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 March 31, 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 May 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 March 31, 1997 (Unaudited)
and December 31, 1996..............................................3
Consolidated Statements of Income for the Three Month
Periods Ended March 31, 1997 and 1996 (Unaudited)..................4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 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................................9
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............................15
Signatures...........................................................15
2
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TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
-------------- -------------
Assets (Unaudited)
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities ............................... $ 86,986,671 $ 87,229,855
Equity securities............................... 7,307,334 7,494,817
Short-term investments.......................... 5,533,364 3,302,125
------------- -------------
99,827,369 98,026,797
Cash................................................ 142,445 360,586
Accrued investment income........................... 1,309,380 1,126,642
Deferred policy acquisition costs................... 10,577,107 10,198,397
Property and equipment.............................. 1,862,293 1,705,389
Prepaid reinsurance premium......................... 330,836 300,200
Reinsurance recoverable............................. 155,192 153,274
Other assets........................................ 1,166,814 531,238
------------- -------------
Total assets........................................ $115,371,436 $ 112,402,523
============= =============
Liabilities and stockholders' equity Liabilities:
Losses and loss adjustment expenses............... $ 6,992,554 $ 6,305,397
Unearned premiums................................. 7,776,734 8,216,478
Amounts payable to reinsurer...................... 321 1,993
Current taxes payable............................. 1,831 1,596
Deferred income taxes............................. 5,141,135 4,276,081
Unearned ceding commission........................ 89,674 80,573
Accrued expenses and other liabilities............ 1,203,439 1,840,369
------------- -------------
Total liabilities................................... 21,205,688 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
10,000,000 shares; 6,645,361 issued
and outstanding shares.........,................. 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 $318,776 at
March 31, 1997 and $823,287
at December 31, 1996........................... 607,624 1,568,800
Retained earnings............................... 34,144,839 30,697,951
------------- -------------
Total stockholders' equity.......................... 94,165,748 91,680,036
------------- -------------
Total liabilities and stockholders' equity.......... $115,371,436 $112,402,523
============= =============
See accompanying notes
3
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TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended
March 31
1997 1996
---- ----
Revenue:
Premiums written:
Direct.......................................... $7,894,068 $5,678,899
Assumed......................................... 6,039 10,949
Ceded........................................... (521,604) (616,759)
------------- ------------
Net premiums written............................... 7,378,503 5,073,089
Change in unearned premiums........................ 470,380 405,817
------------- ------------
Earned premiums.................................... 7,848,883 5,478,906
Net investment income.............................. 1,471,915 1,279,124
Realized investment losses......................... (881) (42,285)
Other income....................................... 2,664 10
------------- ------------
9,322,581 6,715,755
Losses and expenses:
Losses and loss adjustment expenses................ 1,241,546 680,507
Reinsurance recoveries............................. (45,696) (27,482)
------------- ------------
Net losses and loss adjustment expenses............ 1,195,850 653,025
Amortization of deferred policy acquisition costs.. 973,055 772,232
Other operating expenses (net)..................... 2,121,764 1,615,103
------------- ------------
4,290,669 3,040,360
------------- ------------
Income before income taxes......................... 5,031,912 3,675,395
Income taxes:
Current......................................... 458 (59,430)
Deferred........................................ 1,584,566 1,185,808
------------- ------------
1,585,024 1,126,378
------------- ------------
Net income......................................... $3,446,888 $2,549,017
============= ============
Earnings per common and common equivalent share:
Primary......................................... $ .50 $ .39
============= ============
Fully diluted................................... $ .50 $ .38
============= ============
Shares used in computing earnings per common
and common equivalent share:
Primary......................................... 6,897,990 6,628,409
============= ============
Fully diluted................................... 6,898,040 6,786,174
============= ============
See accompanying notes.
4
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
March 31
---------------------------
1997 1996
---- ----
Operating activities
Net income.......................................... $ 3,446,888 $ 2,549,017
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss and unearned premium reserves............... 247,413 (78,709)
Accrued expenses and other liabilities........... (650,246) (225,208)
Current taxes payable............................ 235 0
Amounts due to/from reinsurers................... (34,226) 1,872,152
Accrued investment income........................ (182,738) (176,594)
Policy acquisition costs deferred................ (1,351,765) (2,114,466)
Amortization of policy acquisition costs......... 973,055 772,232
Net realized investment losses .................. 881 42,285
Provision for depreciation....................... 128,379 83,357
Accretion of discount on investments............. (149,142) (148,092)
Deferred income taxes............................ 1,369,566 1,126,008
Unearned ceding commission....................... 9,101 (510,655)
Other assets..................................... (635,658) 193,349
------------ ------------
Net cash provided by operating activities........... 3,171,743 3,384,676
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.................... (10,278,355) (9,428,784)
Sales - fixed maturities........................ 9,064,083 4,852,676
Purchases - equities............................ (385,641) (894,290)
Sales - equities................................ 726,551 246,813
Purchase of property and equipment................ (285,283) (74,462)
------------ ------------
Net cash used in investing activities............... (1,158,645) (5,298,047)
Financing activities
Net cash provided by financing activities........... -- --
------------ ------------
Net change in cash and short-term investments....... 2,013,098 (1,913,371)
Cash and short-term investments at beginning
of period........................................ 3,662,711 4,425,448
------------ ------------
Cash and short-term investments at end of period.... $ 5,675,809 $ 2,512,077
============ ============
Supplemental schedule of cash flow information......
