Triad Guaranty Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2005
or
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o |
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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)
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Delaware
(State of Incorporation)
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56-1838519
(I.R.S. Employer Identification Number) |
101 South Stratford Road
Winston-Salem, North Carolina 27104
(Address of principal executive offices)
(336) 723-1282
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as described in Exchange Act
Rule 12b-2) Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No o
Number of shares of Common Stock, $0.01 par value, outstanding as of November 2, 2005:
14,773,469 shares.
TRIAD GUARANTY INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited) |
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September 30 |
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December 31 |
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2005 |
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2004 |
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(In thousands, except share data) |
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ASSETS
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Invested assets: |
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Securities available-for-sale, at fair value: |
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|
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Fixed maturities (amortized cost: $495,341 and $435,432) |
|
$ |
512,555 |
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$ |
454,121 |
|
Equity securities (cost: $8,004 and $8,626) |
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|
9,715 |
|
|
|
10,272 |
|
Short-term investments |
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|
16,027 |
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|
|
16,095 |
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|
|
|
|
|
|
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538,297 |
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|
480,488 |
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Cash |
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|
1,391 |
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|
6,865 |
|
Real estate acquired in claim settlement |
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|
2,684 |
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|
|
211 |
|
Accrued investment income |
|
|
6,555 |
|
|
|
6,229 |
|
Deferred policy acquisition costs |
|
|
33,332 |
|
|
|
32,453 |
|
Prepaid federal income taxes |
|
|
132,947 |
|
|
|
119,132 |
|
Property and equipment |
|
|
8,157 |
|
|
|
8,945 |
|
Income taxes recoverable |
|
|
1,139 |
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|
|
977 |
|
Reinsurance recoverable |
|
|
991 |
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|
1,164 |
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Other assets |
|
|
16,720 |
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|
|
15,571 |
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Total assets |
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$ |
742,213 |
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|
$ |
672,035 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities: |
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Losses and loss adjustment expenses |
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$ |
41,823 |
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|
$ |
34,042 |
|
Unearned premiums |
|
|
14,148 |
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|
|
15,942 |
|
Amounts payable to reinsurer |
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|
4,656 |
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|
|
4,467 |
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Deferred income taxes |
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|
152,444 |
|
|
|
137,925 |
|
Unearned ceding commission |
|
|
51 |
|
|
|
200 |
|
Long-term debt |
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34,499 |
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|
34,493 |
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Accrued interest on debt |
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|
584 |
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|
1,275 |
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Current taxes payable |
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|
576 |
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|
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Accrued expenses and other liabilities |
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6,501 |
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|
6,348 |
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Total liabilities |
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255,282 |
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234,692 |
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Commitments and contingencies Note 4 |
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Stockholders equity: |
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Preferred stock, par value $0.01 per share authorized
1,000,000 shares; no shares issued and outstanding |
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Common stock, par value $0.01 per share authorized
32,000,000 shares; issued and outstanding 14,818,506 shares
at September 30, 2005 and 14,631,678 shares at December 31, 2004 |
|
|
148 |
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|
146 |
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Additional paid-in capital |
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|
103,274 |
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|
94,852 |
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Accumulated other comprehensive income, net of income tax
liability of $6,624 at September 30, 2005 and $7,117 at
December 31, 2004 |
|
|
12,301 |
|
|
|
13,218 |
|
Deferred compensation |
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|
(3,674 |
) |
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|
(1,501 |
) |
Retained earnings |
|
|
374,882 |
|
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|
330,628 |
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|
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Total stockholders equity |
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|
486,931 |
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|
437,343 |
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Total liabilities and stockholders equity |
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$ |
742,213 |
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$ |
672,035 |
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See accompanying notes.
1
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2005 |
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2004 |
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2005 |
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2004 |
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(Dollars in thousands, except per share information) |
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Revenue: |
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Premiums written: |
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Direct |
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$ |
53,272 |
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$ |
45,453 |
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$ |
152,158 |
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$ |
128,798 |
|
Ceded |
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(10,299 |
) |
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(9,137 |
) |
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(29,863 |
) |
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(25,859 |
) |
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Net premiums written |
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|
42,973 |
|
|
|
36,316 |
|
|
|
122,295 |
|
|
|
102,939 |
|
Change in unearned premiums |
|
|
1,155 |
|
|
|
(497 |
) |
|
|
1,731 |
|
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|
875 |
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Earned premiums |
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44,128 |
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|
35,819 |
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|
124,026 |
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|
103,814 |
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|
|
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Net investment income |
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5,896 |
|
|
|
5,255 |
|
|
|
17,054 |
|
|
|
14,439 |
|
Net realized investment (losses) gains |
|
|
(170 |
) |
|
|
(142 |
) |
|
|
(124 |
) |
|
|
416 |
|
Other income |
|
|
2 |
|
|
|
5 |
|
|
|
13 |
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|
|
10 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
49,856 |
|
|
|
40,937 |
|
|
|
140,969 |
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|
118,679 |
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Losses and expenses: |
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Net losses and loss adjustment expenses |
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16,958 |
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|
9,234 |
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|
|
44,876 |
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|
25,818 |
|
Interest expense on debt |
|
|
694 |
|
|
|
693 |
|
|
|
2,080 |
|
|
|
2,079 |
|
Amortization of deferred policy
acquisition costs |
|
|
3,714 |
|
|
|
3,670 |
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|
|
11,066 |
|
|
|
10,305 |
|
Other operating expenses (net of
acquisition costs deferred) |
|
|
7,494 |
|
|
|
6,699 |
|
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|
21,728 |
|
|
|
19,768 |
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|
|
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|
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|
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|
28,860 |
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|
|
20,296 |
|
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|
79,750 |
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|
57,970 |
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|
|
|
|
|
|
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|
Income before income taxes |
|
|
20,996 |
|
|
|
20,641 |
|
|
|
61,219 |
|
|
|
60,709 |
|
Income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current |
|
|
706 |
|
|
|
571 |
|
|
|
2,107 |
|
|
|
1,723 |
|
Deferred |
|
|
4,996 |
|
|
|
5,274 |
|
|
|
14,859 |
|
|
|
15,771 |
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
5,702 |
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|
5,845 |
|
|
|
16,966 |
|
|
|
17,494 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
15,294 |
|
|
$ |
14,796 |
|
|
$ |
44,253 |
|
|
$ |
43,215 |
|
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Earnings per common and common
equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.04 |
|
|
$ |
1.02 |
|
|
$ |
3.01 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
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|
|
|
|
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|
Diluted |
|
$ |
1.03 |
|
|
$ |
1.00 |
|
|
$ |
2.99 |
|
|
$ |
2.94 |
|
|
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|
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|
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|
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Shares used in computing earnings per
common and common equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
14,753,673 |
|
|
|
14,546,950 |
|
|
|
14,680,355 |
|
|
|
14,502,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
14,837,017 |
|
|
|
14,747,667 |
|
|
|
14,809,568 |
|
|
|
14,712,675 |
|
|
|
|
|
|
|
|
|
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|
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|
See accompanying notes.
2
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
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|
Nine Months Ended |
|
|
|
September 30 |
|
|
|
2005 |
|
|
2004 |
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|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
44,253 |
|
|
$ |
43,215 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and unearned premium reserves |
|
|
5,987 |
|
|
|
4,456 |
|
Accrued expenses and other liabilities |
|
|
153 |
|
|
|
1,363 |
|
Current taxes payable |
|
|
576 |
|
|
|
714 |
|
Income taxes recoverable |
|
|
(162 |
) |
|
|
|
|
Amounts due to/from reinsurer |
|
|
362 |
|
|
|
614 |
|
Accrued investment income |
|
|
(326 |
) |
|
|
(1,153 |
) |
Policy acquisition costs deferred |
|
|
(11,945 |
) |
|
|
(13,119 |
) |
Amortization of deferred policy acquisition costs |
|
|
11,066 |
|
|
|
10,305 |
|
Net realized investment losses (gains) |
|
|
124 |
|
|
|
(416 |
) |
Provision for depreciation |
|
|
2,575 |
|
|
|
2,417 |
|
Accretion of discount on investments |
|
|
(251 |
) |
|
|
(689 |
) |
Deferred income taxes |
|
|
14,859 |
|
|
|
15,771 |
|
Prepaid federal income taxes |
|
|
(13,815 |
) |
|
|
(14,281 |
) |
Unearned ceding commission |
|
|
(149 |
) |
|
|
(353 |
) |
Real estate acquired in claim settlement, net of write-downs |
|
|
(2,473 |
) |
|
|
146 |
|
Accrued interest on debt |
|
|
(691 |
) |
|
|
(691 |
) |
Other assets |
|
|
(1,149 |
) |
|
|
4,263 |
|
Other operating activities |
|
|
3,150 |
|
|
|
(616 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
52,144 |
|
|
|
51,946 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
Purchases fixed maturities |
|
|
(93,536 |
) |
|
|
(128,900 |
) |
Sales fixed maturities |
|
|
33,864 |
|
|
|
70,703 |
|
Purchases equities |
|
|
|
|
|
|
(370 |
) |
Sales equities |
|
|
512 |
|
|
|
854 |
|
Net change in short-term investments |
|
|
68 |
|
|
|
12,078 |
|
Purchases of property and equipment |
|
|
(1,787 |
) |
|
|
(2,501 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(60,879 |
) |
|
|
(48,136 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
3,261 |
|
|
|
1,796 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,261 |
|
|
|
1,796 |
|
|
|
|
|
|
|
|
Net change in cash |
|
|
(5,474 |
) |
|
|
5,606 |
|
Cash at beginning of period |
|
|
6,865 |
|
|
|
973 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
1,391 |
|
|
$ |
6,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds |
|
$ |
16,246 |
|
|
$ |
15,488 |
|
Interest |
|
|
2,765 |
|
|
|
2,765 |
|
See accompanying notes.
3
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
1. The Company
Triad Guaranty Inc. 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 or investors to protect the lender or investor against loss from
defaults on low down payment residential mortgage loans and to facilitate the sale of mortgage
loans in the secondary market. Triad Guaranty Inc. and its subsidiaries are collectively referred
to as the Company.
2. Accounting Policies And Basis Of Presentation
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States 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 months ended
September 30, 2005 and 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005. 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, 2004.
4
Stock Options
Currently, the Company grants stock options to certain employees for a fixed number of shares
with an exercise price equal to or greater than the fair value of the shares at the date of grant.
