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, 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 August 2,
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 June 30, 1999 (Unaudited)
and December 31, 1998..............................................3
Consolidated Income Statements for the Three and Six Month
Periods Ended June 30, 1999 and 1998 (Unaudited)...................4
Consolidated Statements of Cash Flow for the Six Month
Periods Ended June 30, 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 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
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value ... $ 154,981,641 $ 157,391,829
Equity securities, available-for-sale, at fair value... 16,412,403 14,024,012
Short-term investments................................. 8,953,370 5,885,192
Other invested assets.................................. 3,089,747 --
------------- -------------
183,437,161 177,301,033
Cash................................................... 22,359 444,200
Real estate acquired in settlement of claims........... 145,515 ---
Accrued investment income.............................. 2,366,934 2,258,878
Deferred policy acquisition costs...................... 18,215,275 16,015,559
Property and equipment................................. 4,461,694 3,446,656
Prepaid reinsurance premium............................ 9,898 14,703
Reinsurance recoverable................................ 32,002 610,817
Other assets........................................... 5,767,667 5,163,924
------------- -------------
Total assets........................................... $ 214,458,505 $ 205,255,770
============= =============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses................ $ 14,671,267 $ 12,142,990
Unearned premiums.................................. 6,942,775 7,054,737
Current taxes payable.............................. 60,011 45,787
Deferred income taxes.............................. 8,044,660 7,930,878
Unearned ceding commission......................... 475,049 621,161
Long-term debt..................................... 34,459,480 34,457,080
Accrued interest on debt........................... 1,274,972 1,274,972
Accrued expenses and other liabilities............. 3,374,767 4,196,825
------------- -------------
Total liabilities...................................... 69,302,981 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
shares issued and outstanding at June 30, 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 (benefit) of ($27,403)
at June 30, 1999 and $2,101,170 at
December 31, 1998................................ (45,144) 3,907,920
Deferred compensation.............................. (86,768) ---
Retained earnings.................................. 83,374,174 71,950,718
------------- --------------
Total stockholders' equity............................. 145,155,524 137,531,340
------------- -------------
Total liabilities and stockholders' equity............. $ 214,458,505 $ 205,255,770
============= =============
</TABLE>
See accompanying notes
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct..........................................$ 15,945,500 $12,765,965 $ 31,053,137 $ 24,335,699
Assumed......................................... 3,677 3,106 9,309 8,927
Ceded........................................... (455,834) (236,972) (722,842) (477,471)
------------ ----------- ------------ ------------
Net premiums written............................... 15,493,343 12,532,099 30,339,604 23,867,155
Change in unearned premiums........................ (32,982) 126,749 107,157 721,949
------------ ----------- ------------ ------------
Earned premiums.................................... 15,460,361 12,658,848 30,446,761 24,589,104
Net investment income.............................. 2,637,248 2,325,686 5,086,226 4,364,254
Realized investment gains.......................... 175,239 158,750 1,032,240 274,264
Other income....................................... 5,135 569 9,444 1,039
------------ ----------- ------------ ------------
18,277,983 15,143,853 36,574,671 29,228,661
Losses and expenses:
Losses and loss adjustment expenses................ 1,353,935 1,102,813 4,275,940 2,582,517
Reinsurance recoveries............................. 1,055 3,955 (5,900) 1,483
------------ ----------- ------------ ------------
Net losses and loss adjustment expenses............ 1,354,990 1,106,768 4,270,040 2,584,000
Interest expense on debt........................... 702,479 692,302 1,394,917 1,169,190
Amortization of deferred policy acquisition costs.. 1,752,797 1,362,618 3,469,262 2,635,326
Other operating expenses (net)..................... 3,726,325 3,246,071 7,278,483 6,337,531
------------ ----------- ------------ ------------
7,536,591 6,407,759 16,412,702 12,726,047
------------ ----------- ------------ ------------
Income before income taxes......................... 10,741,392 8,736,094 20,161,969 16,502,614
Income taxes:
Current......................................... 1,746 213 14,430 426
Deferred........................................ 3,294,717 2,691,127 6,123,355 5,074,238
------------ ----------- ------------ ------------
3,296,463 2,691,340 6,137,785 5,074,664
------------ ----------- ------------ ------------
Net income.........................................$ 7,444,929 $ 6,044,754 $ 14,024,184 $ 11,427,950
============ =========== ============ ============
Earnings per common and
common equivalent share:
Basic........................................... $.56 $.45 $1.05 $.86
