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, 1998
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)
(336) 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 6, 1998:
13,304,722 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, 1998 (Unaudited)
and December 31, 1997................................................3
Consolidated Income Statement for the Three Month
Periods Ended March 31, 1998 and 1997 (Unaudited)....................4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1998 and 1997 (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 6. Exhibits and Reports on Form 8-K.................................16
Signatures...............................................................16
2
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TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
------------ -------------
Assets (Unaudited)
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities ............................... $133,434,540 $ 99,725,487
Equity securities............................... 12,677,081 11,466,028
Short-term investments.......................... 13,347,249 8,685,842
------------ -------------
159,458,870 119,877,357
Cash................................................ 41,000 8,557
Accrued investment income........................... 1,989,304 1,460,168
Deferred policy acquisition costs................... 13,218,093 12,587,355
Property and equipment.............................. 2,681,067 2,524,228
Prepaid reinsurance premium......................... 20,237 23,263
Reinsurance recoverable............................. 55,128 49,447
Other assets........................................ 2,661,348 2,448,685
------------ -------------
Total assets........................................ $180,125,047 $138,979,060
============ =============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses............. $ 9,629,555 $ 8,960,411
Unearned premiums............................... 7,390,114 7,988,342
Current taxes payable........................... 3,322 3,318
Deferred income taxes........................... 8,901,364 7,521,874
Long term debt.................................. 34,500,923 - -
Accrued interest on debt........................ 476,194 - -
Accrued expenses and other liabilities.......... 2,089,100 2,724,324
------------ -------------
Total liabilities................................... 62,990,572 27,198,269
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; 13,302,721
issued and outstanding shares at March 31,
1998 and 13,293,721 at December 31, 1997...... 133,027 132,937
Additional paid-in capital...................... 59,410,383 59,369,223
Accumulated other comprehensive income,
net of income tax liability of $2,330,895
at March 31, 1998 and $2,368,998
at December 31, 1997........................... 4,334,553 4,405,315
Retained earnings................................ 53,256,512 47,873,316
------------ -------------
Total stockholders' equity.......................... 117,134,475 111,780,791
------------ -------------
Total liabilities and stockholders' equity.......... $180,125,047 $138,979,060
============ =============
See accompanying notes.
3
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TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended
March 31
1998 1997
Revenue:
Premiums written:
Direct.......................................... $11,569,733 $7,894,068
Assumed......................................... 5,821 6,039
Ceded........................................... (240,499) (521,604)
------------ -----------
Net premiums written............................... 11,335,055 7,378,503
Change in unearned premiums........................ 595,201 470,380
------------ -----------
Earned premiums.................................... 11,930,256 7,848,883
Net investment income.............................. 2,038,569 1,471,915
Realized investment gains (losses)................. 115,513 (881)
Other income....................................... 470 2,664
------------ -----------
14,084,808 9,322,581
Losses and expenses:
Losses and loss adjustment expenses................ 1,479,704 1,241,546
Reinsurance recoveries............................. (2,472) (45,696)
------------ -----------
Net losses and loss adjustment expenses............ 1,477,232 1,195,850
Interest expense on debt........................... 476,888 - -
Amortization of deferred policy acquisition costs.. 1,272,708 973,055
Other operating expenses (net)..................... 3,091,460 2,121,764
------------ -----------
6,318,288 4,290,669
------------ -----------
Income before income taxes......................... 7,766,520 5,031,912
Income taxes:
Current......................................... 213 458
Deferred........................................ 2,383,111 1,584,566
------------ -----------
2,383,324 1,585,024
------------ -----------
Net income......................................... $ 5,383,196 $3,446,888
============ ===========
Earnings per common and
common equivalent share:
Basic........................................... $.40 $.26
============ ===========
Diluted......................................... $.39 $.25
============ ===========
Shares used in computing earnings
per common and common equivalent share:
Basic........................................... 13,301,554 13,290,722
============ ===========
Diluted......................................... 13,870,538 13,621,034
============ ===========
See accompanying notes.
