FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 0-22342
Triad Guaranty Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-1838519
(State of Incorporation) (I.R.S. Employer Identification Number)
101 South Stratford Road, Suite 500
Winston-Salem, North Carolina 27104
(Address of principal executive offices)
(910) 723-1282
(Registrant's telephone number, including area code)
----------------------------------------------------
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 / /
Number of shares of Common Stock, $.01 par value, outstanding as of August
1, 1996: 6,645,361 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 (Unaudited)
and December 31, 1995....................................................3
Consolidated Statements of Income for the Three and Six Month
Periods Ended June 30, 1996 and 1995 (Unaudited).........................4
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1996 and 1995 (Unaudited).........................5
Notes to Consolidated Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders................17
Signatures..........................................................18
2
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities ............................................. $ 81,710,102 $76,093,199
Equity securities ............................................ 6,233,064 5,659,026
Short-term investments ......................................... 1,650,117 4,226,207
------------ -----------
89,593,283 85,978,432
Cash ............................................................. 286,154 199,241
Accrued investment income ........................................ 1,070,848 895,657
Deferred policy acquisition costs ................................ 9,295,025 7,576,684
Property and equipment ........................................... 1,429,413 1,340,052
Prepaid reinsurance premium ...................................... 375,363 2,039,240
Reinsurance recoverable .......................................... 77,825 271,106
Other assets ..................................................... 444,812 716,837
------------ -----------
Total assets ..................................................... $102,572,723 $99,017,249
============ ===========
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses .......................... $ 5,254,343 $ 4,589,103
Unearned premiums ............................................ 8,447,714 9,086,274
Amounts payable to reinsurer ................................. 35,773 71,437
Current taxes payable ........................................ 1,596 39,931
Deferred income taxes ........................................ 3,012,206 2,708,572
Unearned ceding commission ................................... 102,959 620,115
Accrued expenses and other liabilities ....................... 1,461,831 1,460,475
------------ -----------
Total liabilities ................................................ 18,316,422 18,575,907
Commitments and contingent liabilities - Note 4
Stockholders' equity:
Preferred stock, par value $.01 per share --- authorized
1,000,000 shares; no shares issued and outstanding ......... -- --
Common stock, par value $.01 per share --- authorized
10,000,000 shares; 6,645,361 issued and outstanding shares
at June 30, 1996 and 4,418,939 at December 31, 1995 ........ 66,453 44,189
Additional paid-in capital .................................... 59,346,832 59,141,808
Unrealized gain on available-for-sale securities, net of income
tax liability of $70,427 at June 30, 1996 and $889,387
at December 31, 1995 ...................................... 140,947 1,732,209
Retained earnings ............................................ 24,702,069 19,523,136
------------ -----------
Total stockholders' equity ....................................... 84,256,301 80,441,342
------------ -----------
Total liabilities and stockholders' equity ....................... $102,572,723 $99,017,249
============ ===========
</TABLE>
See accompanying notes
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct.......................................... $6,112,251 $4,752,533 $11,791,151 $8,550,801
Assumed......................................... 4,799 7,335 15,747 18,422
Ceded........................................... (558,200) (1,027,033) (1,174,959) (1,884,459)
---------- ----------- ----------- -----------
Net premiums written............................... 5,558,850 3,732,835 10,631,939 6,684,764
Change in unearned premiums........................ 204,396 (93,964) 610,214 402,257
---------- ----------- ----------- -----------
Earned premiums.................................... 5,763,246 3,638,871 11,242,153 7,087,021
Net investment income.............................. 1,364,174 1,141,587 2,643,298 2,340,435
Realized investment gains.......................... (99,286) 147,359 (141,572) 162,972
Other income....................................... 107,699 0 107,709 105
---------- ----------- ----------- -----------
7,135,833 4,927,817 13,851,588 9,590,533
Losses and expenses:
Losses and loss adjustment expenses................ 652,371 511,869 1,332,878 1,060,039
Reinsurance recoveries............................. (37,777) (93,478) (65,259) (213,558)
---------- ----------- ----------- -----------
Net losses and loss adjustment expenses............ 614,594 418,391 1,267,619 846,481
Amortization of deferred policy acquisition costs.. 828,975 587,199 1,601,207 1,135,392
Other operating expenses (net)..................... 1,868,720 1,116,923 3,483,824 2,296,821
---------- ----------- ----------- -----------
3,312,289 2,122,513 6,352,650 4,278,694
