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, 1999
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, 1999:
13,292,694 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998.............................................3
Consolidated Income Statements for the Three Month
Periods Ended March 31, 1999 and 1998 (Unaudited) ................4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1999 and 1998 (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
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value ...... $156,410,369 $157,391,829
Equity securities, available-for-sale, at fair value...... 13,741,415 14,024,012
Short-term investments.................................... 6,509,994 5,885,192
Other invested assets..................................... 3,000,000 ---
------------ ------------
179,661,778 177,301,033
Cash...................................................... 394,147 444,200
Accrued investment income................................. 2,407,728 2,258,878
Deferred policy acquisition costs......................... 17,224,016 16,015,559
Property and equipment.................................... 3,971,366 3,446,656
Prepaid reinsurance premium............................... 11,953 14,703
Reinsurance recoverable................................... 501,553 610,817
Other assets.............................................. 5,364,567 5,163,924
------------ ------------
Total assets.............................................. $209,537,108 $205,255,770
============ ============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses................... $14,433,539 $ 12,142,990
Unearned premiums..................................... 6,911,848 7,054,737
Current taxes payable................................. 58,470 45,787
Deferred income taxes................................. 10,012,727 7,930,878
Unearned ceding commission............................ 515,508 621,161
Long-term debt........................................ 34,458,268 34,457,080
Accrued interest on debt.............................. 583,722 1,274,972
Accrued expenses and other liabilities................ 2,294,936 4,196,825
------------ ------------
Total liabilities......................................... 69,269,018 67,724,430
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; 13,292,694 issued
and outstanding shares at March 31, 1999 and
13,408,869 at December 31, 1998..................... 132,927 134,089
Additional paid-in capital............................ 61,780,335 61,538,613
Accumulated other comprehensive income, net
of income tax liability of $1,354,382 at
March 31, 1999 and $2,101,170 at December 31, 1998. 2,521,028 3,907,920
Deferred compensation................................. (95,445) ---
Retained earnings..................................... 75,929,245 71,950,718
------------ ------------
Total stockholders' equity................................ 140,268,090 137,531,340
------------ ------------
Total liabilities and stockholders' equity................ $209,537,108 $205,255,770
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Premiums written:
Direct........................................... $15,107,637 $11,569,733
Assumed.......................................... 5,632 5,821
Ceded............................................ (267,008) (240,499)
----------- -----------
Net premiums written................................ 14,846,261 11,335,055
Change in unearned premiums......................... 140,139 595,201
----------- -----------
Earned premiums..................................... 14,986,400 11,930,256
Net investment income............................... 2,448,978 2,038,569
Realized investment gains........................... 857,001 115,513
Other income........................................ 4,309 470
----------- -----------
18,296,688 14,084,808
Losses and expenses:
Losses and loss adjustment expenses................. 2,922,006 1,479,704
Reinsurance recoveries.............................. (6,955) (2,472)
----------- -----------
Net losses and loss adjustment expenses............. 2,915,051 1,477,232
Interest expense on debt............................ 692,438 476,888
Amortization of deferred policy acquisition costs... 1,716,465 1,272,708
Other operating expenses (net)...................... 3,552,158 3,091,460
----------- -----------
8,876,112 6,318,288
----------- -----------
Income before income taxes.......................... 9,420,576 7,766,520
Income taxes:
Current.......................................... 12,684 213
Deferred......................................... 2,828,638 2,383,111
----------- -----------
2,841,322 2,383,324
----------- -----------
Net income.......................................... $ 6,579,254 $ 5,383,196
=========== ===========
Earnings per common and
common equivalent share:
Basic............................................ $ .49 $ .40
=========== ===========
Diluted.......................................... $ .48 $ .39
=========== ===========
Shares used in computing earnings
per common and common equivalent share:
Basic............................................ 13,358,268 13,301,554
=========== ===========
Diluted.......................................... 13,687,648 13,870,538
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income........................................... $ 6,579,254 $ 5,383,196
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves................ 2,147,660 70,916
Accrued expenses and other liabilities............ (1,906,674) (634,126)