The Company accounts for stock option grants using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly recognizes no compensation cost for these grants. Had compensation expense been
recognized using the fair value method on the grant date, net income and earnings per share on a
pro forma basis would be as shown in the table below. For purposes of pro forma disclosures, the
estimated fair value of the options is expensed over the options vesting periods (in thousands,
except for earnings per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income as reported |
|
$ |
15,294 |
|
|
$ |
14,796 |
|
|
$ |
44,253 |
|
|
$ |
43,215 |
|
Net income pro forma |
|
$ |
15,143 |
|
|
$ |
14,675 |
|
|
$ |
43,822 |
|
|
$ |
42,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.04 |
|
|
$ |
1.02 |
|
|
$ |
3.01 |
|
|
$ |
2.98 |
|
Diluted |
|
$ |
1.03 |
|
|
$ |
1.00 |
|
|
$ |
2.99 |
|
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share pro forma: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.03 |
|
|
$ |
1.01 |
|
|
$ |
2.99 |
|
|
$ |
2.95 |
|
Diluted |
|
$ |
1.02 |
|
|
$ |
0.99 |
|
|
$ |
2.96 |
|
|
$ |
2.91 |
|
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires the
compensation cost relating to stock-based payment transactions to be recognized in financial
statements beginning on July 1, 2005. On April 14, 2005, the Securities and Exchange Commission
amended Regulation S-X so that filers who are not small business issuers will not be required to
file financial statements in compliance with SFAS 123R until the first fiscal year beginning after
June 15, 2005. As a result, the Company plans on adopting SFAS 123R effective January 1, 2006,
utilizing the modified prospective application as defined in that statement. The impact of
adoption is anticipated to be similar to that described in our 2004 Form 10-K.
3. Consolidation
The consolidated financial statements include the accounts of Triad Guaranty Inc. and all of
its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
4. Commitments And Contingencies
Reinsurance
Certain premiums and losses are ceded to other insurance companies under various reinsurance
agreements, the majority of which are captive reinsurance agreements with affiliates of certain
customers. Reinsurance contracts do not relieve Triad from its obligations to
5
policyholders. Failure of the reinsurer to honor its obligation could result in losses to
Triad; consequently, allowances are established for amounts deemed uncollectible. Triad evaluates
the financial condition of its reinsurers and monitors credit risk arising from similar geographic
regions, activities, or economic characteristics of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvency.
Insurance In Force, Dividend Restrictions, and Statutory Results
Insurance regulations generally limit the writing of mortgage guaranty insurance to an
aggregate amount of insured risk no greater than 25 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, 2005 and December 31, 2004, as presented below, was computed by applying the various
percentage settlement options to the insurance in force amounts, adjusted by risk ceded under
reinsurance agreements and by applicable stop-loss limits and deductible amounts, based on the
original insured amount of the loan. Triads ratio is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
Net risk |
|
$ |
7,317,253 |
|
|
$ |
7,049,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus |
|
$ |
134,697 |
|
|
$ |
135,662 |
|
Statutory contingency reserve |
|
|
427,155 |
|
|
|
369,484 |
|
|
|
|
|
|
|
|
Total |
|
$ |
561,852 |
|
|
$ |
505,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio |
|
13.0 to 1 |
|
|
|
14.0 to 1 |
|
|
|
|
|
|
|
|
Triad and its wholly-owned subsidiaries are each required under their respective domiciliary
states insurance code to maintain a minimum level of statutory capital and surplus. Triad, an
Illinois domiciled insurer, is required under the Illinois Insurance Code (the Code) to maintain
minimum statutory capital and surplus of $5 million. 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 statutory surplus as regards
policyholders, or (b) statutory net income for the calendar year preceding the date of the
dividend.
Net income as determined in accordance with statutory accounting practices was $61.2
million and $57.9 million for the nine months ended September 30, 2005 and 2004, respectively, and
$78.2 million for the year ended December 31, 2004.
At September 30, 2005 and December 31, 2004, the amount of Triads equity that could be paid
out in dividends to stockholders was $51.0 million and $51.9 million, respectively, which was the
earned surplus of Triad on a statutory basis on those dates.
6
Loss Reserves
The Company establishes loss reserves to provide for the estimated costs of settling claims on
loans reported in default and loans in default that are in the process of being reported to the
Company. The Companys reserving process incorporates various components in a formula that gives
effect to current economic conditions and profiles delinquencies by such factors as policy year,
geography, lender, chronic late payment characteristics, the number of months the policy has been
in default, as well as whether the policies in default were underwritten as flow business or as
part of a structured bulk transaction. The process is based upon the assumption that long-term
historical experience, taking into consideration the above factors and adjusted for current
economic events that the Company believes will significantly impact the long-term loss development,
provides a reasonable basis for estimating projected claim rates (frequency) and claim amounts
(severity). The Company considers severity and frequency to be the significant assumptions in the
establishment of its loss reserves. Estimation of loss reserves has always been a difficult and
inexact process and there are inherent risks and uncertainties involved in making these
assumptions. Economic conditions that have affected the development of loss reserves in the past
may not necessarily affect development patterns in the future in either a similar manner or degree.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses,
there can be no assurance that reserves will be adequate to cover ultimate loss developments on
loans in default, currently or in the future. The Companys profitability and financial condition
could be adversely affected to the extent that its estimated reserves are insufficient to cover
losses on loans in default.
Litigation
A lawsuit was filed against the Company in January 2004 in the ordinary course of the
Companys business alleging violations of the Fair Credit Reporting Act. The Company is vigorously
defending the lawsuit. In the opinion of management, the ultimate resolution of this pending
litigation will not have a material adverse effect on the financial position or results of
operations of the Company.
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 effects of
stock options and unvested restricted stock on the weighted-average shares outstanding. There are
no other reconciling items between the denominators used in basic earnings per share and diluted
earnings per share. The numerator used in basic earnings per share and diluted earnings per share
is the same for all periods presented.
6. Comprehensive Income
Comprehensive income consists of 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 months ended September 30, 2005 and 2004, the
Companys comprehensive income was $11.1 million and $23.6 million, respectively. For the nine
months ended September 30, 2005 and 2004, comprehensive income totaled $43.3 million and $44.7
million, respectively.
7
7. Income Taxes
Income tax expense differs from the amounts computed by applying the Federal statutory income
tax rate to income before income taxes primarily due to tax-exempt interest that the Company earns
from its investments in municipal bonds.
8. Subsequent Events
On November 1, 2005, the Company completed a transaction with Collateral Investment Corp.
(CIC) in which CIC transferred all of its 2,573,551 shares of the Companys common stock to the
Company in exchange for 2,528,514 newly issued shares of the Companys common stock. The 2,573,551
shares transferred by CIC were subsequently retired by the Company, resulting in a reduction of
outstanding shares of the Company of 45,037.
8
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes
the consolidated financial condition, changes in financial position, and results of operations of
the Company for the three month and nine month periods ended September 30, 2005 and 2004. This
discussion supplements Managements Discussion and Analysis in Form 10-K for the year ended
December 31, 2004, and should be read in conjunction with the interim financial statements and
notes contained herein.
Certain of the statements contained herein, other than statements of historical fact, are
forward-looking statements that have been made based upon our expectations and beliefs concerning
future developments and their potential effect on us. These statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include
estimates and assumptions related to future economic, competitive, and legislative developments.
These developments and their potential effect on us are subject to change and uncertainty, which
are, in many instances, beyond our control. Actual developments and their results could differ
materially from those expected by us, depending on the outcome of certain factors, including the
possibility of general economic and business conditions that are different than anticipated,
legislative developments, changes in interest rates or the stock markets, stronger than anticipated
competitive activity, and the factors described in the forward-looking statements.
Update on Critical Accounting Estimates
Our Annual Report on Form 10-K describes the accounting policies that are critical to the
understanding of our results of operations and our financial position. These critical accounting
policies relate to the assumptions and judgments utilized in establishing the reserve for losses
and loss adjustment expenses, determining if declines in fair values of investments are other than
temporary, and establishing appropriate initial amortization schedules for deferred policy
acquisition costs (DAC) and subsequent adjustments to that amortization.
We believe that these continue to be the critical accounting policies applicable to the
Company and that these policies were applied in a consistent manner during the first nine months of
2005.
Overview
Through our subsidiaries, we provide mortgage guaranty insurance coverage to residential
mortgage lenders and investors in the United States as a credit-enhancement vehicle, typically when
individual borrowers have less than 20% equity in the property. Mortgage guaranty insurance
facilitates the sale of individual low down payment loans in the secondary market and provides
protection to lenders who choose to keep the loans in
9
their own portfolios. Our flow channel consists of business originated by lenders and
submitted to us on a loan-by-loan basis. Through our structured bulk channel, we provide mortgage
insurance to lenders and investors who seek additional default protection, capital relief, and
credit-enhancement on groups of loans that are sold in the secondary market.
Mortgage guaranty insurance can generally be grouped into two categories, based upon the
different risk characteristics. These two categories are primary and pool insurance. We offer
Primary and Modified Pool insurance as defined below, but do not offer traditional pool insurance.
Historically, we have reported our financial and operating information based on the flow and
bulk distribution channels. Although we continue to manage our business by these distribution
channels, we believe that reporting information from a risk exposure perspective helps clarify our
business and the risk factors in our portfolio. Therefore, in this Form 10-Q and in future
filings, we will report our information using the Primary insurance and Modified Pool insurance
classifications.
We classify a policy as Primary insurance if it a) provides first dollar loss coverage and has
a loan to value ratio greater than 80% or b) is part of a structured transaction and has a loan to
value ratio less than 80% and the structured transaction does not have a stop loss or deductible.
Primary insurance can be delivered through our flow or bulk channels, although the majority is
delivered through the flow channel.
Modified Pool insurance is written as part of a structured bulk transaction to provide credit
enhancement to lenders and investors who seek additional default protection and capital relief.
This type of insurance a) provides coverage that exceeds the protection provided by existing
primary insurance or b) provides primary coverage on loans with a loan to value ratio of less than
80% and that are part of a structured transaction with a stop loss or deductible. Modified Pool
insurance may have stated stop loss limits in the aggregate on the pool of loans and may also have
a deductible under which no losses are paid until the losses exceed the deductible amount.
Our revenues principally consist of a) initial and renewal earned premiums (net of reinsurance
premiums ceded on our flow business as part of our risk management strategies) and b) investment
income on invested assets. We also realize investment gains, net of investment losses,
periodically as a source of revenue when the opportunity presents itself within the context of our
overall investment strategy.
Our expenses principally consist of a) amounts ultimately paid on claims submitted, b)
increases in reserves for estimated future claim payments, c) general and administrative costs of
acquiring new business and servicing existing policies, d) other general business expenses, and e)
income taxes.