---------- ----------- ----------- -----------
Income before income taxes......................... 3,823,544 2,805,304 7,498,938 5,311,839
Income taxes:
Current......................................... 21,688 675 (37,741) 1,000
Deferred........................................ 1,149,787 868,969 2,335,595 1,643,689
---------- ----------- ----------- -----------
1,171,475 869,644 2,297,854 1,644,689
---------- ----------- ----------- -----------
Net income......................................... $2,652,069 $1,935,660 $5,201,084 $3,667,150
========== ========== ========== ==========
Net income per share............................... $.40 $.29 $.78 $.55
========== ========== ========== ==========
Average shares outstanding......................... 6,636,407 6,628,409 6,632,408 6,628,409
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------
1996 1995
<S> <C> <C>
Operating activities
Net income..................................................................... $5,201,084 $3,667,150
Adjustments to reconcile net income to net cash provided by operating activities:
Loss and unearned premium reserves.......................................... 26,679 (229,154)
Accrued expenses and other liabilities...................................... 1,789 47,763
Current taxes payable....................................................... (38,335) (3,432)
Amounts due to/from reinsurers.............................................. 1,821,496 115,317
Accrued investment income................................................... (175,191) 78,394
Policy acquisition costs deferred........................................... (3,319,548) (1,903,285)
Amortization of policy acquisition costs.................................... 1,601,207 1,135,392
Net realized investment gains .............................................. 141,572 (162,972)
Provision for depreciation.................................................. 173,634 142,245
Accretion of discount on investments........................................ (297,484) (274,362)
Amortization of deferred compensation....................................... 0 74,770
Deferred income taxes....................................................... 1,062,795 (45,660)
Unearned ceding commission.................................................. (517,156) (57,105)
Other assets................................................................ 272,023 (122,251)
----------- -----------
Net cash provided by operating activities...................................... 5,954,565 2,462,810
Investing activities
Securities available-for-sale:
Purchases - fixed maturities............................................... (14,758,381) 0
Sales - fixed maturities................................................... 6,626,542 100,658
Purchases - equities....................................................... (1,990,238) (852,868)
Sales - equities........................................................... 1,736,306 943,854
Securities held-to-maturity:
Purchases.................................................................. 0 (2,637,403)
Maturities................................................................. 0 2,024,669
Purchase of property and equipment........................................... (262,995) (205,206)
----------- -----------
Net cash used in investing activities.......................................... (8,648,766) (626,296)
Financing activities
Proceeds from exercise of stock options........................................ 205,536 --
Retirement of common stock (at cost)........................................... (512) --
----------- -----------
Net cash provided by financing activities...................................... 205,024 0
----------- -----------
Net change in cash and short-term investments.................................. (2,489,177) 1,836,514
Cash and short-term investments at beginning of period......................... 4,425,448 2,433,518
----------- -----------
Cash and short-term investments at end of period............................... $1,936,271 $4,270,032
============ ===========
Supplemental schedule of cash flow information
Cash paid during the period for income taxes and
United States Mortgage Guaranty Tax and Loss Bonds........................ $1,213,559 $1,689,349
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
NOTE 1 -- THE COMPANY
Triad Guaranty Inc. (the "Company") is a holding company which, through its
wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("Triad"),
provides private mortgage insurance coverage in the United States to mortgage
lenders to protect the lender against loss from defaults on low down payment
residential mortgage loans.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Triad
Guaranty Inc. annual report on form 10-K for the year ended December 31, 1995.
NOTE 3 -- CONSOLIDATION
The consolidated financial statements include the amounts of Triad Guaranty
Inc. and its wholly-owned subsidiaries, Triad Guaranty Insurance Corporation and
Triad Guaranty Assurance Corporation. All significant intercompany accounts and
transactions have been eliminated.
6
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
June 30, 1996
(Unaudited)
NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES
REINSURANCE - The Company assumes and cedes certain premiums and losses from/to
reinsurers under various reinsurance agreements. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of the
reinsurer to honor its obligation could result in losses to the Company;
consequently, allowances are established for amounts when deemed uncollectible.
