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, 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 August 3,
1998: 13,344,138 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998 (Unaudited)
and December 31, 1997................................................3
Consolidated Statements of Income for the Three and Six Month
Periods Ended June 30, 1998 and 1997 (Unaudited).....................4
Consolidated Statements of Cash Flow for the Six Month
Periods Ended June 30, 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 2. Changes in Securities............................................17
Item 4. Submission of Matters to a Vote of Security Holders..............17
Item 6. Exhibits and Reports on Form 8-K.................................17
Signatures...............................................................18
2
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
--------------- --------------
Assets (Unaudited)
Invested assets:
Securities available-for-sale, at fair value:
Fixed maturities ........................... $ 147,390,960 $ 99,725,487
Equity securities........................... 11,848,132 11,466,028
Short-term investments........................ 5,075,676 8,685,842
--------------- --------------
$ 164,314,768 $ 119,877,357
Cash............................................ 2,663 8,557
Accrued investment income....................... 2,073,511 1,460,168
Deferred policy acquisition costs............... 13,861,594 12,587,355
Property and equipment.......................... 2,901,649 2,524,228
Prepaid reinsurance premium..................... 17,339 23,263
Reinsurance recoverable......................... 44,432 49,447
Other assets.................................... 3,465,500 2,448,685
--------------- --------------
Total assets.................................... $ 186,681,456 $ 138,979,060
=============== ==============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses......... $ 9,925,980 $ 8,960,411
Unearned premiums........................... 7,260,468 7,988,342
Current taxes payable....................... 3,322 3,318
Deferred income taxes....................... 7,586,700 7,521,874
Long term debt.............................. 34,493,752 - -
Accrued interest on debt.................... 1,167,444 - -
Accrued expenses and other liabilities...... 2,659,276 2,724,324
--------------- --------------
Total liabilities............................... 63,096,942 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 32,000,000 shares; 13,326,222
shares issued and outstanding at June 30,
1998 and 13,293,721 at December 31, 1997.. 133,262 132,937
Additional paid-in capital.................. 59,852,186 59,369,223
Accumulated other comprehensive income,
net of income tax liability of $2,311,105
at June 30, 1998 and $2,368,998 at
December 31, 1997......................... 4,297,799 4,405,315
Retained earnings........................... 59,301,267 47,873,316
--------------- --------------
Total stockholders' equity...................... 123,584,514 111,780,791
--------------- --------------
Total liabilities and stockholders' equity...... $ 186,681,456 $ 138,979,060
=============== ==============
See accompanying notes
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct..........................................$ 12,765,965 $ 9,653,077 $ 24,335,699 $ 17,547,145
Assumed......................................... 3,106 10,014 8,927 16,054
Ceded........................................... (236,972) (535,109) (477,471) (1,056,713)
------------ ----------- ------------ ------------
Net premiums written............................... 12,532,099 9,127,982 23,867,155 16,506,486
Change in unearned premiums........................ 126,749 (143,248) 721,949 327,132
------------ ----------- ------------ ------------
Earned premiums.................................... 12,658,848 8,984,734 24,589,104 16,833,618
Net investment income.............................. 2,325,686 1,501,664 4,364,254 2,973,579
Realized investment gains.......................... 158,750 6,732 274,264 5,851
Other income....................................... 569 3,367 1,039 6,030
------------ ----------- ------------ ------------
15,143,853 10,496,497 29,228,661 19,819,078
Losses and expenses:
Losses and loss adjustment expenses................ 1,102,813 1,142,592 2,582,517 2,384,138
Reinsurance recoveries............................. 3,955 (52,696) 1,483 (98,392)
------------ ----------- ------------ ------------
Net losses and loss adjustment expenses............ 1,106,768 1,089,896 2,584,000 2,285,746
Interest expense on debt........................... 692,302 - - 1,169,190 - -
Amortization of deferred policy acquisition costs.. 1,362,618 984,388 2,635,326 1,957,443
Other operating expenses (net)..................... 3,246,071 2,545,600 6,337,531 4,667,363
