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, 1997
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, 1997: 6,645,361 shares.
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TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996....................................... ........3
Consolidated Statements of Income for the Three and Six Month
Periods Ended June 30, 1997 and 1996 (Unaudited).....................4
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1997 and 1996 (Unaudited).....................5
Notes to Consolidated Financial Statements..............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................10
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders............17
Signatures.............................................................18
2
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TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
-------------- -------------
Assets (Unaudited)
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities ............................. $ 94,536,390 $ 87,229,855
Equity securities............................. 9,112,232 7,494,817
Short-term investments.......................... 2,707,012 3,302,125
-------------- -------------
$ 106,355,634 98,026,797
Cash.............................................. 113,831 360,586
Accrued investment income......................... 1,354,419 1,126,642
Deferred policy acquisition costs................. 10,909,631 10,198,397
Property and equipment............................ 1,967,310 1,705,389
Prepaid reinsurance premium....................... 291,202 300,200
Reinsurance recoverable........................... 191,085 153,274
Other assets...................................... 1,138,597 531,238
-------------- -------------
Total assets...................................... $ 122,321,709 $ 112,402,523
============== =============
Liabilities and stockholders' equity Liabilities:
Losses and loss adjustment expenses...........$ 7,487,793 6,305,397
Unearned premiums............................. 7,880,348 8,216,478
Amounts payable to reinsurer.................. 576 1,993
Current taxes payable......................... 3,322 1,596
Deferred income taxes......................... 5,574,265 4,276,081
Unearned ceding commission.................... 80,414 80,573
Accrued expenses and other liabilities........ 1,643,342 1,840,369
-------------- -------------
Total liabilities................................. 22,670,060 20,722,487
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 20,000,000 shares; 6,645,361
shares issued and outstanding............... 66,453 66,453
Additional paid-in capital.................... 59,346,832 59,346,832
Unrealized gain on available-for-sale
securities, net of income tax liability
of $1,094,201 at June 30, 1997 and
$823,287 at December 31, 1996............... 2,060,326 1,568,800
Retained earnings.............................. 38,178,038 30,697,951
-------------- -------------
Total stockholders' equity....................... 99,651,649 91,680,036
-------------- -------------
Total liabilities and stockholders' equity....... $ 122,321,709 $ 112,402,523
============== =============
See accompanying notes
3
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct........................................... $ 9,653,077 $ 6,112,251 $17,547,145 $11,791,151
Assumed.......................................... 10,014 4,799 16,054 15,747
Ceded............................................ (535,109) (558,200) (1,056,713) (1,174,959)
----------- ----------- ----------- ------------
Net premiums written................................ 9,127,982 5,558,850 16,506,486 10,631,939
Change in unearned premiums......................... (143,248) 204,396 327,132 610,214
----------- ----------- ----------- ------------
Earned premiums..................................... 8,984,734 5,763,246 16,833,618 11,242,153
Net investment income............................... 1,501,664 1,364,174 2,973,579 2,643,298
Realized investment gains........................... 6,732 (99,286) 5,851 (141,572)
Other income........................................ 3,367 0 6,030 0
----------- ----------- ----------- ------------
10,496,497 7,028,134 19,819,078 13,743,879
Losses and expenses:
Losses and loss adjustment expenses................. 1,142,592 652,371 2,384,138 1,332,878
Reinsurance recoveries.............................. (52,696) (37,777) (98,392) (65,259)
----------- ----------- ----------- ------------
Net losses and loss adjustment expenses............. 1,089,896 614,594 2,285,746 1,267,619
Amortization of deferred policy acquisition costs... 984,388 828,975 1,957,443 1,601,207
Other operating expenses (net)...................... 2,545,600 1,761,021 4,667,363 3,376,115
----------- ----------- ----------- ------------
4,619,884 3,204,590 8,910,552 6,244,941
----------- ----------- ----------- ------------
Income before income taxes.......................... 5,876,613 3,823,544 10,908,526 7,498,938
Income taxes:
Current.......................................... 1,710 21,688 2,168 (37,741)
Deferred......................................... 1,841,704 1,149,787 3,426,270 2,335,595
----------- ----------- ----------- ------------
1,843,414 1,171,475 3,428,438 2,297,854
----------- ----------- ----------- ------------
Net income.......................................... $ 4,033,199 $ 2,652,069 $ 7,480,088 $ 5,201,084
=========== =========== =========== ============
Earnings per common and common equivalent share:
Primary.......................................... $.58 $.40 $1.08 $.78
=========== =========== =========== ============
Fully diluted.................................... $.58 $.39 $1.07 $.76
=========== =========== =========== ============
Shares used in computing earnings per common
and common equivalent share:
Primary.......................................... 6,928,485 6,636,407 6,913,238 6,632,408
=========== =========== =========== =============
Fully diluted.................................... 6,994,424 6,837,428 6,994,424 6,833,429
=========== =========== =========== =============
</TABLE>
See accompanying notes.