Cash paid during the period for income taxes
and United States Mortgage Guaranty Tax
and Loss Bonds.................................... $ 215,458 $ 0
============ ============
See accompanying notes.
5
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 month period ended March 31, 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.
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, a wholly-owned subsidiary of Triad
Guaranty Insurance Corporation. All significant intercompany accounts and
transactions have been eliminated.
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.
6
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 1997
(Unaudited)
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 March 31, 1997 and December 31, 1996, 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:
March 31 December 31
1997 1996
Net risk............................. $1,574,737,669 $1,452,824,414
================ =================
Statutory capital and surplus........ $ 57,208,296 $ 57,070,475
Statutory contingency reserve........ 39,238,014 35,072,109
---------------- -----------------
Total................................ $ 96,446,310 $ 92,142,584
================ =================
Risk-to-capital ratio................ 16.3-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
greater of (a) ten percent of Triad's statutory surplus as regards
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 $4,637,369 for the three months ended March 31, 1997 and $13,396,769 for the
year ended December 31, 1996.
At March 31, 1997, none of the Company's equity could be paid out in
dividends to the stockholders because the earned surplus of Triad, on a
statutory basis, was a ========
Risk-to-capitand $1,347,326 at March 31, 1997
and December 31, 1996, respectively.
7
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=
Triad is re TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 1997
(Unaudited)
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 first quarter ended March 31,
1997 of $ .02 per share. For the first quarter ended March 31, 1996, the impact
of Statement 128 will not 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Net income for the first three months of 1997 increased 35.2% to $3.4
million compared to $2.5 million in the first three months of 1996. This
improvement is attributable to a 43.3% increase in earned premiums, a 15.1%
increase in net investment income and an improved combined (loss and expense)
ratio.
Net income per share assuming full dilution increased 33.0% to $0.50 for
the first three months of 1997 compared to $0.38 per share for the first three
months of 1996. The Company reported only nominal amounts of realized investment
losses in the first quarter of 1997 and 1996 resulting in operating earnings per
share assuming full dilution of $0.50 and $0.38, respectively.
New insurance written during the first three months of 1997 was $650
million compared to $460 million in the first three months of 1996, an increase
of 41.6%. 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 the introduction of new risk sharing products to Triad
customers. 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 slightly higher but still favorable interest rate environment in
the first three months of 1997 has caused both refinance and home buying
activities to remain strong. Due to the increase in interest rates, refinance
activity declined to 18.4% of new insurance written in the first quarter of 1997
compared to 29.5% of insurance written in the same period of 1996. Total direct
insurance in force reached $7.0 billion at March 31, 1997 compared to $5.5
billion at March 31, 1996, an increase of 28.1%.
Net new insurance written, which excludes coverage on seasoned business,
was $596 million during the first quarter of 1997 compared to $460 million for
the same period of 1996, an increase of 29.7%. According to industry data,
Triad's national market share, which is calculated based on net new insurance
written, increased by approximately 50% to 2.4% for the first quarter of 1997
compared to 1.6% for the same period of 1996.
Total direct premiums written were $7.9 million for the first three months
of 1997, an increase of 39.0% compared to $5.7 million for the first three
months of 1996. Net premiums written increased by 45.4% to $7.4 million in the
first three months of 1997 compared to $5.1 million for the same period in 1996.
Earned premiums increased 43.3% to $7.8 million for the first three months of
1997 from $5.5 million in the 1996 first quarter. Contributing to this growth in
written and earned premium were the increase in new insurance written, growth in
insurance in force, continued geographic expansion and an improvement in the
Company's persistency rate. Sales under the Company's monthly premium plan
represented 93.5% of new insurance written in the first quarter of 1997 compared
to 91.4% in the 1996 first quarter. Annualized persistency has improved to 84.8%
in the first three months of 1997 compared to 82.4% in the first three months of
1996 reflecting the decline in refinance activity.