============ =========== ============ ============
Diluted......................................... $.55 $.44 $1.03 $.82
============ =========== ============ ============
Shares used in computing earnings per
common and common equivalent share:
Basic........................................... 13,292,694 13,313,901 13,325,306 13,307,755
============ =========== ============ ============
Diluted......................................... 13,576,596 13,866,624 13,631,947 13,868,608
============ =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income................................................. $14,024,184 $11,427,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves...................... 2,416,315 237,695
Accrued expenses and other liabilities.................. (947,460) (44,140)
Current taxes payable................................... 14,224 4
Accrued investment income............................... (197,803) (613,343)
Policy acquisition costs deferred....................... (5,668,978) (3,909,565)
Amortization of policy acquisition costs................ 3,469,262 2,635,326
Net realized investment gains .......................... (1,032,240) (274,264)
Provision for depreciation.............................. 367,101 408,371
Accretion of discount on investments.................... (540,376) (456,009)
Deferred income taxes................................... 2,242,355 122,720
Accrued interest on debt................................ --- 1,167,444
Real estate acquired in claim settlement................ (145,515) 141,999
Other assets............................................ (603,743) (860,688)
Other operating activities.............................. 607,920 ---
----------- -----------
Net cash provided by operating activities.................. 14,005,246 9,983,500
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.......................... (22,712,451) (55,453,677)
Sales - fixed maturities.............................. 19,418,026 7,529,296
Purchases - equities.................................. (3,845,139) (3,839,720)
Sales - equities...................................... 2,629,342 4,264,323
Purchases of other invested assets...................... (3,000,000) ---
Purchases of property and equipment..................... (1,384,399) (778,697)
----------- -----------
Net cash used in investing activities...................... (8,894,621) (48,278,475)
Financing activities
Proceeds from issuance of long term debt................... --- 34,493,752
Purchase and subsequent retirement of common stock......... (2,602,187) ---
Proceeds from exercise of stock options.................... 137,899 185,163
----------- -----------
Net cash (used in) provided by financing activities........ (2,464,288) 34,678,915
----------- -----------
Net change in cash and short-term investments.............. 2,646,337 (3,616,060)
Cash and short-term investments at beginning of period..... 6,329,392 8,694,399
----------- -----------
Cash and short-term investments at end of period........... $ 8,975,729 $ 5,078,339
=========== ===========
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds.................................... $ 3,881,205 $ 4,869,426
Interest................................................ $ 1,382,500 $ ---
Non-cash investing and finance activities:
Exchange of restricted common stock for
intangible asset...................................... $ --- $ 298,125
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ended June
30, 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 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, 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 June 30, 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:
June 30, December 31,
1999 1998
---- ----
Net risk............................ $ 2,993,506,867 $ 2,776,205,499
================ ================
Statutory capital and surplus....... $ 91,750,336 $ 89,539,785
Statutory contingency reserve....... 96,895,092 81,614,277
---------------- ----------------
Total............................... $ 188,645,428 $ 171,154,062
================ ================
Risk-to-capital ratio............... 15.9-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 $18,021,213 for the six months ended June 30, 1999 and $31,252,891 for the
year ended December 31, 1998.
At June 30, 1999 and December 31, 1998, the amount of Triad's equity that
could be paid out in dividends to stockholders was $8,034,409 and $5,823,857,
respectively, which was the earned surplus of Triad on a statutory basis on
those dates.
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
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June 30, 1999
(Unaudited)
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 June 30, 1999 and 1998,
the Company's comprehensive income was $4.9 million and $6.0 million,
respectively. For the six month periods ended June 30, 1999 and 1998, the
Company's comprehensive income was $10.1 million and $11.3 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 six months of 1999 increased 22.7% to $14.0
million compared to $11.4 million in the first six months of 1998. Net income
for the second quarter of 1999 increased 23.2% to $7.4 million compared to $6.0
million for the second quarter of 1998. This improvement was primarily
attributable to a 23.8% (22.1% in the second quarter) increase in earned
premiums, a 16.5% (13.4% in the second quarter) increase in net investment
income, $1.0 million in realized investment gains, a favorable loss ratio and an
improved expense ratio.