------------ ----------- ------------ ------------
6,407,759 4,619,884 12,726,047 8,910,552
------------ ----------- ------------ ------------
Income before income taxes......................... 8,736,094 5,876,613 16,502,614 10,908,526
Income taxes:
Current......................................... 213 1,710 426 2,168
Deferred........................................ 2,691,127 1,841,704 5,074,238 3,426,270
------------ ----------- ------------ ------------
2,691,340 1,843,414 5,074,664 3,428,438
------------ ----------- ------------ ------------
Net income.........................................$ 6,044,754 $ 4,033,199 $ 11,427,950 $ 7,480,088
============ =========== ============ ============
Earnings per common and
common equivalent share:
Basic........................................... $.45 $.30 $.86 $.56
============ =========== ============ ============
Diluted......................................... $.44 $.30 $.82 $.55
============ =========== ============ ============
Shares used in computing earnings per
common and common equivalent share:
Basic........................................... 13,313,901 13,290,722 13,307,755 13,290,722
============ =========== ============ ============
Diluted......................................... 13,866,624 13,660,199 13,868,608 13,640,617
============ =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30
--------------------------
1998 1997
Operating activities
Net income........................................ $11,427,950 $ 7,480,088
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves............. 237,695 846,266
Accrued expenses and other liabilities......... (44,140) (221,549)
Current taxes payable.......................... 4 1,726
Accrued investment income...................... (613,343) (227,777)
Policy acquisition costs deferred.............. (3,909,565) (2,668,677)
Amortization of policy acquisition costs....... 2,635,326 1,957,443
Net realized investment gains ................. (274,264) (5,851)
Provision for depreciation..................... 408,371 278,241
Accretion of discount on investments........... (456,009) (304,510)
Deferred income taxes.......................... 122,720 1,027,270
Accrued interest on debt....................... 1,167,444 - -
Real estate acquired in claim settlement....... 141,999 - -
Other assets................................... (860,688) (608,249)
----------- -----------
Net cash provided by operating activities......... 9,983,500 7,554,421
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.................. (55,453,677) (17,193,982)
Sales - fixed maturities...................... 7,529,296 10,180,132
Purchases - equities.......................... (3,839,720) (2,035,585)
Sales - equities.............................. 4,264,323 1,191,623
Purchase of property and equipment.............. (778,697) (538,477)
----------- -----------
Net cash used in investing activities............. (48,278,475) (8,396,289)
Financing activities
Proceeds from issuance of long term debt.......... 34,493,752
Proceeds from exercise of stock options........... 185,163 0
----------- -----------
Net cash provided by financing activities......... 34,678,915 0
----------- -----------
Net change in cash and short-term investments..... (3,616,060) (841,868)
Cash and short-term investments at beginning
of period..................................... 8,694,399 3,662,711
----------- -----------
Cash and short-term investments at end of period.. $ 5,078,339 $ 2,820,843
=========== ===========
Supplemental schedule of cash flow information
Cash paid during the period for income taxes
and United States Mortgage Guaranty Tax
and Loss Bonds................................. $ 4,869,426 $ 2,399,677
=========== ===========
Non-cash investing and finance activities:
Exchange of restricted common stock for
intangible asset............................... $ 298,125 $ - -
=========== ===========
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ended June
30, 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
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June 30, 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 June 30, 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:
June 30, December 31
1998 1997
Net risk............................. $ 2,482,240,033 $2,231,572,130
=============== ==============
Statutory capital and surplus........ $ 89,171,906 $ 60,929,830
Statutory contingency reserve........ 67,403,841 54,766,669
--------------- --------------
Total................................ $ 156,575,747 $ 115,696,499
=============== ==============
Risk-to-capital ratio................ 15.9-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 $15,175,165 for the six months ended June 30, 1998 and $22,916,215 for the
year ended December 31, 1997.