In the 1996 fourth quarter, the Company introduced its revised Stick With
Triad program featuring the Slam Dunk Loan (SM) approval process whereby the
Company issues a certificate of insurance based on the borrower's credit score.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
The popularity of this product, to a large extent, has replaced customer use of
the Company's delegated underwriting program. Commitments processed through the
Company's delegated underwriting program accounted for 11.4% of commitments
received for the first quarter of 1997, compared to 35.6% in the first quarter
of 1996 and 38.0% for all of 1996.
Net investment income for the first quarter of 1997 was $1.5 million, a
15.1% increase over $1.3 million in the first three months of 1996. This
increase resulted from the growth in average invested assets of $7.1 million to
$97.3 million at March 31, 1997 from $85.2 million at March 31, 1996. The yield
on average invested assets increased to 6.1% for the first three months of 1997
compared to 6.0% for the same period of 1996. The portfolio's tax-equivalent
yield was 7.8% in the first quarter of 1997 and 7.7% in the first quarter of
1996. 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 63% or $54.7 million of the Company's
fixed maturity portfolio at March 31, 1997 was composed of state and municipal
tax-preferred securities.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 15.2% for the 1997 first quarter compared to 11.9% for the same period of
1996 and 13.3% for all of 1996. The higher loss ratio incurred in the 1997 first
quarter reflects an expected higher level of delinquencies reduced by the
effects of increased production of new insurance. While the Company experienced
an increase in its loss ratio, paid losses continue to remain low at 6.7% and
6.3% of earned premium for the first quarter 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. With increasing production,
71% of the Company's insurance in force has been 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.
During periods of significant refinancing activity, it is possible that
policies on stronger loans may lapse and that weaker loans may remain in force,
thus potentially increasing the loss ratio on older business. Substantial
increases in production of new business during these periods can offset the
increased loss ratio on the older business.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 83.1% in the first three months of 1997 to $1.2 million compared to
$653,000 in the first three months 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 26.0% to
$973,000 in the first three months of 1997 compared to $772,000 for the first
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
three months of 1996. 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 $2.1 million for the first three
months of 1997 compared to $1.6 million for the same period in 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 quarter of 1997 was 41.9% compared to 47.1% for the first quarter
of 1996 and 43.8% for all of 1996. The primary factor contributing to this
improvement was the higher level of written premiums in the first quarter of
1997.
The effective tax rate for the first quarter of 1997 was 31.5% compared to
30.6% in the first quarter 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 three months of 1997 of $3.2 million compared to $3.4 million for the
first three months of 1996. The decrease in the Company's cash flow is primarily
attributable to the recapture of previously ceded premiums in the first quarter
of 1996 resulting from the Company's restructuring of its reinsurance
agreements.
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
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
of Triad's rapid growth in written premiums and the requirement to add amounts
to the statutory contingency reserve equal to at least 50% of earned premiums
(which reduces statutory earned surplus), Triad reported a deficit in statutory
earned surplus of $1.2 million at March 31, 1997 and $1.3 million at December
31, 1996. 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 $99.8 million at March 31, 1997,
including a total of $94.3 million in fixed maturity securities and equity
securities classified as available-for-sale. Net unrealized investment gains on
equity securities were $1.1 million and net unrealized investment losses on
fixed maturity securities totaled $199,000 at March 31, 1997.
Approximately 9% or $7.4 million of the Company's fixed maturity portfolio
at March 31, 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 March 31, 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 $7.0 million at March 31, 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 $22,000 at March 31, 1997
compared to $23,000 at December 31, 1996. The Company's delinquency ratio, the
ratio of delinquent insured loans to total insured loans, was 0.49% at March 31,
1997 compared to 0.44% at December 31, 1996.
The Company's unearned premium reserve of $7.8 million at March 31, 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
produces little unearned premium compared to annual and single premium products.
Also, the Company has experienced a high level of refinance activity in the
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
first quarter of 1997 whereby older annual premium policies are replaced by
monthly premium policies resulting in a decline in the unearned premium reserve.
Total stockholders' equity increased to $94.2 million at March 31, 1997
from $91.7 million at December 31, 1996. This increase resulted from net income
of $3.4 million for the first three months of 1997, offset by a decrease in net
unrealized gains on invested assets classified as available-for-sale of $962,000
(net of income tax).
Triad's total statutory policyholders' surplus increased to $57.2 million
at March 31, 1997 from $57.1 million at December 31, 1996. This increase
resulted from net income of $4.6 million offset primarily by an increase in the
contingency reserve of $4.2 million. Triad's deficit in statutory earned surplus
was $1.2 million at March 31, 1997 compared to $1.3 million at December 31,
1996, reflecting growth in statutory net income greater than the increase in the
contingency reserve. The balance in the contingency reserve was $39.2 million at
March 31, 1997 compared to $35.1 million at December 31, 1996.
