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, 2000
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 1, 2000:
13,313,194 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999.............................................3
Consolidated Income Statements for the Three Month
Periods Ended March 31, 2000 and 1999 (Unaudited).................4
Consolidated Statements of Cash Flow for the Three Month
Periods Ended March 31, 2000 and 1999 (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..................................14
Signatures................................................................14
2
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value .....$175,159,377 $164,579,416
Equity securities, available-for-sale, at fair value..... 12,883,068 13,075,648
Short-term investments................................... 9,065,258 13,908,666
------------ ------------
197,107,703 191,563,730
Cash..................................................... 1,351,307 215,553
Real estate.............................................. 145,515 145,515
Accrued investment income................................ 2,893,539 2,591,612
Deferred policy acquisition costs........................ 20,697,659 19,906,877
Prepaid federal income taxes ............................ 36,561,666 35,415,666
Property and equipment................................... 6,765,390 5,915,262
Prepaid reinsurance premium.............................. 37,161 34,227
Reinsurance recoverable.................................. 8,037 29,980
Other assets............................................. 7,202,917 7,322,130
------------ ------------
Total assets.............................................$272,770,894 $263,140,552
============ ============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses.................. $14,459,127 $ 14,751,348
Unearned premiums.................................... 6,753,048 6,831,290
Amounts payable to reinsurer ........................ 298,625 319,294
Current taxes payable................................ 70,272 70,272
Deferred income taxes................................ 46,101,587 41,750,341
Unearned ceding commission........................... 358,422 400,521
Long-term debt....................................... 34,463,266 34,461,979
Accrued interest on debt............................. 583,722 1,274,972
Accrued expenses and other liabilities............... 2,873,235 6,208,079
------------ ------------
Total liabilities........................................ 105,961,304 106,068,096
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; issued and
outstanding 13,313,194 shares at March 31, 2000
and 13,303,194 at December 31, 1999................ 133,132 133,032
Additional paid-in capital........................... 62,168,087 61,972,312
Accumulated other comprehensive income, net of
income tax asset of $1,997,960 at March 31, 2000
and $2,546,666 at December 31, 1999............... (3,704,750) (4,723,775)
Deferred compensation................................ (198,696) (69,414)
Retained earnings.................................... 108,411,817 99,760,301
------------ ------------
Total stockholders' equity............................... 166,809,590 157,072,456
------------ ------------
Total liabilities and stockholders' equity...............$272,770,894 $263,140,552
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue:
Premiums written:
Direct.............................................. $18,007,841 $15,107,637
Assumed............................................. 3,840 5,632
Ceded............................................... (948,409) (267,008)
----------- -----------
Net premiums written................................... 17,063,272 14,846,261
Change in unearned premiums............................ 81,176 140,139
----------- -----------
Earned premiums........................................ 17,144,448 14,986,400
Net investment income.................................. 2,925,993 2,448,978
Realized investment gains.............................. 777,881 857,001
Other income........................................... 5,740 4,309
----------- -----------
20,854,062 18,296,688
Losses and expenses:
Losses and loss adjustment expenses.................... 1,570,781 2,922,006
Reinsurance recoveries................................. 25,357 (6,955)
----------- -----------
Net losses and loss adjustment expenses................ 1,596,138 2,915,051
Interest expense on debt............................... 692,538 692,438
Amortization of deferred policy acquisition costs...... 2,000,147 1,716,465
Other operating expenses (net)......................... 4,111,183 3,552,158
----------- -----------
8,400,006 8,876,112
----------- -----------
Income before income taxes............................. 12,454,056 9,420,576
Income taxes:
Current............................................. - - 12,684
Deferred............................................ 3,802,540 2,828,638
----------- -----------
3,802,540 2,841,322
----------- -----------
Net income............................................. $ 8,651,516 $ 6,579,254
=========== ===========
Earnings per common and
common equivalent share:
Basic............................................... $ .65 $ .49
============ ===========
Diluted............................................. $ .63 $ .48
============ ===========
Shares used in computing earnings
per common and common equivalent share:
Basic............................................... 13,309,961 13,358,268
============ ===========
Diluted............................................. 13,655,901 13,687,648
============ ===========
</TABLE>
See accompanying notes
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income................................................ $ 8,651,516 $ 6,579,254
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves..................... (370,463) 2,147,660