4
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30
-------------------------
1997 1996
---- ----
Operating activities
Net income.............................................$ 7,480,088 $ 5,201,084
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss and unearned premium reserves.................. 846,266 26,679
Accrued expenses and other liabilities.............. (191,160) 1,789
Current taxes payable............................... 1,726 (38,335)
Amounts due to/from reinsurers...................... (30,230) 1,821,496
Accrued investment income........................... (227,777) (175,191)
Policy acquisition costs deferred................... (2,668,677) (3,319,548)
Amortization of policy acquisition costs............ 1,957,443 1,601,207
Net realized investment gains ...................... (5,851) 141,572
Provision for depreciation.......................... 278,241 173,634
Accretion of discount on investments................ (304,510) (297,484)
Deferred income taxes............................... 1,027,270 1,062,795
Unearned ceding commission.......................... (159) (517,156)
Other assets........................................ (608,249) 272,023
------------ -----------
Net cash provided by operating activities.............. 7,554,421 5,954,565
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.......................(17,193,982) (14,758,381)
Sales - fixed maturities........................... 10,180,132 6,626,542
Purchases - equities............................... (2,035,585) (1,990,238)
Sales - equities................................... 1,191,623 1,736,306
Purchase of property and equipment................... (538,477) (262,995)
------------ -----------
Net cash used in investing activities.................. (8,396,289) (8,648,766)
Financing activities
Proceeds from exercise of stock options................ 0 205,536
Retirement of common stock (at cost)................... 0 (512)
------------ -----------
Net cash provided by financing activities.............. 0 205,024
------------ -----------
Net change in cash and short-term investments.......... (841,868) (2,489,177)
Cash and short-term investments at beginning
of period............................................. 3,662,711 4,425,448
------------ -----------
Cash and short-term investments at end of period.......$ 2,820,843 $ 1,936,271
============ ===========
Supplemental schedule of cash flow
information Cash paid during the period for
income taxes and United States Mortgage
Guaranty Tax and Loss Bonds.......................... $2,399,677 $1,213,559
============ ===========
See accompanying notes.
5
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(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, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. 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, 1996.
Certain prior year amounts have been reclassified to conform with the
current year presentation. The reclassifications had no effect on previously
reported net income or stockholders' equity.
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
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1997
(Unaudited)
NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES
REINSURANCE - Triad assumes and cedes certain premiums and losses from/to
reinsurers under various reinsurance agreements. Reinsurance contracts do not
relieve Triad from its obligations to policyholders. Failure of the reinsurer to
honor its obligation could result in losses to Triad; consequently, allowances
are established for amounts when deemed uncollectible.
INSURANCE IN FORCE, DIVIDEND RESTRICTIONS, AND STATUTORY RESULTS - Insurance
regulations ave been eliminated.
6
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1997
(Unaudited)
NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES
REINSURANCE - Triad assumes and cedes certain premiums and losses from/to
reinsurers under various reinsurance agreements. Reinsurance contracts do not
relieve Triad from its obligations to policyholders. Failure of the reinsurer to
ho 1997 1996
---- ----
Net risk.......................... $1,855,902,566 $1,452,824,414
=============== ===============
Statutory capital and surplus..... $58,709,857 $57,070,475
Statutory contingency reserve..... 43,906,554 35,072,109
--------------- ---------------
Total............................. $102,616,411 $91,142,584
=============== ===============
Risk-to-capital ratio............. 18.1-to-1 15.8-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
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1997
(Unaudited)
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.
Net income as determined in accordance with statutory accounting practices
was $10,170,417 for the six months ended June 30, 1997 and $13,396,769 for the
year ended December 31, 1996.