At June 30, 1998 and December 31, 1997, the amount of Triad's equity that
could be paid out in dividends to stockholders was $5,455,978 and $2,512,027,
respectively, which was the earned surplus of Triad on a statutory basis on
those dates.
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June 30, 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.
Prior to adoption of this statement, these amounts were reported as a component
to stockholders' equity. The adoption of this statement had no impact on the
Company's net income or stockholders' equity.
For the three month periods ended June 30, 1998 and 1997, the Company's
comprehensive income was $6.0 million and $5.5 million, respectively. For the
six month periods ended June 30, 1998 and 1997, the Company's comprehensive
income was $11.3 million and $8.0 million, respectively. Prior period financial
statements have been reclassified to conform to the requirements of Statement
No. 130.
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
8
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June 30, 1998
(Unaudited)
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
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 six months of 1998 increased 52.8% to $11.4
million compared to $7.5 million in the first six months of 1997. Net income for
the second quarter of 1998 increased 49.9% to $6.0 million compared to $4.0
million for the second quarter of 1997. This improvement is attributable to a
46.1% (40.9% in the second quarter) increase in earned premiums, a 46.8% (54.9%
in the second quarter) increase in net investment income and an improved
combined 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 50.3% to $0.82 for the
first six months of 1998 compared to $0.55 per share for the first six months of
1997. Net income per share for the second quarter of 1998 was $0.44 on a diluted
basis compared to $0.30 per share for the same period of 1997. Operating
earnings per share were $0.81 for the first half of 1998 compared to $0.55 for
the first half of 1997. Operating earnings exclude net realized gains of
approximately $274,000 in the first six months of 1998 and of approximately
$6,000 in the same period of 1997.
Net new insurance written was $2.0 billion for the first six months of 1998
as compared to $1.3 billion for the first six months of 1997, an increase of
53.3%. For the second quarter, net new insurance written totaled $1.2 billion in
1998 compared to $731 million in 1997. The Company also produced approximately
$171 million of new insurance written on seasoned loans in the first half of
1998 compared to $641 million in the same period of 1997. The increase in new
insurance written was the result of a strong economy, continued geographic
expansion, the penetration of Triad's products in the marketplace to both new
and existing customers and the introduction of new products. According to
industry data, Triad's national market share of net new insurance written
increased to 2.5% for the first six 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 six months of 1998 which caused home buying and
refinance activities to remain strong. Refinance activity was 33.8% of new
insurance written in the first six months of 1998 compared to 14.0% in the first
six months of 1997. Total direct insurance in force reached $10.1 billion at
June 30, 1998, compared to $8.0 billion at June 30, 1997, an increase of 26.4%.
Total direct premiums written were $24.3 million for the first six months
of 1998, an increase of 38.7% compared to $17.5 million for the first six months
of 1997. Net premiums written increased by 44.6% to $23.9 million in the first
six months of 1998 compared to $16.5 million for the same period in 1997. Earned
premiums increased 46.1% to $24.6 million for the first half of 1998 from $16.8
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
million in the first half 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 78.3% at June 30,
1998, compared to 84.2%at December 31, 1997. Sales under the Company's monthly
premium plan represented 97.8% of new insurance written in the first half of
1998 compared to 94.2% in the same period of 1997.