INSURANCE IN FORCE, DIVIDEND RESTRICTIONS, AND STATUTORY RESULTS - Insurance
regulations limit the writing of mortgage guaranty insurance to an aggregate
amount of insured risk no greater than twenty-five times the total of statutory
capital and surplus and the statutory contingency reserve. The amount of net
risk for insurance in force at June 30, 1996 and December 31, 1995, as presented
below, was computed by applying the various percentage settlement options to the
insurance in force amounts based on the original insured amount of the loan.
Triad's ratio is as follows:
June 30 December 31
1996 1995
Net risk.......................... $1,234,205,126 $869,650,148
=============== ===============
Statutory capital and surplus..... $56,136,861 $55,951,158
Statutory contingency reserve..... 28,124,066 22,297,737
Total............................. $84,260,927 $78,248,895
=============== ===============
Risk-to-capital ratio............. 14.6-to-1 11.1-to-1
=============== ===============
Triad is required under the Illinois Insurance Code (the "Code") to
maintain minimum statutory capital and surplus of $5,000,000. In addition, Triad
Guaranty Assurance Corporation is required under the Code to maintain minimum
capital and surplus of $5,000,000. The Code permits dividends to be paid only
out of earned surplus and also requires prior approval of extraordinary
dividends. An extraordinary dividend is any dividend or distribution of cash or
other property the fair value of which, together with that of other dividends or
distributions made within a period of twelve consecutive months, exceeds the
greater of (a) ten percent of Triad's statutory surplus as regards to
policyholders, or (b) Triad's statutory net income for the calendar year
preceding the date of the dividend.
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
June 30, 1996
(Unaudited)
Net income as determined in accordance with statutory accounting practices
was $5,555,235 for the six months ended June 30, 1996 and $9,337,430 for the
year ended December 31, 1995.
At June 30, 1996, none of Triad's equity could be paid out to the parent
company in dividends because the earned surplus of Triad, on a statutory basis,
was a deficit of $2,280,942 and $2,466,645 at June 30, 1996 and December 31,
1995, respectively.
LOSS RESERVES - The Company establishes loss reserves to provide for the
estimated costs of settling claims with respect to loans reported to be in
default and loans in default which have not been reported to the Company. Due to
the inherent uncertainty in estimating reserves for losses and loss adjustment
expenses, there can be no assurance that the reserves will prove to be adequate
to cover ultimate loss development.
NOTE 5 -- STOCKHOLDERS' EQUITY
On May 23, 1996, the Company's Board of Directors approved a three-for-two
stock split of the Company's Common Stock in the form of a 50% stock dividend on
June 28, 1996. All references to average number of shares outstanding and per
share amounts included herein have been restated to reflect the stock split.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Net income for the first six months of 1996 increased 41.8% to $5.2 million
compared to $3.7 million in the first six months of 1995. Net income for the
second quarter of 1996 increased 37.0% to $2.7 million compared to $1.9 million
in the second quarter of 1995. This improvement is attributable to a 58.6%
(58.4% in the second quarter) increase in earned premiums, a 12.9% (19.5% in the
second quarter) increase in net investment income and a continuing low loss
ratio.
Net income per share, which reflects the three-for-two stock split on June
28, 1996, increased 41.7% to $0.78 for the first six months of 1996 compared to
$0.55 per share for the first six months of 1995. Net income per share for the
second quarter of 1996 was $0.40 per share compared to $0.29 per share for the
same period of 1995. Operating earnings per share were $0.80 for the first six
months of 1996 compared to $0.54 per share for the same period in 1995.
Operating earnings exclude realized investment losses of approximately $142,000
in the first six months of 1996 and realized investment gains of approximately
$163,000 in the same period of 1995.
For the first half of 1996, new insurance written was $1.1 billion compared
to $644 million in the first half of 1995, an increase of 66%. New insurance
written in the second quarter of 1996 totaled $612 million compared to $364
million a year ago. This increase is the result of the continued penetration of
Triad's products in the marketplace coupled with a favorable interest rate
environment for much of 1996, which has caused both refinance and home buying
activities to remain strong. Refinance activity accounted for 23.5% of new
insurance written in the first six months of 1996 compared to 4.7% of new
insurance written in the same period of 1995. A portion of the increase in new
insurance written is attributable to the introduction of the Company's contract
underwriting program in late 1995 and the additional mortgage insurance
production this program has generated.