Our profitability depends largely on a) the adequacy of our product pricing and underwriting
discipline relative to the risks insured, b) persistency levels, c) operating
10
efficiencies, and d) the level of investment yield, including realized gains and losses, on
our investment portfolio. We define persistency as the percentage of insurance in force remaining
from twelve months prior. Cancellations of policies originated during the past twelve months are
not considered in our calculation of persistency. This method of calculating persistency may vary
from that of other mortgage insurers. We believe that our calculation presents an accurate measure
of the percentage of insurance in force remaining from twelve months prior. Cancellations result
primarily from the borrower refinancing or selling mortgaged residential properties and, to a
lesser degree, from the borrower achieving prescribed equity levels at which the lender no longer
requires mortgage guaranty insurance.
For a more detailed description of our industry and operations, refer to the Business
section of our Form 10-K.
Consolidated Results of Operations
Following is a summary of our results of operations for the three months and nine months ended
September 30, 2005 and 2004 (in thousands, except per share information) along with a column
indicating a favorable or unfavorable percentage change from 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
|
|
|
|
|
|
|
|
Favorable/ |
|
|
|
|
|
|
|
|
|
|
Favorable/ |
|
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
Earned premiums |
|
$ |
44,128 |
|
|
$ |
35,819 |
|
|
|
23.2 |
% |
|
$ |
124,026 |
|
|
$ |
103,814 |
|
|
|
19.5 |
% |
Net investment income |
|
|
5,896 |
|
|
|
5,255 |
|
|
|
12.2 |
|
|
|
17,054 |
|
|
|
14,439 |
|
|
|
18.1 |
|
Net realized investment
gains/(losses) |
|
|
(170 |
) |
|
|
(142 |
) |
|
|
(19.7 |
) |
|
|
(124 |
) |
|
|
416 |
|
|
|
(129.8 |
) |
Other income |
|
|
2 |
|
|
|
5 |
|
|
|
(60.0 |
) |
|
|
13 |
|
|
|
10 |
|
|
|
30.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
49,856 |
|
|
|
40,937 |
|
|
|
21.8 |
|
|
|
140,969 |
|
|
|
118,679 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss
adjustment expenses |
|
|
16,958 |
|
|
|
9,234 |
|
|
|
(83.6 |
) |
|
|
44,876 |
|
|
|
25,818 |
|
|
|
(73.8 |
) |
Interest expense on debt |
|
|
694 |
|
|
|
693 |
|
|
|
(0.1 |
) |
|
|
2,080 |
|
|
|
2,079 |
|
|
|
|
|
Amortization of deferred
policy acquisition costs |
|
|
3,714 |
|
|
|
3,670 |
|
|
|
(1.2 |
) |
|
|
11,066 |
|
|
|
10,305 |
|
|
|
(7.4 |
) |
Other operating expenses
(net of acquisition costs
deferred) |
|
|
7,494 |
|
|
|
6,699 |
|
|
|
(11.9 |
) |
|
|
21,728 |
|
|
|
19,768 |
|
|
|
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
20,996 |
|
|
|
20,641 |
|
|
|
1.7 |
|
|
|
61,219 |
|
|
|
60,709 |
|
|
|
0.8 |
|
Income taxes |
|
|
5,702 |
|
|
|
5,845 |
|
|
|
2.4 |
|
|
|
16,966 |
|
|
|
17,494 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,294 |
|
|
$ |
14,796 |
|
|
|
3.4 |
% |
|
$ |
44,253 |
|
|
$ |
43,215 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.03 |
|
|
$ |
1.00 |
|
|
|
3.0 |
% |
|
$ |
2.99 |
|
|
$ |
2.94 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continued to achieve strong growth in earned premiums and net investment income over
both the third quarter and nine months ended September 30, 2004, although adverse development of
losses and loss adjustment expenses had a significant impact on
11
our results for the three months and nine months ended September 30, 2005. During the third
quarter of 2005, the number of paid losses increased as we worked through the claim processing issues
identified in the second quarter and we reduced the inventory of unpaid claims. Further, we
increased reserves to reflect the growth in the number of defaults due to the continued seasoning
of our insurance in force and to reflect higher long-term severity trends. During the third
quarter of 2005, average severity on paid losses returned to a more normalized level when compared
to the unusually high levels experienced in the second quarter of 2005 due, in part, to improved
loss mitigation efforts. Average severity on paid losses has fluctuated and will continue to
fluctuate from quarter to quarter due to the relatively small number of claims paid in a given
quarter.
We describe our results in greater detail in the discussions that follow. The information is
presented in three categories: Production and In Force, Revenues, and Losses and Expenses.
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Net income increased 3.4% for the third quarter of 2005 over the third quarter of 2004 driven
by a 23.2% increase in earned premiums, partially offset by an 83.6% increase in net losses and
loss adjustment expenses. Diluted realized investment losses per share, net of taxes, reduced
diluted earnings per share by $0.01 for the third quarter of both 2005 and 2004. Diluted realized
gains and losses per share is a non-GAAP measure. We believe this is relevant and useful
information to investors because, except for write-downs on other-than-temporarily impaired
securities, it shows the effect that our discretionary sales of investments had on earnings.
Production and In Force
Total insurance written in the third quarter of 2005 was $7.6 billion compared to $4.0 billion
for the same period of 2004, an increase of 90.0%. Total insurance written includes Primary and
Modified Pool insurance.
Primary insurance written for the third quarter of 2005 increased to $3.1 billion from $2.7
billion for the third quarter of 2004. As stated earlier, Primary insurance may be written through
our flow channel as well as through structured bulk transactions, although the Primary insurance
written through structured bulk transactions is generally a very low portion of the total. For the
third quarter of 2005, Primary insurance written through structured bulk transactions was less than
1% of total Primary insurance written compared to 1.9% for the third quarter of 2004.
Modified Pool insurance written in the third quarter of 2005 increased to $4.5 billion from
$1.3 billion for the third quarter of 2004. Modified Pool insurance is only written through
structured bulk transactions. The amount of insurance written through structured bulk transactions
is likely to vary significantly from period to period due to: a) the limited number of transactions
(but with larger size) occurring in this market, b) the
12
level of competition from other mortgage insurers, c) the relative attractiveness in the
marketplace of mortgage insurance versus other forms of credit enhancement, and d) our willingness
to accept the changing loan composition and underwriting criteria of the market.
The following table provides estimates of our national market share of net new insurance
written, using industry definitions, through our flow and structured bulk channels based on
information available from the industry association and other public sources for the three months
ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Flow business |
|
|
6.0 |
% |
|
|
4.9 |
% |
Structured bulk transactions |
|
|
17.1 |
% |
|
|
8.2 |
% |
Total |
|
|
9.5 |
% |
|
|
5.5 |
% |
Our market share of flow business increased in the third quarter of 2005 from that of 2004 due
to increased market penetration within our targeted lenders. We are actively monitoring, applying
underwriting restrictions, and filing increased rates for the changing risk elements within the
market, which could have an impact on future production. Our bulk market share will vary from
period to period since the structured bulk market has significantly larger individual transactions.
Bulk market share is also dependent on the availability of transactions that meet our credit
quality and pricing benchmarks and on which we are able to bid successfully.
Periodically we enter into structured bulk transactions involving loans that have insurance
effective dates within the current reporting period but for which detailed loan information
regarding the insured loans is not provided by the issuer of the transaction until later. When this
situation occurs, we accrue premiums that are due but not yet paid based upon the estimated
commitment amount of the transaction in the reporting period with respect to each loans insurance
effective date. However, the policies are not reflected in our in force, insurance written, or
related industry data totals until we verify the loan level detail. At September 30, 2005, we had
approximately $608 million of structured transactions with effective dates within the third quarter
of 2005 for which loan level detail had not been received and verified and, therefore, is not
included in our data or industry totals. These amounts will be reported as new production and
insurance in force totals in the fourth quarter of 2005, when the issuer of the transactions
provides accurate loan level detail to us. We have properly included in premium written and
premium earned the respective estimated amounts due and earned during the third quarter of 2005
related to this insurance. At September 30, 2004, we had $67 million of structured transactions
with effective dates within the third quarter for which loan level detail had not been received.
13
The following table provides detail on our direct insurance in force at September 30,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Primary insurance |
|
$ |
29,820 |
|
|
$ |
28,811 |
|
Modified Pool insurance |
|
|
13,406 |
|
|
|
7,010 |
|
|
|
|
|
|
|
|
Total |
|
$ |
43,226 |
|
|
$ |
35,821 |
|
|
|
|
|
|
|
|
Our Primary insurance in force increased 3.5% at September 30, 2005 over September 30, 2004 as
a result of continued strong production and an improvement in persistency. Primary insurance
persistency at September 30, 2005 improved to 69.7% from 67.8% at September 30, 2004. Average
mortgage coupon rates in our existing portfolio have declined over the past two years while
mortgage rates in the market have generally remained flat or increased slightly over this period.
These conditions have caused a reduction in cancellations from refinancings. We anticipate that
persistency rates will continue near current levels for the remaining quarter of 2005. However,
persistency may be adversely affected if market interest rates decline from the levels experienced
during the third quarter of 2005.
Our Modified Pool insurance in force grew 91.2% at September 30, 2005 over September 30, 2004,
with growth of $3.4 billion in the third quarter of 2005. Our Modified Pool production will vary
from period to period since the structured bulk market has significantly larger individual
transactions. Bulk production is also dependent on the availability of transactions that meet our
credit quality and pricing benchmarks and on which we are able to bid successfully.
