ (11,697) 2,553
-------- --------
Total shareholders' equity per accompanying
consolidated balance sheets..................... $111,868 $100,484
======== ========
</TABLE>

39
<PAGE> 41

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
Statutory net income................................... $13,789 $ 9,882 $6,610
Deferred income taxes recorded for GAAP.............. (287) 284 736
Change in deferred policy acquisition costs
capitalized for GAAP.............................. 2,412 1,469 2,209
Other................................................ 829 760 (95)
------- ------- ------
Combined net income of insurance company subsidiaries
based on GAAP..................................... 16,743 12,395 9,460
Net loss attributable to non-insurance parent and
subsidiaries...................................... (2,562) (1,825) (397)
------- ------- ------
Net income per accompanying consolidated
statements of income......................... $14,181 $10,570 $9,063
======= ======= ======
</TABLE>

TITAN Indemnity is required by the Texas Department of Insurance to
maintain capital and surplus of $2,000,000 and TITAN Insurance is required by
the Michigan Insurance Bureau to maintain capital and surplus in an amount
determined adequate by the commissioner, but not less than $1,000,000.

In 1992, TITAN Indemnity underwent a financial examination by the Texas
Department of Insurance through the period ended June 30, 1992. TITAN Insurance
was examined by the Michigan Insurance Bureau through the period ended December
31, 1994.

Regulations that affect Holdings and the insurance industry are often the
result of the National Association of Insurance Commissioners ("the NAIC"). The
NAIC is an association of state insurance commissioners, regulators and support
staff that acts as a coordinating body for the state insurance regulatory
process. In 1994 the NAIC established new risk-based capital ("RBC")
requirements to assist regulators in monitoring the financial strength and
stability of property and casualty insurers. Under the NAIC requirements, each
insurer must maintain its total capital and surplus above a calculated threshold
or take corrective measures to achieve the threshold. The insurance companies
have calculated their RBC levels and have determined that their capital and
surplus are in excess of the threshold requirements.

6. DEFERRED POLICY ACQUISITION COSTS

The costs of acquiring new and renewal business, which vary with and are
directly related to the production of such business, have been deferred to the
extent that such costs are deemed recoverable from

40
<PAGE> 42

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

future unearned premiums and anticipated investment income. Information related
to deferred policy acquisition costs is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Net asset balance, beginning of period............... $ 10,086 $ 8,617 $ 6,408
Amounts deferred:
Commissions to agents.............................. 21,324 16,373 17,255
Taxes and fees..................................... 3,382 3,607 2,653
Other underwriting costs........................... 16,590 13,695 7,787
-------- -------- --------
41,296 33,675 27,695
Fee and ceding commission income................... (5,007) (3,140) (292)
-------- -------- --------
Net amounts deferred............................ 36,289 30,535 27,403
-------- -------- --------
Net amortization..................................... (33,877) (29,066) (25,194)
-------- -------- --------
Net asset balance, end of period................ $ 12,498 $ 10,086 $ 8,617
======== ======== ========
</TABLE>

7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

Notes payable and capitalized lease obligations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Term loan at various interest rates (from 6.76% to 7.2%),
due in installments through October 30, 2001, secured by
the common stock of TITAN Indemnity....................... $20,000 $10,000
$10,000,000 revolving line of credit, at LIBOR plus 110
basis points (6.77%), due July 30, 2001, secured by the
common stock of TITAN Indemnity........................... 2,000 --
Capitalized lease obligation secured by an aircraft......... 1,843 2,014
Capitalized lease obligation secured by property and
equipment................................................. 181 305
------- -------
Total............................................. $24,024 $12,319
======= =======
</TABLE>

Note payable -- premium finance subsidiary ($15,750,000 and $7,000,000 at
December 31, 1996 and 1995, respectively) represents WPAC's borrowings under its
revolving line of credit, at LIBOR plus 60 basis points (6.26% at December 31,
1996). The $25 million revolving line of credit is secured by premium finance
contracts and is due July 30, 1997.

Maturities at December 31, 1996 (in thousands) are as follows:

<TABLE>
<S> <C>
1997........................................................ $22,086
1998........................................................ 4,249
1999........................................................ 4,295
2000........................................................ 4,330
2001........................................................ 4,814
Thereafter.................................................. --
-------
Total............................................. $39,774
=======
</TABLE>

41
<PAGE> 43

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total interest payments of $1,898,000, $1,038,000 and $317,000 were made
during 1996, 1995 and 1994, respectively.

Holdings is committed under various operating lease agreements for office
space, non-standard automobile retail selling locations and property and
equipment. Rent expense and future minimum lease payments under these agreements
are not material to the accompanying consolidated financial statements.