4
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TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
March 31
---------------------------
1998 1997
---- ----
Operating activities
Net income.......................................... $ 5,383,196 $ 3,446,888
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves............... 70,916 247,413
Accrued expenses and other liabilities........... (634,126) (675,371)
Current taxes payable............................ 4 235
Accrued investment income........................ (529,136) (182,738)
Policy acquisition costs deferred................ (1,903,445) (1,351,765)
Amortization of policy acquisition costs......... 1,272,708 973,055
Net realized investment (gains) losses .......... (115,513) 881
Provision for depreciation....................... 206,811 128,379
Accretion of discount on investments............. (197,715) (149,142)
Deferred income taxes............................ 1,417,594 1,369,566
Real estate acquired in claim settlement......... 141,999 --
Accrued interest on debt......................... 476,194 --
Other assets..................................... (354,661) (635,658)
------------ ------------
Net cash provided by operating activities........... 5,234,826 3,171,743
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.................... (38,143,846) (10,278,355)
Sales - fixed maturities........................ 3,814,529 9,064,083
Purchases - equities............................ (3,160,977) (385,641)
Sales - equities................................ 2,763,701 726,551
Purchase of property and equipment................ (356,555) (285,283)
------------ ------------
Net cash used in investing activities............... (35,083,148) (1,158,645)
Financing activities
Proceeds from issuance of long term debt............ 34,500,923 --
Proceeds from exercise of stock options............. 41,250 --
------------ ------------
Net cash provided by financing activities........... 34,542,173 --
------------ ------------
Net change in cash and short-term investments....... 4,693,851 2,013,098
Cash and short-term investments at beginning
of period....................................... 8,694,398 3,662,711
------------ ------------
Cash and short-term investments at end of period.... $13,388,249 $ 5,675,809
============ ============
Supplemental schedule of cash flow information
Cash paid during the period for income taxes
and United States Mortgage
Guaranty Tax and Loss Bonds..................... $ 883,213 $ 215,458
============ ============
See accompanying notes.
5
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
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, 1998
(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, 1998 and December 31, 1997, 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
1998 1997
---- ----
Net risk......................... $2,313,504,845 $2,231,572,130
================= ===============
Statutory capital and surplus.... $ 87,727,230 $ 60,929,830
Statutory contingency reserve.... 60,963,401 54,766,669
----------------- ---------------
Total............................ $ 148,690,631 $ 115,696,499
================= ===============
Risk-to-capital ratio............ 15.6-to-1 19.3-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 $7,513,864 for the three months ended March 31, 1998 and $22,916,215 for the
year ended December 31, 1997.
At March 31, 1998 and December 31, 1997, the amount of Triad's equity that
could be paid out in dividends to stockholders was $4,309,427 and $2,512,027,
respectively, which was the earned surplus of Triad on a statutory basis on
those dates.
7
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 1998
(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
Basic and diluted earnings per share are based on the weighted average
daily number of shares outstanding. For diluted earnings per share, the
denominator includes the dilutive effect of stock options on the
weighted-average shares outstanding. There are no other reconciling items
between the denominator used in basic earnings per share and diluted earnings
per share, and the numerator used in basic earnings per share and diluted
earnings per share is the same for all periods presented.
NOTE 6 - - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement No. 130 establishes
standards for reporting and display of the components of comprehensive income in
financial statements. Comprehensive income is divided into net income and other
comprehensive income. For the Company, other comprehensive income is composed of
unrealized gains or losses on available-for-sale securities, net of income tax.
For the three month periods ended March 31, 1998 and 1997, Triad's comprehensive
income was $5.3 million and $2.5 million, respectively. Comprehensive income for
those periods consists of net income from operations of $5.4 million and $3.4
million less unrealized losses on available-for-sale securities, net of income
tax effect, of $70,000 and $961,000, respectively. The adoption of this
statement had no impact on the Company's net income or stockholders' equity.
NOTE 7 - - LONG TERM DEBT
On January 29, 1998, the Company completed a $35 million private offering
of notes due January 15, 2028. The notes, which represent unsecured obligations
of the Company, bear interest at a rate of 7.9% per annum and are non-callable.
The notes are rated "A" by Standard and Poor's Corporation and "A+" by Fitch
Investors Service. The Company contributed $25 million of the net proceeds from
the sale of the notes to Triad in exchange for a surplus debenture. The Company
will be dependent upon payments under the surplus debenture issued by Triad and
upon possible future dividends from Triad, all of which will be subject to
significant payment restrictions under Illinois insurance laws, to provide funds
8
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TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 1998
(Unaudited)
for the payment of the Company's obligations under the notes. The Company
retained the balance of the net proceeds of the offering, approximately $9.4
million, which will be available for general corporate purposes, including,
without limitation, investment, payments of principal and interest on the notes
and possible future contributions to the capital of Triad.