At June 30, 1997, Triad could pay out to the parent company a dividend of
$292,055, representing the earned surplus, on a statutory basis, of Triad on
that date. At December 31, 1996, no dividend could be paid out to the parent
company, because the surplus of Triad, on a statutory basis, was a deficit of
$1,347,326.
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 - - EARNINGS PER SHARE
Primary and fully diluted earnings per share are based on the weighted
average daily number of shares outstanding. For both primary and fully diluted
earnings per share, computation of the weighted average daily number of shares
outstanding includes common stock equivalents. Common stock equivalents include
stock options that have a dilutive effect on earnings per share.
NOTE 6 - - NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the three and six month periods ended
June 30, 1997 of $ .03 and $ .05 per share, respectively. For the three and six
month periods ended June 30, 1996, the impact of Statement 128 is not expected
to be material. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
8
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1997
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" which is effective for fiscal years
beginning after December 31, 1997. The Statement establishes standards for
reporting and display of comprehensive income and its components in financial
statements. The Company expects to adopt the provisions of Statement No. 130 in
the first quarter of 1998 and will reclassify the financial statements for
earlier periods provided for comparative purposes as required by the Statement.
The application of the new rules will not have an impact on the Company's
financial position or results of operations.
9
<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 1997 increased 43.8% to $7.5 million
compared to $5.2 million in the first six months of 1996. Net income for the
second quarter of 1997 increased 52.1% to $4.0 million compared to $2.7 million
for the second quarter of 1996. This improvement is attributable to a 49.7%
(55.9% in the second quarter) increase in earned premiums, a 12.5% (10.1% in the
second quarter) increase in net investment income and an improved combined loss
and expense ratio.
Net income per share assuming full dilution increased 40.5% to $1.07 for
the first six months of 1997 compared to $0.76 per share for the first six
months of 1996. Net income per share for the second quarter of 1997 was $0.58 on
a fully diluted basis compared to $0.39 per share for the same period of 1996.
Operating earnings per share were $1.07 for the first half of 1997 compared to
$0.78 for the first half of 1996. Operating earnings exclude realized gains of
approximately $6,000 in the first six months of 1997 and realized losses of
approximately $142,000 in the same period of 1996.
New insurance written during the first six months of 1997 was $2.0 billion
compared to $1.1 billion in the first six months of 1996, an increase of 83.6%.
For the second quarter, new insurance written totaled $1.3 billion in 1997
compared to $612 million in 1996. This increase in gross new insurance written
is the result of continued geographic expansion and the penetration of Triad's
products in the marketplace including Triad's new risk sharing products. The
Company has also benefited from the January 1997 upgrade of Triad's
claims-paying ability rating from "AA-" to "AA" by Standard & Poor's
Corporation. A favorable interest rate environment in the first six months of
1997 caused home buying activities to remain strong. Refinance activity declined
to 14.0% of new insurance written in the first six months of 1997 compared to
23.5% of insurance written in the same period of 1996. Total direct insurance in
force reached $8.0 billion at June 30, 1997 compared to $5.8 billion at June 30,
1996, an increase of 37.9%.
Net new insurance written, which excludes coverage on seasoned loans, was
$1.3 billion during the first half of 1997 compared to $1.1 billion for the same
period of 1996, an increase of 23.9%. According to industry data, Triad's
national market share, which is calculated based on net new insurance written,
increased by approximately 50% to 2.5% for the six months of 1997 compared to
1.7% for the same period of 1996.
There exist regulatory and industry issues regarding the future of certain
risk sharing programs, such as captive reinsurance, currently being marketed
within the mortgage insurance industry. Triad's new risk sharing programs have
been well received. In the first half of 1997, a significant portion of Triad's
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
production, which does not include captive reinsurance, resulted from its new
risk sharing programs. However, the resolution of the regulatory and industry
questions regarding risk sharing programs make the continued viability of such
programs uncertain.
Total direct premiums written were $17.5 million for the first six months
of 1997, an increase of 48.8% compared to $11.8 million for the first six months
of 1996. Net premiums written increased by 55.3% to $16.5 million in the first
six months of 1997 compared to $10.6 million for the same period in 1996. Earned
premiums increased 49.7% to $16.8 million for the first half of 1997 from $11.2
million in the first half of 1996. Contributing to this growth in written and
earned premium were the increase in new insurance written and an improvement in
the Company's persistency rate. Sales under the Company's monthly premium plan
represented 94.2% of new insurance written in the first half of 1997 compared to
92.3% in the same period of 1996. Annualized persistency has improved to 84.6%
in the first six months of 1997 compared to 83.2% in the first six months of
1996 reflecting the decline in refinance activity.