In July 1996, Holdings and WPAC entered into a $55 million credit facility
with a group of banks, increasing the limit of the $45 million credit facility
originally negotiated in August 1995. The 1996 credit facility includes a $10
million revolving line of credit until July 30, 2001 for Holdings' working
capital purposes, a $20 million term loan utilized by the Company's insurance
subsidiaries to increase underwriting capacity, and a $25 million revolving
credit facility available until July 30, 1997 for WPAC's premium finance
operations. WPAC's revolving credit facility was amended in February, 1997,
increasing the amount available for premium finance contracts to $50 million,
concurrent with WPAC's purchase of Elite Premium Services, Inc (see note 18).
This increased the Company's total debt facility to $80 million. The credit
facilities for both Holdings and WPAC bear interest at rates based on LIBOR or
the bank's base rate plus a margin ranging from 0 to 200 basis points, depending
upon the total amount of indebtedness of Holdings, the statutory surplus of
TITAN Indemnity, the term of the loan and other factors. In addition, Holdings
has purchased interest rate swap agreements which fix the interest rate on a
portion of the term loan's principal ($7.5 million at December 31, 1996) at
7.01% through February 11, 1997 and on the remainder of the term loan's
principal at 7.20% through March 30, 1998.

The loan agreements contain certain financial covenants. At December 31,
1996, Holdings was in compliance with the covenants stated in the credit
facility with one exception, for which Holdings has received a waiver for the
duration of the loan agreements.

8. RELATED PARTY TRANSACTIONS

A Director of Holdings owns the company that manages the investments of
Holdings and provides certain investment banking services. For the years ended
December 31, 1996, 1995 and 1994, Holdings incurred $243,000, $212,000 and
$154,000, respectively, for such services.

Holdings has entered into employment agreements with certain executives
which grant the executives the right to receive certain benefits, including base
salary, should such executives be terminated other than for cause.

9. CONCENTRATIONS OF CREDIT RISK

The insurance companies transact business with independent insurance
agents, who represent their insureds. Public entity and certain other premiums
are due from agents ($5,555,000 and $5,755,000 at December 31, 1996 and 1995,
respectively) and represent unpaid agents' balances, net of an allowance for
doubtful accounts of approximately $160,000 at December 31, 1996 and 1995. Such
agents' balances may be secured by the related unearned premium and the
insured's coverage may be canceled if the insured fails to remit the premium to
the agent. However, if the insured has paid the agent, the balance due to TITAN
Indemnity from the agent is unsecured. Non-standard automobile insurance
balances are due from policyholders ($16,293,000 and $10,203,000 at December 31,
1996 and 1995, respectively) and are secured by the related unearned premium.
The insurance companies require policyholders to remit a minimum down payment at
the policy origination date and subsequent scheduled payments are monitored in
order to prevent coverage beyond the date for which payment has been received.
If subsequent payments are not made timely, the policy is canceled at no loss to
the insurance companies. In the opinion of management, the net amounts carried
on the accompanying consolidated balance sheets are collectible.

42
<PAGE> 44

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. PARENT COMPANY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
BALANCE SHEETS
Investment in subsidiaries, at equity in net assets....... $128,111 $ 99,849
Investments............................................... 2,019 8,952
Federal income taxes receivable........................... 1,238 581
Deferred tax asset........................................ 273 55
Property and equipment, net............................... 1,251 781
Other assets.............................................. 1,102 577
-------- --------
$133,994 $110,795
======== ========

Notes payable............................................. $ 22,000 $ 10,000
Other liabilities......................................... 126 311
Shareholders' equity...................................... 111,868 100,484
-------- --------
$133,994 $110,795
======== ========
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
STATEMENTS OF INCOME
Equity in income of subsidiaries.......................... $15,515 $11,864 $9,331
Net realized gains (losses) on sales...................... 23 (216) 2
Investment income......................................... 184 147 158
------- ------- ------
15,722 11,795 9,491
------- ------- ------
Expenses.................................................. 2,454 1,642 665
Income tax benefit........................................ (913) (417) (237)
------- ------- ------
Net income............................................. $14,181 $10,570 $9,063
======= ======= ======
</TABLE>

Substantially all of Holdings' retained earnings are attributable to the
insurance companies. The Texas Insurance Code limits the amount of dividends
TITAN Indemnity can pay to Holdings in any twelve month period to the greater of
its statutory net income for the preceding year or 10% of policyholders' surplus
as of the 31st day of December of the preceding year. The Michigan Insurance
Code limits the amount of dividends TITAN Insurance can pay to TITAN Indemnity
in any twelve-month period to the greater of its statutory net income for the
preceding year, excluding realized gains (losses) on sales of investments, or
10% of its policyholders' surplus as of the preceding year end. In addition,
TITAN Insurance is specifically prohibited from paying or declaring dividends if
its gross premiums written over any twelve month period exceed 300% of its
policyholders' surplus. Considering such restrictions, approximately $8.0
million and $12.1 million is available for distribution by TITAN Indemnity and
TITAN Insurance to their respective parent companies during 1996. In 1995, TITAN
Indemnity paid dividends to Holdings of $750,000. TITAN Insurance paid
$3,500,000, $1,612,000 and $1,297,000 in cash dividends to TITAN Indemnity in
1996, 1995 and 1994, respectively.