Total direct premiums written were $11.8 million for the first six months
of 1996, an increase of 37.9% compared to $8.6 million for the first six months
of 1995. Contributing to this growth were the strong mortgage market, the
requirements of the secondary mortgage market for deeper coverage, and the
Company's expansion into new territories. Offsetting the growth somewhat was the
decrease in the annualized persistency rate to 83.2% for the second quarter of
1996 compared to 90.7% for the second quarter of 1995 and 86.4% for all of 1995.
Sales under the Company's monthly premium plan represented 92.3% of new
insurance written in the first half of 1996 compared to 75.5% in the first half
of 1995. The monthly product spreads the collection of premiums over 12 equal
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
monthly payments, rather than one payment received in advance as on annual
premium plans. However, renewal premiums on monthly premium plans are greater
than the renewal premiums on a comparable annual premium plan. While in the
short term monthly premium plans decrease the level of written premium,
management expects the ultimate level of written premium on monthly premium
plans to exceed the level of written premium produced by comparable annual
premium plans. Management believes that the percentage of new insurance written
for sales under the monthly premium plan will remain at or slightly above the
current level for the foreseeable future.
Net premiums written increased by 59.0% to $10.6 million in the first six
months of 1996 compared to $6.7 million for the same period in 1995. Net
premiums written for the second quarter of 1996 were $5.6 million compared to
$3.7 million in 1995, an increase of 48.9%. Earned premiums increased 58.6% to
$11.2 million for the first six months of 1996 and by 58.4% to $5.8 million in
the 1996 second quarter. This increase in written and earned premium is
attributable to the increase in new insurance written and the change in the
Company's reinsurance program, as discussed herein.
Effective January 1, 1996, the Company eliminated its quota share
reinsurance on new business, recaptured substantial portions of its quota share
coverage on renewal business and secured excess of loss reinsurance to protect
against catastrophic losses. These changes have reduced the Company's quota
share cede rate to 6.5% of direct premiums written in the first half of 1996
compared to 22.0% in the first half of 1995. Premiums ceded under the Company's
quota share reinsurance agreements for the first six months of 1996 totaled
$764,000 compared to $1,884,000 in the first six months of 1995.
Total direct insurance in force reached $5.8 billion at June 30, 1996,
compared to $4.6 billion at June 30, 1995, an increase of 26.7%.
In keeping with the Company's risk strategy, the Company has not
aggressively solicited mortgage insurance under lender guidelines which allow
relaxed credit standards, reduced borrower paid down payment (e.g., 97% LTV
loans) and expanded underwriting ratios. These products have been especially
popular with borrowers with weak credit histories. Management believes that
successful long term home ownership is not being promoted by the evolution of
many of these programs and that substantially higher loss ratios will result.
The Company does not delegate the underwriting of its 97% LTV product and
continues to maintain underwriting standards which promote successful long-term
home ownership.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
The Company's delegated underwriting program accounted for 36.2% of
commitments received for the first half of 1996. This program has allowed Triad
to serve a greater number of the country's larger mortgage originators. Mortgage
originators who participate in the Company's delegated program follow strict
criteria regarding property type and minimum credit standards. The Company also
performs extensive post-issuance quality control reviews of certificates issued
through each approved mortgage originator under the program. Management expects
the percentage of commitments processed through the Company's delegated
underwriting program to increase.
Net investment income for the first six months of 1996 was $2.6 million, a
12.9% increase over the first six months of 1995. Net investment income for the
second quarter of 1996 was $1.4 million, a 19.5% increase over the second
quarter of 1995. This increase resulted from the growth in average invested
assets of $9.1 million to $86.5 million at June 30, 1996 from $77.4 million at
June 30, 1995. The yield on average invested assets was 6.1% for the first six
months of 1996, compared to 6.0% for the same period of 1995. This yield
reflects the Company's investment strategy to emphasize tax-preferred securities
which yield lower pre-tax rates than similar fully-taxable securities.
Approximately 49% or $39.9 million of the Company's fixed maturity portfolio at
June 30, 1996 was comprised of state and municipal tax-preferred securities.
