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, 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 August 1,
2000: 13,322,194 shares.
<PAGE>
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999.........................................3
Consolidated Income Statements for the Three and Six Month
Periods Ended June 30, 2000 and 1999 (Unaudited)..............4
Consolidated Statements of Cash Flow for the Six Month
Periods Ended June 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 4. Submission of Matters to a Vote of Security Holders...........15
Item 6. Exhibits and Reports on Form 8-K..............................15
Signatures............................................................16
2
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value ... $184,254,040 $164,579,416
Equity securities, available-for-sale, at fair value... 13,209,334 13,075,648
Short-term investments................................. 6,152,882 13,908,666
------------ ------------
203,616,256 191,563,730
Cash................................................... 1,507,548 215,553
Real estate acquired in settlement of claims........... 150,370 145,515
Accrued investment income.............................. 2,718,651 2,591,612
Deferred policy acquisition costs...................... 21,232,951 19,906,877
Prepaid federal income taxes .......................... 43,089,666 35,415,666
Property and equipment................................. 7,710,676 5,915,262
Reinsurance recoverable................................ 1,972 29,980
Other assets........................................... 7,988,836 7,356,357
------------ ------------
Total assets........................................... $288,016,926 $263,140,552
============ ============
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses................ $ 14,571,328 $ 14,751,348
Unearned premiums.................................. 6,665,136 6,831,290
Amounts payable to reinsurer....................... 568,164 319,294
Current taxes payable.............................. 70,272 70,272
Deferred income taxes.............................. 49,559,771 41,750,341
Unearned ceding commission......................... 1,789,050 400,521
Long-term debt..................................... 34,464,579 34,461,979
Accrued interest on debt........................... 1,274,972 1,274,972
Accrued expenses and other liabilities............. 4,109,456 6,208,079
------------ ------------
Total liabilities...................................... 113,072,728 106,068,096
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; 13,316,194
shares issued and outstanding at June 30, 2000
and 13,303,194 at December 31, 1999............... 133,162 133,032
Additional paid-in capital........................... 62,198,558 61,972,312
Accumulated other comprehensive income, net of
income tax asset of $2,215,161 at June 30, 2000
and $2,546,666 at December 31, 1999............... (4,108,123) (4,723,775)
Deferred compensation................................ (177,478) (69,414)
Retained earnings.................................... 116,898,079 99,760,301
------------ ------------
Total stockholders' equity............................. 174,944,198 157,072,456
------------ ------------
Total liabilities and stockholders' equity............. $288,016,926 $263,140,552
============ ============
</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
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums written:
Direct........................................... $18,828,514 $15,945,500 $36,836,354 $31,053,137
Assumed.......................................... 1,892 3,677 5,732 9,309
Ceded............................................ (1,112,400) (455,834) (2,060,808) (722,842)
----------- ----------- ----------- -----------
Net premiums written................................ 17,718,006 15,493,343 34,781,278 30,339,604
Change in unearned premiums......................... 117,697 (32,982) 198,873 107,157
----------- ----------- ----------- -----------
Earned premiums..................................... 17,835,703 15,460,361 34,980,151 30,446,761
Net investment income............................... 3,067,447 2,637,248 5,993,440 5,086,226
Realized investment gains........................... 35,803 175,239 813,684 1,032,240
Other income........................................ 5,625 5,135 11,365 9,444
----------- ----------- ----------- -----------
20,944,578 18,277,983 41,798,640 36,574,671
Losses and expenses:
Losses and loss adjustment expenses................. 2,052,470 1,353,935 3,623,251 4,275,940
Reinsurance recoveries.............................. 7,230 1,055 32,587 (5,900)
----------- ----------- ----------- -----------
Net losses and loss adjustment expenses............. 2,059,700 1,354,990 3,655,838 4,270,040
Interest expense on debt............................ 692,563 702,479 1,385,100 1,394,917
Amortization of deferred policy acquisition costs... 2,027,741 1,752,797 4,027,889 3,469,262