Current taxes payable............................. 12,683 4
Accrued investment income......................... (148,850) (529,136)
Policy acquisition costs deferred................. (2,924,922) (1,903,445)
Amortization of policy acquisition costs.......... 1,716,465 1,272,708
Net realized investment gains .................... (857,001) (115,513)
Provision for depreciation........................ 182,457 206,811
Accretion of discount on investments.............. (270,204) (197,715)
Deferred income taxes............................. 2,828,638 1,417,594
Real estate acquired in claim settlement.......... (145,515) 141,999
Accrued interest on debt.......................... (691,250) 476,194
Other assets...................................... (55,128) (354,661)
Other operating activities........................ 28,490 - -
----------- ------------
Net cash provided by operating activities............ 6,496,103 5,234,826
Investing activities Securities available-for-sale:
Purchases - fixed maturities..................... (9,737,219) (38,143,846)
Sales - fixed maturities......................... 9,648,176 3,814,529
Purchases - equities............................. (1,090,302) (3,160,977)
Sales - equities................................. 1,429,224 2,763,701
Purchases of other invested assets................. (3,000,000) - -
Purchase of property and equipment................. (706,945) (356,555)
----------- ------------
Net cash used in investing activities................ (3,457,066) (35,083,148)
Financing activities
Proceeds from issuance of long term debt............. - - 34,500,923
Purchase and subsequent retirement of common stock... (2,602,187) - -
Proceeds from exercise of stock options.............. 137,899 41,250
----------- -----------
Net cash (used in) provided by financing activities.. (2,464,288) 34,542,173
----------- -----------
Net change in cash and short-term investments........ 574,749 4,693,851
Cash and short-term investments at beginning
of period......................................... 6,329,392 8,694,398
------------ ------------
Cash and short-term investments at end of period..... $ 6,904,141 $13,388,249
============ ============
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
Interest......................................... $1,382,500 $ - -
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998.
NOTE 3 -- CONSOLIDATION
The consolidated financial statements include 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
March 31, 1999
(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, 1999 and December 31, 1998, 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
1999 1998
Net risk........................... $2,890,203,444 $2,776,205,499
============== ==============
Statutory capital and surplus...... $ 89,421,867 $ 89,539,785
Statutory contingency reserve...... 89,044,412 81,614,277
Total.............................. $ 178,466,279 $ 171,154,062
============== ==============
Risk-to-capital ratio.............. 16.2-to-1 16.2-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 $8,724,920 for the three months ended March 31, 1999 and $31,252,891 for the
year ended December 31, 1998.
At March 31, 1999 and December 31, 1998, the amount of Triad's equity that
could be paid out in dividends to stockholders was $5,705,939 and $5,823,857,
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
March 31, 1999
(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
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. For the three month periods ended March 31, 1999 and 1998,
the Company's comprehensive income was $5.2 million and $5.3 million,
respectively.
8
<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 1999 increased 22.2% to $6.6
million compared to $5.4 million in the first three months of 1998. This
improvement was primarily attributable to a 25.6% increase in earned premiums, a
20.1% increase in net investment income, and $857,000 in realized investment
gains, offset by a higher combined loss and expense ratio.
Net income per share on a diluted basis increased 23.9% to $0.48 for the
first three months of 1999 compared to $0.39 per share for the first three
months of 1998. Operating earnings per share were $0.44 for the first three
months of 1999 compared to $0.38 for the first three months of 1998, an increase
of 15.8%. Operating earnings exclude net realized investment gains of
approximately $857,000 and $116,000 in the first three months 1999 and 1998,
respectively.
Net new insurance written was $1.3 billion for the first three months of
1999 as compared to $860 million for the first three months of 1998, an increase
of 54.5%. The Company also produced approximately $5 million of new insurance
written on seasoned loans in the first quarter of 1999 compared to $41 million
in the same period of 1998. 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, which is calculated based on net new insurance written, increased
to 2.7% for the first three months of 1999 compared to 2.5% reported for the
first three months of 1998 and 2.6% for all of 1998.
The growth in new insurance written also reflects the favorable interest
rate environment in the first three months of 1999 which caused home buying and
refinance activities to remain strong. Refinance activity was 39.8% of new
insurance written in the first three months of 1999 compared to 34.3% in the
first three months of 1998. Total direct insurance in force reached $11.7
billion at March 31, 1999, compared to $9.5 billion at March 31, 1998, an
increase of 23.7%.
