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 September 30, 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 November 1,
2000: 13,337,194 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999............................................3
Consolidated Income Statements for the Three and Nine Month
Periods Ended September 30, 2000 and 1999 (Unaudited)............4
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 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
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets (Unaudited)
Invested assets:
Fixed maturities, available-for-sale, at fair value ........ $193,412,851 $164,579,416
Equity securities, available-for-sale, at fair value........ 13,462,860 13,075,648
Short-term investments...................................... 9,558,970 13,908,666
------------ ------------
216,434,681 191,563,730
Cash........................................................ 854,786 215,553
Real estate acquired in settlement of claims................ --- 145,515
Accrued investment income................................... 3,011,006 2,591,612
Deferred policy acquisition costs........................... 21,978,338 19,906,877
Prepaid federal income taxes ............................... 46,174,666 35,415,666
Property and equipment...................................... 8,726,117 5,915,262
Reinsurance recoverable..................................... 6,916 29,980
Other assets................................................ 8,661,562 7,356,357
------------ ------------
Total assets................................................ $305,848,072 $263,140,552
============ ============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses..................... $ 14,994,832 $ 14,751,348
Unearned premiums....................................... 6,901,873 6,831,290
Amounts payable to reinsurer............................ 961,284 319,294
Current taxes payable................................... 70,274 70,272
Deferred income taxes................................... 54,755,044 41,750,341
Unearned ceding commission.............................. 1,635,351 400,521
Long-term debt.......................................... 34,465,919 34,461,979
Accrued interest on debt................................ 583,722 1,274,972
Accrued expenses and other liabilities.................. 5,188,728 6,208,079
------------ ------------
Total liabilities........................................... 119,557,027 106,068,096
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; 13,325,194 shares
issued and outstanding at September 30, 2000 and
13,303,194 at December 31, 1999......................... 133,252 133,032
Additional paid-in capital................................ 62,268,718 61,972,312
Accumulated other comprehensive income, net of
income tax asset of $1,261,382 at September 30, 2000
and $2,546,666 at December 31, 1999..................... (2,336,819) (4,723,775)
Deferred compensation..................................... (156,259) (69,414)
Retained earnings......................................... 126,382,153 99,760,301
------------ ------------
Total stockholders' equity.................................. 186,291,045 157,072,456
------------ ------------
Total liabilities and stockholders' equity.................. $305,848,072 $263,140,552
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct.......................................... $19,643,199 $17,033,429 $56,479,553 $48,086,566
Assumed......................................... 1,310 4,238 7,042 13,547
Ceded........................................... (1,351,124) (402,691) (3,411,933) (1,125,533)
----------- ----------- ----------- -----------
Net premiums written............................... 18,293,385 16,634,976 53,074,662 46,974,580
Change in unearned premiums........................ (222,812) (130,101) (23,938) (22,944)
----------- ----------- ----------- -----------
Earned premiums.................................... 18,070,573 16,504,875 53,050,724 46,951,636
Net investment income.............................. 3,155,999 2,657,110 9,149,439 7,743,336
Realized investment gains.......................... 906,172 (33,890) 1,719,856 998,350
Other income....................................... 7,500 3,500 18,865 12,944
----------- ----------- ----------- -----------
22,140,244 19,131,595 63,938,884 55,706,266
Losses and expenses:
Losses and loss adjustment expenses................ 1,940,536 1,525,266 5,563,788 5,801,207
Reinsurance recoveries............................. (8,171) (6,651) 24,416 (12,551)
----------- ----------- ----------- -----------
Net losses and loss adjustment expenses............ 1,932,365 1,518,615 5,588,204 5,788,656
Interest expense on debt........................... 692,590 692,487 2,077,690 2,087,404
Amortization of deferred policy acquisition costs.. 2,083,299 1,744,618 6,111,187 5,213,879
Other operating expenses (net)..................... 3,706,422 3,815,904 11,820,324 11,094,387
----------- ----------- ----------- -----------
8,414,676 7,771,624 25,597,405 24,184,326
----------- ----------- ----------- -----------
Income before income taxes......................... 13,725,568 11,359,971 38,341,479 31,521,940
Income taxes:
Current......................................... --- (2,144) 208 12,286
Deferred........................................ 4,241,494 3,488,049 11,719,418 9,611,404
----------- ----------- ----------- -----------
4,241,494 3,485,905 11,719,626 9,623,690
----------- ----------- ----------- -----------