In the 1996 fourth quarter, Triad introduced its revised Stick With Triad
program featuring the Slam Dunk Loan(SM) approval process whereby Triad issues a
certificate of insurance based on the borrower's credit score. The popularity of
this product, to a large extent, has replaced customer use of Triad's delegated
underwriting program. Commitments processed through Triad's delegated
underwriting program accounted for 11.0% of commitments received for the first
half of 1997, compared to 36.2% in the first half of 1996 and 38.0% for all of
1996.
Net investment income for the first half of 1997 was $3.0 million, a 12.5%
increase over $2.6 million in the first half of 1996. Net investment income for
the second quarter of 1997 was $1.5 million, a 10.1% increase over the second
quarter of 1996. This increase resulted from the growth in average invested
assets of $12.8 million to $99.3 million at June 30, 1997 from $86.5 million at
June 30, 1996. The yield on average invested assets decreased slightly to 6.0%
for the first six months of 1997 compared to 6.1% for the same period of 1996.
The portfolio's tax-equivalent yield was 7.9% for the first six months of 1997
up from 7.7% for all of 1996. Approximately 66% or $62.2 million of the
Company's fixed maturity portfolio at June 30, 1997 was composed of state and
municipal tax-preferred securities.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 13.6% for the first six months of 1997 compared to 11.3% for the same period
of 1996 and 13.3% for all of 1996. The loss ratio was 12.1% for the second
quarter of 1997 compared to 10.7% for the second quarter of 1996. The higher
loss ratios for 1997 reflect an expected higher level of delinquencies reduced
by the effects of the increase in earned premiums. While the Company experienced
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
an increase in its loss ratio, paid losses continue to remain low at 6.8% and
5.8% of earned premium for the first half of 1997 and 1996, respectively.
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. The Company's favorable loss
ratio reflects the low level of delinquencies compared to the number of insured
loans and the fact that approximately 73% of the Company's insurance in force
was originated in the last 36 months. Although the claims experience on new
insurance written in previous years has been quite favorable, the Company
expects its incurred losses to increase as a greater amount of its insurance in
force reaches its anticipated highest claim frequency years. Due to the inherent
uncertainty of future premium levels, losses, economic conditions and other
factors that impact earnings, it is impossible to predict with any degree of
certainty the impact of such higher claims frequencies on future earnings.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 80.3% in the first six months of 1997 to $2.3 million compared to
$1.3 million in the first six months of 1996. Losses and loss adjustment
expenses for the second quarter of 1997 were $1.1 million compared to $615,000
for the second quarter of 1996. 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.
Amortization of deferred policy acquisition costs increased by 22.2% to
$2.0 million in the first six months of 1997 compared to $1.6 million for the
first six months of 1996. These costs were $984,000 for the second quarter of
1997 compared to $829,000 for the second quarter of 1996, an increase of 18.7%.
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 $4.7 million for the first six months
of 1997 compared to $3.4 million for the same period in 1996. For the second
quarter of 1997, other operating expense increase to $2.5 million from $1.8
million in the second quarter of 1996. This increase in expenses is primarily
attributable to advertising, personnel, facilities and equipment costs required
to support the Company's product development, geographic expansion and increased
production. A decline in ceding commissions earned, which are reported as a
reduction in other operating expenses, also contributed to the increase in
expenses.
The expense ratio (ratio of underwriting expenses to net premiums written)
for the first half of 1997 was 40.1% compared to 46.8% for the first half of
1996 and 43.8% for all of 1996. The expense ratio for the second quarter of 1997
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
improved to 38.7% from 46.6% reported a year earlier. The primary factor
contributing to this improvement was the higher level of written premiums in the
first half of 1997.
The effective tax rate for the first six months of 1997 was 31.4% compared
to 30.6% in the first six months of 1996. This increase is primarily the result
of 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 from new funds invested in 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.
The Company generated positive cash flow from operating activities for the
first six months of 1997 of $7.6 million compared to $6.0 million for the first
six months of 1996. The increase in Triad's operating cash flow reflects the
growth in insurance written and insurance in force that has more than offset any
increases in claims paid and other expenses.