We believe that the quality of our insurance in force portfolio is affected predominantly by
the following:
|
|
|
The strength of the borrower as measured by a variety of factors including the
borrowers housing and total debt ratios, FICO credit score and employment status |
|
|
|
|
The attributes of loans insured including LTV ratio, purpose of the loan, type of
loan instrument, level of loan documentation and type of underlying property
securing the loan |
|
|
|
|
The seasoning of the loans insured |
|
|
|
|
The economic conditions of the geographic regions of the underlying properties
subject to mortgage insurance |
|
|
|
|
The quality, integrity and loan underwriting and servicing performance of lenders
from which we receive loans to insure. |
14
The following table provides information on direct risk in force for our Primary and Modified Pool
insurance at September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Primary Insurance: |
|
|
|
|
|
|
|
|
FICO credit score distribution: |
|
|
|
|
|
|
|
|
Credit score less than 575 |
|
|
0.9 |
% |
|
|
1.1 |
% |
Credit score between 575 and 619 |
|
|
4.4 |
% |
|
|
4.7 |
% |
Credit score greater than 619 |
|
|
94.7 |
% |
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
|
LTV: |
|
|
|
|
|
|
|
|
95.01% and above |
|
|
14.2 |
% |
|
|
11.9 |
% |
90.01% to 95.00% |
|
|
42.0 |
% |
|
|
42.6 |
% |
90.00% and below |
|
|
43.8 |
% |
|
|
45.5 |
% |
|
|
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
Fixed |
|
|
73.4 |
% |
|
|
77.5 |
% |
ARM (positive amortization) |
|
|
23.3 |
% |
|
|
22.2 |
% |
ARM (potential negative amortization) |
|
|
3.3 |
% |
|
|
0.3 |
% |
ARM (scheduled amortization) |
|
|
0.0 |
% |
|
|
0.0 |
% |
Other |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Modified Pool Insurance: |
|
|
|
|
|
|
|
|
FICO credit score distribution: |
|
|
|
|
|
|
|
|
Credit score less than 575 |
|
|
0.2 |
% |
|
|
0.5 |
% |
Credit score between 575 and 619 |
|
|
1.2 |
% |
|
|
2.3 |
% |
Credit score greater than 619 |
|
|
98.6 |
% |
|
|
97.2 |
% |
|
|
|
|
|
|
|
|
|
LTV: |
|
|
|
|
|
|
|
|
95.01% and above |
|
|
0.0 |
% |
|
|
0.0 |
% |
90.01% to 95.00% |
|
|
0.6 |
% |
|
|
0.4 |
% |
90.00% and below |
|
|
99.4 |
% |
|
|
99.6 |
% |
|
|
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
Fixed |
|
|
43.2 |
% |
|
|
61.4 |
% |
ARM (positive amortization) |
|
|
56.8 |
% |
|
|
38.6 |
% |
ARM (potential negative amortization) |
|
|
0.0 |
% |
|
|
0.0 |
% |
ARM (scheduled amortization) |
|
|
0.0 |
% |
|
|
0.0 |
% |
Other |
|
|
0.0 |
% |
|
|
0.0 |
% |
15
We have defined Alt-A as individual loans generally having FICO scores greater than 619 and
that have been underwritten with reduced or no documentation. Alt-A continues to grow as a
percentage of our Primary insurance in force, and the majority of our Modified Pool insurance is
classified as Alt-A. The following table shows the percentage of our insurance in force that we
have classified as Alt-A at September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Primary insurance |
|
|
9.2 |
% |
|
|
6.7 |
% |
Modified Pool insurance |
|
|
66.5 |
% |
|
|
50.5 |
% |
Total |
|
|
27.0 |
% |
|
|
15.2 |
% |
A portion of the bulk transactions entered into in the last two years have been structured
with deductibles that have put us in the second loss position. Approximately 19% and 51% of our
insurance written attributable to structured bulk transactions during the third quarter of 2005 and
2004, respectively, was structured with deductibles.
Revenues
Total direct premiums written were $53.3 million for the third quarter of 2005, an increase of
17.2% over $45.5 million written for the third quarter of 2004. This increase was driven by an
$8.6 million increase in direct renewal premiums written, partially offset by a $0.8 million
decline in direct initial premiums. Increased persistency coupled with stable production over the
past year were the primary factors that caused the increase in renewal premiums written in the
third quarter of 2005.
As further described in our Form 10-K, we cede a portion of our Primary insurance premiums
under risk-sharing arrangements with affiliates of our lender partners (referred to as captive
reinsurance arrangements) as well as under other excess of loss reinsurance treaties. The
difference between direct premiums written and net premiums written is ceded premium. Net premiums
written increased 18.3% to $43.0 million in the third quarter of 2005 over $36.3 million for the
third quarter of 2004. Ceded premiums written increased 12.7% to $10.3 million in the third
quarter of 2005 from $9.1 million in the third quarter of 2004.
16
The following table provides further data on ceded premiums for the three months ended
September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Premium cede rate (ceded premiums written as a percentage
of direct premiums written) |
|
|
19.3 |
% |
|
|
20.1 |
% |
Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written) |
|
|
17.8 |
% |
|
|
18.2 |
% |
Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements) |
|
|
37.1 |
% |
|
|
36.8 |
% |
During the third quarter of 2005, 58.1% of Primary insurance written and 23.6% of total
insurance written was subject to captive reinsurance arrangements, compared to 51.3% of Primary
insurance written and 34.0% of total insurance written in the same period of 2004. The increase in
the percentage of Primary insurance written subject to captive reinsurance arrangements is
primarily a result of increased production from lenders that participate in captive reinsurance
arrangements. At September 30, 2005, 58.3% of direct Primary insurance in force and 39.5% of total
direct insurance in force was subject to captive reinsurance arrangements, compared to 56.1% of
direct Primary insurance in force and 43.7% of total insurance in force at September 30, 2004.
None of our Modified Pool insurance in force is subject to captive reinsurance arrangements.
We believe captive reinsurance arrangements are an effective risk management tool as selected
lenders share in the risk under these arrangements. Additionally, captive reinsurance arrangements
are structured so that Triad receives credit against the capital required in certain risk-based
capital models utilized by rating agencies. We remain committed to the concept of captive
reinsurance arrangements, including deep ceded arrangements where the net premium cede rate is
greater than 25%, on a lender-by-lender basis as we deem it to be prudent. We will continue to be
an active participant with our lender partners in structures utilizing alternative attachment
points, risk bands, cede rates, and ceding commissions.
Earned premiums increased 23.2% to $44.1 million for the third quarter of 2005 from $35.8
million for the third quarter of 2004 primarily due to the strong growth in net premiums written.
The difference between net written premiums and earned premiums is the change in the unearned
premium reserve. Our unearned premium liability decreased $1.2 million during the third quarter of
2005 compared to an increase of $0.5 million during the third quarter of 2004. An unearned premium
reserve is established primarily on premiums received on annual products. Direct written premium
from the annual premium product represented 10.5% of direct premium written in the third quarter of
2005 compared to 15.5% in the third quarter of 2004. Production of annual premium product
transactions has been decreasing in recent quarters.
17
Assuming no significant decline in interest rates, we anticipate our persistency will remain
at current levels or improve slightly during the remainder of 2005. This should continue to have a
positive effect on renewal earned premiums and total earned premiums in the last quarter of 2005.
Net investment income for the third quarter of 2005 grew 12.2% over the third quarter of 2004,
primarily due to the growth in average invested assets. Average invested assets at cost or
amortized cost for the third quarter of 2005 grew 16.8% over the third quarter of 2004 as a result
of the investment of cash flows from operations throughout the year. Our investment portfolio
tax-equivalent yield declined to 6.81% at September 30, 2005 from 7.02% at September 30, 2004.
Net realized investment gains/(losses), except for write-downs on other-than-temporarily
impaired securities, are the result of our discretionary dispositions of investment securities in
the context of our overall portfolio management strategies and are likely to vary significantly
from period to period. We wrote down other-than-temporarily impaired securities by approximately
$170 thousand in the third quarter of 2005 compared to approximately $165 thousand in the third
quarter of 2004. See further discussion of impairment write-downs in the Realized Losses and
Impairments section below.
Losses and Expenses
Net losses and loss adjustment expenses (LAE) increased 83.6% or $7.7 million for the third
quarter of 2005 over the third quarter of 2004. Net losses and LAE is comprised of both paid
losses and the change in loss and LAE reserves during the period. The following table provides
detail on direct paid losses for our Primary and Modified Pool insurance for the three months ended
September 30, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Primary insurance |
|
$ |
11,980 |
|
|
$ |
6,547 |
|
Modified Pool insurance |
|
|
1,475 |
|
|
|
733 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,455 |
|
|
$ |
7,280 |
|
|
|
|
|
|
|
|
Direct paid losses, excluding LAE, were $13.5 million for the third quarter of 2005, up
slightly from $13.3 million for the second quarter of 2005 and up 84.9% from $7.3 million for the
third quarter of 2004. In the second quarter of 2005, one of our larger servicers unexpectedly
expedited its claims processing procedures, causing an increase in the number of claims filed, and
therefore, an increase in the inventory of unpaid claims at June 30, 2005. During the third
quarter of 2005, we reduced this inventory of unpaid claims, causing an increase in the number of
paid claims compared to the second quarter of 2005. We also made several improvements in our loss
mitigation efforts during the third quarter of 2005. These improvements included a claims system
upgrade, hiring additional personnel with real estate expertise to assist us in acquiring
properties in lieu of foreclosure, and improved loan modifications and restructuring
18
procedures to assist borrowers in default. Average severity decreased from approximately
$29,200 in the second quarter of 2005 to $25,700 in the third quarter of 2005, a level more
consistent with the past several quarters. This decrease in average severity kept the level of
paid losses close to what was experienced in the second quarter of 2005 despite the increase in the
number of claims paid. Our average severity on paid losses can fluctuate significantly from
quarter to quarter and is the product of a relatively small number of claims paid in a given
quarter.
Direct paid losses for the third quarter of 2005 increased $6.2 million over the third quarter
of 2004 primarily as a larger percentage of our insurance in force is moving into the peak claim
paying period of two to five years from loan origination. At September 30, 2005, approximately 32%
of our total risk in force was in the peak claim paying period compared to approximately 20% at
September 30, 2004. If persistency remains near current levels, then we would anticipate the
percentage of the risk in force within the peak claim paying period to be in the 32% 37% range.
Another contributor to the increase in paid claims from the third quarter of 2004 was the increase
in average severity from an unusually low level of approximately $18,300 to approximately $25,700
for the third quarter of 2005.
Net losses and loss adjustment expenses also includes the change in reserves for losses and
loss adjustment expenses. The reserve for losses and loss adjustment expenses increased $3.2
million in the third quarter of 2005 compared to an increase of $1.8 million in the third quarter
of 2004. We increased reserves in the third quarter of 2005 primarily to reflect an increase in
the number of reported defaults and also to reflect higher long-term severity trends. We have
utilized historical long-term performance in our reserving methodology and adjust our factors for
current economic conditions when we believe the conditions will significantly impact the long-term
loss development. We will continue to monitor and evaluate trends affecting frequency and severity
as well as the results of our loss mitigation efforts mentioned earlier. We are cautious about the
current housing market and certain market segments that have recently experienced rapid house price
appreciation. Our reserving model and judgment incorporates this forward-looking perspective.