The Company currently has no plans for significant capital expenditures.
However, Triad continues to upgrade and enhance its computer systems and
technological capabilities.
In the first quarter of 1997, Triad introduced a mortgage insurance program
to enable the Company to better meet the needs and requirements of the larger
national lenders. The program increases the lender's share of the risk of loss
on an insured book of business and provides for a fee to the lender for this
increased risk. While the impact of this product to Triad cannot be predicted
with certainty, management believes that successful marketing and acceptance of
this product by national lenders could provide significant growth opportunities
for Triad for the remainder of 1997.
The Company's marketing of its new products together with the Company's
geographic expansion and focus on national lenders have dramatically increased
the number of applications received in the first quarter of 1997. As a result,
management believes that production levels in the first half of 1997 could
approach twice the production level achieved in the first half of 1996. The
precise level of production, however, will depend on a number of factors
including interest rates, regulatory requirements and general economic
conditions.
The Company's ability to write insurance depends on the adequacy of its
capital in relation to risk in force. A significant reduction of capital or a
significant increase in risk may impair the Company's ability to write
additional insurance. Freddie Mac and Fannie Mae require the Company to maintain
a risk-to-capital ratio of no more than 25-to-1. A number of states also
generally limit the Company's risk-to-capital ratio to 25-to-1. As of March 31,
1997 Triad's risk-to-capital ratio was 16.3-to-1, and as of December 31, 1996
was 15.8-to-1, as compared to 20.3-to-1 for the industry as a whole at December
31, 1995, 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 Triad's needs and
alternatives for additional capital.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
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 first quarter ended March 31,
1997 of $0.02 per share. The impact on primary earnings per share for the first
quarter ended March 31, 1996 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.
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.
14
<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 - None
Item 5. Other Information - None
Item 6. a. Exhibits
Exhibit Description
------- -----------
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: May 13, 1997
/s/ Michael R. Oswalt
---------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
11 Statement Re Computation of Net Income per Share
27 Financial Data Schedule
16
EXHIBIT 11
TRIAD GUARANTY INC.
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three Month Periods Ended March 31, 1997 and 1996
Three Months Ended
March 31,
------------------
1997 1996
---- ----
PRIMARY NET INCOME PER SHARE
Weighted average common shares
outstanding............................ 6,645,361 6,628,409
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method.................. 252,629 0
------------ -------------
Adjusted shares outstanding................ 6,897,990 6,628,409
============ =============
Net income................................. $3,446,888 $2,549,017
============ =============
Primary net income per share............... $ .50 $ .39
============ =============
FULLY DILUTED NET INCOME PER SHARE
Weighted average common shares
outstanding............................ 6,645,361 6,628,409
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method.................. 252,679 157,765
----------- -------------
Adjusted shares outstanding................ 6,898,040 6,786,174
=========== =============
Net income................................. $3,446,888 $2,549,017
=========== =============
Fully diluted net income per share......... $ .50 $ .38
=========== =============
17
<PAGE>
EXHIBIT 11
Three months Ended
March 31,
--------------------
1997 1996
---- ----
ADDITIONAL PRIMARY COMPUTATION
Weighted average common shares
outstanding 6,645,361 6,628,409
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 252,629 154,021
----------- -------------
Adjusted shares outstanding 6,897,990 6,782,430
=========== =============
Net income $3,446,888 $2,549,017
=========== =============
Primary net income per share $ .50 $ .38(a)
=========== =============
(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%.
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the three months ended March 31, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 86,986,671
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,307,334
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 99,827,369
<CASH> 142,445
<RECOVER-REINSURE> 19,797
<DEFERRED-ACQUISITION> 10,577,107
<TOTAL-ASSETS> 115,371,436
<POLICY-LOSSES> 6,992,554
<UNEARNED-PREMIUMS> 7,776,734
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 66,453
<OTHER-SE> 94,099,295
<TOTAL-LIABILITY-AND-EQUITY> 115,371,436
7,848,883
<INVESTMENT-INCOME> 1,471,915
<INVESTMENT-GAINS> (881)
<OTHER-INCOME> 2,664
<BENEFITS> 1,195,850
<UNDERWRITING-AMORTIZATION> 973,055
<UNDERWRITING-OTHER> 2,121,764
<INCOME-PRETAX> 5,031,912
<INCOME-TAX> 1,585,024
<INCOME-CONTINUING> 3,446,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,446,888
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