43
<PAGE> 45

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LINE OF BUSINESS INFORMATION

The following presents information regarding Holdings' operations by major
line of business for the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
NON-
STANDARD PUBLIC
AUTOMOBILE ENTITY
---------- -------
IN THOUSANDS
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Premiums written.......................................... $106,394 $61,208
Premiums earned........................................... 93,908 54,203
Fee and ceding commission income.......................... 6,649 1,208
Losses and loss expenses.................................. 55,096 35,678
YEAR ENDED DECEMBER 31, 1995
Premiums written.......................................... 80,607 53,655
Premiums earned.......................................... 69,070 44,896
Fee and ceding commission income......................... 2,923 162
Losses and loss expenses................................. 40,595 27,792
YEAR ENDED DECEMBER 31, 1994
Premiums written.......................................... 56,410 47,423
Premiums earned........................................... 47,333 39,412
Fee and ceding commission income.......................... 720 1,798
Losses and loss expenses.................................. 26,666 23,627
</TABLE>

44
<PAGE> 46

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. LOSSES AND LOSS EXPENSES INCURRED AND PAID

Information regarding the reserve for unpaid losses and loss expenses is as
follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Reserves for losses and loss expenses at
beginning of year, gross.............. $122,811 $ 98,405 $ 76,514
Reinsurance balances recoverable........ (39,787) (32,275) (23,190)
-------- -------- --------
Reserves for losses and loss expenses at
beginning of year, net................ 83,024 66,130 53,324
-------- -------- --------
Add:
Provision for losses and loss expenses
occurring:
Current year....................... 90,565 71,278 51,534
Prior years........................ 4,522 1,165 905
-------- -------- --------
Total......................... 95,087 72,443 52,439
-------- -------- --------
Less:
Loss and loss expense payments for
claims occurring during:
Current year....................... 41,060 27,152 17,015
Prior years........................ 39,281 28,397 22,618
-------- -------- --------
Total......................... 80,341 55,549 39,633
-------- -------- --------
Reserves for losses and loss expenses at
beginning of year, net................ 97,770 83,024 66,130
Reinsurance balances recoverable........ 44,101 39,787 32,275
-------- -------- --------
Reserves for losses and loss expenses at
end of year, gross.................... $141,871 $122,811 $ 98,405
======== ======== ========
</TABLE>

The 1996 provision for losses and loss expenses for prior years related
primarily to discontinued programs, certain public entity lines of business and
Michigan auto personal injury protection coverage. Holdings discontinued its
involvement in an aviation program in 1993 and a contract surety program in
1995. Adverse development from these discontinued programs totaled $1.4 million
in 1996. Approximately, $1.1 million of adverse development related to the
contract surety program and $300,000 related to the aviation program. The losses
incurred during 1996 related to certain claims settled at amounts in excess of
the established reserve for unpaid losses and loss expenses. Public entity
experienced adverse development in 1996, which aggregated approximately $2.1
million on certain liability coverages related primarily to several large losses
on prior years. Michigan personal injury protection experienced approximately
$0.9 million of adverse development in 1996 on 1995 claims, principally in
connection with known cases that developed additional severity. Management of
Holdings has since modified underwriting criteria for such coverages and
adjusted its reserving practices.

13. EMPLOYEE BENEFIT PLANS

Holdings sponsors defined contribution retirement plans under Section
401(k) of the Internal Revenue Code. These plans cover substantially all
employees who meet specified service requirements. Under these plans, the
Holdings may, at its discretion, match 50% of each employee's contribution up to
10% of the employee's salary. Such matching contributions have not been
material.

45
<PAGE> 47

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. STOCK OPTIONS AND WARRANTS

At December 31, 1996, Holdings had two stock option plans which are further
described below. Holdings applies the intrinsic value method in accounting for
its plans. Accordingly, no compensation expense has been recognized in the
accompanying consolidated financial statements. Had compensation expense for
Holding's stock option plans been determined using the fair value method,
Holding's net income and net income per share would have been reduced to the pro
forma amounts indicated below. The effects of applying SFAS 123 as calculated
below may not be representative of the effects on reported net income for future
years.

<TABLE>
<CAPTION>
1996 1995
-------- --------
IN THOUSANDS, EXCEPT PER
SHARE DATA
<S> <C> <C>
Net income:
As reported............................................... $14,181 $10,570
Pro forma................................................. 13,846 10,453
Net income per share:
As reported............................................... $ 1.48 $ 1.33
Pro forma................................................. 1.44 1.32
</TABLE>

Holdings has two fixed stock option plans. Under the 1993 Stock Option
Plan, Holdings may grant options to employees, directors and consultants of
Holdings for up to 992,250 shares of Common Stock. Holdings may also grant
options to outside directors under the 1993 Directors' Stock Option Plan.
Options issued under both plans were at exercise prices equal to the market
price of Holdings' stock on the date of grant and an option's maximum term is
ten years with vesting ranging from immediate to five years.

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rates of 5.4% dividend
yield of 1.9%, expected lives of 10 years for the 1993 Stock Option Plan and 5
years for the 1993 Directors Stock Option Plan; and volatility of 23.3%.