Net income per share on a diluted basis increased 24.8% to $1.03 for the
first six months of 1999 compared to $0.82 per share for the first six months of
1998. Net income per share for the second quarter of 1999 was $0.55 on a diluted
basis compared to $0.44 per share for the same period of 1998. Operating
earnings per share were $0.98 for the first half of 1999 compared to $0.81 for
the first half of 1998, an increase of 20.8%. Operating earnings exclude net
realized investment gains of approximately $1.0 million and $274,000 in the
first half of 1999 and 1998, respectively.
Net new insurance written was $2.5 billion for the first six months of 1999
as compared to $2.0 billion for the first six months of 1998, an increase of
20.8%. For the second quarter, net new insurance written totaled $1.1 billion in
1999 compared to $1.2 billion in 1998. The Company also produced approximately
$8 million of new insurance written on seasoned loans in the first half of 1999
compared to $171 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, was 2.5% for the first six months of 1999 compared to
2.5% reported for the first six 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 six months of 1999 which caused home buying and
refinance activities to remain strong. Refinance activity was 34.1% of new
insurance written in the first six months of 1999 compared to 33.8% in the first
six months of 1998. Total direct insurance in force reached $12.1 billion at
June 30, 1999, compared to $10.1 billion at June 30, 1998, an increase of 19.8%.
Total direct premiums written were $31.1 million for the first six months
of 1999, an increase of 27.6% compared to $24.3 million for the first six months
of 1998. Net premiums written increased by 27.1% to $30.3 million for the first
six months of 1999 compared to $23.9 million for the same period in 1998. Earned
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
premiums increased 23.8% to $30.4 million for the first six months of 1999 from
$24.6 million for the first six months 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 insurance remaining in force from one year prior, was 66.6% at
June 30, 1999, compared to 70.0% at December 31, 1998.
Net investment income for the first half of 1999 was $5.1 million, a 16.5%
increase over $4.4 million for the same period in 1998. Net investment income
for the second quarter of 1999 was $2.6 million, a 13.4% increase over the
second quarter of 1998. This increase in investment income is the result of
growth in the average book value of invested assets by $35.7 million to $176.9
million at June 30, 1999, from $141.2 million at June 30, 1998. The growth in
average invested assets is attributable to normal operating cash flow. The yield
on average invested assets declined to 5.8% for the first six months of 1999
compared to 6.2% 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 six months of 1999 and 8.0% for the
first six months of 1998. Approximately 72% or $113.0 million of the Company's
fixed maturity portfolio at June 30, 1999, was composed of state and municipal
tax-preferred securities as compared to 68% at June 30, 1998.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 14.0% for the first six months of 1999 as compared to 10.5% for the same
period of 1998 and 13.3% for all of 1998. The loss ratio was 8.8% for the second
quarter of 1999 compared to 8.7% for the second quarter 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 80% of the Company's
insurance in force was originated in the last 36 months. The increase in the
loss ratio in the first half 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
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
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 65.2% in the first six months of 1999 to $4.3 million compared to
$2.6 million in the first six months of 1998. Net losses and loss adjustment
expenses for the second quarter of 1999 and 1998 were $1.4 million and $1.1
million, respectively. 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 31.6% to
$3.5 million in the first six months of 1999 compared to $2.6 million for the
first six months of 1998. These costs were $1.8 million for the second quarter
of 1999 compared to $1.4 for the second quarter of 1998, an increase of 28.6%.
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 half
of 1999.
Other operating expenses increased 14.8% to $7.3 million for the first six
months of 1999 as compared to $6.3 million for the same period in 1998. For the
second quarter of 1999, other operating expenses increased to $3.7 million from
$3.2 million in the second quarter of 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 six months of 1999 was 35.4% compared to 37.6% for the first six
months of 1998 and 35.4% for all of 1998. The expense ratio for the second
quarter of 1998 improved to 35.4% from 36.8% reported a year earlier.
Contributing to this improvement is the higher level of written premiums in the
first half of 1999 partially offset by the increase in expenses.