In the first six months of 1996, the Company reported realized investment
losses of $142,000 ($99,000 in the second quarter) primarily from the sale of
equity securities sold in connection with the Company's program of selling
short-term covered calls and from the sale of approximately $5 million in
mortgage backed securities.
Other income, primarily revenue associated with fee-based contract
underwriting services, was $108,000 for the first half of 1996. The Company
began providing contract underwriting services in late 1995.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 11.3% for the first six months of 1996 compared to 11.9% for the same period
of 1995 and 14.3% for all of 1995. The loss ratio was 10.7% for the second
quarter of 1996 compared to 11.5% for the same period of 1995. The favorable
ratio reflects the low level of delinquencies compared to the number of insured
loans and the fact that approximately 78.0% of the insurance in force was
originated in the last 36 months. Management believes, based upon its experience
and industry data, that claims incidence for it and other private mortgage
insurers is generally highest in the third through sixth years after loan
origination. Although the claims experience on new insurance written in previous
years has been quite favorable, the Company expects its incurred losses to
increase as a greater amount of its insurance in force reaches its anticipated
highest claim frequency years. Due to the inherent uncertainty of future premium
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
levels, losses, economic conditions and other factors that impact earnings, it
is impossible to predict with any degree of certainty the impact of such higher
claims frequencies on future earnings.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 49.8% in the first six months of 1996 to $1.3 million compared to
$846,000 in the first six months of 1995. Losses and loss adjustment expenses
for the second quarter of 1996 were $615,000 compared to $418,000 during the
second quarter of 1995. This increase reflects the increase in the Company's
insurance in force and the resulting recognition of a greater amount of
insurance in force reaching its higher claim frequency years. A decrease in
reinsurance recoveries attributable to the Company's restructuring of its
reinsurance program also contributed to the increase in net losses and loss
adjustment expenses.
Amortization of deferred policy acquisition costs increased by 41.0% to
$1.6 million in the first six months of 1996 compared to $1.1 million for the
first six months of 1995. These costs were $829,000 for the second quarter of
1996 compared to $587,000 for the second quarter of 1995, an increase of 41.2%.
The increase in amortization reflects a growing balance of deferred policy
acquisition costs to amortize as the Company builds its total insurance in
force.
Other operating expenses increased to $3.5 million for the first six months
of 1996 compared to $2.3 million for the same period in 1995. For the second
quarter of 1996, other operating expenses increased to $1.9 million from $1.1
million in the second quarter of 1995. This increase in expenses is primarily
attributable to personnel, facilities and equipment costs required to support
Triad's geographic expansion and increased production coupled with a reduction
in ceding commissions earned following changes in the Company's quota share
reinsurance program. Ceding commissions paid to the Company are reported as a
reduction in other operating expenses and decreased to $333,000 in the first six
months of 1996 compared to $791,000 in the first six months of 1995. For the
second quarter of 1996 ceding commissions were $132,000 compared to $409,000 in
the second quarter of 1995.
The expense ratio (ratio of underwriting expenses to net premiums written)
for the first six months of 1996 was 47.8% compared to 51.3% for the first six
months of 1995 and 46.9% for all of 1995. The primary factor contributing to
this change is the higher level of written premiums in the first half of 1996.
The expense ratio for the second quarter of 1996 increased to 48.5% compared to
45.7% for the same period of 1995, reflecting expenses incurred relating to the
Company's expansion and growth in production, underwriting and data processing
capabilities.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
The effective tax rate for the first six months of 1996 was 30.6% compared
to 31.0% in the first six months of 1995. This reduction is the result of
increased investments in tax-preferred securities offset somewhat by the
phase-in of the 35% Federal statutory income tax rate applicable to companies
with annual taxable income above $10 million. Management expects the Company's
effective tax rate to remain about the same or increase slightly as long as
yields on tax-preferred securities remain favorable in relation to fully taxable
securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of operating funds consist primarily of premiums
written and investment income. Operating funds are applied primarily to the
payment of claims and expenses.
Triad generated positive cash flow from operating activities for the first
six months of 1996 of $6.0 million compared to $2.5 million for the first six
months of 1995. The increase in Triad's operating cash flow is attributable
primarily to the impact of the Company's restructuring of its reinsurance
agreements and the resulting recapture of premiums previously ceded.