Total direct premiums written were $15.1 million for the first three months
of 1999, an increase of 30.6% compared to $11.6 million for the first three
months of 1998. Net premiums written increased by 31.0% to $14.8 million for the
first three months of 1999 compared to $11.3 million for the same period in
1998. Earned premiums increased 25.6% to $15.0 million for the first three
months of 1999 from $11.9 million for the first quarter of 1998. This growth in
written and earned premium resulted from the increase in new insurance written
offset by a decline in the Company's persistency rate. The Company's
persistency, or the percentage of policies remaining in force from one year
prior, was 70.6% compared to 73.4% for all of 1998. This low level of
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
persistency can be expected to cause future renewal premiums to be lower than
would have been expected, which would, in turn, have an adverse effect on
earnings.
Net investment income for the first quarter of 1999 was $2.4 million, a
20.1% increase over $2.0 million for the same period in 1998. This increase in
investment income is the result of growth in the average book value of invested
assets by $39.0 million to $172.0 million at March 31, 1999, from $133.0 million
at March 31, 1998. The growth in average 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 declined to
5.7% for the first three months of 1999 compared to 6.1% for the same period of
1998 reflecting the Company's continued investment strategy to emphasize tax
preferred securities which yield lower pre-tax rates than similar fully taxable
securities. The portfolio's tax-equivalent yield was 7.8% for the first three
months of both 1999 and 1998. Approximately 70% or $107.3 million of the
Company's fixed maturity portfolio at March 31, 1999, was composed of state and
municipal tax-preferred securities as compared to 67% at March 31, 1998.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 19.5% for the 1999 first quarter as compared to 12.4% for the same period of
1998 and 13.3% for all of 1998. The Company's favorable loss ratio reflects the
low level of delinquencies compared to the number of insured loans and the fact
that approximately 79% of the Company's insurance in force was originated in the
last 36 months. The increase in the loss ratio in the first quarter of 1999
reflects both the higher number of reported delinquencies and the impact that
low persistency has had on earned premiums. 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.
10
<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 97.3% in the first three months of 1999 to $2.9 million compared to
$1.5 million in the first three months of 1998. This 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 34.9% to
$1.7 million in the first three months of 1999 compared to $1.3 million for the
first three months of 1998. 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 due to refinance
activity during the first quarter of 1999.
In January 1998, the Company completed a $35.0 million private offering of
notes due January 15, 2028, which bear interest at a rate of 7.9% per annum.
Interest expense relating to this debt was $692,000 for the first quarter of
1999 compared to $477,000 for the first quarter of 1998.
Standard & Poor's Corporation in February 1999 affirmed the "AA" Financial
Strength and counterparty credit rating of Triad. In addition, the "A" issuer
credit rating and senior debt rating of the Company were also affirmed.
Other operating expenses increased 14.9% to $3.6 million for the first
three months of 1999 as compared to $3.1 million for the same period in 1998.
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 1999 was 35.5% compared to 38.5% for the first quarter
of 1998 and 35.4% for all of 1998. Contributing to this improvement between the
quarterly periods is the higher level of written premiums in the first quarter
of 1999 partially offset by the increase in expenses.
The effective tax rate for the first quarter of 1999 was 30.2% compared to
30.7% in the first quarter of 1998. This decrease is primarily the result of the
increase in investment in tax preferred securities. 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
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, interest, expenses, and taxes.
The Company generated positive cash flow from operating activities for the
first three months of 1999 of $6.5 million compared to $5.2 million for the
first three months of 1998. 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, interest, and other expenses.
The Company's business does not routinely require significant capital
expenditures. Positive cash flows are invested pending future payments of claims
and expenses. Cash flow shortfalls, if any, could be funded through sales of
short term investments and other investment portfolio securities.
The parent company's cash flow is dependent on interest income and payments
from Triad including cash dividends, management fees, and interest payments
under surplus notes. 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 reimbursed by Triad in the form of management fees.
In December 1998, the Company announced that its Board of Directors had
authorized the purchase of up to $3.0 million of the Company's outstanding
Common Stock. Through March 31, 1999, the Company had purchased 146,000 shares
of its common stock for approximately $2.6 million. The Company funded the
purchase of these shares through the sale of invested assets.