Net investment income for the first half of 1998 was $4.4 million, a 46.8%
increase over $3.0 million in the first half of 1997. Net investment income for
the second quarter of 1998 was $2.3 million, a 54.9% increase over the second
quarter of 1997. This increase in investment income is the result of growth in
the average book value of invested assets by $41.9 million to $141.2 million at
June 30, 1998, from $99.3 million at June 30, 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 increased slightly to 6.2% for the first six months of 1998 compared to
6.0% for the first six months of 1997 and for all of 1997. The portfolio's
tax-equivalent yield was 8.0% for the first six months of 1998 and for all of
1997. Approximately 68% or $97.6 million of the Company's fixed maturity
portfolio at June 30, 1998, was composed of state and municipal tax-preferred
securities as compared to 66% at June 30, 1997.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 10.5% for the first six months of 1998 compared to 13.6% for the same period
of 1997 and 13.4% for all of 1997. The loss ratio was 8.7% for the second
quarter of 1998 compared to 12.1% for the second quarter 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 76% 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 be canceled 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 13.0% in the first six months of 1998 to $2.6 million compared to
$2.3 million in the first six months of 1997. Net losses and loss adjustment
expenses for the second quarter of 1998 and 1997 were $1.1 million. The year to
date increase reflects the growing amount 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 34.6% to
$2.6 million in the first six months of 1998 compared to $2.0 million for the
first six months of 1997. These costs were $1.4 million for the second quarter
of 1998 compared to $984,000 for the second quarter of 1997, an increase of
38.4%. The increase in amortization reflects both a growing 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 six months of 1998.
Other operating expenses increased 35.8% to $6.3 million for the first six
months of 1998 compared to $4.7 million for the same period in 1997. For the
second quarter of 1998, other operating expenses increased to $3.2 million from
$2.5 million in the second quarter of 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 half of 1998 was 37.6% compared to 40.1% for the first half of
1997 and 37.5% for all of 1997. The expense ratio for the second quarter of 1998
improved to 36.8% from 38.7% reported a year earlier. The primary factor
contributing to this improvement was the higher level of written premiums in the
first half of 1998 offset by the increase in expenses.
The effective tax rate for the first six months of 1998 was 30.8% compared
to 31.4% in the first six months of 1997. This decrease is the result of the
increase in investment in tax preferred securities and the completion of the
phase-in during 1997 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 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 cash flow is applied primarily to the
payment of claims and expenses.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
The Company generated positive cash flow from operating activities for the
first six months of 1998 of $10.0 million compared to $7.6 million for the first
six 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 parent company contributed $25.0 million of the net
proceeds to Triad in exchange for a surplus debenture. The parent company is
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
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. 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 $164.3 million at June 30, 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 operating cash
flow. 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 $3.4 million on equity securities and $3.2 million on fixed maturity
securities at June 30, 1998. Fixed maturity securities and equity securities
classified as available for sale totaled $159.2 million at June 30, 1998. The
fixed maturity portfolio consisted of approximately 68% municipal securities,
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
23% corporate securities, 7% U.S. government obligations and 2% mortgage-backed
bonds at June 30, 1998.
The Company's loss reserves increased to $9.9 million at June 30, 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 $25,500 at June 30, 1998,
compared to $23,100 at December 31, 1997. The Company's delinquency ratio, the
ratio of delinquent insured loans to total insured loans, was 0.44% at June 30,
1998, compared to 0.47% at December 31, 1997.
The Company's unearned premium reserve of $7.3 million at June 30, 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.
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 $123.6 million at June 30,
1998, from $111.8 million at December 31, 1997. This increase resulted from net
income of $11.4 million for the first six months of 1998 and from additional
paid-in capital of $483,000 resulting from the exercise of employee stock
options and the issuance of restricted stock in connection with the buyout of
one of the Company's exclusive commissioned general agencies. These increases
were offset somewhat by a decline in net unrealized gains on investments of
about $108,000.
Triad's total statutory policyholders' surplus increased to $89.2 million
at June 30, 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 $15.2 million, and
unrealized gains on equity securities of $422,000 offset primarily by an
increase in the statutory contingency reserve of $12.6 million. Triad's
statutory earned surplus was $5.5 million at June 30, 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 $67.4 million at June 30, 1998, compared to
$54.8 million at December 31, 1997.