19
The following table shows further detail about the Companys loss reserves at September 30,
2005 and 2004 broken out by Primary and Modified Pool insurance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Primary insurance: |
|
|
|
|
|
|
|
|
Reserves for reported defaults |
|
$ |
35,206 |
|
|
$ |
26,432 |
|
Reserves for defaults incurred but not reported |
|
|
4,646 |
|
|
|
3,544 |
|
|
|
|
|
|
|
|
Total Primary insurance |
|
|
39,852 |
|
|
|
29,976 |
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance: |
|
|
|
|
|
|
|
|
Reserves for reported defaults |
|
|
1,305 |
|
|
|
2,266 |
|
Reserves for defaults incurred but not reported |
|
|
563 |
|
|
|
206 |
|
|
|
|
|
|
|
|
Total Modified Pool insurance |
|
|
1,868 |
|
|
|
2,472 |
|
|
|
|
|
|
|
|
|
|
Reserve for loss adjustment expenses |
|
|
103 |
|
|
|
99 |
|
|
|
|
|
|
|
|
Total reserves for losses and loss adjustment expenses |
|
$ |
41,823 |
|
|
$ |
32,547 |
|
|
|
|
|
|
|
|
As seen in the following table, the number of defaults subject to deductibles has grown while
the number of defaults without deductibles has decreased at September 30, 2005 when compared to
September 30, 2004. Until the projected loss reserve for the aggregate defaults within a
particular pool of loans with a deductible exceeds a pre-established threshold, no reserves are
established for loans within the pool. As of September 30, 2005, no individual structured bulk
transaction had reported claims that approach these individual deductible amounts. The following
table shows the number of loans in default at September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Primary insurance |
|
|
4,312 |
|
|
|
3,902 |
|
Modified Pool insurance: |
|
|
|
|
|
|
|
|
With deductibles |
|
|
709 |
|
|
|
197 |
|
Without deductibles |
|
|
632 |
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
Total Modified Pool insurance |
|
|
1,341 |
|
|
|
1,106 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,653 |
|
|
|
5,008 |
|
|
|
|
|
|
|
|
|
|
Total excluding defaults on
loans with deductibles |
|
|
4,944 |
|
|
|
4,811 |
|
|
|
|
|
|
|
|
|
|
The number of loans in default grew 12.9% from September 30, 2004 to September 30, 2005, while
our number of insured loans in force grew 14.1% over the same period. Excluding the defaults with
deductibles, the number of loans in default grew 2.8% from September 30, 2004 to September 30,
2005. Because of the growth of our in force business, we believe the number of loans in default
for both Primary and Modified Pool insurance will continue to increase as the more recent books
continue to season.
20
Our loss ratio (the ratio of incurred losses and loss adjustment expense to premiums earned)
increased to 38.4% for the third quarter of 2005 from 25.8% for the third quarter of 2004 primarily
due to the increases in incurred losses discussed above and also reflects the seasoning of the
existing book of business.
We are cautious about housing market conditions in certain regions that have recently
experienced rapid house price appreciation. Changes in the economic environment could accelerate
paid and incurred loss development. Due to the inherent uncertainty of future premium levels,
losses, economic conditions, and other factors that affect earnings, it is difficult to predict the
impact of such higher claim frequencies on future earnings.
Amortization of DAC was relatively flat in the third quarter of 2005 compared to the same
period of 2004. Growth in DAC amortization due to growth in the asset balance was offset by a
refinement in methodology implemented in the first quarter of 2005 for the calculation of the
dynamic adjustment used to reflect persistency levels. See further discussion in the Deferred
Policy Acquisition Costs section below.
The increase of 11.9% in other operating expenses in the third quarter of 2005 over the third
quarter of 2004 was well below the growth in premiums and insurance in force as we continue to
focus on controlling our operating expenses. The expense ratio (ratio of the amortization of
deferred policy acquisition costs and other operating expenses to net premiums written) for the
third quarter of 2005 improved to 26.1% from 28.6% for the third quarter of 2004. We have made
substantial investments in technology that allow for growth in both our Primary and Modified Pool
insurance without proportional increases in operating expenses.
Our effective tax rate was 27.2% for the third quarter of 2005 compared to 28.3% for the third
quarter of 2004. The decrease in the effective tax rate is due primarily to an increase in
tax-exempt interest resulting from a higher percentage of tax-preferred municipal securities in the
investment portfolio. We expect our effective tax rate to remain near current levels or increase
slightly as earned premium may grow faster than tax-preferred income.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Net income increased 2.4% for the first nine months of 2005 over the first nine months of
2004, driven by a 19.5% increase in earned premiums and an 18.1% increase in net investment income,
almost fully offset by a 73.8% increase in net losses and loss adjustment expenses. Diluted
realized investment gains and losses per share, net of taxes, reduced earnings per share in the
first nine months of 2005 by $0.01 compared to a $0.02 contribution for the first nine months of
2004.
21
Production
Total insurance written in the first nine months of 2005 increased 27.5% to $16.7 billion
compared to $13.1 billion for the same period of 2004. Total insurance written includes Primary
and Modified Pool insurance written.
According to the industry data available, mortgage originations have remained relatively flat
for the first nine months of 2005 when compared to the same period of 2004, while the mortgage
insurance penetration in the mortgage marketplace has declined over these same periods. The
expansion of alternative credit enhancements such as 80/10/10 structures has eroded the mortgage
insurance industrys overall penetration into the mortgage marketplace. Despite the decline in
mortgage insurance penetration in the mortgage marketplace, our market share increased as our
primary insurance written remained flat at $8.2 billion for the first nine months of both 2005 and
2004. Modified Pool insurance written in the first nine months of 2005 was $8.4 billion compared
to $4.9 billion in the first nine months of 2004. Modified Pool insurance written will vary from
period to period for the reasons explained in the quarterly comparisons above.
A portion of the bulk transactions entered into in the last two years have been structured
with deductibles that have put us in the second loss position. Approximately 43% and 83% of our
insurance written attributable to structured bulk transactions during the first nine months of 2005
and 2004, respectively, was structured with deductibles.
Revenues
Total direct premiums written were $152.2 million in the first nine months of 2005 compared to
$128.8 million for the same period of 2004, an increase of 18.1% primarily due to a $23.2 million
increase in renewal direct premiums. Increased persistency and strong production were the main
contributors to this growth in renewal premiums.
Net premiums written increased 18.8% to $122.3 million for the first nine months of 2005 from
$102.9 million for the first nine months of 2004. Ceded premiums written increased 15.5% to $29.9
million for the first nine months of 2005 as compared to $25.9 million for the first nine months of
2004, slightly less than the growth in direct premiums written.
22
The following table provides further data on ceded premiums for the nine months ended
September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Premium cede rate (ceded premiums written as a percentage
of direct premiums written) |
|
|
19.6 |
% |
|
|
20.1 |
% |
Captive reinsurance premium cede rate (ceded premiums
written under captive reinsurance arrangements as a
percentage of direct premiums written) |
|
|
18.1 |
% |
|
|
18.1 |
% |
Average captive premium cede rate (ceded premiums written
under captive reinsurance arrangements as a percentage of
direct premiums written under captive reinsurance
arrangements) |
|
|
36.6 |
% |
|
|
36.9 |
% |
During the first nine months of 2005, 53.8% of Primary insurance written and 26.6% of total
insurance written was subject to captive reinsurance arrangements, compared to 55.0% of Primary
insurance written and 34.6% of total insurance written in the same period of 2004. The decrease in
the percentage of Primary insurance written subject to captive reinsurance arrangements from 2004
to 2005 is primarily a result of an increase in production of our lender paid product that
generally is not subject to captive reinsurance arrangements. Additionally, none of our Modified
Pool insurance is subject to captive reinsurance arrangements.
Earned premiums increased 19.5% to $124.0 million for the first nine months of 2005 from
$103.8 million for the first nine months of 2004. Our unearned premium liability decreased $1.7
million from December 31, 2004 to September 30, 2005, as compared to a decrease of $0.9 million
from December 31, 2003 to September 30, 2004. Direct written premium from the annual premium
product represented 12.9% of direct premium written in the first nine months of 2005 compared to
14.8% for the first nine months of 2004. Production of annual premium product transactions has
been decreasing in recent quarters.
Net investment income for the nine months ended September 30, 2005 increased 18.1% over the
first nine months of 2004 despite a decline in portfolio yields. This growth was primarily due to
growth in invested assets combined with an increase of $0.2 million in the market value of a
certain security that requires changes in market value to be reflected in investment income.
Average invested assets at cost or amortized cost for the first nine months of 2005 grew 16.4% over
that for the first nine months of 2004 as a result of the investment of cash flows from operations
throughout the year.
During the nine months ended September 30, 2005, we wrote down other-than-temporarily impaired
securities by approximately $170 thousand compared to approximately $304 thousand in the same
period of 2004. See further discussion of impairment write-downs in the Realized Losses and
Impairments section below.
23
Losses and Expenses
Net losses and loss adjustment expenses increased 73.8% for the first nine months of 2005 over
the first nine months of 2004. Net paid losses, excluding loss adjustment expenses, increased to
$36.4 million during the nine months ended September 30, 2005 from $20.0 million during the same
period of 2004, an increase of 82.0%. This increase primarily occurred in both the second and
third quarters of 2005 for the reasons discussed in the quarterly comparisons above. Average
severity for all loans combined was approximately $26,000 for the first nine months of 2005
compared to $21,900 for the first nine months of 2004. The following table provides detail on
direct paid losses from Primary and Modified Pool insurance for the nine months ended September 30,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Primary insurance |
|
$ |
32,810 |
|
|
$ |
18,558 |
|
Modified Pool insurance |
|
|
3,595 |
|
|
|
1,447 |
|
|
|
|
|
|
|
|
Total |
|
$ |
36,405 |
|
|
$ |
20,005 |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses also includes the change in reserves for losses and
loss adjustment expenses. The reserve for losses and loss adjustment expenses increased $7.8
million in the first nine months of 2005 compared to $5.4 million in the first nine months of 2004.
We increased reserves to reflect an increase in the number of reported defaults and higher
long-term severity trends.
Our loss ratio increased to 36.2% for the nine months September 30, 2005 from 24.9% for the
same period of 2004 due to the increases in incurred losses discussed in the quarterly comparisons
above.
Amortization of DAC increased 7.4% for the first nine months of 2005 over the first nine
months of 2004 primarily due to growth in the asset balance. See further discussion in the Deferred
Policy Acquisition Costs section below.
The increase in other operating expenses for the nine months ended September 30, 2005 over the
nine months ended September 30, 2004 of 9.9% is less than the growth in our insurance in force due
to continued efforts to control operating expenses. The expense ratio for the first nine months of
2005 declined to 26.8% from 29.2% for the first nine months of 2004.