Accrued expenses and other liabilities................. (3,334,844) (1,906,674)
Current taxes payable.................................. - - 12,683
Accrued investment income.............................. (301,927) (148,850)
Policy acquisition costs deferred...................... (2,790,930) (2,924,922)
Amortization of policy acquisition costs............... 2,000,147 1,716,465
Net realized investment gains ......................... (777,881) (857,001)
Provision for depreciation............................. 184,045 182,457
Accretion of discount on investments................... (262,067) (270,204)
Deferred income taxes.................................. 3,802,540 2,828,638
Prepaid federal income tax............................. (1,146,000) - -
Real estate acquired in claim settlement............... - - (145,515)
Accrued interest on debt............................... (691,250) (691,250)
Other assets........................................... 119,213 (55,128)
Other operating activities............................. (21,253) 28,490
----------- -----------
Net cash provided by operating activities................. 5,060,846 6,496,103
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.......................... (11,741,828) (9,737,219)
Sales - fixed maturities.............................. 3,377,678 9,648,176
Purchases - equities.................................. (603,291) (1,090,302)
Sales - equities...................................... 1,187,739 1,429,224
Purchases of other invested assets...................... - - (3,000,000)
Purchase of property and equipment...................... (1,034,173) (706,945)
----------- -----------
Net cash used in investing activities..................... (8,813,875) (3,457,066)
Financing activities
Purchase and subsequent retirement of common stock........ - - (2,602,187)
Proceeds from exercise of stock options................... 45,375 137,899
----------- -----------
Net cash provided by (used in) financing activities....... 45,375 (2,464,288)
----------- -----------
Net change in cash and short-term investments............. (3,707,654) 574,749
Cash and short-term investments at beginning of period.... 14,124,219 6,329,392
----------- -----------
Cash and short-term investments at end of period.......... $10,416,565 $ 6,904,141
=========== ===========
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage
Guaranty Tax and Loss Bonds......................... $ 1,146,000 $ - -
Interest.............................................. $ 1,382,500 $ 1,382,500
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
NOTE 3 -- CONSOLIDATION
The consolidated financial statements include Triad Guaranty Inc. and its
wholly-owned subsidiaries. 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.
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
6
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 2000
(Unaudited)
risk for insurance in force at March 31, 2000 and December 31, 1999, 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
2000 1999
Net risk........................... $3,323,158,366 $3,218,850,073
============== ==============
Statutory capital and surplus...... $ 97,369,506 $ 94,602,027
Statutory contingency reserve...... 122,412,748 113,813,344
-------------- --------------
Total.............................. $ 219,782,254 $ 208,415,371
============== ==============
Risk-to-capital ratio.............. 15.1-to-1 15.4-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 $12,297,934 for the three months ended March 31, 2000 and $40,019,488 for
the year ended December 31, 1999.
At March 31, 2000 and December 31, 1999, the amount of Triad's equity that
could be paid out in dividends to stockholders was $13,653,579 and $10,886,099,
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
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.
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 2000
(Unaudited)
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. For the
three month periods ended March 31, 2000 and 1999, the Company's comprehensive
income was $9.7 million and $5.2 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 2000 increased 31.5% to $8.7
million compared to $6.6 million for the first three months of 1999. This
improvement is attributable primarily to a 14.4% increase in earned premiums, a
19.5% increase in net investment income, and a 45.2% decrease in loss and loss
adjustment expenses.
Net income per share on a diluted basis increased 31.8% to $0.63 for the
first three months of 2000 compared to $0.48 per share for the first three
months of 1999. Operating earnings per share were $0.60 for the first quarter of
2000 compared to $0.44 for the first quarter of 1999. Operating earnings exclude
net realized investment gains of approximately $778,000 and $857,000 in the
first three months of 2000 and 1999, respectively.
Net new insurance written was $749 million for the first three months of
2000 as compared to $1.3 billion for the first three months of 1999, a decrease
of 43.7%. The Company also produced approximately $22 million of new insurance
written on seasoned loans in the first quarter of 2000 as compared to
approximately $5 million in the same period of 1999. The decrease in new
insurance written was primarily the result of declines in the industry mortgage
insurance market. Driven by a higher interest rate environment, the total
industry net new mortgage insurance written market decreased 34.6% in the first
quarter of 2000 as compared the first quarter of 1999. According to industry
data, Triad's national market share of net new insurance written was 2.3% for
the first three months of 2000 compared to 2.7% for the first three months of
1999. Total direct insurance in force reached $13.4 billion at March 31, 2000,
compared to $11.7 billion at March 31, 1999, an increase of 14.5%.