A summary of the status of Holding's two fixed option plans as of December
31, 1996, 1995 and 1994, changes during the years then ended, and the
weighted-average fair value of options granted during 1996 and 1995 is presented
below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year............................... 595,026 $10.71 525,927 $10.52 231,573 $ 9.07
Granted............................ 356,550 13.19 96,075 11.26 304,841 11.59
Exercised.......................... (43,564) 9.04 (20,946) 9.06 -- --
Forfeited.......................... (1,049) 13.10 (6,030) 8.94 (10,487) 9.07
------- ------- -------
Outstanding, at end of year.......... 906,963 11.90 595,026 10.71 525,927 10.53
======= ======= =======
Options exercisable at year-end...... 405,472 307,437 154,023
======= ======= =======
Weighted average fair value of
options granted.................... $ 6.63 $ 4.30
</TABLE>

46
<PAGE> 48

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about fixed stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED
AVERAGE
REMAINING NUMBER OF
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE EXERCISABLE
- -------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 8.73............................................ 50,180 7.7 years 41,177
9.07............................................ 184,709 6.8 184,709
9.95............................................ 27,563 9.4 27,563
12.24............................................ 248,061 4.3 99,223
13.10............................................ 18,900 8.9 6,300
13.45............................................ 10,500 3.8 --
14.70............................................ 10,500 3.8 --
12.98............................................ 10,500 9.1 --
12.86............................................ 179,550 9.2 --
13.81............................................ 31,500 9.3 31,500
13.50............................................ 75,000 9.7 15,000
15.50............................................ 60,000 9.9 --
------- -------
906,963 405,472
======= =======
</TABLE>

In addition, during 1993, Holdings issued warrants for 452,025 shares of
common stock at a price of $14.96 per share. Such warrants are adjustable for
any dilution caused by the issuance of additional shares or convertible
securities and the holders are entitled to cumulative dividends ($0.93 per share
at December 31, 1996) upon exercise. All such warrants remained outstanding at
December 31, 1996 at a net effective exercise price of $14.52 and expire in
September 1998.

15. ACQUISITIONS AND CONTINGENT CONSIDERATION

During 1996, Holdings acquired the net assets of independent insurance
agencies in Texas, Nevada and Colorado. These acquisitions together with the
prior year acquisitions of the Michigan non-standard automobile operations and
the net assets of independent insurance agencies in Arizona and Michigan, have
given rise to goodwill and non-competition agreements summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------ -------- ------- -------
GOODWILL NON-COMPETITION AGREEMENTS
-------------------------- ----------------------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Net asset balance, beginning of
period........................... $13,007 $ 5,641 $2,189 $ 7,762 $3,673 $1,497
Additions:
Contingent consideration
accrued....................... -- 4,261 2,511 -- 4,260 2,511
Independent agency
acquisitions.................. 2,502 3,551 1,116 82 625 --
Amortization expense............... (969) (446) (175) (1,189) (796) (335)
------- ------- ------ ------- ------ ------
Net asset balance, end of period... $14,540 $13,007 $5,641 $ 6,655 $7,762 $3,673
======= ======= ====== ======= ====== ======
</TABLE>

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

Holdings is required to disclose estimated fair values of its financial
instruments. Fair value estimates, methods and assumptions are set forth below.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect a premium or discount that could result from offering
for sale at one time the entire holdings of a particular

47
<PAGE> 49

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial instrument. Fair value estimates are based on judgments regarding
economic conditions, risk characteristics of the financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment, and therefore, cannot be
determined with precision.

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

Financial Assets -- Fair values for fixed maturities, equity securities and
short-term investments are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying amounts of cash and cash
equivalents, premium finance contracts and other invested assets approximate
their fair values. The fair value of mortgage notes receivable is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to similar borrowers with similar credit ratings and the same
remaining maturities.

Financial Liabilities -- The fair value of the Company's borrowings are
estimated using discounted cash flow analyses based on Holdings' current
incremental borrowing rates for similar types and maturities of instruments.

The carrying amount and fair value of the Company's financial instruments
consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
IN THOUSANDS
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Fixed maturities, available for sale..... $145,531 $145,531 $112,990 $112,990
Fixed maturities, held to maturity....... 16,114 16,104 19,871 19,982
Equity securities, available for sale.... 16,479 16,479 14,679 14,679
Short-term investments................... 270 270 4,898 4,898
Cash..................................... 3,682 3,682 11,008 11,008
Premium finance contracts................ 23,469 23,469 12,858 12,858
Mortgage notes receivable................ 15,935 15,910 12,281 12,311
Other invested assets.................... 3,313 3,313 5,273 5,273
FINANCIAL LIABILITIES:
Notes payable and capitalized lease
obligations........................... 24,024 24,024 12,319 12,319
Note payable -- premium finance
subsidiary............................ 15,750 15,750 7,000 7,000
</TABLE>

48
<PAGE> 50

TITAN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

The unaudited operating results by quarter for 1996, 1995 and 1994 are
summarized below:

<TABLE>
<CAPTION>
TOTAL
REVENUES INCOME NET
AND OTHER BEFORE NET INCOME
INCOME INCOME TAX INCOME PER SHARE
--------- ---------- ------- ---------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
1996:
1st....................................... $ 39,081 $ 4,486 $ 3,086 $ .33
2nd....................................... 43,612 5,344 3,692 .38
3rd....................................... 44,547 5,190 3,524 .37
4th....................................... 47,056 5,679 3,879 .40
-------- ------- ------- -----
Year.............................. $174,296 $20,699 $14,181 $1.48
======== ======= ======= =====
1995:
1st....................................... $ 29,857 $ 3,365 $ 2,393 $ .31
2nd....................................... 32,891 3,643 2,481 .32
3rd....................................... 33,626 3,870 2,713 .35
4th....................................... 35,468 4,408 2,983 .35
-------- ------- ------- -----
Year.............................. $131,842 $15,286 $10,570 $1.33
======== ======= ======= =====
1994:
1st....................................... $ 22,438 $ 2,967 $ 2,017 $ .26
2nd....................................... 24,368 2,985 2,125 .28
3rd....................................... 25,257 3,517 2,407 .30
4th....................................... 28,598 3,378 2,514 .32
-------- ------- ------- -----
Year.............................. $100,661 $12,847 $ 9,063 $1.16
======== ======= ======= =====
</TABLE>

18. SUBSEQUENT EVENT

In February, 1997, WPAC executed an agreement to acquire a premium finance
company, Elite Premium Services, Inc. ("Elite"), for approximately $400,000 in
cash and additional consideration to be determined as a function of future
amounts financed through sources provided by Elite for each of the five years
beginning with 1997 subject to a maximum of $275,000 annually. In connection
with the acquisition, WPAC increased the limit of its credit facility to $50
million and increased its borrowings under the credit facility by approximately
$11.5 million for finance contracts acquired in the acquisition.

19. LEGAL PROCEEDINGS

Holdings is routinely engaged in litigation in the normal course of its
business, including defending claims for punitive damages. The insurance
companies defend third-party claims brought against their insureds, as well as
defend themselves against first-party and coverage claims. Additionally,
contingencies may arise from insurance regulatory matters and regulatory
litigation matters.

Holdings believes the resolution of the above claims and lawsuits will not
have a material adverse effect on its financial condition or results of
operations.

49
<PAGE> 51

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
TITAN Holdings, Inc.:

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TITAN
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

February 13, 1997

San Antonio, Texas

50
<PAGE> 52

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

None.

PART III

Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "1997 Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report, the Stock Option Committee Report or the Performance Graph included in
the 1997 Proxy Statement.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's 1997 Proxy Statement.

The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to the section in Part I, Item 1,
entitled "Executive Officers of the Registrant".

The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Company's 1997 Proxy Statement
and is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.

51
<PAGE> 53

PART IV

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

(a) The following documents are filed as a part of this Report:

1. Financial Statements

<TABLE>
<CAPTION>
FORM 10-K
PAGE NUMBERS
------------
<S> <C>
Consolidated Balance Sheets, December 31, 1996 and 1995..... 25
Consolidated Statements of Income, Years Ended December 31,
1996, 1995 and 1994....................................... 26
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994.......................... 27
Consolidated Statements of Cash Flows, Years Ended December
31, 1996, 1995 and 1994................................... 28
Notes to Consolidated Financial Statements.................. 29-48
Independent Auditors' Report................................ 49
</TABLE>

2. Financial Statement Schedules: The financial statement schedules of the
Company other than the one listed below are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the Consolidated Financial Statements or Notes thereto.

Schedule VII-Mortgage Loans on Real Estate and Interest Earned on
Mortgages.

3. Exhibit Index: The Exhibits listed on the next page are filed as part
of, or incorporated by reference into, this Report.