9
<PAGE>
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 1998 increased 56.2% to $5.4
million compared to $3.4 million in the first three months of 1997. This
improvement was primarily attributable to a 52.0% increase in earned premiums, a
38.5% increase in net investment income and an improved loss and expense ratio.
Net income per share on a diluted basis, which reflects the two-for-one
stock split effective on October 28, 1997, increased 53.4% to $0.39 for the
first three months of 1998 compared to $0.25 per share for the first three
months of 1997. Operating earnings per share were $0.38 for the first three
months of 1998 compared to $0.25 for the first three months of 1997, an increase
of 51.1%. Operating earnings exclude net realized investment gains of
approximately $116,000 in the first three months of 1998 and net realized
investment losses of approximately $1,000 in the first three months of 1997.
Net new insurance written was $860 million for the first three months of
1998 as compared to $596 million for the first three months of 1997, an increase
of 44.3%. The Company also produced approximately $41 million of new insurance
written on seasoned loans in the first quarter of 1998 compared to $54 million
in the same period of 1997. The increase in new insurance written was the result
of continued geographic expansion and the penetration of Triad's products in the
marketplace to both new and existing customers. According to industry data,
Triad's national market share, which is calculated based on net new insurance
written, increased to 2.5% for the first three months of 1998 compared to 2.4%
reported for all of 1997.
The growth in new insurance written also reflects the favorable interest
rate environment in the first three months of 1998 which caused home buying and
refinance activities to remain strong. Refinance activity was 34.3% of new
insurance written in the first three months of 1998 compared to 18.4% in the
first three months of 1997. Total direct insurance in force reached $9.5 billion
at March 31, 1998, compared to $7.0 billion at March 31, 1997, an increase of
35.7%.
Total direct premiums written were $11.6 million for the first three months
of 1998, an increase of 46.6% compared to $7.9 million for the first three
months of 1997. Net premiums written increased by 53.6% to $11.6 million for the
first three months of 1998 compared to $7.4 million for the same period in 1997.
Earned premiums increased 52.0% to $11.9 million for the first three months of
1998 from $7.8 million for the first quarter of 1997. This growth in written and
earned premium resulted from the increase in new insurance written, offset
somewhat by a decline in the Company's persistency rate. The Company's
persistency, or the number of policies remaining in force from one year prior,
was 81.8% compared to 84.2% for all of 1997. Sales under the Company's monthly
premium plan represented 97.5% of new insurance written in the first quarter of
1998 compared to 93.5% in the first quarter of 1997.
Triad's "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, accounted for 56.2% of new commitments in the first three months
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
of 1998 compared to 34.7% for the same period of 1997. Commitments processed
through Triad's delegated underwriting program accounted for 14.8% of
commitments received for the first three months of 1998, compared to 11.4% for
the first three months of 1997.
Net investment income for the first quarter of 1998 was $2.0 million, a
38.5% increase over $1.5 million for the same period in 1997. This increase in
investment income is the result of growth in the average book value of invested
assets by $35.7 million to $133.0 million at March 31, 1998, from $97.3 million
at March 31, 1997. The growth in invested assets is attributable to both the
investment of the proceeds of the Company's $35.0 million debt offering
completed in late January 1998, and the increase in invested assets due to
normal operating cash flow. The yield on average invested assets was 6.1% for
both the first three months of 1998 and for the same period of 1997. The
portfolio's tax-equivalent yield was 7.8% for the first three months of both
1998 and 1997. Approximately 67% or $87.6 million of the Company's fixed
maturity portfolio at March 31, 1998 was composed of state and municipal
tax-preferred securities as compared to 63% at March 31, 1997.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 12.4% for the 1998 first quarter as compared to 15.2% for the same period of
1997 and 13.4% for all of 1997. The Company's favorable loss ratio reflects the
low level of delinquencies compared to the number of insured loans and the fact
that approximately 74% of the Company's insurance in force was originated in the
last 36 months. Management believes, based upon its experience and industry
data, that claims incidence for it and other private mortgage insurers is
generally highest in the third through sixth years after loan origination.