Other operating expenses (net)...................... 4,002,720 3,726,325 8,113,902 7,278,483
----------- ----------- ----------- -----------
8,782,724 7,536,591 17,182,729 16,412,702
----------- ----------- ----------- -----------
Income before income taxes.......................... 12,161,854 10,741,392 24,615,911 20,161,969
Income taxes:
Current.......................................... 208 1,746 208 14,430
Deferred......................................... 3,675,384 3,294,717 7,477,924 6,123,355
----------- ----------- ----------- -----------
3,675,592 3,296,463 7,478,132 6,137,785
----------- ----------- ----------- -----------
Net income.......................................... $ 8,486,262 $ 7,444,929 $17,137,779 $14,024,184
=========== =========== =========== ===========
Earnings per common and
common equivalent share:
Basic............................................ $ .64 $ .56 $ 1.29 $ 1.05
=========== =========== ============ ===========
Diluted.......................................... $ .62 $ .55 $ 1.25 $ 1.03
=========== =========== ============ ===========
Shares used in computing earnings per
common and common equivalent share:
Basic............................................ 13,313,293 13,292,694 13,311,647 13,325,306
=========== =========== ============ ===========
Diluted.......................................... 13,674,441 13,576,596 13,665,191 13,631,947
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income............................................... $ 17,137,779 $ 14,024,184
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss and unearned premium reserves.................... (346,174) 2,416,315
Accrued expenses and other liabilities................ (2,098,623) (947,460)
Current taxes payable................................. --- 14,224
Accrued investment income............................. (127,039) (197,803)
Policy acquisition costs deferred..................... (5,353,963) (5,668,978)
Amortization of policy acquisition costs.............. 4,027,889 3,469,262
Net realized investment gains ........................ (813,684) (1,032,240)
Provision for depreciation............................ 364,009 367,101
Accretion of discount on investments.................. (583,941) (540,376)
Deferred income taxes................................. 7,477,924 6,123,355
Prepaid federal income tax............................ (7,674,000) (3,881,000)
Unearned ceding commission ........................... 1,388,529 (146,112)
Real estate acquired in claim settlement.............. (4,855) (145,515)
Other assets.......................................... (599,759) (603,743)
Other operating activities............................ 289,196 754,032
------------ ------------
Net cash provided by operating activities................ 13,083,288 14,005,246
Investing activities
Securities available-for-sale:
Purchases - fixed maturities........................ (23,513,548) (22,712,451)
Sales - fixed maturitie.s........................... 5,811,889 19,418,026
Purchases - equities................................ (1,089,501) (3,845,139)
Sales - equities.................................... 1,327,630 2,629,342
Purchases of other invested assets.................... --- (3,000,000)
Purchase of property and equipment.................... (2,159,423) (1,384,399)
------------ ------------
Net cash used in investing activities.................... (19,622,953) (8,894,621)
Financing activities
Purchase and subsequent retirement of common stock....... --- (2,602,187)
Proceeds from exercise of stock options.................. 75,876 137,899
------------ ------------
Net cash provided by (used in) financing activities...... 75,876 (2,464,288)
------------ ------------
Net change in cash and short-term investments............ (6,463,789) 2,646,337
Cash and short-term investments at beginning of period... 14,124,219 6,329,392
------------ ------------
Cash and short-term investments at end of period......... $ 7,660,430 $ 8,975,729
============ ============
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds.................................. $ 7,674,208 $ 3,881,205
Interest.............................................. $ 1,382,500 $ 1,382,500
</TABLE>
See accompanying notes.
5
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six month periods ended June
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
June 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 June 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:
June 30, December 31,
2000 1999
Net risk.......................... $ 3,468,931,315 $ 3,218,850,073
=============== ===============
Statutory capital and surplus..... $ 98,231,806 $ 94,602,027
Statutory contingency reserve..... 131,456,247 113,813,344
--------------- ---------------
Total............................. $ 229,688,053 $ 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 $23,606,073 for the six months ended June 30, 2000 and $40,019,488 for the
year ended December 31, 1999.