52
<PAGE> 54
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
10.15* Employment Agreement dated January 1, 1993, between TITAN
Holdings, Inc. and Michael J. Bodayle. (1)
10.17 Loan Agreement dated August 8, 1995 among TITAN Holdings,
Inc., as borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, First Interstate Bank of Texas,
N.A. and Dresdner Bank AG, New York and Dresdner Bank AG,
New York Branch as agent. (5)
10.18 Pledge Agreement dated as of August 8, 1995 among TITAN
Holdings, Inc. and Dresdner Bank AG, New York and Grand
Cayman Branches, First Interstate Bank to Texas, N.A. and
Dresdner Bank AG, New York Branch as agent. (5)
10.19 Loan Agreement dated August 8, 1995 among Westchester
Premium Acceptance Corporation, as borrower, and Dresdner
Bank AG, New York and Grand Cayman Branches, First
Interstate Bank of Texas, N.A. and Dresdner Bank AG, New
York Branch as agent. (5)
10.20 Pledge and Security Agreement, dated as of August 8, 1995
among Westchester Premium Acceptance Corporation and
Dresdner Bank AG, New York and Grand Cayman Branches,
First Interstate Bank of Texas, N.A. and Dresdner Bank
AG, New York Branch as agent. (5)
10.21* TITAN Holdings, Inc. 1993 Directors' Stock Option Plan. (5)
10.22 Investment Management Agreement dated as of May 8, 1995
between TITAN Holdings, Inc. and Lyon Securities, Inc. (5)
10.47 Office Space Lease Agreement dated October 6, 1986 between
One Oak Park Limited and TITAN Holdings, Inc., as
amended. (1)
10.48 Office Building Lease dated March 9, 1993, between Aetna
Casualty and Surety Company and Imperial Midwest
Insurance Company. (1)
10.52 Letter Agreement dated September 30, 1993 to Stock Purchase
Agreement among TITAN Indemnity Company and the
shareholders of VFS, Inc. (2)
10.53* Amendment to TITAN Holdings, Inc., 1993 Stock Option Plan. (3)
10.59* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Thomas E. Mangold. (4)
10.60* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Michael W. Grandstaff. (4)
10.61* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Martin F. Gohr. (4)
10.63 Casualty Excess of Loss Reinsurance Agreement No.
63-2407-1-2-3/CX-392-3 among Munich American Reinsurance
Company, Munich Reinsurance Company, U.S. Branch, TITAN
Indemnity Company and TITAN Insurance Company. (6)
10.64 Loan Agreement dated July 30, 1996 among TITAN Holdings,
Inc. As a borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, Bank One Texas, N.A., and
NationsBanc of Texas, N.A. and Dresdner Bank, AG, New
York Branch as Agent. (7)
10.65 Pledge Agreement dated as of July 30, 1996 among TITAN
Holdings, Inc. and Dresdner Bank, AG, New York and Grand
Cayman Branches, Bank One Texas, N.A. and Nationsbank of
Texas, N.A. and Dresdner Bank, AG, New York Branch as
Agent. (7)
</TABLE>

53
<PAGE> 55

<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
10.66 Loan Agreement dated July 30, 1996 among Westchester Premium
Acceptance Corporation as borrower, and Dresdner Bank AG,
New York and Grand Cayman Branches, Bank One Texas, N.A.,
and Nationsbank of Texas, N.A. and Dresdner Bank AG, New
York Branch as Agent. (7)
10.67 Pledge and Security Agreement dated as of July 30, 1996
among Westchester Premium Acceptance Corporation and
Dresdner Bank, AG, New York and Grand Cayman Branches,
Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and
Collateral Agent. (6)
10.68* Amendment to TITAN Holdings, Inc. 1993 Stock Option Plan
10.69 Agreement of Amendment dated as of February 21, 1997 among
Westchester Premium Acceptance Corporation and Dresdner
Bank AG, New York and Grand Cayman Branches, Bank One
Texas, N.A., and Nationsbank of Texas, N.A. and Dresdner
Bank, AG, New York Branch as Agent and Collateral Agent.
22.4 Subsidiaries of the Registrant. (6)
27.2 Financial Data Schedule, December 31, 1996.
23.2 Consent of KPMG Peat Marwick LLP.
28.5 Schedule P of the 1995 Annual Statement for TITAN Indemnity
Company. (6)
28.6 Schedule P of the 1995 Annual Statement for TITAN Insurance
Company. (6)
28.7 Schedule P of the 1996 Annual Statement for TITAN Indemnity
Company. (8)
28.8 Schedule P of the 1996 Annual Statement for TITAN Insurance
Company. (8)
</TABLE>

* Denotes management contract or compensatory plan.
- ---------------

(1) Incorporated by reference herein to the Registration Statement on Form S-1
filed on July 7, 1993, Registration No. 33-62732.

(2) Incorporated by reference herein to Form 10-K for the quarterly period ended
September 30, 1993 filed on November 12, 1993.

(3) Incorporated by reference herein to Form 10-K for the year ended December
31, 1993 filed on March 29, 1994.

(4) Incorporated by reference herein to Form 10-K for the year ended December
31, 1994 filed on March 29, 1995.

(5) Incorporated by reference herein to the Registration Statement on Form S-1
filed on November 20, 1995, Registration No. 33-98224.

(6) Incorporated by reference herein to Form 10-K for the year ended December
31, 1995 filed on March 29, 1996.

(7) Incorporated by reference herein to Form 10-Q for the quarterly period ended
June 30, 1996 filed on August 14, 1996.

(b) Reports on Form 8-K: None

(8) Incorporated by reference herein to Form 10-K for the year ended December
31, 1996 filed on March 28, 1997

54
<PAGE> 56

SIGNATURES

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

TITAN HOLDINGS, INC.

By: /s/ MARK E. WATSON, JR.
----------------------------------
Mark E. Watson, Jr.