Consolidated invested assets were $179.7 million at March 31, 1999,
including $170.2 million classified as available-for-sale. Net unrealized
investment gains were $1.8 million on equity securities and $2.1 million on
fixed maturity securities at March 31, 1999. The fixed maturity portfolio
consisted of approximately 70% municipal securities, 23% corporate securities,
6% U.S. government obligations, and 1% mortgage-backed bonds at March 31, 1999.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
The Company's loss reserves increased to $14.4 million at March 31, 1999,
compared to $12.1 million at December 31, 1998. 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 $20,600 at March 31, 1999,
compared to $23,400 at December 31, 1998. The Company's delinquency ratio, the
ratio of reported delinquent insured loans to total insured loans, was 0.70% at
March 31, 1999, compared to 0.53% at December 31, 1998.
The Company's unearned premium reserve of $6.9 million at March 31, 1999,
decreased from $7.1 million at December 31, 1998. This decline is primarily
attributable 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 $140.3 million at March 31, 1999,
from $137.5 million at December 31, 1998. This increase resulted primarily from
net income of $6.6 million for the first three months of 1999 offset by a
decrease in net unrealized gains on invested assets classified as
available-for-sale of $1.4 million (net of income tax) and the retirement of
146,000 shares of the Company's stock purchased for $2.6 million.
Triad's total statutory policyholders' surplus decreased to $89.4 million
at March 31, 1999, from $89.5 million at December 31, 1998. This decrease
resulted primarily from statutory net income of $8.7 million offset by a an
increase in the statutory contingency reserve of $7.4 million and a decrease in
unrealized gains on equity securities of $1.2 million. Triad's statutory earned
surplus was $5.7 million at March 31, 1999, compared to $5.8 million at December
31, 1998, reflecting growth in statutory net income greater than the increase in
the statutory contingency reserve offset by the decrease in unrealized gains in
equity securities. Approximately $780,000 and $1.9 million of the statutory
earned surplus for March 31, 1999, and December 31, 1998, respectively, was
attributable to unrealized gains. The balance in the statutory contingency
reserve was $89.0 million at March 31, 1999, compared to $81.6 million at
December 31, 1998.
The Company is undertaking modifications and upgrades to enhance its
computer systems and technological capabilities. The Company expects to incur
between $3.0 to $4.0 million for this system conversion and upgrade
(approximately $2.2 million in capitalized costs have been incurred for the
project through March 31, 1999) and is funding the project through cash flow
from operations.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED
All of the Company's existing computer systems which are integral to its
business were originally developed to be year 2000 compliant or were
reprogrammed to be compliant. The Company completed its testing during the first
quarter of 1999 and based on this testing the Company believes that it does not
have material exposure relating to the year 2000 compliance issue. Year 2000
compliance costs relating to the Company's existing computer systems were
expensed as incurred and are immaterial. Some of the 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 worked with these third parties to
coordinate necessary testing of year 2000 related system interfaces. As a result
of this testing, the Company does not anticipate that year 2000 compliance
issues arising from interfaces with third-party systems will have a material
adverse impact on its operations.
Triad's ability to write insurance depends on the maintenance of its
claims-paying ability ratings 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
March 31, 1999, and December 31, 1999, Triad's risk-to-capital ratio was
16.2-to-1 as compared to 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; decreases in persistency, which are affected by loan refinancings in
periods of low interest rates, may have an adverse effect on earnings; 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 effect
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
------- -----------
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 14, 1999
/s/ Michael R. Oswalt
---------------------
Michael R. Oswalt
Vice President and Controller,
Principal Accounting Officer
15
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the three months ended March 31, 1999, 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-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 156,410,369
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,741,415
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 179,661,778
<CASH> 394,147
<RECOVER-REINSURE> 924
<DEFERRED-ACQUISITION> 17,224,016
<TOTAL-ASSETS> 209,537,108
<POLICY-LOSSES> 14,433,539
<UNEARNED-PREMIUMS> 6,911,848
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,458,268
0
0
<COMMON> 132,927
<OTHER-SE> 140,135,163
<TOTAL-LIABILITY-AND-EQUITY> 209,537,108
14,986,400
<INVESTMENT-INCOME> 2,448,978
<INVESTMENT-GAINS> 857,001
<OTHER-INCOME> 4,309
<BENEFITS> 2,915,051
<UNDERWRITING-AMORTIZATION> 1,716,465
<UNDERWRITING-OTHER> 3,552,158
<INCOME-PRETAX> 9,420,576
<INCOME-TAX> 2,841,322
<INCOME-CONTINUING> 6,579,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,579,254
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
