FORM 10-Q
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, 2008
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 or other jurisdiction of
incorporation or organization)
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56-1838519
(I.R.S. Employer
Identification No.) |
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101 South Stratford Road
Winston-Salem, North Carolina
(Address of principal executive offices)
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27104
(Zip Code) |
(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 a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of common stock, par value $0.01 per share, outstanding as of October 31, 2008,
was 15,116,259.
TRIAD GUARANTY INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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(dollars in thousands, except per share data) |
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2008 |
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2007 |
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(unaudited) |
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(audited) |
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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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Fixed maturities (amortized cost: $870,305 and $710,924) |
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$ |
862,486 |
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$ |
725,631 |
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Equity securities (cost: $615 and $2,520) |
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615 |
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2,162 |
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Short-term investments |
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27,619 |
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56,746 |
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Total invested assets |
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890,720 |
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784,539 |
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Cash and cash equivalents |
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47,818 |
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124,811 |
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Real estate acquired in claim settlement |
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3,661 |
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10,860 |
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Accrued investment income |
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10,808 |
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10,246 |
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Deferred policy acquisition costs |
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36,243 |
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Prepaid federal income taxes |
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15 |
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116,008 |
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Property and equipment |
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9,556 |
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11,421 |
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Reinsurance recoverable, net |
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111,827 |
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5,815 |
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Other assets |
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27,551 |
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32,910 |
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Total assets |
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$ |
1,101,956 |
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$ |
1,132,853 |
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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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$ |
1,042,053 |
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$ |
359,939 |
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Unearned premiums |
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16,870 |
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17,793 |
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Amounts payable to reinsurers |
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1,118 |
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6,525 |
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Deferred income taxes |
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22,889 |
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123,297 |
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Revolving line of credit |
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80,000 |
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Long-term debt |
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34,527 |
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34,519 |
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Accrued interest on debt |
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584 |
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1,355 |
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Accrued expenses and other liabilities |
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12,314 |
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10,574 |
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Total liabilities |
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1,130,355 |
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634,002 |
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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 15,116,259 shares at September
30, 2008 and 14,920,243 shares at December 31, 2007 |
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151 |
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149 |
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Additional paid-in capital |
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112,665 |
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109,679 |
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Accumulated other comprehensive income, net of income tax liability
of $6,475 at December 31, 2007 |
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(7,913 |
) |
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13,405 |
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Retained earnings (accumulated deficit) |
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(133,302 |
) |
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375,618 |
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Total stockholders equity (deficiency in assets) |
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(28,399 |
) |
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498,851 |
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Total liabilities and stockholders equity |
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$ |
1,101,956 |
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$ |
1,132,853 |
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See accompanying notes.
1
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(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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(dollars in thousands, except per share data) |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Premiums written: |
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Direct |
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$ |
79,041 |
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$ |
86,946 |
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$ |
252,987 |
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$ |
248,507 |
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Ceded |
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(14,847 |
) |
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(14,391 |
) |
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(46,322 |
) |
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(40,081 |
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Net premiums written |
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64,194 |
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72,555 |
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206,665 |
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208,426 |
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Change in unearned premiums |
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1,460 |
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(465 |
) |
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918 |
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(2,656 |
) |
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Earned premiums |
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65,654 |
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72,090 |
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207,583 |
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205,770 |
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Net investment income |
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10,349 |
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8,370 |
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29,071 |
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23,392 |
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Net realized investment (losses) gains |
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(6,519 |
) |
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85 |
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(7,615 |
) |
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(3,020 |
) |
Other income |
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2 |
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2 |
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6 |
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6 |
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69,486 |
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80,547 |
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229,045 |
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226,148 |
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Losses and expenses: |
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Net losses and loss adjustment expenses |
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231,194 |
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106,813 |
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745,202 |
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181,287 |
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Interest expense on debt |
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691 |
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1,161 |
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2,863 |
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2,548 |
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Policy acquisition costs |
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4,567 |
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39,416 |
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13,860 |
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Other
operating expenses (net of acquisition costs deferred) |
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8,726 |
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11,686 |
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50,070 |
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32,733 |
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240,611 |
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124,227 |
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837,551 |
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230,428 |
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Loss before income tax benefit |
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(171,125 |
) |
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(43,680 |
) |
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(608,506 |
) |
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(4,280 |
) |
Income tax benefit: |
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Current |
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(4,593 |
) |
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(2,057 |
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(4,595 |
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1,468 |
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Deferred |
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(6,437 |
) |
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(9,774 |
) |
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(94,991 |
) |
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(3,248 |
) |
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(11,030 |
) |
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(11,831 |
) |
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(99,586 |
) |
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(1,780 |
) |
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Net loss |
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$ |
(160,095 |
) |
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$ |
(31,849 |
) |
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$ |
(508,920 |
) |
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$ |
(2,500 |
) |
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Loss per common and common equivalent share: |
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Basic |
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$ |
(10.69 |
) |
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$ |
(2.15 |
) |
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$ |
(34.14 |
) |
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$ |
(0.17 |
) |
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Diluted |
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$ |
(10.69 |
) |
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$ |
(2.15 |
) |
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$ |
(34.14 |
) |
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$ |
(0.17 |
) |
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Shares used in computing loss per common and
common equivalent share: |
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Basic |
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14,973,386 |
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14,838,124 |
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14,907,129 |
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14,827,534 |
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Diluted |
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14,973,386 |
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14,838,124 |
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14,907,129 |
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14,827,534 |
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See accompanying notes.