March 27, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK E. WATSON, JR. Chairman of the Board, Chief March 27, 1997
- ----------------------------------------------------- Executive Officer and
Mark E. Watson, Jr. President

/s/ THOMAS E. MANGOLD Executive Vice President, and March 27, 1997
- ----------------------------------------------------- Director
Thomas E. Mangold

/s/ MARK E. WATSON, III Senior Vice President, General March 27, 1997
- ----------------------------------------------------- Counsel and Secretary and
Mark E. Watson, III Director

/s/ MICHAEL W. GRANDSTAFF Senior Vice President, March 27, 1997
- ----------------------------------------------------- Treasurer and Chief Financial
Michael W. Grandstaff Officer (Principle Financial
and Accounting Officer)

/s/ LUCIUS E. BURCH, III Director March 27, 1997
- -----------------------------------------------------
Lucius E. Burch, III

/s/ HECTOR DE LEON Director March 27, 1997
- -----------------------------------------------------
Hector De Leon

/s/ E.B. LYON, III Director March 27, 1997
- -----------------------------------------------------
E.B. Lyon, III

/s/ CHRISTOPHER J. MURPHY, III Director March 27, 1997
- -----------------------------------------------------
Christopher J. Murphy, III

/s/ TOBY S. WILT Director March 27, 1997
- -----------------------------------------------------
Toby S. Wilt

/s/ GARY V. WOODS Director March 27, 1997
- -----------------------------------------------------
Gary V. Woods
</TABLE>

55
<PAGE> 57

SCHEDULE VII: MORTGAGE LOANS ON REAL ESTATE AND INTEREST
EARNED ON MORTGAGES

<TABLE>
<CAPTION>
PART I -- MORTGAGE LOANS ON REAL PART II -- INTEREST EARNED ON
ESTATE AT CLOSE OF PERIOD MORTGAGES
-------------------------------- ------------------------------
AMOUNT OF INTEREST DUE INTEREST
CARRYING PRINCIPAL UNPAID AND ACCRUED INCOME EARNED
AMOUNT ON AT CLOSE OF AT CLOSE OF APPLICABLE TO
MORTGAGE PERIOD PERIOD PERIOD
------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>

Liens on:
Residential (2 loans)...................... $ 569,110 $ 569,110 $ 8,363 $ 39,256
Apartments and business:
Shopping center.......................... 991,775 991,775 14,909 87,212
Office building.......................... 875,632 875,632 13,168 80,255
Apartment building....................... 875,137 875,137 13,543 44,040
Office building.......................... 770,259 770,259 11,579 52,364
Garden office building................... 750,854 750,854 11,281 68,364
Warehouse................................ 721,289 721,289 10,842 50,402
Distribution center...................... 701,608 701,608 10,389 63,807
Apartment building....................... 694,640 694,640 11,303 68,876
Retail center............................ 633,972 633,972 9,959 59,701
Office building.......................... 599,248 599,248 9,517 16,100
Cold storage warehouse................... 584,978 584,978 8,298 52,672
Distribution center...................... 545,334 545,334 8,860 54,037
Others:
$0 -- 100,000 (2 loans).................. 106,939 106,939 1,798 9,437
100,001 -- 150,000 (2 loans)............. 276,480 276,480 4,523 27,405
150,001 -- 200,000 (5 loans)............. 921,186 921,186 14,369 80,395
200,001 -- 250,000 (4 loans)............. 906,540 906,540 14,892 76,720
250,001 -- 300,000 (5 loans)............. 1,370,509 1,370,509 21,137 124,933
300,001 -- 350,000 (1 loan).............. 320,187 320,187 4,874 29,983
350,001 -- 400,000 (3 loans)............. 1,092,359 1,092,359 18,118 109,234
400,001 -- 450,000 (3 loans)............. 1,280,115 1,280,115 19,768 120,264
450,001 -- 500,000 (1 loan).............. 466,533 466,533 7,208 43,472
----------- ----------- -------- ----------
Sub-total........................ 6,740,848 6,740,848 106,687 621,843
----------- ----------- -------- ----------
Loan loss provision:....................... (120,000) (120,000) 0 0
----------- ----------- -------- ----------
Total............................ $15,934,684 $15,934,684 $248,698 $1,358,929
=========== =========== ======== ==========
</TABLE>

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

Note:

(1) All mortgages are first liens and there are no mortgages being foreclosed or
subject to delinquent interest.

(2) Carrying amount and principal unpaid by state:

<TABLE>
<S> <C>
Texas....................................................... $14,945,080
Arizona..................................................... 721,289
Colorado.................................................... 388,315
Loan loss reserve........................................... (120,000)
-----------
$15,934,684
===========
</TABLE>

56
<PAGE> 58

(3) Reconciliation:

<TABLE>
<S> <C>
Balance at beginning of period.............................. $12,281,364
Additions during period:
New mortgage loans..................................... 4,981,066
Deductions during period:
Collections of principal............................... (1,207,746)
Loan loss provision......................................... (120,000)
-----------
Balance at close of period.................................. $15,934,684
===========
</TABLE>