Our effective tax rate decreased to 27.7% for the first nine months of 2005 from 28.8% for the
first nine months of 2004 due primarily to a higher proportion of interest income from
tax-preferred municipal securities.
24
Significant Customers
Our objective is controlled, profitable growth in both the flow and bulk arenas while adhering
to our risk management strategies. Our strategy is to continue our focus on national lenders while
maintaining the productive relationships that we have built with regional lenders. Our ten largest
customers were responsible for 77.6% and 77.2% of flow insurance written during the three- and
nine-month periods ended September 30, 2005 compared to 71.6% and 71.0% during the three- and
nine-month periods ended September 30, 2004. Our two largest customers were responsible for 59.3%
and 61.0% of flow insurance written during the three- and nine- month periods ended September 30,
2005 compared to 54.9% and 53.9% during the three- and nine-month periods ended September 30, 2004,
respectively. The loss of one or more of these significant customers could have an adverse effect
on our business.
Financial Position
Total assets increased to $742 million at September 30, 2005, an annualized growth rate of
13.9% over December 31, 2004, primarily the result of growth in invested assets. Total liabilities
increased to $255 million at September 30, 2005, from $235 million at December 31, 2004, primarily
due to an increase in deferred tax liabilities. This section identifies several items on our
balance sheet that are important in the overall understanding of our financial position. These
items include deferred policy acquisition costs, prepaid federal income tax and related deferred
income taxes, and loss and loss adjustment expense reserves. The majority of our assets are
contained in the investment portfolio. A separate Investments section follows the Financial
Position section and reviews our investment portfolio, key portfolio management strategies, and
methodologies by which we manage credit risk.
Deferred Policy Acquisition Costs
Costs expended to acquire new business are capitalized as DAC and recognized as expense over
the anticipated premium paying life of the policy in a manner that approximates the estimated gross
profits. We employ a dynamic model that calculates amortization of DAC separately for each year of
policy origination. The model relies on assumptions that we make based upon historical industry
experience and our own unique experience regarding the annual persistency development of each year
of policy origination. Persistency is the most important assumption utilized in determining the
timing of reported amortization expense reflected in the income statement and the carrying value of
DAC on the balance sheet. A change in the assumed persistency can impact the current and future
amortization expense as well as the carrying value on the balance sheet. Our model accelerates DAC
amortization through a dynamic adjustment when actual persistency for a particular year of policy
origination is lower than the estimated persistency originally utilized in the model. This dynamic
adjustment is capped at the levels assumed in the models, and we do not decrease DAC amortization
below the levels assumed in the model when persistency increases above those levels. When actual
persistency is lower than that assumed in our models, the dynamic
25
adjustment effectively adjusts the estimated policy life utilized in the model to a policy
life based upon the current actual persistency.
Our DAC models separate the costs capitalized and the amortization streams between
transactions arising from the structured bulk and flow delivery channels. Generally, structured
bulk transactions have significantly lower acquisition costs associated with the production of the
business and they also have a shorter original estimated policy life. We apply the dynamic
adjustment utilizing the same methodology to the structured bulk DAC models. At September 30, 2005
and December 31, 2004, net unamortized DAC relating to the structured bulk delivery channel
amounted to 6.4% and 5.4% of the total DAC on the balance sheet.
DAC amortization was relatively flat in the third quarter of 2005 compared to the third
quarter of 2004. The following table shows the changes in the DAC asset for the three months and
nine months ended September 30, 2005 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Balance beginning of period |
|
$ |
33,082 |
|
|
$ |
31,553 |
|
|
$ |
32,453 |
|
|
$ |
29,363 |
|
Costs capitalized |
|
|
3,964 |
|
|
|
4,294 |
|
|
|
11,945 |
|
|
|
13,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization normal |
|
|
(3,296 |
) |
|
|
(3,040 |
) |
|
|
(9,873 |
) |
|
|
(9,166 |
) |
Amortization dynamic
adjustment |
|
|
(418 |
) |
|
|
(630 |
) |
|
|
(1,193 |
) |
|
|
(1,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization |
|
|
(3,714 |
) |
|
|
(3,670 |
) |
|
|
(11,066 |
) |
|
|
(10,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
33,332 |
|
|
$ |
32,177 |
|
|
$ |
33,332 |
|
|
$ |
32,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2005, we refined the intra-period estimation of actual persistency for
the calculation of the dynamic adjustment to DAC amortization. Rather than utilizing a quarterly
persistency rate to calculate the dynamic adjustment as in prior periods, we utilized a projected
annual persistency rate through December 31 of the current year for this calculation. Assuming no
large swings in persistency, we expect the dynamic adjustment for the remaining quarter of 2005 to
approximate the third quarter adjustment shown above.
Prepaid Federal Income Taxes and Deferred Income Taxes
We purchase ten-year non-interest bearing United States Mortgage Guaranty Tax and Loss Bonds
(Tax and Loss Bonds) in lieu of paying current federal income taxes to take advantage of a
special contingency reserve deduction for mortgage guaranty companies. We record these bonds on
our balance sheet as prepaid federal income taxes. Purchases of Tax and Loss Bonds are essentially
a prepayment of federal income taxes
26
that will become due in ten years when the contingency reserve is released and the Tax and
Loss Bonds mature. Prepaid income taxes were $132.9 million at September 30, 2005 and $119.1
million at December 31, 2004.
Deferred income taxes are provided for the differences in reported taxable income in the
financial statements compared to the tax return. The largest cumulative difference is the special
contingency reserve deduction for mortgage insurers mentioned above. The remainder of the deferred
tax liability has primarily arisen from book and tax reporting differences related to deferred
policy acquisition costs and unrealized investment gains.
Reserve for Losses and Loss Adjustment Expenses
Our loss and loss adjustment expense reserves grew to $41.8 million at September 30, 2005 from
$34.0 million at December 31, 2004, primarily due to increases in the severity factors utilized in
our reserve calculations and the continued seasoning of our insurance in force. The increases in
the severity factors were the result of trends that we believe will affect long-term loss
development.
We calculate our best estimate of reserves to provide for the estimated costs of settling
claims on loans reported in default and loans in default that are in the process of being reported
to us, utilizing various factors that have been developed and tested over time. With respect to
loans reported in default, loss and loss adjustment expense reserves are established when notices
of default are received. Consistent with industry practices, we do not establish loss reserves for
future claims on insured loans that are not currently in default. Our reserving methodology
focuses on the determination of a loss severity factor and a projected claim rate (frequency
factor) for each reported delinquent loan category at the valuation date.
We analyze various components in determining the loss severity factor, including the baseline
severity, policy year, geography and salvage recoverable. In determining the frequency factor, we
focus our analysis on the policy year/policy age, the number of previously reported defaults to
identify chronic late payers, and the number of months that the payment is past due. We utilize
historical long-term performance in our reserving methodology and adjust our factors for current
economic conditions when we believe the conditions will significantly impact long-term loss
development trends. We are cautious about the current housing market, especially as it relates to
relaxed lender credit standards and unsustainable levels of house price appreciation in certain
areas. We will continue to monitor the trends affecting frequency and severity as well as the
results of our loss mitigation efforts. Our reserving model and judgment incorporates this
forward-looking perspective. For these reasons, there may be fluctuations in the reserve factors
utilized from period to period. Because the estimate for loss reserves is sensitive to the
estimates of claims frequency and severity, we perform analyses to test the reasonableness of the
best estimate generated by the loss reserve process and make adjustments as deemed appropriate.
Adjustments to reserve estimates are reflected in the financial statements in the periods in which
the adjustments are made.
27
Further, we analyze defaults within individual structured bulk transactions to determine
whether the business was written with a deductible that would put us in a second loss position.
Until the projected loss reserve for the aggregate defaults within a particular pool of loans with
a deductible exceeds a pre-established threshold, no reserves are established for loans within the
pool.
We believe that years two through five have the highest incidence of defaults for Primary
insurance and years two to four have the highest incidence of defaults for Modified Pool insurance.
At September 30, 2005, approximately 32% of our total risk in force was in the peak claim paying
period compared to approximately 17% at December 31, 2004. Because of this fact, we expect loss
reserves to continue to grow, reflecting the growth and seasoning of our insurance in force.
The following table shows default statistics as of September 30, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
|
|
2005 |
|
2004 |
Total business: |
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
297,400 |
|
|
|
266,574 |
|
Number of loans in default |
|
|
5,653 |
|
|
|
5,445 |
|
Percentage of loans in default
(default rate) |
|
|
1.90 |
% |
|
|
2.04 |
% |
|
|
|
|
|
|
|
|
|
Primary insurance: |
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
219,159 |
|
|
|
218,011 |
|
Number of loans in default |
|
|
4,312 |
|
|
|
4,203 |
|
Percentage of loans in default |
|
|
1.97 |
% |
|
|
1.93 |
% |
|
|
|
|
|
|
|
|
|
Modified Pool insurance: |
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
78,241 |
|
|
|
48,563 |
|
Number of loans in default |
|
|
1,341 |
|
|
|
1,242 |
|
With deductibles |
|
|
709 |
|
|
|
410 |
|
Without deductibles |
|
|
632 |
|
|
|
832 |
|
Percentage of loans in default* |
|
|
1.71 |
% |
|
|
2.56 |
% |
|
|
|
|
|
|
|
|
|
Alt-A business**: |
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
65,695 |
|
|
|
39,047 |
|
Number of loans in default |
|
|
1,122 |
|
|
|
988 |
|
Percentage of loans in default |
|
|
1.71 |
% |
|
|
2.53 |
% |
|
|
|
* |
|
Calculated based on total number of loans in default |
|
** |
|
Alt-A is included in Primary and Modified Pool insurance amounts above. As of
September 30, 2005 we changed our Alt-A classification to be based on the individual loan
characteristics, regardless of whether it was written through the flow or structured bulk
channel. Prior year amounts reflect the revised Alt-A classification. |
28
The number of loans in default reported above includes all reported delinquencies that
are in excess of two payments in arrears at the reporting date and all reported delinquencies that
were previously in excess of two payments in arrears and have not been brought current. The
default rate for Primary insurance increased slightly from December 31, 2004 to September 30, 2005,
reflecting the continued seasoning of the portfolio as more of the business reaches the period of
expected greater default incidence. The decline in the default rate for Modified Pool insurance
and Alt-A business is primarily the result of the recent growth of those products, in which we do
not expect to see a significant number of defaults in the earlier development years, and is
consistent with managements expectation.