The effective tax rate for the first half of 1999 was 30.4% compared to
30.8% in the first half 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 six months of 1999 of $14.0 million compared to $10.0 million for the
first six 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 other than for enhancements to its computer systems and
technological capabilities. 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.
Consolidated invested assets were $183.4 million at June 30, 1999,
including $171.4 million classified as available-for-sale. Net unrealized
investment gains were $2.7 million on equity securities and net unrealized
investment losses were $2.8 million on fixed maturity securities at June 30,
1999. The fixed maturity portfolio consisted of approximately 72% municipal
securities, 23% corporate securities, 4% U.S. government obligations, and 1%
mortgage-backed bonds at June 30, 1999.
The Company's loss reserves increased to $14.7 million at June 30, 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 $21,100 at June 30, 1999,
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
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 0.67% at
June 30, 1999, compared to 0.53% at December 31, 1998.
The Company's unearned premium reserve of $6.9 million at June 30, 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 $145.2 million at June 30, 1999,
from $137.5 million at December 31, 1998. This increase resulted primarily from
net income of $14.0 million for the first six months of 1999 offset by a
decrease in net unrealized gains on invested assets classified as
available-for-sale of $4.0 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 increased to $91.8 million
at June 30, 1999, from $89.5 million at December 31, 1998. This increase
resulted primarily from statutory net income of $18.0 million offset by an
increase in the statutory contingency reserve of $15.3 million. Triad's
statutory earned surplus was $8.0 million at June 30, 1999, compared to $5.8
million at December 31, 1998, reflecting growth in statutory net income and
unrealized gains on equity securities greater than the increase in the statutory
contingency reserve. Approximately $2.0 and $1.9 million of the statutory earned
surplus for June 30, 1999, and December 31, 1998, respectively, was attributable
to unrealized gains. The balance in the statutory contingency reserve was $96.9
million at June 30, 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 $2.8 million in capitalized costs have been incurred for the
project through June 30, 1999) and is funding the project through cash flow from
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 June
30, 1999, and December 31, 1998, Triad's risk-to-capital ratio was 15.9-to-1 and
16.2-to-1, respectively, as compared to 14.8-to-1 for the industry as a whole at
December 31, 1998, the latest industry data available.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
YEAR 2000 ISSUE
The Company is dependent on processes that have been automated and are
completely handled by computers. In the past, computer programs were written
using only two digits to identify a year in the date field. Although this has
worked well it could present problems as companies move into the year 2000 due
to the fact that the two digits "00" may be read as "1900" rather than "2000".
This technical problem may cause computer programs to fail or create erroneous
results.
In 1997, the Company began conducting a review and analysis of all computer
hardware and software and created a plan to address potential problems relating
to Year 2000 concerns. Due to the fact that Triad began operations less than
twelve years ago the Company's hardware and software represent, for the most
part, relatively new technology. As computer programs have been created, in many
cases, programmers have had the foresight to include a 4-digit year. Many
programs and equipment have only recently been added to the existing
configuration. The Company has concluded its assessment of potential Year 2000
issues and believes that its internal exposure to Year 2000 concerns are
minimal.
STATE OF READINESS. The Company defines 'Year 2000 Compliant' to mean that
hardware and software will continue to work accurately and without failure
before, during and after the date changes to January 1, 2000 with neither
functionality nor performance being affected by the date change. With this as
the Company's goal, the plan developed to ensure that the Company is Year 2000
compliant has six major steps: 1) define possible problem areas, 2) research
potential issues, 3) make corrections, 4) conduct preliminary tests, 5)
implement final changes, 6) review and complete testing. As a part of this plan,
the Company maintains communication with its strategic business partners and
customers to advise of its progress and subsequent completion of its compliance
testing.
The first step involves identifying every aspect of the Company's business
that may be computerized or may interface with a process that is computerized.
Research includes contacting hardware and software vendors/suppliers. Each
vendor/supplier has been required to present evidence of Year 2000 compliance
for all hardware and software licensed for use by the Company. In a few cases,
the Company's equipment was not compliant and replacements/upgrades have been
initiated.