Although the claims experience on new insurance written in previous years has
been quite favorable, the Company expects its incurred losses to increase as a
greater amount of its insurance in force reaches its anticipated highest claim
frequency years. Due to the inherent uncertainty of future premium 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 23.5% in the first three months of 1998 to $1.5 million compared to
$1.2 million in the first three months of 1997. This increase reflects the
growth of 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 30.8% to
$1.3 million in the first three months of 1998 compared to $1.0 million for the
first three months of 1997. The increase in amortization reflects both a growing
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
balance of deferred policy acquisition costs to amortize as the Company builds
its total insurance in force and a higher cancellation rate during the first
quarter of 1998.
Other operating expenses increased 45.7% to $3.1 million for the first
three months of 1998 as compared to $2.1 million for the same period in 1997.
This increase in expenses is primarily attributable to advertising, personnel,
facilities and equipment costs required to support the Company's product
development, technology enhancements, geographic expansion and increased
production.
The expense ratio (ratio of underwriting expenses to net premiums written)
for the first quarter of 1998 was 38.5% compared to 41.9% for the first quarter
of 1997 and 37.5% for all of 1997. The primary factor contributing to this
improvement between the quarterly periods is the higher level of written
premiums in the first quarter of 1998.
The effective tax rate for the first quarter of 1998 was 30.7% compared to
31.5% in the first quarter of 1997. This decrease is the result of completion of
the phase-in of the 35% federal statutory income tax rate applicable to
companies with annual taxable income above $10 million and the increase in
investment in tax preferred securities. Management expects the Company's
effective tax rate to increase slightly during 1998 as the funds from the $35
million debt offering, completed in January 1998, are invested in taxable
securities. However, any increase in the effective rate is largely dependent
upon the Company's taxable income growing faster than its tax preferred
investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of operating cash flow consist primarily of premiums
written and investment income. Operating cash flow is applied primarily to the
payment of claims and expenses.
The Company generated positive cash flow from operating activities for the
first three months of 1998 of $5.2 million compared to $3.2 million for the
first three months of 1997. The increase in Triad's operating cash flow reflects
the growth in renewal premiums and insurance written that has more than offset
the 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.
In January 1998, the Company completed a $35.0 million private offering of
notes due January 15, 2028. The notes, which represent unsecured obligations of
the Company, bear interest at a rate of 7.9% per annum and are non-callable. The
notes are rated "A" by Standard and Poor's Corporation and "A+" by Fitch
Investors Service. The Company contributed $25.0 million of the net proceeds to
Triad in exchange for a surplus debenture. The Company is dependent upon
payments under the surplus debenture issued by Triad and upon possible future
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
dividends from Triad, all of which will be subject to significant payment
restrictions under Illinois insurance laws, to provide funds for the payment of
the Company's obligations under the notes. The Company retained the balance of
the net proceeds of the offering, approximately $9.4 million, and these proceeds
are available for general corporate purposes, including, without limitation,
investment, payments of principal and interest on the notes and possible future
contributions to the capital of Triad.
The parent company's cash flow is dependent on interest income, cash
dividends, revenues from management fees and interest payments under the surplus
debenture 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 as of the end of the preceding fiscal year and limit
the amount of dividends that may be paid without prior approval of the Illinois
Insurance Department. Triad had an earned surplus of $4.3 million at March 31,
1998, and $2.5 million at December 31, 1997. The Illinois Insurance Department
permits expenses of the parent company to be paid by Triad in the form of
management fees.
Consolidated invested assets were $159.5 million at March 31, 1998,
compared to $119.9 million at December 31, 1997. This increase is attributable
to the investment of proceeds of the $35.0 million debt offering and normal
operating cash flow. To date, the Company's investments have emphasized
tax-preferred securities. Because of restrictions imposed under federal income
tax laws, investment by the Company of proceeds of the note offering must be
made in taxable securities. Through investment of a portion of the net proceeds
of the note offering, the Company has increased its investments in higher
yielding non-investment grade securities to approximately 9% of its consolidated
investment portfolio, up from approximately 3% at December 31, 1997. Net
unrealized investment gains were $3.5 million on equity securities and $3.1
million on fixed maturity securities at March 31, 1998. Fixed maturity
securities and equity securities classified as available for sale totaled $146.1
million at March 31, 1998. The fixed maturity portfolio consisted of
approximately 67% municipal securities, 22% corporate securities, 8% U.S.
government obligations and 3% mortgage-backed bonds at March 31, 1998.