Total direct premiums written were $18.0 million for the first three months
of 2000, an increase of 19.2% compared to $15.1 million for the first three
months of 1999. Net premiums written increased by 14.9% to $17.1 million in the
first three months of 2000 compared to $14.8 million for the same period of
1999. Earned premiums increased 14.4% to $17.1 million for the first three
months of 2000 from $15.0 million for the first three months of 1999. This
growth in written and earned premiums resulted from both new insurance written
and an improvement in the Company's persistency. Approximately 41.9% of new
insurance written during 2000 is subject to captive mortgage reinsurance and
other risk-sharing arrangements compared to 22.9% of new insurance written in
1999. Ceded premiums for the first quarter of 2000, which includes third party
reinsurance arrangements as well as captive reinsurance agreements, increased
255% over the same period of 1999. This increase in ceded premiums is due to
more insurance being written under risk-sharing arrangements and the Company's
purchase of additional excess of loss reinsurance to meet rating agency capital
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED
guidelines for expected levels of insurance growth. Management anticipates ceded
premiums will continue to increase as a result of the expected increase in
risk-sharing programs.
Refinance activity was 12.7% of new insurance written in the first quarter
of 2000 compared to 39.8% of insurance written in the first quarter of 1999,
reflecting the rise in interest rates since early 1999. Persistency, or the
amount of insurance in force remaining from one year prior, was 80.8% at March
31, 2000, compared to 68.3% at March 31, 1999, and 77.1% at December 31, 1999.
Persistency for the first quarter of 2000 improved to an annualized rate of
90.1% reflecting the trend of rising interest rates and declining cancellations.
Sales under the Company's monthly premium plan represented 93.8% of new
insurance written in the first quarter of 2000 compared to 96.9% in the same
period of 1999.
Net investment income for the first three months of 2000 was $2.9 million,
a 19.5% increase over $2.4 million in the first three months of 1999. This
increase in investment income is the result of growth in the average book value
of invested assets by $18.3 million to $190.3 million at March 31, 2000, from
$172.0 million at March 31, 1999. The growth in invested assets is attributable
to normal operating cash flow. The yield on average invested assets increased to
6.2% for the first three months of 2000, as compared to 5.7% for the first three
months of 1999. This increase in yield is a result of increased investments into
higher yielding intermediate term securities. The portfolio's tax-equivalent
yield was 7.7% for the first quarter of 2000 versus 7.8% for the first quarter
of 1999. Based on amortized cost, approximately 70% or $128.4 million of the
Company's fixed maturity portfolio at March 31, 2000 was composed of state and
municipal tax-preferred securities as compared to 70% or $107.3 million at March
31, 1999.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 9.3% for the first quarter of 2000 as compared to 19.5% for the first
quarter of 1999 and 11.1% for all of 1999. The Company's favorable loss ratio
reflects the low level of delinquencies compared to the number of insured loans
and the fact that as of March 31, 2000 approximately 79% 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 claim frequencies on future earnings.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
decreased by 45.2% in the first quarter of 2000 to $1.6 million compared to $2.9
million for the same period of 1999. This decrease is reflective of the current
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED
strong economy and the Company's improvement in its delinquency ratio and the
number of reported delinquent loans.
Amortization of deferred policy acquisition costs increased by 16.5% to
$2.0 million in the first three months of 2000 compared to $1.7 million for the
first three months of 1999. The increase in amortization reflects a growing
balance of deferred policy acquisition costs to amortize as the Company builds
its total insurance in force.
Other operating expenses increased 15.7% to $4.1 million for the first
quarter of 2000 compared to $3.6 million for the same period in 1999. This
increase in expenses is primarily attributable to advertising, production,
personnel, technology enhancements, geographic expansion, and the research,
development, and implementation costs associated with risk-sharing structures.
The expense ratio (ratio of underwriting expenses to net premiums written) for
the first quarter of 2000 was 35.8% compared to 35.5% for the first quarter of
1999 and 34.5% for all of 1999.
The effective tax rate for the first three months of 2000 was 30.5% as
compared to 30.2% for the first three months of 1999. 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.
Standard and Poor's Corporation in March 2000 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 confirmed.
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 quarter of 2000 of $5.1 million compared to $6.5 million for the same
period of 1999. The decrease in Triad's operating cash flow reflects increases
in shared premiums due to risk-sharing agreements, paid losses, taxes, and
underwriting expenses that more than offset the growth in new and renewal
premiums.