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. Triad
had an earned surplus of $292,000 at June 30, 1997 and a deficit of $1.3 million
at December 31, 1996. Triad has no immediate plans to pay a cash dividend 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 $106.4 million at June 30, 1997,
including a total of $103.6 million in fixed maturity securities and equity
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
securities classified as available-for-sale. Net unrealized investment gains on
equity securities were $1.7 million and on fixed maturity securities were $1.4
million at June 30, 1997.
Approximately 8% or $7.4 million of the Company's fixed maturity portfolio
at June 30, 1997 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, 1997 was $3.4 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 sponsored or guaranteed.
The Company's loss reserves increased to $7.5 million at June 30, 1997
compared to $6.3 million at December 31, 1996. 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 reserves per delinquent loan were $23,000 at June 30, 1997 and at
December 31, 1996. The Company's delinquency ratio, the ratio of delinquent
insured loans to total insured loans, was 0.45% at June 30, 1997 compared to
0.44% at December 31, 1996.
The Company's unearned premium reserve of $7.9 million at June 30, 1997
decreased from $8.2 million at December 31, 1996. This decline is attributable
primarily to the continued high production of the monthly premium product, which
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
produces little unearned premium compared to annual and single premium products.
Refinance activity is also responsible for the decrease in unearned premiums,
whereby older annual premium policies are replaced by monthly premium policies.
Total stockholders' equity increased to $99.7 million at June 30, 1997 from
$91.7 million at December 31, 1996. This increase resulted from net income of
$7.5 million for the first six months of 1997 and an increase in net unrealized
gains on invested assets classified as available-for-sale of $492,000 (net of
income tax).
Triad's total statutory policyholders' surplus increased to $58.7 million
at June 30, 1997 from $57.1 million at December 31, 1996. This increase resulted
from net income of $10.2 million offset primarily by an increase in the
statutory contingency reserve of $8.8 million. Triad's statutory earned surplus
was $292,000 at June 30, 1997 compared to a deficit of $1.3 million at December
31, 1996, reflecting growth in statutory net income greater than the increase in
the statutory contingency reserve. The balance in the statutory contingency
reserve was $43.9 million at June 30, 1997 compared to $35.1 million at December
31, 1996.
The Company expects to incur aggregate capital costs of approximately $2.0
million in 1997 and 1998 to upgrade and enhance its computer systems and
technological capabilities. The Company expects to fund such expenditures with
cash flow from operations.
Triad's ability to write insurance depends on the adequacy of its capital
in relation to risk in force. A significant reduction of capital or a
significant increase in risk may impair Triad's ability to write additional
insurance. Freddie Mac and Fannie Mae require Triad to maintain a
risk-to-capital ratio of no more than 25-to-1. A number of states also generally
limit Triad's risk-to-capital ratio to 25-to-1. As of June 30, 1997 Triad's
risk-to-capital ratio was 18.1-to-1, and as of December 31, 1996 was 15.8-to-1,
as compared to 19.4-to-1 for the industry as a whole at December 31, 1996, the
latest industry data available. Management believes its risk- to-capital ratio
can increase up to approximately 20-to-1 without an adverse effect on its
claims-paying ability ratings. With increasing production, management and the
Board of Directors are evaluating the Company's needs and alternatives for
additional capital for Triad.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
increase in primary earnings per share for the three and six month periods ended
June 30, 1997 of $ .03 and $ .05 per share, respectively. For the three and six
month periods ended June 30, 1996, the impact of Statement 128 is not expected
to be material. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income which is effective for fiscal years
beginning after December 31, 1997. The Statement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. The Company expects to adopt the provisions of Statement No. 130 in
the first quarter of 1998 and will reclassify the financial statements for
earlier periods provided for comparative purposes as required by the Statement.
The application of the new rules will not have an impact on the Company's
financial position or results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis and this Report contain forward
looking statements relating to future plans, expectations and performance which
involve various risks and uncertainties, including but not limited to the
following: interest rates may increase from their current levels; housing
transactions and mortgage issuance may decrease for many reasons including
changes in interest rates or economic conditions; the Company's market share may
change as a result of changes in underwriting criteria or competitive products
or rates; the amount of new insurance written could be affected by changes in
federal housing legislation, including changes in the Federal Housing
Administration loan limits and coverage requirements of Freddie Mac and Fannie
Mae; the Company's performance may be impacted by changes in the performance of
the financial markets and general economic conditions. Economic downturns in
regions where Triad's risk is more concentrated could have a particular adverse
affect on Triad's financial condition and loss development. Accordingly, actual
results may differ from those set forth in the forward looking statements.