At June 30, 2000 and December 31, 1999, the amount of Triad's equity that
could be paid out in dividends to stockholders was $14,515,878 and $10,886,099,
respectively, which was the earned surplus of Triad on a statutory basis on
those dates.
7
<PAGE>
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June 30, 2000
(Unaudited)
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 June 30, 2000 and 1999, the Company's comprehensive
income was $8.1 million and $4.9 million, respectively. For the six month
periods ended June 30, 2000 and 1999, the Company's comprehensive income was
$17.8 million and $10.1 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 2000 increased 22.2% to $17.1
million compared to $14.0 million for the first six months of 1999. Net income
for the second quarter of 2000 increased 14.0% to $8.5 million compared to $7.4
million for the second quarter of 1999. This improvement is attributable
primarily to a 14.9% (15.4% in the second quarter) increase in earned premiums,
a 17.8% (16.3% in the second quarter) increase in net investment income, and a
14.4% decrease in net loss and loss adjustment expenses.
Net income per share on a diluted basis increased 21.9% to $1.25 for the
first six months of 2000 compared to $1.03 per share for the first six months of
1999. Net income per share for the second quarter of 2000 was $0.62 on a diluted
basis compared to $0.55 per share for the same period of 1999. Operating
earnings per share were $1.22 for the first half of 2000 compared to $0.98 for
the first half of 1999, an increase of 24.1%. Operating earnings exclude net
realized investment gains of approximately $814,000 and $1.0 million in the
first half of 2000 and 1999, respectively.
Net new insurance written was $1.9 billion for the first six months of 2000
as compared to $2.5 billion for the first six months of 1999, a decrease of
24.1%. For the second quarter, net new insurance written totaled $1.1 billion in
both 2000 and 1999. The decrease in new insurance written for the six months was
primarily the result of declines in the industry mortgage insurance market,
however this decline in the industry market moderated somewhat in the second
quarter. Driven by a higher interest rate environment, the total industry net
new mortgage insurance written market decreased 25.3% in the first half of 2000
as compared to the first half of 1999. According to industry data, Triad's
national market share of net new insurance written was 2.7% for the second
quarter and 2.5% for the first six months of 2000 as compared to 2.3% and 2.5%
for the respective periods in 1999. Total direct insurance in force reached
$14.0 billion at June 30, 2000, compared to $12.1 billion at June 30, 1999, an
increase of 15.4%.
Direct premiums written were $36.8 million for the first six months of
2000, an increase of 18.6% compared to $31.1 million for the first six months of
1999. Net premiums written increased by 14.6% to $34.8 million in the first six
months of 2000 compared to $30.3 million for the same period of 1999. Earned
premiums increased 14.9% to $35.0 million for the first six months of 2000 from
$30.4 million for the first six 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 41.1% 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 half of 2000, which includes third party reinsurance
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED.
arrangements as well as captive reinsurance agreements, increased 185% 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 12.8% of new insurance written in the first half of
2000 compared to 34.1% of insurance written in the first half 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 83.2% at June
30, 2000, compared to 66.6% at June 30, 1999, and 77.1% at December 31, 1999.
Sales under the Company's monthly premium plan represented 95.2% of new
insurance written in the first half of 2000 compared to 96.8% in the same period
of 1999.
Net investment income for the first six months of 2000 was $6.0 million, a
17.8% increase over $5.1 million in the first six months of 1999. Net investment
income for the second quarter of 2000 was $3.1 million, a 16.3% increase over
the second quarter of 1999. This increase in investment income is the result of
growth in the average book value of invested assets by $27.0 million to $203.9
million at June 30, 2000, from $176.9 million at June 30, 1999. The growth in
invested assets is attributable to normal operating cash flow. The yield on
average invested assets increased to 5.9% for the first six months of 2000, as
compared to 5.8% for the first six 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 7.9% for the first half of
2000 versus 7.8% for the first half of 1999. Based on amortized cost,
approximately 70% or $134.8 million of the Company's fixed maturity portfolio at
June 30, 2000, was composed of state and municipal tax-preferred securities as
compared to 72% or $113.0 million at June 30, 1999.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 10.5% for the first half of 2000 as compared to 14.0% for the first half of
1999 and 11.1% for all of 1999. The loss ratio was 11.5% for the second quarter
of 2000 compared to 8.8% for the second 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 June 30, 2000, approximately 77% 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
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED.