The Company's business does not routinely require significant capital
expenditures. Positive cash flows are invested pending future payments of claims
and expenses. Cash flow shortfalls, if any, could be funded through sales of
short term investments and other investment portfolio securities.
The parent company's cash flow is dependent on cash dividends and revenues
from management fees from Triad. The insurance laws of the State of Illinois
impose certain restrictions on dividends from Triad. These restrictions, based
on statutory accounting practices, include requirements that dividends may be
paid only out of statutory earned surplus and limit the amount of dividends that
may be paid without prior approval of the Illinois Insurance Department. Because
of Triad's rapid growth in written premiums and the requirement to add amounts
to the statutory contingency reserve equal to at least 50% of earned premiums
(which reduces statutory earned surplus), Triad reported a deficit in statutory
earned surplus of $2.3 million at June 30, 1996 and $2.5 million at December 31,
1995. Accordingly, Triad may not presently pay cash dividends to the parent
company. The Illinois Insurance Department permits expenses of the parent
company to be charged to Triad in the form of management fees.
Consolidated invested assets were $89.6 million at June 30, 1996, including
$87.9 million in fixed maturity and equity securities all of which are
classified as available-for-sale. Net unrealized investment losses on fixed
maturity securities were $410,000 and unrealized investment gains on equity
securities totaled $606,000 at June 30, 1996.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
Approximately 20% or $16.7 million of the Company's fixed maturity
portfolio at June 30, 1996 was composed of mortgage-backed securities,
substantially all of which are guaranteed by U.S. Government Agencies. Certain
mortgage-backed securities are subject to significant prepayment risk due to the
fact that, in periods of declining interest rates, mortgages may be repaid more
rapidly than scheduled as borrowers refinance higher rate mortgages to take
advantage of lower rates. As a result, holders of mortgage-backed securities may
receive large prepayments on their investments which must be reinvested at then
current rates.
Included in the Company's fixed maturity portfolio of mortgage backed
securities at June 30, 1996 was $5.4 million invested in planned amortization
class ("PAC") collateralized mortgage obligations ("CMOs"). PACs are tranches of
CMOs specifically designed to amortize in a more predictable manner and to
protect against prepayments as interest rates decline. In periods of declining
interest rates, prepayments are first applied to the non-PAC tranches of the
CMO, creating improved call protection for the PAC tranche. Only after all
non-PAC tranches have been paid off are prepayments applied to the PAC tranche.
In periods of increasing interest rates, prepayments are first applied to the
PAC tranche, thus reducing extension risk for PACs. As a result, PACs have a
more stable cash flow than most other mortgage securities because they have
better call protection and less extension risk. All principal balances invested
in CMOs by the Company are U.S. Government agency guaranteed.
The Company's reinsurance recoverable of $78,000 and prepaid reinsurance
premium of $375,000 at June 30, 1996 decreased from $271,000 and $2.0 million,
respectively, at December 31, 1995. These decreases primarily reflect the
recapture of previously ceded losses and unearned premiums as part of the
Company's restructuring of its reinsurance program.
The Company's loss reserves increased to $5.3 million at June 30, 1996
compared to $4.6 million at December 31, 1995. This growth is the result of the
increases in new insurance written and the maturing of the Company's risk in
force. Consistent with industry practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.
The Company's delinquency ratio, the ratio of delinquent insured loans to total
insured loans, was 0.38% at June 30, 1996 compared to 0.41% at December 31,
1995.
The Company's unearned premium reserve of $8.4 million at June 30, 1996
decreased from $9.1 million at December 31, 1995. This decline is attributable
primarily to the continued high production of the monthly premium product, which
produces little or no unearned premium. Also, the Company has experienced a
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
higher level of refinance activity in the first half of 1996 whereby older
annual premium policies are replaced by monthly premium policies resulting in an
accelerated decline in the unearned premium reserve.
Total stockholders' equity increased to $84.3 million at June 30, 1996 from
$80.4 million at December 31, 1995. This increase resulted from net income of
$5.2 million for the first six months of 1996 and from additional paid-in
capital of $205,000 resulting from the exercise of employee stock options and
the issuance of common stock under the Company's stock incentive plan. This was
partially offset by a decrease in net unrealized gains on invested assets
classified as available-for-sale of $1.6 million (net of income tax).