2
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
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Nine Months Ended |
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September 30, |
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(dollars in thousands) |
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2008 |
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2007 |
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Operating activities |
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Net loss |
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$ |
(508,920 |
) |
|
$ |
(2,500 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Losses, loss adjustment expenses and unearned premium reserves |
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681,191 |
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|
118,890 |
|
Accrued expenses and other liabilities |
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|
1,791 |
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|
6,665 |
|
Reinsurance, net |
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|
(111,419 |
) |
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|
464 |
|
Accrued investment income |
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|
(575 |
) |
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|
(1,319 |
) |
Policy acquisition costs deferred |
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|
(3,173 |
) |
|
|
(14,291 |
) |
Policy acquisition costs |
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|
39,416 |
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|
13,860 |
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Net realized investment losses |
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7,615 |
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|
3,020 |
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Provision for depreciation |
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|
3,195 |
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|
1,740 |
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Accretion of discount on investments |
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1,667 |
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|
526 |
|
Deferred income taxes |
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(94,991 |
) |
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|
(3,248 |
) |
Prepaid federal income taxes |
|
|
115,993 |
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|
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(1,909 |
) |
Real estate acquired in claim settlement, net of write-downs |
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|
7,199 |
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(2,396 |
) |
Accrued interest on debt |
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(771 |
) |
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(224 |
) |
Other assets |
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5,361 |
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|
2,904 |
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Other operating activities |
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7,059 |
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(13,022 |
) |
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Net cash provided by operating activities |
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150,638 |
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|
109,160 |
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Investing activities |
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Securities available-for-sale: |
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Purchases fixed maturities |
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(782,316 |
) |
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|
(237,994 |
) |
Sales fixed maturities |
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|
586,248 |
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|
104,401 |
|
Maturities fixed maturities |
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25,902 |
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|
1,500 |
|
Purchases equities |
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(55 |
) |
Sales equities |
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|
268 |
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|
7,338 |
|
Net change in short-term investments |
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26,692 |
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(73,671 |
) |
Purchases of property and equipment |
|
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(1,348 |
) |
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(4,636 |
) |
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Net cash used in investing activities |
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(144,554 |
) |
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(203,117 |
) |
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Financing activities |
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Funding
(repayment) of revolving credit facility |
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(80,000 |
) |
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|
80,000 |
|
Excess tax benefits from share-based compensation |
|
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|
175 |
|
Proceeds from exercise of stock options |
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|
616 |
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Net cash (used in) provided by financing activities |
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(80,000 |
) |
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|
80,791 |
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Foreign currency translation adjustment on cash and cash equivalents |
|
|
(3,077 |
) |
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|
5,174 |
|
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|
Net change in cash and cash equivalents |
|
|
(76,993 |
) |
|
|
(7,992 |
) |
Cash and cash equivalents at beginning of period |
|
|
124,811 |
|
|
|
38,609 |
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Cash and cash equivalents at end of period |
|
$ |
47,818 |
|
|
$ |
30,617 |
|
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Supplemental schedule of cash flow information |
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Cash (received) paid during the period for: |
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|
|
|
Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds |
|
$ |
(115,993 |
) |
|
$ |
11,501 |
|
Interest |
|
$ |
3,631 |
|
|
$ |
2,765 |
|
See accompanying notes.