Net income......................................... $ 9,484,074 $ 7,874,066 $26,621,853 $21,898,250
=========== =========== =========== ===========
Earnings per common and
common equivalent share:
Basic........................................... $ .71 $ .59 $ 2.00 $ 1.64
============ =========== =========== ===========
Diluted......................................... $ .69 $ .58 $ 1.94 $ 1.61
============ =========== =========== ===========
Shares used in computing earnings per
common and common equivalent share:
Basic........................................... 13,321,574 13,296,118 13,314,971 13,315,470
============ =========== =========== ===========
Diluted......................................... 13,753,179 13,633,130 13,694,535 13,632,235
============ =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------
2000 1999
<S> <C> <C>
Operating activities
Net income............................................... $26,621,853 $21,898,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves.................... 314,067 2,811,483
Accrued expenses and other liabilities................ (1,019,351) 544,629
Amounts due to/from reinsurer......................... 618,410 790,314
Accrued investment income............................. (419,394) (490,862)
Policy acquisition costs deferred..................... (8,182,648) (8,181,460)
Amortization of policy acquisition costs.............. 6,111,187 5,213,879
Net realized investment gains ........................ (1,719,856) (998,350)
Provision for depreciation............................ 562,042 539,757
Accretion of discount on investments.................. (1,022,675) (788,322)
Deferred income taxes................................. 11,719,418 9,611,404
Prepaid federal income taxes ......................... (10,759,000) (6,874,000)
Unearned ceding commission............................ 1,234,830 (186,558)
Accrued interest on debt.............................. (691,250) (691,250)
Real estate acquired in claim settlement.............. 145,515 (145,515)
Other assets.......................................... (1,190,963) (1,233,690)
----------- -----------
Net cash provided by operating activities................ 22,322,185 21,819,709
Investing activities
Securities available-for-sale:
Purchases - fixed maturities......................... (35,469,807) (36,005,234)
Sales - fixed maturities............................. 11,806,158 24,185,777
Purchases - equities................................. (1,663,169) (4,095,139)
Sales - equities..................................... 2,520,941 2,989,878
Purchases of other invested assets..................... --- (3,000,000)
Purchase of property and equipment..................... (3,372,897) (2,450,488)
----------- -----------
Net cash used in investing activities.................... (26,178,774) (18,375,206)
Financing activities
Purchase and subsequent retirement of common stock....... --- (2,602,187)
Proceeds from exercise of stock options.................. 146,126 172,274
----------- -----------
Net cash provided by financing activities................ 146,126 (2,429,913)
----------- -----------
Net change in cash and short-term investments............ (3,710,463) 1,014,590
Cash and short-term investments at beginning of period... 14,124,219 6,329,392
----------- -----------
Cash and short-term investments at end of period......... $10,413,756 $ 7,343,982
=========== ===========
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds.................................. $ 10,759,208 $ 6,874,205
Interest.............................................. $ 2,765,000 $ 2,775,017
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine month periods ended
September 30, 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 - Triad assumes and cedes certain premiums and losses from/to
reinsurers under various reinsurance agreements. Reinsurance contracts do not
relieve Triad from its obligations to policyholders. Failure of the reinsurer to
honor its obligation could result in losses to Triad; consequently, allowances
are established for amounts when deemed uncollectible.
6
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
September 30, 2000
(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 September 30, 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:
September 30, December 31,
2000 1999
Net risk......................... $3,575,609,500 $3,218,850,073
============== ==============
Statutory capital and surplus.... $ 101,702,192 $ 94,602,027
Statutory contingency reserve.... 140,564,039 113,813,344
-------------- --------------
Total............................ $ 242,266,231 $ 208,415,371
============== ==============
Risk-to-capital ratio............ 14.8-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. Triad Re Insurance Corporation, a subsidiary
of Triad and domiciled in Vermont, is required under the Vermont Insurance Code
to maintain minimum statutory capital and surplus of $1,000,000 and is subject
to certain dividend limitations.
Net income as determined in accordance with statutory accounting practices
was $37,214,320 for the nine months ended September 30, 2000 and $40,019,488 for
the year ended December 31, 1999.
At September 30, 2000 and December 31, 1999, the amount of Triad's equity
that could be paid out in dividends to stockholders was $17,986,264 and
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
September 30, 2000
(Unaudited)
$10,886,099, respectively,which was the earned surplus of Triad on a statutory
basis on those dates.