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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED
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 $197.1 million at March 31, 2000,
compared to $191.6 million at December 31, 1999. Fixed maturity securities and
equity securities classified as available-for-sale totaled $188.0 million at
March 31, 2000. Net unrealized investment gains were $1.5 million on equity
securities, and net unrealized investment losses were $7.2 million on fixed
maturity securities at March 31, 2000. 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, 2000.
The Company's loss reserves were $14.5 million at March 31, 2000, compared
to $14.8 million at December 31, 1999. The loss reserves at March 31, 2000,
reflect the Company's decline in delinquent loans from the levels reported at
December 31, 1999. 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 $21,300 at
March 31, 2000, compared to $21,400 at December 31, 1999. The Company's
delinquency ratio, the ratio of delinquent insured loans to total insured loans,
was 0.61% at March 31, 2000, compared to 0.64% at December 31, 1999.
Total stockholders' equity increased to $166.8 million at March 31, 2000,
from $157.1 million at December 31, 1999. This increase resulted primarily from
net income of $8.7 million for the first quarter of 2000 and the change in net
unrealized gains and losses on invested assets classified as available-for-sale
of $1.0 million (net of income tax).
Triad's total statutory policyholders' surplus increased to $97.4 million
at March 31, 2000, from $94.6 million at December 31, 1999. This increase
resulted primarily from statutory net income of $12.3 million offset by an
increase in the statutory contingency reserve of $8.6 million. Triad's statutory
earned surplus was $13.7 million at March 31, 2000, compared to $10.9 million at
December 31, 1999, reflecting, primarily, growth in statutory net income greater
than the increase in the statutory contingency reserve. Approximately $534,000
and $1.0 million of the statutory earned surplus for March 31, 2000, and
December 31, 1999, respectively, was attributable to unrealized gains. The
balance in the statutory contingency reserve was $122.4 million at March 31,
2000, compared to $113.8 million at December 31, 1999.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED
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, 2000, Triad's risk-to-capital ratio was 15.1-to-1, as compared to
15.4-to-1 at December 31, 1999, and 14.8-to-1 for the industry as a whole at
December 31, 1999, the latest industry data available.
The Company is undertaking modifications and upgrades to enhance its
computer systems and technological capabilities. The Company expects to incur
approximately $5.7 million for this system conversion and upgrade (approximately
$5.1 million in capitalized costs have been incurred for the project through
March 31, 2000) and is funding the project through cash flow from operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis and this Report contain forward
looking statements relating to future plans, expectations, and performance which
involve various risks and uncertainties, including but not limited to the
following: interest rates may increase from their current levels; housing
transactions and mortgage issuance may decrease for many reasons including
changes in interest rates or economic conditions; the Company's market share may
change as a result of changes in underwriting criteria or competitive products
or rates; the amount of new insurance written could be affected by changes in
federal housing legislation, including changes in the Federal Housing
Administration loan limits and coverage requirements of Freddie Mac and Fannie
Mae; the Company's financial condition and competitive position could be
affected by legislation impacting the mortgage guaranty industry specifically
and the financial services industry in general; 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 amount of new insurance
written and the growth of insurance in force or risk in force as well as the
performance of the Company may be adversely impacted by the competitive
environment in the private mortgage insurance industry, including the type,
structure, and pricing of products and services offered by the Company and its
competitors; 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.
13
<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 12, 2000
/s/ Michael R. Oswalt
-------------------------
Michael R. Oswalt
Senior Vice President and Controller,
Principal Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for
the three months ended March 31, 2000, 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-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 175,159,377
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,883,068
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 197,107,703
<CASH> 1,351,307
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 20,697,659
<TOTAL-ASSETS> 272,770,894
<POLICY-LOSSES> 14,459,127
<UNEARNED-PREMIUMS> 6,753,048
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,463,266
0
0
<COMMON> 133,132
<OTHER-SE> 166,676,458
<TOTAL-LIABILITY-AND-EQUITY> 272,770,894
17,144,448
<INVESTMENT-INCOME> 2,925,993
<INVESTMENT-GAINS> 777,881
<OTHER-INCOME> 5,740
<BENEFITS> 1,596,138
<UNDERWRITING-AMORTIZATION> 2,000,147
<UNDERWRITING-OTHER> 4,111,183
<INCOME-PRETAX> 12,454,056
<INCOME-TAX> 3,802,540
<INCOME-CONTINUING> 8,651,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,651,516
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