The Company's loss reserves increased to $9.6 million at March 31, 1998,
compared to $9.0 million at December 31, 1997. 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 $25,200 at March 31, 1998
compared to $23,100 at December 31, 1997. The Company's ratio of delinquent
insured loans to total insured loans was 0.45% at March 31, 1998, compared to
0.47% at December 31, 1997.
The Company's unearned premium reserve of $7.4 million at March 31, 1998,
decreased from $8.0 million at December 31, 1997. This decline is attributable
primarily to the continued production of the monthly premium product, which
produces little unearned premium compared to annual and single premium products.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
Cancellation activity also can contribute to the decrease in unearned premiums,
whereby older annual premium policies are canceled or replaced by monthly
premium policies.
Total stockholders' equity increased to $117.1 million at March 31, 1998,
from $111.8 million at December 31, 1997. This increase resulted primarily from
net income of $5.4 million for the first three months of 1998 offset slightly by
a decrease in net unrealized gains on invested assets classified as
available-for-sale of $71,000 (net of income tax).
Triad's total statutory policyholders' surplus increased to $87.7 million
at March 31, 1998, from $60.9 million at December 31, 1997. This increase
resulted from the Company's contribution to Triad of $25.0 million of note
proceeds through a surplus debenture, statutory net income of $7.5 million, and
unrealized gains on equity securities of $712,000 offset primarily by an
increase in the statutory contingency reserve of $6.2 million. Triad's statutory
earned surplus was $4.3 million at March 31, 1998 compared to $2.5 million at
December 31, 1997, reflecting growth in statutory net income greater than the
increase in the statutory contingency reserve. The balance in the statutory
contingency reserve was $61.0 million at March 31, 1998, compared to $54.8
million at December 31, 1997.
The Company is undertaking modifications and upgrades to enhance its
computer systems and technological capabilities. The Company expects that
approximately $1.6 million will be expended in 1998 to complete this system
upgrade and that the project will be funded through cash flow from operations.
As a part of this effort, management has initiated a program to prepare the
Company's computer systems and applications to be year 2000 compliant. The
Company expects to incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancement necessary to
prepare the systems for the year 2000. Most of the modifications will be made as
part of the Company's capital upgrade to its computer systems throughout 1998.
Triad's ability to write insurance depends on the adequacy of its statutory
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. A number of states limit Triad's risk-to-capital ratio to 25-to-1. As
of March 31, 1998, Triad's risk-to-capital ratio was 15.6-to-1, as compared to
19.3-to-1 at December 31, 1997, and 19.4-to-1 for the industry as a whole at
December 31, 1996, the latest industry data available.
Rating agencies also require capital levels based on a company's
performance sensitivity to various depression scenarios. In determining capital
levels, the rating agencies allow the use of different forms of capital
including statutory capital, reinsurance and debt. The effect of the Company's
contribution of $25.0 million of the proceeds of its note offering to the
capital of Triad in January 1998 was to improve its risk-to-capital ratio and to
provide additional capital considered in the rating agencies' depression models.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
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; rating agencies may revise methodologies for determining the Company's
claims-paying ability ratings and may revise or withdraw the assigned ratings at
any time; 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
particularly 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 other documents filed by the Company with the Securities and Exchange
Commission.
15
<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
a. Exhibits
ITEM 6.
Exhibit Description
------- -----------
27 Financial Data Schedule
b. Reports on Form 8-K - None
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TRIAD GUARANTY INC.
Date: May 13, 1998
/s/ Michael R. Oswalt
-----------------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the three months ended March 31, 1998, 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-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 133,434,540
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,677,081
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 159,458,870
<CASH> 41,000
<RECOVER-REINSURE> 10,149
<DEFERRED-ACQUISITION> 13,218,093
<TOTAL-ASSETS> 180,125,047
<POLICY-LOSSES> 9,629,555
<UNEARNED-PREMIUMS> 7,390,114
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,500,923
0
0
<COMMON> 133,027
<OTHER-SE> 117,001,448
<TOTAL-LIABILITY-AND-EQUITY> 180,125,047
11,930,256
<INVESTMENT-INCOME> 2,038,569
<INVESTMENT-GAINS> 115,513
<OTHER-INCOME> 470
<BENEFITS> 1,477,232
<UNDERWRITING-AMORTIZATION> 1,272,708
<UNDERWRITING-OTHER> 3,091,460
<INCOME-PRETAX> 7,766,520
<INCOME-TAX> 2,383,324
<INCOME-CONTINUING> 5,383,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,383,196
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