LOSS RESERVES - Triad 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 Triad. 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. For the
three month periods ended September 30, 2000 and 1999, the Company's
comprehensive income was $11.3 million and $5.3 million, respectively. For the
nine month periods ended September 30, 2000 and 1999, the Company's
comprehensive income was $29 million and $15.4 million, respectively.
NOTE 7 - - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), which was effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. Management does not anticipate the adoption of SFAS 133 will have a
significant effect on the Company's results of operations or its financial
position due to its limited use of derivative instruments.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Net income for the first nine months of 2000 increased 21.6% to $26.6
million compared to $21.9 million for the first nine months of 1999. Net income
for the third quarter of 2000 increased 20.4% to $9.5 million compared to $7.9
million for the third quarter of 1999. This improvement is attributable
primarily to a 13.0% (9.5% in the third quarter) increase in earned premiums, an
18.2% (18.8% in the third quarter) increase in net investment income, $1.7
million in realized investment gains, and an improved combined loss and expense
ratio.
Net income per share on a diluted basis increased 21.0% to $1.94 for the
first nine months of 2000 compared to $1.61 per share for the first nine months
of 1999. Net income per share for the third quarter of 2000 was $0.69 on a
diluted basis compared to $0.58 per share for the same period of 1999. Operating
earnings per share were $1.86 for the first nine months of 2000 compared to
$1.56 for the first nine months of 1999, an increase of 19.5%. Operating
earnings exclude net realized investment gains of approximately $1.7 million and
$1.0 million in the first nine months of 2000 and 1999, respectively.
Net new insurance written was $3.1 billion for the first nine months of
2000 as compared to $3.5 billion for the first nine months of 1999, a decrease
of 13.4%. For the third quarter, net new insurance written totaled $1.2 billion
in 2000 compared to $1.1 billion in 1999. The decrease in new insurance written
for the nine months was primarily the result of declines in the industry
mortgage insurance market; however this market decline moderated somewhat in the
third quarter. Driven by a higher interest rate environment, the total industry
net new mortgage insurance written market decreased 19.8% in the first nine
months of 2000 as compared to the first nine months of 1999. According to
industry data, Triad's national market share of net new insurance written was
2.6% for both the third quarter and for the first nine months of 2000 as
compared to 2.2% and 2.4% for the respective periods in 1999. Total direct
insurance in force reached $14.5 billion at September 30, 2000, compared to
$12.6 billion at September 30, 1999, an increase of 14.5%.
Direct premiums written were $56.5 million for the first nine months of
2000, an increase of 17.5% compared to $48.1 million for the first nine months
of 1999. Net premiums written increased by 13.0% to $53.1 million in the first
nine months of 2000 compared to $47.0 million for the same period of 1999.
Earned premiums increased 13.0% to $53.1 million for the first nine months of
2000 from $47.0 million for the first nine 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 43.6% 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 all of
1999. Ceded premiums for the first nine months of 2000, which includes third
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
party reinsurance arrangements as well as captive reinsurance agreements,
increased 203% 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 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 12.3% of new insurance written in the first nine
months of 2000 compared to 28.3% of insurance written in the first nine months
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 82.1% at
September 30, 2000, compared to 68.0% at September 30, 1999, and 77.1% at
December 31, 1999.
Net investment income for the first nine months of 2000 was $9.1 million,
an 18.2% increase over $7.7 million in the first nine months of 1999. Net
investment income for the third quarter of 2000 was $3.2 million, an 18.8%
increase over the third quarter of 1999. This increase in investment income is
the result of growth in the average book value of invested assets by $27.6
million to $207.9 million at September 30, 2000, from $180.3 million at
September 30, 1999. The growth in invested assets is attributable to normal
operating cash flow. The pre-tax yield on average invested assets increased to
5.9% for the first nine months of 2000, as compared to 5.7% for the first nine
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 8.0% for the first nine months of 2000 versus 7.8% for the first nine
months of 1999. Based on amortized cost, approximately 69% or $137.9 million of
the Company's fixed maturity portfolio at September 30, 2000, was composed of
state and municipal tax-preferred securities as compared to 73% or $120.7
million at September 30, 1999.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 10.5% for the first nine months of 2000 as compared to 12.3% for the first
nine months of 1999 and 11.1% for all of 1999. The loss ratio was 10.7% for the
third quarter of 2000 compared to 9.2% for the third quarter 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 September 30, 2000,
approximately 75% 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.