Attention is also directed to other risk factors set forth in documents filed by
the Company with the Securities and Exchange Commission.
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 22, 1997. Shares
entitled to vote at the Annual Meeting totaled 6,645,361, of which 5,724,708
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 5,723,708 1,000
Raymond H. Elliott 5,723,708 1,000
William T. Ratliff, III 5,723,708 1,000
Darryl W. Thompson 5,723,708 1,000
David W. Whitehurst 5,723,708 1,000
Additionally, at the Annual Meeting, stockholders approved a resolution to
amend the Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 10,000,000 to 20,000,000.
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
----------- -----------
3.1 Certificate of Incorporation of the
Registrant, as Amended
11 Statement Re Computation of Net
Income per Share
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, 1997
/s/ Michael R. Oswalt
------------------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
18
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of the Registrant, as Amended
11 Statement Re Computation of Net Income per Share
27 Financial Data Schedule
19
<PAGE>
EXHIBIT 3.1
Certificate of Incorporation
of
Triad Guaranty Inc.
FIRST. The name of the corporation is: Triad Guaranty Inc. (the
"Corporation").
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of Newcastle
(the "Registered Office"). The name of its registered agent at such address is
The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 11,000,000 shares, divided into
two classes as follows:
1,000,000 shares of Preferred Stock of the par value of
$0.01 per share ("Preferred Stock"); and
10,000,000 shares of Common Stock of the par value of $0.01 per share
("Common Stock").
The designations, powers, preferences and rights, and the qualifications,
limitations or restrictions of the above classes of stock are as follows:
DIVISION I
Preferred Stock
1. The board of directors is expressly authorized at any time, and from
time to time, to issue shares of Preferred Stock in one or more series, and for
such consideration as the board of directors may determine, with such voting
powers, full or limited but not to exceed one vote per share, or without voting
powers, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated in the resolution or resolutions
providing for the issue thereof, and as are not stated in this Certificate of
20
<PAGE>
Incorporation, or any amendment thereto. All shares of any one series shall be
of equal rank and identical in all respects.
2. No dividend shall be paid or declared on any particular series of
Preferred Stock unless dividends shall be paid or declared pro rata on all
shares of Preferred Stock at the time outstanding of each other series which
ranks equally as to dividends with such particular series.
3. Unless and except to the extent otherwise required by law or provided in
the resolution or resolutions of the board of directors creating any series of
Preferred Stock pursuant to this Division I, the holders of the Preferred Stock
shall have no voting power with respect to any matter whatsoever. In no event
shall the Preferred Stock be entitled to more than one vote in respect of each
share of stock. Subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock, any amendment to this Certificate of
Incorporation which shall increase or decrease the authorized capital stock of
any class or classes may be adopted by the affirmative vote of the holders of a
majority of the outstanding shares of the voting stock of the Corporation.
4. Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, shall, upon compliance with any applicable provisions
of the GCL, have the status of authorized and unissued shares of Preferred Stock
and may be reissued by the board of directors as part of the series of which
they were originally a part or may be reclassified into and reissued as part of
a new series or as a part of any other series, all subject to the protective
conditions or restrictions of any outstanding series of Preferred Stock.
DIVISION II
Common Stock
1. Dividends. Subject to the preferential dividend rights, if any,
applicable to shares of the Preferred Stock and subject to applicable
requirements, if any, with respect to the setting aside of sums for purchase,
retirement or sinking funds for the Preferred Stock, the holders of the Common
Stock shall be entitled to receive to the extent permitted by law, such
dividends as may be declared from time to time by the board of directors.
2. Liquidation. In the event of the voluntary or involuntary liquidation,
dissolution, distribution of assets or winding up of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of the Common Stock shall
21
<PAGE>
be entitled to receive all the remaining assets of the Corporation of whatever
kind available for distribution to stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively.
3. Voting rights. Except as may be otherwise required by law or this
Certificate of Incorporation, each holder of the Common Stock shall have one
vote in respect of each share of stock held by him or her of record on the books
of the Corporation on all matters voted upon by the stockholders.