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 14.4% in the first six months of 2000 to $3.7 million compared to
$4.3 million for the same period of 1999. Net losses and loss adjustment
expenses for the second quarter of 2000 and 1999 were $2.1 million and $1.4
million, respectively. This year-to-date decrease is reflective of the current
strong economy, claim mitigation efforts, and fewer severely defaulted policies
as compared to a year ago.
Amortization of deferred policy acquisition costs increased by 16.1% to
$4.0 million in the first six months of 2000 compared to $3.5 million for the
first six months of 1999. These costs were $2.0 million for the second quarter
of 2000 compared to $1.8 million for the second quarter of 1999, an increase of
15.7%. 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 11.5% to $8.1 million for the first six
months of 2000 compared to $7.3 million for the same period in 1999. For the
second quarter of 2000, other operating expenses increased to $4.0 million from
$3.7 million in the second quarter of 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 half of
2000 was 34.9% compared to 35.4% for the first half of 1999 and 34.5% for all of
1999. The expense ratio for the second quarter of 2000 was 34.0% compared to
35.4% for the second quarter of 1999.
The effective tax rate was 30.4% for the first six months of 2000 and 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED.
The Company generated positive cash flow from operating activities for the
first six months of 2000 of $13.1 million compared to $14.0 million for the same
period of 1999. The decrease in Triad's operating cash flow reflects increases
in shared premiums and fee payments due to reinsurance and 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.
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 $203.6 million at June 30, 2000, compared
to $191.6 million at December 31, 1999. Fixed maturity securities and equity
securities classified as available-for-sale totaled $197.5 million at June 30,
2000. Net unrealized investment gains were $1.4 million on equity securities,
and net unrealized investment losses were $7.8 million on fixed maturity
securities at June 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 June 30, 2000.
The Company's loss reserves were $14.6 million at June 30, 2000, compared
to $14.8 million at December 31, 1999. The loss reserves at June 30, 2000,
reflect a slight decrease in severity of the Company's 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 $21,000 at June 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 0.60% at June 30, 2000, compared to 0.64% at December 31,
1999.
Total stockholders' equity increased to $174.9 million at June 30, 2000,
from $157.1 million at December 31, 1999. This increase resulted primarily from
net income of $17.1 million for the first half of 2000 and by the change in net
unrealized gains and losses on invested assets classified as available-for-sale
of $616,000 (net of income tax).
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED.
Triad's total statutory policyholders' surplus increased to $98.2 million
at June 30, 2000, from $94.6 million at December 31, 1999. This increase
resulted primarily from statutory net income of $23.6 million offset by an
increase in the statutory contingency reserve of $17.6 million. Triad's
statutory earned surplus was $14.5 million at June 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 $288,000 and $1.0 million of the statutory earned surplus for June
30, 2000, and December 31, 1999, respectively, was attributable to unrealized
gains. The balance in the statutory contingency reserve was $131.5 million at
June 30, 2000, compared to $113.8 million at December 31, 1999.
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, 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 $7.2 million for this system conversion and upgrade (approximately
$6.2 million in capitalized costs have been incurred for the project through
June 30, 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED.
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
The Annual Meeting of Stockholders was held on May 18, 2000. Shares
entitled to vote at the Annual Meeting totaled 13,313,194 of which 12,266,848
shares were represented at the meeting.
At the Annual Meeting, the following five director 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 12,208,626 58,222
Raymond H. Elliott 12,208,626 58,222
William T. Ratliff, III 12,201,126 65,722
Darryl W. Thompson 12,100,617 166,231
David W. Whitehurst 12,201,126 65,722
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
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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 14, 2000
/s/ Michael R. Oswalt
------------------------
Michael R. Oswalt
Senior Vice President and Controller,
Principal Accounting Officer
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