Triad's total statutory policyholders' surplus increased to $56.1 million
at June 30, 1996 from $56.0 million at December 31, 1995. This increase is
primarily related to statutory net income for the first half of 1996 of $5.6
million and an unrealized investment gain of $473,000 offset by an increase in
the contingency reserve of $5.8 million. Triad's deficit in statutory earned
surplus was $2.3 million at June 30, 1996, reflecting the continuing increase in
the contingency reserve. The balance in the contingency reserve was $28.1
million at June 30, 1996 compared to $22.3 million at December 31, 1995.
The Company has no current plans for significant capital expenditures.
The Company's ability to write insurance depends on the adequacy of its
capital in relation to risk in force. A significant reduction of capital may
impair the Company's ability to write insurance. Freddie Mac and Fannie Mae
require the Company to maintain a risk-to-capital ratio of no more than 25-to-1.
As of June 30, 1996 Triad's risk-to-capital ratio was 14.6-to-1 compared to
11.1-to-1 at December 31, 1995. This increase is due to the increased production
in the first half of 1996 and the elimination of substantial portions of the
Company's quota share reinsurance as of January 1, 1996. The risk-to-capital
ratio for the industry as a whole was 20.3-to-1 at December 31, 1995, the latest
industry data available.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis and this Report contain forward
looking statements which involve various risks and uncertainties, including but
not limited to the following: interest rates may increase or decrease from their
current levels; housing transactions and mortgage issuance may decrease for many
reasons including changes in interest rates or economic conditions; the
Company's market share may change as a result of changes in underwriting
criteria or competitive products; the Company's performance may be impacted by
changes in the performance of the financial markets and general economic
conditions.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
Accordingly actual results may differ from those set forth in the forward
looking statements. Attention is also directed to other risk factors set forth
in documents filed by the Company with the Securities and Exchange Commission.
16
<PAGE>
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 23, 1996. Shares
entitled to vote at the Annual Meeting totaled 4,418,939, of which 4,069,593
shares were represented at the meeting.
At the Annual Meeting, the following five directors were elected. Also
shown are the number of shares cast for and authorization withheld for each
nominee.
Name of Nominee Number of Votes for Authorization Withheld
- - --------------- ------------------- ----------------------
Robert T. David 4,048,093 21,500
Raymond H. Elliott 4,048,093 21,500
William T. Ratliff, III 4,044,593 25,000
Darryl W. Thompson 4,044,593 25,000
David W. Whitehurst 4,044,593 25,000
Additionally, at the Annual Meeting, stockholders approved a resolution to
amend the Company's 1993 Long-Term Stock Incentive Plan to increase the number
of shares of the Company's Common Stock, par value $ .01 per share, reserved for
issuance thereunder from 400,000 shares to 700,000 shares.
The foregoing totals do not give effect to the three-for-two stock split of
the Company's Common Stock on June 28, 1996.
No other matters came before the Annual Meeting or any adjournments
thereof.
Item 5. Other Information - None
17
<PAGE>
Item 6. a. Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
b. Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements 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.
TRIAD GUARANTY INC.
-------------------
Date: August 12, 1996
/s/ Michael R. Oswalt
---------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the six months ended June 30, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 81,710,102
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,233,064
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 89,593,283
<CASH> 286,154
<RECOVER-REINSURE> 5,914
<DEFERRED-ACQUISITION> 9,295,025
<TOTAL-ASSETS> 102,572,723
<POLICY-LOSSES> 5,254,343
<UNEARNED-PREMIUMS> 8,447,714
<POLICY-OTHER> 35,773
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 66,453
<OTHER-SE> 84,189,848
<TOTAL-LIABILITY-AND-EQUITY> 102,572,723
11,242,153
<INVESTMENT-INCOME> 2,643,298
<INVESTMENT-GAINS> (141,572)
<OTHER-INCOME> 107,709
<BENEFITS> 1,267,619
<UNDERWRITING-AMORTIZATION> 1,601,207
<UNDERWRITING-OTHER> 3,483,824
<INCOME-PRETAX> 7,498,938
<INCOME-TAX> 2,297,854
<INCOME-CONTINUING> 5,201,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,201,084
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