Substantially all of the Company's existing computer systems which are
integral to its business were originally developed to be year 2000 compliant or
will be reprogrammed. The Company plans to reprogram its existing computer
systems, as necessary, and complete testing of the Company's existing system by
December 31, 1998. Year 2000 compliance costs incurred relating to the Company's
existing computer systems are being expensed and are immaterial. Some of the
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
Company's computer systems integral to its business interface with computer
systems of third parties. Virtually all transactions with systems operated by
third parties involve nationally recognized service bureaus and government
sponsored entities such as Freddie Mac and Fannie Mae. The Company is working
with these third parties to coordinate any necessary testing of year 2000
related system interfaces. As a result, the Company does not anticipate that
year 2000 compliance issues arising from interfaces with third-party systems
will have a material impact on its operations.
The Company also is undertaking modifications and upgrades to enhance its
computer systems and technological capabilities. The Company expects that
aggregate costs of approximately $2.8 million will be expended for this system
conversion and upgrade (approximately $1.1 million has been expended for the
project thus far through June 30, 1998) and that the project will be funded
through cash flow from operations. As a part of the systems enhancement effort,
which should be completed in the first quarter of 1999, management has initiated
a program to insure that the Company's new computer systems and applications are
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 insure that the systems are year 2000 compliant. Most
of the modifications will be made as part of the Company's capital upgrade to
its computer systems throughout the remainder of 1998 and 1999.
Triad's ability to write insurance depends on the maintenance of its
claims-paying ability rating and 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. A number of states
also generally limit Triad's risk-to-capital ratio to 25-to-1. As of June 30,
1998, Triad's risk-to-capital ratio was 15.9-to-1, as compared to 19.3-to-1 at
December 31, 1997, and 17.8-to-1 for the industry as a whole at December 31,
1997, the latest industry data available.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis and this Report contain forward
looking statements 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
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED.
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 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
(c) On April 17, 1998, the Company issued an aggregate of
7,500 shares of its Common Stock to two individuals in
connection with the acquisition of certain business
interests from them valued for this purpose at $298,125.
Exemption from registration is provided under Section
4(2) of the Securities Act of 1933, as amended, and
Regulation D thereunder for transactions by an issuer
not involving any public offering.
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 14, 1998. Shares
entitled to vote at the Annual Meeting totaled 13,302,721, of which 11,383,945
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.
AUTHORIZATION
NAME OF NOMINEE NUMBER OF VOTES FOR WITHHELD
--------------- ------------------- -------------
Robert T. David 11,353,317 30,628
Raymond H. Elliott 11,341,417 42,528
William T. Ratliff,III 11,346,635 37,310
Darryl W. Thompson 11,346,635 37,310
David W. Whitehurst 11,357,735 26,210
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 20,000,000 to 32,000,000.
No other matters came before the Annual Meeting or any adjournments
thereof.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. A. EXHIBITS
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
17
<PAGE>
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, 1998
/s/ Michael R. Oswalt
-----------------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the six months ended June 30, 1998, 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-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 147,390,960
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,848,132
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 164,314,768
<CASH> 2,663
<RECOVER-REINSURE> 10,300
<DEFERRED-ACQUISITION> 13,861,594
<TOTAL-ASSETS> 186,681,456
<POLICY-LOSSES> 9,925,980
<UNEARNED-PREMIUMS> 7,260,468
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,493,752
0
0
<COMMON> 133,262
<OTHER-SE> 123,451,252
<TOTAL-LIABILITY-AND-EQUITY> 186,681,456
24,589,104
<INVESTMENT-INCOME> 4,364,254
<INVESTMENT-GAINS> 274,264
<OTHER-INCOME> 1,039
<BENEFITS> 2,584,000
<UNDERWRITING-AMORTIZATION> 2,635,326
<UNDERWRITING-OTHER> 6,337,531
<INCOME-PRETAX> 16,502,614
<INCOME-TAX> 5,074,664
<INCOME-CONTINUING> 11,427,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,427,950
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