3
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
1. The Company
Triad Guaranty Inc. (the Company) is a holding company which, through its wholly-owned
subsidiary, Triad Guaranty Insurance Corporation (Triad), has historically provided mortgage
insurance coverage in the United States. Triad ceased issuing new commitments for mortgage
insurance coverage on July 15, 2008 and is in run-off. In run-off, the Company will not write any
new mortgage insurance coverage, but will continue to service its remaining insurance in force,
including collecting premiums on the remaining business in force and paying claims resulting from
loans currently in default or loans that may go into default in the future. Triad has agreed to a
corrective order from the Illinois Division of Insurance that, among other items, includes
restrictions on the distribution of funds.
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 (GAAP) 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 months and
nine months ended September 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on Form 10-K for
the year ended December 31, 2007.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, which
establishes a framework for measuring fair value under GAAP, clarifies the definition of fair value
within that framework, and expands disclosures about the use of the fair value measurements. In
accordance with SFAS 157, the Company adopted the fair value measurement on a prospective basis and
accordingly has provided the required disclosures only for the most recent interim reporting date.
The following table summarizes the assets measured at fair value and the source of the inputs in
the determination of fair value:
4
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Fair Value Measurements at Reporting Date Using |
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Quoted Prices |
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in Active |
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Significant |
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Markets for |
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Other |
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Significant |
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|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
(dollars in thousands) |
|
September 30, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
862,486 |
|
|
$ |
|
|
|
$ |
854,866 |
|
|
$ |
7,620 |
|
Equity securities |
|
|
615 |
|
|
|
615 |
|
|
|
|
|
|
|
|
|
Real estate acquired in claim
settlement |
|
|
3,661 |
|
|
|
|
|
|
|
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
866,762 |
|
|
$ |
615 |
|
|
$ |
858,527 |
|
|
$ |
7,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant unobservable inputs (Level 3) were used in determining the fair value on certain
bonds in the fixed maturities portfolio during this period. The following table provides a
reconciliation of the beginning and ending balances of these Level 3 bonds and the related gains
and losses related to these assets during the first nine months of 2008.
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
Certain Bonds in Fixed Maturities AFS |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(dollars in thousands) |
|
September 30, 2008 |
|
|
September 30, 2008 |
|
Beginning balance |
|
$ |
33,208 |
|
|
$ |
7,402 |
|
Total gains and losses (realized and unrealized): |
|
|
|
|
|
|
|
|
Included in operations |
|
|
|
|
|
|
(130 |
) |
Included in other comprehensive income |
|
|
(491 |
) |
|
|
(834 |
) |
Purchases, issuances and settlements |
|
|
(24,999 |
) |
|
|
383 |
|
Transfers in and/or out of Level 3 |
|
|
(98 |
) |
|
|
799 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
7,620 |
|
|
$ |
7,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains and loss for the period included in
operations attributable to the change in unrealized gains
or
losses relating to assets still held at the reporting date |
|
$ |
(507 |
) |
|
$ |
(854 |
) |
|
|
|
|
|
|
|
Gains and losses (realized and unrealized) included in operations or other comprehensive
income for the nine months ended September 30, 2008 are reported as net realized investment gains
as a gain of $20,000 and an unrealized loss through other comprehensive income of $854,000.
In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of
FASB Statement No. 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Accordingly, we did not apply the provisions of SFAS 157 to
nonfinancial assets and nonfinancial liabilities within the scope of FSP 157-2. Examples of items
to which the deferral is applicable include, but are not limited to:
|
|
|
Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair value in
subsequent periods; |
5
|
|
|
Reporting units measured at fair value in the goodwill impairment test under SFAS No.
142, Goodwill and Other Intangible Assets (SFAS 142), and indefinite-lived intangible
assets measured at fair value for impairment assessment under SFAS 142; |
|
|
|
|
Nonfinancial long-lived assets measured at fair value for an impairment assessment
under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets; |
|
|
|
|
Asset retirement obligations initially measured at fair value under SFAS No. 143,
Accounting for Asset Retirement Obligations; and |
|
|
|
|
Nonfinancial liabilities for exit or disposal activities initially measured at fair
value under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. |
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157 in a market that is not active. During times when there is little market
activity for a financial asset, the objective of fair value measurement remains the same, that is,
the price that would be received by the holder of the financial asset in an orderly transaction
(exit price) that is not a forced liquidation or distressed sale at the measurement date.