57
<PAGE> 59

INDEX TO EXHIBIT

<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation. (1)
3.2 Bylaws of the Registrant, as amended. (1)
3.3 Amended and Restated Articles of Incorporation of the
Registrant.
3.4 Bylaws of the Registrant, as amended.
4.2 Form of Underwriters' Warrant Agreement, including form of
Underwriters' Warrant. (1)
4.3 Specimen of revised certificate representing Common Stock,
$.01 par value, of the Registrant. (4)
4.4 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Thomas E. Mangold as Management
Sellers Representative. (5)
4.5 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Monis Schuster as Seller
Representative. (5)
10.1* TITAN Holdings, Inc. 1993 Stock Option Plan. (1)
10.4 Stock Purchase Agreement dated January 1, 1992, among TITAN
Indemnity Company and the shareholders of VFS, Inc. (1)
10.5 Amendment to Stock Purchase Agreement dated January 31,
1992, among TITAN Indemnity Company and the shareholders
of VFS, Inc. (1)
10.14* Employment Agreement dated January 1, 1993 between TITAN
Holdings, Inc. and Mark E. Watson, Jr. (1)
10.15* Employment Agreement dated January 1, 1993, between TITAN
Holdings, Inc. and Michael J. Bodayle. (1)
10.17 Loan Agreement dated August 8, 1995 among TITAN Holdings,
Inc., as borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, First Interstate Bank of Texas,
N.A. and Dresdner Bank AG, New York and Dresdner Bank AG,
New York Branch as agent. (5)
10.18 Pledge Agreement dated as of August 8, 1995 among TITAN
Holdings, Inc. and Dresdner Bank AG, New York and Grand
Cayman Branches, First Interstate Bank to Texas, N.A. and
Dresdner Bank AG, New York Branch as agent. (5)
10.19 Loan Agreement dated August 8, 1995 among Westchester
Premium Acceptance Corporation, as borrower, and Dresdner
Bank AG, New York and Grand Cayman Branches, First
Interstate Bank of Texas, N.A. and Dresdner Bank AG, New
York Branch as agent. (5)
10.20 Pledge and Security Agreement, dated as of August 8, 1995
among Westchester Premium Acceptance Corporation and
Dresdner Bank AG, New York and Grand Cayman Branches,
First Interstate Bank of Texas, N.A. and Dresdner Bank
AG, New York Branch as agent. (5)
10.21* TITAN Holdings, Inc. 1993 Directors' Stock Option Plan. (5)
10.22 Investment Management Agreement dated as of May 8, 1995
between TITAN Holdings, Inc. and Lyon Securities, Inc. (5)
10.47 Office Space Lease Agreement dated October 6, 1986 between
One Oak Park Limited and TITAN Holdings, Inc., as
amended. (1)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
10.48 Office Building Lease dated March 9, 1993, between Aetna
Casualty and Surety Company and Imperial Midwest
Insurance Company. (1)
10.52 Letter Agreement dated September 30, 1993 to Stock Purchase
Agreement among TITAN Indemnity Company and the
shareholders of VFS, Inc. (2)
10.53* Amendment to TITAN Holdings, Inc., 1993 Stock Option Plan. (3)
10.59* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Thomas E. Mangold. (4)
10.60* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Michael W. Grandstaff. (4)
10.61* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Martin F. Gohr. (4)
10.63 Casualty Excess of Loss Reinsurance Agreement No.
63-2407-1-2-3/CX-392-3 among Munich American Reinsurance
Company, Munich Reinsurance Company, U.S. Branch, TITAN
Indemnity Company and TITAN Insurance Company. (6)
10.64 Loan Agreement dated July 30, 1996 among TITAN Holdings,
Inc. As a borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, Bank One Texas, N.A., and
NationsBanc of Texas, N.A. and Dresdner Bank, AG, New
York Branch as Agent. (7)
10.65 Pledge Agreement dated as of July 30, 1996 among TITAN
Holdings, Inc. and Dresdner Bank, AG, New York and Grand
Cayman Branches, Bank One Texas, N.A. and Nationsbank of
Texas, N.A. and Dresdner Bank, AG, New York Branch as
Agent. (7)
10.66 Loan Agreement dated July 30, 1996 among Westchester Premium
Acceptance Corporation as borrower, and Dresdner Bank AG,
New York and Grand Cayman Branches, Bank One Texas, N.A.,
and Nationsbank of Texas, N.A. and Dresdner Bank AG, New
York Branch as Agent. (7)
10.67 Pledge and Security Agreement dated as of July 30, 1996
among Westchester Premium Acceptance Corporation and
Dresdner Bank, AG, New York and Grand Cayman Branches,
Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and
Collateral Agent. (6)
10.68* Amendment to TITAN Holdings, Inc. 1993 Stock Option Plan
10.69 Agreement of Amendment dated as of February 21, 1997 among
Westchester Premium Acceptance Corporation and Dresdner
Bank AG, New York and Grand Cayman Branches, Bank One
Texas, N.A., and Nationsbank of Texas, N.A. and Dresdner
Bank, AG, New York Branch as Agent and Collateral Agent.
22.4 Subsidiaries of the Registrant. (6)
27.2 Financial Data Schedule, December 31, 1996.
23.2 Consent of KPMG Peat Marwick LLP.
28.5 Schedule P of the 1995 Annual Statement for TITAN Indemnity
Company. (6)
</TABLE>
<PAGE> 61

<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
28.6 Schedule P of the 1995 Annual Statement for TITAN Insurance
Company. (6)
28.7 Schedule P of the 1996 Annual Statement for TITAN Indemnity
Company. (8)
28.8 Schedule P of the 1996 Annual Statement for TITAN Insurance
Company. (8)
</TABLE>