Based upon the current and reasonable estimates of future economic conditions, we expect cash
flows from operations to be sufficient to cover expected claim payments.
Investment Portfolio
Portfolio Description
Our strategy for managing our investment portfolio is to provide an appropriate level of
investment income while managing credit risk in the portfolio. We invest for the long term, and
most of our investments are held until they mature. Our investment portfolio includes primarily
fixed-income securities, and the majority of these are tax-preferred state and municipal bonds. We
have established a formal investment policy that describes our overall quality and diversification
objectives and limits. Our investment policies and strategies are subject to change depending upon
regulatory, economic, and market conditions as well as our existing financial condition and
operating requirements, including our tax position. While we invest for the long term and most of
our investments are held until they mature, we classify our entire investment portfolio as
available for sale. This classification allows us the flexibility to dispose of securities in
order to meet our investment strategies and operating requirements. All investments are carried on
our balance sheet at fair value.
29
The following schedule shows the growth and diversification of our investment portfolio
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations |
|
$ |
13,422 |
|
|
|
2.5 |
% |
|
$ |
12,728 |
|
|
|
2.7 |
% |
State and municipal bonds |
|
|
475,970 |
|
|
|
88.4 |
|
|
|
415,250 |
|
|
|
86.4 |
|
Corporate bonds |
|
|
23,100 |
|
|
|
4.3 |
|
|
|
26,063 |
|
|
|
5.4 |
|
Mortgage-backed bonds |
|
|
63 |
|
|
|
0.0 |
|
|
|
80 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
512,555 |
|
|
|
95.2 |
|
|
|
454,121 |
|
|
|
94.5 |
|
Equity securities |
|
|
9,715 |
|
|
|
1.8 |
|
|
|
10,272 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities |
|
|
522,270 |
|
|
|
97.0 |
|
|
|
464,393 |
|
|
|
96.7 |
|
Short-term investments |
|
|
16,027 |
|
|
|
3.0 |
|
|
|
16,095 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
538,297 |
|
|
|
100.0 |
% |
|
$ |
480,488 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We seek to provide liquidity in our investment portfolio through cash equivalent
investments and through diversification and investment in publicly traded securities. We attempt
to maintain a level of liquidity and duration in our investment portfolio consistent with our
business outlook and the expected timing, direction, and degree of changes in interest rates. The
effective duration of the fixed maturity portfolio was 7.31 years at September 30, 2005 compared to
7.59 years at December 31, 2004.
We also manage risk and liquidity by limiting our exposure on individual securities. The
following table shows the ten largest exposures to an individual creditor in our investment
portfolio as of September 30, 2005 (dollars in thousands):
|
|
|
|
|
|
|
Carrying |
|
% of Total |
Name of Creditor |
|
Value |
|
Invested Assets |
Atlanta, Georgia Airport |
|
$6,873 |
|
1.28% |
Federal National Mortgage Association |
|
5,483 |
|
1.02 |
AAM/ZAZOVE Institutional Income Fund |
|
5,240 |
|
0.97 |
Port of Seattle, Washington |
|
4,631 |
|
0.86 |
Denver, Colorado City and County Airport |
|
4,253 |
|
0.79 |
Cook County, Illinois |
|
4,238 |
|
0.79 |
Charlotte, North Carolina Airport |
|
4,198 |
|
0.78 |
State of Nevada Water Pollution Control |
|
4,073 |
|
0.76 |
University of Texas |
|
4,038 |
|
0.75 |
Chicago, Illinois OHare International
Airport |
|
3,968 |
|
0.74 |
As shown above, no investment in the securities of any single issuer exceeded 2% of our
investment portfolio at September 30, 2005.
30
Our effective pre-tax yield was 4.79% at September 30, 2005 compared to 4.96% at December 31,
2004. The drop in the effective pre-tax yield reflects the decrease in new money rates available
for investment coupled with our strategies to increase the overall credit quality of the portfolio
and increase our investment in tax-preferred state and municipal bonds.
Unrealized Gains and Losses
The following table summarizes by category our unrealized gains and losses in our securities
portfolio at September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations |
|
$ |
13,460 |
|
|
$ |
72 |
|
|
$ |
(110 |
) |
|
$ |
13,422 |
|
State and municipal bonds |
|
|
460,881 |
|
|
|
15,904 |
|
|
|
(815 |
) |
|
|
475,970 |
|
Corporate bonds |
|
|
20,940 |
|
|
|
2,310 |
|
|
|
(150 |
) |
|
|
23,100 |
|
Mortgage-backed bonds |
|
|
60 |
|
|
|
3 |
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed maturities |
|
|
495,341 |
|
|
|
18,289 |
|
|
|
(1,075 |
) |
|
|
512,555 |
|
Equity securities |
|
|
8,004 |
|
|
|
1,864 |
|
|
|
(153 |
) |
|
|
9,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
503,345 |
|
|
$ |
20,153 |
|
|
$ |
(1,228 |
) |
|
$ |
522,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These unrealized gains and losses do not necessarily represent future gains or losses that we
will realize. Changing conditions related to specific securities, overall market interest rates,
or credit spreads, as well as our decisions concerning the timing of a sale, may impact values we
ultimately realize. We monitor unrealized losses through further analysis according to maturity
date, credit quality, individual creditor exposure and the length of time the individual security
has continuously been in an unrealized loss position. Of the gross unrealized losses on fixed
maturity securities shown above, approximately $580,000 related to bonds with a maturity date in
excess of ten years. The largest individual unrealized loss on any one security at September 30,
2005 was approximately $116,000 on a corporate bond with an amortized cost of $1.0 million. Gross
unrealized gains and losses at December 31, 2004 were $20.9 million and $(0.6) million,
respectively.
31
Credit Risk
Credit risk is inherent in an investment portfolio. We manage this risk through a structured
approach to internal investment quality guidelines and diversification while assessing the effects
of the changing economic landscape. One way we attempt to limit the credit risk in the portfolio
is to maintain investments with high credit ratings. The following table shows our investment
portfolio by credit ratings (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed
Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency bonds |
|
$ |
13,422 |
|
|
|
2.6 |
% |
|
$ |
12,808 |
|
|
|
2.8 |
% |
AAA |
|
|
394,149 |
|
|
|
76.9 |
|
|
|
332,929 |
|
|
|
73.3 |
|
AA |
|
|
55,285 |
|
|
|
10.8 |
|
|
|
53,285 |
|
|
|
11.7 |
|
A |
|
|
30,120 |
|
|
|
5.9 |
|
|
|
33,530 |
|
|
|
7.4 |
|
BBB |
|
|
9,827 |
|
|
|
1.9 |
|
|
|
12,680 |
|
|
|
2.8 |
|
BB |
|
|
828 |
|
|
|
0.2 |
|
|
|
254 |
|
|
|
0.1 |
|
B |
|
|
|
|
|
|
0.0 |
|
|
|
205 |
|
|
|
0.0 |
|
CCC and lower |
|
|
230 |
|
|
|
0.0 |
|
|
|
215 |
|
|
|
0.1 |
|
Not rated |
|
|
8,694 |
|
|
|
1.7 |
|
|
|
8,215 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
512,555 |
|
|
|
100.0 |
% |
|
$ |
454,121 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
$ |
1,532 |
|
|
|
15.8 |
% |
|
$ |
1,519 |
|
|
|
14.8 |
% |
A |
|
|
1,828 |
|
|
|
18.8 |
|
|
|
2,165 |
|
|
|
21.1 |
|
BBB |
|
|
1,132 |
|
|
|
11.6 |
|
|
|
1,155 |
|
|
|
11.2 |
|
BB |
|
|
175 |
|
|
|
1.8 |
|
|
|
|
|
|
|
0.0 |
|
Not rated |
|
|
485 |
|
|
|
5.0 |
|
|
|
525 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,152 |
|
|
|
53.0 |
|
|
|
5,364 |
|
|
|
52.2 |
|
Common stocks |
|
|
4,563 |
|
|
|
47.0 |
|
|
|
4,908 |
|
|
|
47.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities |
|
$ |
9,715 |
|
|
|
100.0 |
% |
|
$ |
10,272 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Further, we regularly review our investment portfolio to identify securities that may
have suffered impairments in value that will not be recovered, termed potentially distressed
securities. In identifying potentially distressed securities, we first screen for all securities
that have a fair value to cost or amortized cost ratio of less than 80%. Additionally, as part of
this identification process, we utilize the following information:
|
§ |
|
Length of time the fair value was below amortized cost |
|
|
§ |
|
Industry factors or conditions related to a geographic area negatively affecting
the security |
|
|
§ |
|
Downgrades by a rating agency |
|
|
§ |
|
Past due interest or principal payments or other violation of covenants |
|
|
§ |
|
Deterioration of the overall financial condition of the specific issuer |
In analyzing our potentially distressed securities list for other-than-temporary impairments,
we pay special attention to securities that have been on the list continually
32
for a period greater than six months. Our ability and intent to retain the investment for a
sufficient time to recover its value is also considered. We assume that, absent reliable
contradictory evidence, a security that is potentially distressed for a continuous period greater
than nine months has incurred an other-than-temporary impairment. Such reliable contradictory
evidence might include, among other factors, a liquidation analysis performed by our investment
advisors or outside consultants, improving financial performance of the issuer, or valuation of
underlying assets specifically pledged to support the credit.
When we conclude that a decline is other than temporary, the security is written down to fair
value through a charge to realized investment gains and losses. We adjust the amortized cost for
securities that have experienced other-than-temporary impairments to reflect fair value at the time
of the impairment. We consider factors that lead to an other-than-temporary impairment of a
particular security in order to determine whether these conditions have impacted other similar
securities.
Regarding the approximate $1.2 million of gross unrealized losses at September 30, 2005, no
securities had a fair value to cost or amortized cost ratio of less than 80%.
Information about unrealized gains and losses is subject to changing conditions. Securities
with unrealized gains and losses will fluctuate, as will those securities that we identify as
potentially distressed. Our current evaluation of other-than-temporary impairments reflects our
intent to hold certain securities for a reasonable period of time sufficient for a forecasted
recovery of fair value. However, we may subsequently decide to sell certain of these securities in
future periods as a result of facts and circumstances impacting a specific security. If we make
the decision to dispose of a security with an unrealized loss, we will write down the security to
its fair value if we have not sold it by the end of the reporting period.