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)
decreased by 3.5% in the first nine months of 2000 to $5.6 million compared to
$5.8 million for the same period of 1999. Net losses and loss adjustment
expenses for the third quarter of 2000 and 1999 were $1.9 million and $1.5
million, respectively. The overall decrease in net losses year-to-date is
reflective of the current strong economy, claim mitigation efforts, and
improvements in the severity of defaulted policies. The increase in net losses
for the quarter reflects slightly higher reported delinquencies compared to one
year ago.
Amortization of deferred policy acquisition costs increased by 17.2% to
$6.1 million in the first nine months of 2000 compared to $5.2 million for the
first nine months of 1999. These costs were $2.1 million for the third quarter
of 2000 compared to $1.7 million for the third quarter of 1999, an increase of
19.4%. 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 6.5% to $11.8 million for the first nine
months of 2000 compared to $11.1 million for the same period in 1999. This
increase in expenses for the nine month period is primarily attributable to
advertising, production, personnel, technology enhancements, geographic
expansion, and the research, development, and implementation costs associated
with risk-sharing structures. For the third quarter of 2000, other operating
expenses were $3.7 million, down slightly from $3.8 million in the third quarter
of 1999. The expense ratio (ratio of underwriting expenses to net premiums
written) for the first nine months of 2000 was 33.8% compared to 34.7% for the
first nine months of 1999 and 34.5% for all of 1999. The expense ratio for the
third quarter of 2000 was 31.6% compared to 33.4% for the third quarter of 1999.
The effective tax rate was 30.6% for the first nine months of 2000 compared
to 30.5% for the first nine 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.
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 nine months of 2000 of $22.3 million compared to $21.8 million for the
same period of 1999. The increase in Triad's operating cash flow reflects the
growth in insurance written, new and renewal premium, and investment income,
partially offset by the increase in paid claims and underwriting expenses.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
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 $216.4 million at September 30, 2000,
compared to $191.6 million at December 31, 1999. Fixed maturity securities and
equity securities classified as available-for-sale totaled $206.9 million at
September 30, 2000. Net unrealized investment gains were $1.8 million on equity
securities, and net unrealized investment losses were $5.4 million on fixed
maturity securities at September 30, 2000. The fixed maturity portfolio
consisted of approximately 70% municipal securities, 22% corporate securities,
7% U.S. government obligations, and 1% mortgage-backed bonds at September 30,
2000.
The Company's loss reserves were $15.0 million at September 30, 2000,
compared to $14.8 million at December 31, 1999. This growth is the result of
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 $20,300 at September 30, 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 0.62% at September
30, 2000, compared to 0.64% at December 31, 1999.
Total stockholders' equity increased to $186.3 million at September 30,
2000, from $157.1 million at December 31, 1999. This increase resulted primarily
from net income of $26.6 million for the first nine months of 2000 and by the
change in net unrealized gains and losses on invested assets classified as
available-for-sale of $2.4 million (net of income tax).
Triad's total statutory policyholders' surplus increased to $101.7 million
at September 30, 2000, from $94.6 million at December 31, 1999. This increase
resulted primarily from statutory net income of $37.2 million offset by an
increase in the statutory contingency reserve of $26.8 million. Triad's
statutory earned surplus was $18.0 million at September 30, 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 $399,000 and $1.0 million of the statutory earned surplus for
September 30, 2000, and December 31, 1999, respectively, was attributable to net
unrealized capital gains. The balance in the statutory contingency reserve was
$140.6 million at September 30, 2000, compared to $113.8 million at December 31,
1999.
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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
September 30, 2000, Triad's risk-to-capital ratio was 14.8-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 $7.9 million for this system conversion and upgrade (approximately
$7.0 million in capitalized costs have been incurred for the project through
September 30, 2000) and is funding the project through cash flow from
operations. Management anticipates that this new system will be amortized over a
60 month period for GAAP purposes and that amortization will commence upon
completion of the system conversion. Management anticipates that amortization of
the new system will commence during the fourth quarter of 2000 or the first
quarter of 2001.
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 or decrease 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.
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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 No. Description
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27 Financial Data Schedule
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: November 14, 2000
/s/ Michael R. Oswalt
-------------------------------------
Michael R. Oswalt
Senior Vice President and Controller,
Principal Accounting Officer
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