DIVISION III
Elimination of Preemptive
Rights
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class or capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or other
securities convertible into stock of the Corporation, now or hereafter
authorized, but any such stock or other securities convertible into stock may be
issued and disposed of pursuant to resolution by the board of directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the board
of directors in the exercise of its discretion may determine and as may be
permitted by law without action by the stockholders.
FIFTH. Nominations of persons for election to the board of directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the board of directors or by any stockholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Article FIFTH. Such nominations, other than those
made by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
22
<PAGE>
a director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
persons' written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (b) as to the stockholder giving the
notice (i) the name and address, as they appear on the Corporation's books, of
such stockholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such stockholder. At the request of the board of
directors any person nominated by the board of directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nominations which pertains
to the nominee. No person shall be eligible for election as a director of the
Corporation at a meeting of the stockholders unless nominated in accordance with
the procedures set forth in this Article FIFTH.
SIXTH. The name and mailing address of the incorporator are as follows: J.
Brett Pritchard, 115 South LaSalle Street, Chicago, IL 60603.
SEVENTH. The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the board of directors.
(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the by-laws of the Corporation.
(3) The number of directors of the Corporation shall be as from time to
time fixed by, or in the manner provided in, the by-laws of the Corporation.
Election of directors need not be by written ballot unless the by-laws so
provide.
(4) No director shall be personally liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL or (iv) for any transaction from which the
23
<PAGE>
director derived an improper personal benefit. If the GCL is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL as so
amended. Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.
(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject, nevertheless, to the provisions of the GCL, this
Certificate of Incorporation, and any by-laws adopted by the stockholders;
provided, however, that no by-laws adopted by the stockholders shall invalidate
any prior act of the directors which would have been valid if such by-laws had
not been adopted.
EIGHTH. Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the GCL) outside the State of Delaware at
such place or places as may be designated from time to time by the board of
directors or in the by-laws of the Corporation.
NINTH. (1) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
24
<PAGE>
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
and amounts paid in settlement actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Corporation and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper.
(3) To the extent that any person referred to in paragraphs (1) and (2) of
this Article NINTH has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to therein or in defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
(4) Any indemnification under paragraphs (1) and (2) of this Article NINTH
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director
or officer is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in said paragraphs (1) and (2). Such
determination shall be made (a) by the board of directors by a majority vote of
a quorum (as defined in the by-laws of the Corporation) consisting of directors
who were not parties to such action, suit or proceeding, or (b) if such a quorum
is not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
stockholders.
(5) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the Corporation in advance of the final disposition
25
<PAGE>
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director or officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the Corporation
as provided in this Article NINTH.
(6) The Corporation may, to the extent authorized from time to time by the
board of directors, grant rights to indemnification and to the advancement of
expenses, to any employee or agent of the Corporation or its subsidiaries, or to
any employee or agent of any entity providing contractual services for the
Corporation or its subsidiaries, to the fullest extent of the provisions of this
Article NINTH with respect to the indemnification and advancement of expenses of
directors and officers of the Corporation.
(7) The indemnification and advancement of expenses provided by or granted
pursuant to the other subsections of this Article NINTH shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office.
(8) The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power to
indemnify him or her against such liability under the provisions of this
Article.
(9) For the purposes of this Article NINTH, references to the "Corporation"
shall include in addition to the resulting Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article NINTH with
26
<PAGE>
respect to the resulting or surviving corporation as he or she would have with
respect to such constituent corporation if its separate existence had continued.
(10) For purposes of this Article NINTH, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interest onf the Corporation" as referred to in this
paragraph.
(11) The indemnification and advancement of expenses provided by, or
granted pursuant to this Article NINTH shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Any repeal or modification of
this Article NINTH shall not adversely affect any right to indemnification or
advancement of expenses of any present or former director, officer, employee or
agent of the Corporation existing at the time of such repeal or modification.
(12) If this Article NINTH or any portion hereof is invalidated by any
court of competent jurisdiction, then the Corporation shall nevertheless provide
such indemnification and advancement of expenses as would otherwise be permitted
under any portion of this Article NINTH that shall not have been invalidated.
TENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
27
<PAGE>
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
ELEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
I, the undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a Corporation pursuant to the GCL, do make this
certificate, hereby declaring and certifying that the facts herein stated are
true and accordingly have hereunto set my hand this 11th day of August, 1993.
/s/ J. Brett Pritchard
-----------------------------
Incorporator
28
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
TRIAD GUARANTY INC.
------------------------------
Triad Guaranty Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That the Board of Directors of the Corporation has unanimously
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of the Corporation:
"RESOLVED, that the Certificate of Incorporation of Triad Guaranty Inc. be
amended by deleting the first paragraph of Article FOURTH thereof and
substituting the following in its place and stead:
"FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 21,000,000
shares, divided into two classes as follows:
1,000,000 shares of Preferred Stock of the par value of $0.01 per
share ("Preferred Stock"); and
20,000,000 shares of Common Stock of the par value of $0.01 per
share ("Common Stock").""
SECOND: That an annual meeting of stockholders of the Corporation was duly
called and held on May 22, 1997 upon notice in accordance with Section 222 of
the General Corporation Law of the State of Delaware at which meeting the
necessary number of shares as required by statute were voted in favor of the
amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Triad Guaranty Inc. has caused this certificate to be
signed by its Chief Executive Officer this 23rd day of May, 1997.
TRIAD GUARANTY INC.
By: /s/ Darryl W. Thompson
-----------------------------------
Darryl W. Thompson, Chief Executive
Officer
29
EXHIBIT 11
TRIAD GUARANTY INC.
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three and Six Month Periods Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Weighted average common
shares outstanding 6,645,361 6,636,407 6,645,361 6,632,408
Net shares to be issued upon
exercise of dilutive stock options
after applying treasury stock
method 283,124 0 267,877 0
---------- ---------- ---------- ----------
Adjusted shares outstanding 6,928,485 6,636,407 6,913,238 6,632,408
========== ========== ========== ==========
Net income $4,033,199 $2,652,069 $7,480,088 $5,201,084
========== ========== ========== ==========
Primary net income per share $.58 $.40 $1.08 $.78
========== ========== ========== ==========
FULLY DILUTED NET INCOME PER SHARE
Weighted average common
shares outstanding 6,645,361 6,636,407 6,645,361 6,632,408
Net shares to be issued upon
exercise of dilutive stock options
after applying treasury stock
method 349,063 201,021 349,063 201,021
---------- ---------- ---------- ----------
Adjusted shares outstanding 6,994,424 6,837,428 6,994,424 6,833,429
========== ========== ========== ==========
Net income $4,033,199 $2,652,069 $7,480,088 $5,201,084
========== ========== ========== ==========
Fully diluted net income per
share $.58 $.39 $1.07 $.76
========== =========== ========== ==========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
ADDITIONAL PRIMARY COMPUTATION
Weighted average common
shares outstanding 6,645,361 6,636,407 6,645,361 6,632,408
Net shares to be issued upon
exercise of dilutive stock options
after applying treasury stock
method 283,124 175,730 267,877 164,876
---------- ---------- ---------- ----------
Adjusted shares outstanding 6,928,485 6,812,137 6,913,238 6,797,284
========== ========== ========== ==========
Net income $4,033,199 $2,652,069 $7,480,088 $5,201,084
========== ========== ========== ==========
Primary net income per share $.58 $.39(a) $1.08 $.77(a)
========== ========== ========== ==========
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
31
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the six months ended June 30, 1997, 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-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 94,536,390
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9,112,232
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 106,355,634
<CASH> 113,831
<RECOVER-REINSURE> 36,322
<DEFERRED-ACQUISITION> 10,909,631
<TOTAL-ASSETS> 122,321,709
<POLICY-LOSSES> 7,487,793
<UNEARNED-PREMIUMS> 7,880,348
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 66,453
<OTHER-SE> 99,585,196
<TOTAL-LIABILITY-AND-EQUITY> 122,321,709
16,833,618
<INVESTMENT-INCOME> 2,973,579
<INVESTMENT-GAINS> 5,851
<OTHER-INCOME> 6,030
<BENEFITS> 2,285,746
<UNDERWRITING-AMORTIZATION> 1,957,443
<UNDERWRITING-OTHER> 4,667,363
<INCOME-PRETAX> 10,908,526
<INCOME-TAX> 3,428,438
<INCOME-CONTINUING> 7,480,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,480,088
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