Realized Losses and Impairments
Realized losses include both write-downs of securities with other-than-temporary impairments
and losses from the sales of securities. During the third quarter and first nine months of 2005,
we wrote down three securities by a total of approximately $170,000. Further details on the
significant write-downs in the third quarter of 2005 are as follows:
|
|
|
An approximate $75,000 write-down on preferred stock of a U.S. automobile
manufacturer for which the fair value had fluctuated to approximately 76% of cost
for the previous nine months. The impairment was primarily the result of weak
operating results for 2005 and recent rating agency downgrades. The circumstances
surrounding this impairment caused us to review a bond holding of an affiliated
finance company of the same U.S. automobile manufacturer. The fair value was
approximately 91% of the book value of this security and had been in an unrealized
loss position continuously for the previous nine months. We wrote down this
security by approximately $60,000 to a value that |
33
|
|
|
approximated its market value. No other securities in our portfolio were impacted
by these circumstances. |
During the third quarter and first nine months of 2004, we wrote down five securities by a
total of approximately $165,000 and $304,000, respectively. Further details on the significant
write-downs in the third quarter of 2004 are as follows:
|
|
|
An approximate $67,000 write-down on common stock of a pharmaceutical company
for which the fair value had fluctuated to approximately 86% of cost for the
previous seven to nine months. We sold this security in the fourth quarter of
2004 and realized a small gain. The circumstances surrounding this impairment did
not impact other securities in our portfolio. |
|
|
|
|
An approximate $53,000 write-down on preferred stock of an international
airline for which the value had fluctuated below 80% of amortized cost for over a
year. We had previously written down this security by approximately $139,000 in
prior quarters. The additional write-down in the third quarter of 2004 resulted
from our assessment that the security was other than temporarily impaired because
of a reduction in credit quality by rating agencies. We sold this security in the
fourth quarter of 2004 at an amount that approximated its carrying value after the
write-down. The circumstances surrounding this impairment did not impact other
securities in our portfolio. |
Liquidity and Capital Resources
Our 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 prepaid
federal income taxes in the form of Tax and Loss Bonds.
We generated positive cash flow from operating activities of $52.1 million in the nine months
ended September 30, 2005 compared to $51.9 million for the same period of 2004. The increase in
cash flow from operating activities in 2005 reflects the growth in premiums and investment income
received, partially offset by an increase in paid losses. Our business does not routinely require
significant capital expenditures other than for enhancements to our 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. We have no existing lines of credit due to the
sufficiency of the operating funds from the sources described above.
The insurance laws of the State of Illinois impose certain restrictions on dividends that an
insurance subsidiary can pay the parent company. These restrictions, based on statutory accounting
practices, include requirements that dividends may be paid only out of statutory earned surplus and
that limit the amount of dividends that may be paid
34
without prior approval of the Illinois Insurance Department. There have been no dividends
paid by the insurance subsidiaries to the parent company. Further, there are no restrictions or
requirements for capital support arrangements between the parent company and Triad or its
subsidiaries.
We cede business to captive reinsurance affiliates of certain mortgage lenders (captives),
primarily under excess of loss reinsurance agreements. Generally, reinsurance recoverables on loss
reserves and unearned premiums ceded to these captives are backed by trust funds or letters of
credit.
Total stockholders equity increased to $486.9 million at September 30, 2005, from $437.3
million at December 31, 2004. This increase resulted primarily from net income for the first nine
months of 2005 of $44.2 million and additional paid-in-capital of $5.0 million resulting from the
exercise of employee stock options and the related tax benefit.
Total statutory policyholders surplus for our insurance subsidiaries decreased to $134.7
million at September 30, 2005, from $135.7 million at December 31, 2004. This decline was caused
by a temporary increase in deferred tax liabilities that flows through statutory surplus. The
primary difference between statutory policyholders surplus and equity computed under generally
accepted accounting principles is the statutory contingency reserve. The balance in the statutory
contingency reserve was $427.2 million at September 30, 2005, compared to $369.4 million at
December 31, 2004. Statutory capital, for the purpose of computing the net risk in force to
statutory capital ratio, includes both policyholders surplus and the contingency reserve.
Statutory capital amounted to $561.9 million at September 30, 2005, compared to $505.1 million at
December 31, 2004.
Triads ability to write insurance depends on the maintenance of its financial strength
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 Triads ability to write additional insurance.
A number of states also generally limit Triads risk-to-capital ratio to 25-to-1. As of September
30, 2005, Triads risk-to-capital ratio was 13.0-to-1 as compared to 14.0-to-1 at December 31,
2004. The risk-to-capital ratio is calculated using net risk in force as the numerator, and
statutory capital as the denominator. Net risk in force is risk in force reduced by risk ceded
under reinsurance arrangements, including captive risk-sharing arrangements as well as any
applicable stop-loss limits and deductible amounts.
Triad is rated AA by both Standard & Poors Ratings Services and Fitch Ratings and Aa3 by
Moodys Investors Service. S&P changed its rating outlook for the U.S. private mortgage insurance
industry to Stable in February 2005. In December 2004, Fitch maintained its Negative rating
outlook for the U.S. private mortgage insurance industry. Currently, Fitch, S&P, and Moodys all
report a Stable ratings outlook for Triad. A reduction in Triads rating or outlook could
adversely affect our operations.
35
Fannie Mae revised its approval requirements for mortgage insurers in 2004. The rules
require prior approval by Fannie Mae for many of Triads activities and new products, allow for
other approved types of mortgage insurers rated less than AA, and give Fannie Mae increased
rights to revise the eligibility standards of mortgage insurers. We do not see any material impact
on our current or future operations as a result of the new rules, although a material impact could
still occur if Fannie Mae were to begin to utilize mortgage insurers rated below AA or revise
eligibility standards of mortgage insurers in a way that would be adverse to Triad.
The Office of Federal Housing Enterprise Oversight (OFHEO) issued its risk-based capital rules
for Fannie Mae and Freddie Mac in 2002. The regulation provides capital guidelines for Fannie Mae
and Freddie Mac in connection with their use of various types of credit protection counterparties
including a more preferential capital credit for insurance from a AAA rated private mortgage
insurer than for insurance from a AA rated private mortgage insurer. The phase-in period for
OFHEOs risk-based capital rules is ten years. We do not believe the new risk-based capital rules
will have a significant adverse impact on our financial condition in the future. However, if the
rules result in future changes to the preferences of Fannie Mae and Freddie Mac regarding their use
of the various types of credit enhancements or their choice of mortgage insurers based on their
credit rating, our financial condition could be significantly harmed.
Off Balance Sheet Arrangements and Aggregate Contractual Obligations
We lease office facilities, automobiles, and office equipment under operating leases with
minimum lease commitments that range from one to ten years. We have no capitalized leases or
material purchase commitments.
Our long-term debt has a single maturity date of 2028. There have been no material changes to
the aggregate contractual obligations shown in our Form 10-K.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Managements 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 prices may increase or decrease from their current levels; |
|
|
§ |
|
housing transactions requiring mortgage insurance may decrease for many reasons
including changes in interest rates or economic conditions or alternative credit
enhancement products; |
|
|
§ |
|
our market share may change as a result of changes in underwriting criteria or
competitive products or rates; |
|
|
§ |
|
the amount of insurance written could be adversely affected by changes in
federal housing legislation, including changes in the Federal Housing |
36
|
|
|
Administration loan limits and coverage requirements of Freddie Mac and Fannie Mae
(Government Sponsored Enterprises); |
|
§ |
|
our financial condition and competitive position could be affected by
legislation or regulation impacting the mortgage guaranty industry or the
Government Sponsored Enterprises, specifically, and the financial services industry
in general; |
|
|
§ |
|
rating agencies may revise methodologies for determining our financial strength
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 insurance written and the growth in insurance in force or risk in
force as well as our performance may be adversely impacted by the competitive
environment in the private mortgage insurance industry, including the type,
structure, and pricing of our products and services and our competitors; |
|
|
§ |
|
if we fail to properly underwrite mortgage loans under contract underwriting
service agreements, we may be required to assume the costs of repurchasing those
loans; |
|
|
§ |
|
with consolidation occurring among mortgage lenders and our insurance production
becoming concentrated in large lenders, our margins may be compressed and the loss
of a significant customer or a change in their business practices affecting
mortgage insurance may have an adverse effect on our earnings; |
|
|
§ |
|
our performance may be impacted by changes in the performance of the financial
markets and general economic conditions; |
|
|
§ |
|
economic downturns in regions where our risk is more concentrated could have a
particularly adverse effect on our financial condition and loss development; |
|
|
§ |
|
revisions in risk-based capital rules by the Office of Federal Housing
Enterprise Oversight for Fannie Mae and Freddie Mac could limit our ability to
compete against various types of credit protection counterparties, including AAA
rated private mortgage insurers; |
|
|
§ |
|
changes in the mortgage insurance provider eligibility guidelines of Fannie Mae
or Freddie Mac could have an adverse effect on the Company; |
|
|
§ |
|
proposed regulation by the Department of Housing and Urban Development to
exclude packages of real estate settlement services, which may include any required
mortgage insurance premium paid at closing, from the anti-referral provisions of
the Real Estate Settlement Procedures Act could adversely affect our earnings; |
|
|
§ |
|
our financial and competitive position could be affected by regulatory reviews
requiring changes to mortgage industry business practices such as captive
reinsurance. |
37
Accordingly, actual results may differ from those set forth in the forward-looking statements.
Attention also is directed to other risk factors set forth in documents filed by the Company with
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Companys market risk exposures at September 30, 2005 have not materially changed from
those identified in Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
|
a) |
|
We carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act of 1934 (Act) Rule 13a-15. Based on that evaluation, our management,
including our CEO and CFO, concluded, as of the end of the period covered by this report,
that our disclosure controls and procedures were effective. Disclosure controls and
procedures include controls and procedures designed to ensure that management, including
our CEO and CFO, is alerted to material information required to be disclosed in our
filings under the Act so as to allow timely decisions regarding our disclosures. In
designing and evaluating disclosure controls and procedures, we recognized that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to
do. |
|
|
b) |
|
There have been no changes in internal controls over financial reporting during the
third quarter of 2005 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. |
Part II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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. Exhibits See exhibit index on page 40.
38
SIGNATURE
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 7, 2005 |
|
|
|
|
|
|
/s/ Kenneth S. Dwyer
Kenneth S. Dwyer
|
|
|
|
|
Vice President and Chief Accounting Officer |
|
|
39
EXHIBIT INDEX
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
10.32 |
|
|
Employment Agreement between the Registrant and Mark K.
Tonnesen (filed as an exhibit to the Registrants Form 8-K
dated September 16, 2005 and incorporated by reference
herein). |
|
|
|
|
|
|
31(i) |
|
|
Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31(ii) |
|
|
Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32 |
|
|
Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
40