In late 1997, the Company began testing its operating software and programs
written in-house. The review of this internal software was completed and
modifications were made and tested. The Company has worked with all interfacing
partners and customers to test both Triad's changes and the changes implemented
by its business partners and customers. Telecommunication equipment and other
peripherals not normally associated with computer systems have also been
verified and tested. The Company has complied with requirements put forth by the
government sponsored enterprises ("GSEs") and has been an active participant in
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
the MBA Year 2000 Readiness Project. As of March 31, 1999, the Company believes
that its major systems are Year 2000 compliant.
COSTS. For the most part, the Company's existing computer systems were
originally developed to be Year 2000 compliant. The current hardware and
software have not required a significant overhaul to become Year 2000 compliant.
As part of the Company's Year 2000 compliance plan, internal personnel and
outside resources were used to address the identified hardware and software
issues necessary to ensure compliance. Expenses relating to the Year 2000
compliance testing are expensed as incurred and are immaterial. As of June 30,
1999, the project is complete with the exception of final contingency plan
implementations.
RISKS. Should any of the Company's efforts to become Year 2000 compliant
prove to be inadequate or ineffective, possible interruptions to critical
business operations could occur. Many of the critical business functions involve
processes that can be accomplished through multiple methods. While the Company's
primary method of operation involves the transmission and receipt of electronic
data, it also has the capability to handle most of its processes manually.
Should there be a Year 2000 problem with the electronic transmission process,
the Company expects that it would be able to substitute manual processing until
the electronic means could be recovered. For instance, loan and claim
submissions are primarily non-electronic. All internal processes have been
thoroughly tested; however, should a problem occur, non-complex subsystems are
available which should allow for quick recovery. The Company's internal analysts
and developers who have been integral in the testing of the Company's systems
are expected to be available to assist in handling any disruptions. The Company
also relies on many external parties to provide critical pieces to its business
functions. Although these external parties have verified their individual Year
2000 compliance, the Company could potentially be adversely affected if their
computer systems are disrupted by the Year 2000 problem.
CONTINGENCY PLANS. The Company's contingency plan is designed to limit, as
much as possible, the disruption that a failure relating to Year 2000 concerns
could cause. The Company is assessing all critical business functions, weighing
whether or not each can be delayed, and prioritizing their degree of impact.
Because the Company's business processes go well beyond the automated functions,
all employees are involved in the contingency planning process. As part of the
contingency plan the Company is performing employee skill assessments, updating
documentation, cross training employees and developing methods to manually
handle processes that may fail electronically. Special Year 2000 employee
guidelines are being created to convey to all Company employees the
expectations, responsibilities, and authority levels necessary. The Company is
also reviewing alternate communication methods and reevaluating security
measures of current systems. The Company's development, testing and assessment
of its contingency plan will continue through 1999.
15
<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; 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.
16
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 13, 1999. Shares
entitled to vote at the Annual Meeting totaled 13,292,694, of which 12,100,140
shares were represented at the meeting.
At the Annual Meeting, the following five directors were elected. Also
shown are the number of shares cast for and authorization withheld for each
nominee.
Name of Nominee Number of Votes for Authorization
Withheld
Robert T. David 12,072,890 27,250
Raymond H. Elliott 12,072,890 27,250
William T. Ratliff,III 12,072,890 27,250
Darryl W. Thompson 12,069,278 30,862
David W. Whitehurst 12,072,890 27,250
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 13, 1999
/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, 1999, 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-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 154,981,641
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,412,403
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 183,437,161
<CASH> 22,359
<RECOVER-REINSURE> 1,249
<DEFERRED-ACQUISITION> 18,215,275
<TOTAL-ASSETS> 214,458,505
<POLICY-LOSSES> 14,671,267
<UNEARNED-PREMIUMS> 6,942,775
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,459,480
0
0
<COMMON> 132,927
<OTHER-SE> 145,022,597
<TOTAL-LIABILITY-AND-EQUITY> 214,458,505
30,446,761
<INVESTMENT-INCOME> 5,086,226
<INVESTMENT-GAINS> 1,032,240
<OTHER-INCOME> 9,444
<BENEFITS> 4,270,040
<UNDERWRITING-AMORTIZATION> 3,469,262
<UNDERWRITING-OTHER> 7,278,483
<INCOME-PRETAX> 20,161,969
<INCOME-TAX> 6,137,785
<INCOME-CONTINUING> 14,024,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,024,184
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