Determining fair value of a financial asset during a period of market inactivity may require the
use of significant judgment and evaluation of the facts and circumstances to determine if
transactions for financial assets are forced liquidation or distressed sales. An entitys own
assumptions regarding future cash flows and risk-adjusted discount rates for financial assets are
acceptable when relevant observable inputs are not available. In addition, FSP 157-3 provides an
illustrative example of key considerations when determining fair value of a financial asset when
the market for the asset is not active. FSP 157-3 was effective on October 10, 2008, including all
prior periods for which financial statements have not been issued. Any changes in valuation
techniques resulting from the adoption of FSP 157-3 will be accounted for as a change in accounting
estimated in accordance with SFAS No, 154, Accounting Changes and Error Corrections. We adopted
the guidance in FSP 157-3 in our financial statements for the reporting period ended September 30,
2008. The adoption did not have a material impact on our consolidated financial condition or
results of operations.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company does not anticipate that FSP 142-3 will have a material impact on the
Companys financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This statement identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with GAAP. SFAS 162 is effective 60
days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company does not anticipate that SFAS 162 will have a material impact on the
Companys financial position or results of operations.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 (SFAS 160). This statement establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. This statement is effective prospectively, except for certain retrospective
disclosure requirements, for fiscal years beginning after December 15, 2008. This statement will
be effective for the Company beginning January 1, 2009. The Company does not anticipate SFAS 160
will have a material impact on the Companys financial position or results of operations.
6
In December 2007, the FASB issued SFAS 141(R), Business Combinationsa replacement of FASB
Statement No. 141 (SFAS 141(R)), which significantly changes the principles and requirements for
how the acquirer of a business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. This
statement is effective prospectively, except for certain retrospective adjustments to deferred tax
balances, for fiscal years beginning after December 15, 2008. This statement will be effective for
the Company
beginning January 1, 2009. The Company does not anticipate that SFAS 141(R) will have a
material impact on the Companys financial position or results of operations.
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 policyholders.
Failure of the reinsurer to honor its obligation could result in losses to Triad; consequently,
allowances are established for amounts deemed uncollectible.
Under captive reinsurance agreements, the counterparties are required to establish trust
accounts to support the reinsurers obligations under the reinsurance agreements. At September 30,
2008, we had approximately $248 million in captive reinsurance trust balances supporting the risk
transferred to captives. As of September 30, 2008, there were 2 captive reinsurance arrangements
where the total ceded reserves, combined with any unpaid ceded claims, had exceeded the trust
balance and the recoverable was therefore limited to the trust balance.
Triad maintains a $95 million Excess-of-Loss reinsurance treaty that provides a benefit when
Triads risk-to-capital ratio exceeds 25-to-1 and the combined ratio exceeds 100% (the attachment
point). Once the attachment point has been reached, following a one-time deductible of $25
million, the carrier is responsible for the reimbursement of all paid losses in each quarter that
the attachment point is breached up to the one-time $95 million policy limit. The coverage period
is for 10 years. Additionally, terms of the treaty require Triad to continue the payment of
premiums to the reinsurer amounting to approximately $2 million per year for the entire ten year
period.
Under the terms specified above, the reinsurance treaty reached the attachment point at the
end of the first quarter of 2008, and Triad subsequently notified the reinsurance carrier of the
change in coverage. However, in April 2008, the reinsurance carrier informed Triad that, in its
opinion, Triad had not complied with covenants in the reinsurance agreement and provided notice of
termination of the agreement. In the second quarter of 2008, Triad notified the reinsurance
carrier that it disputed the carriers claim, including the carriers alleged termination of the
reinsurance agreement. Triad believes that the reinsurance carriers claims are without merit and
has demanded arbitration as provided under the agreement. Triad expects the arbitration hearing
will begin in 2008, but does not expect to have a decision until 2009. As the matter is in dispute,
the Company has not recorded any ceded reserves or any recoverable from the reinsurance carrier
under the agreement in its GAAP financial statements.
7
Insurance In Force, Dividend Restrictions, and Statutory Results
Historically, insurance regulators and rating agencies utilized the risk-to-capital ratio as a
general guideline to limit the risk a mortgage insurer could write with a 25-to-1 risk-to-capital
ratio as the maximum allowed. Capital for purposes of this computation includes the statutory
capital and surplus as well as the statutory contingency reserve. The amount of net risk for
insurance in force at September 30, 2008 and December 31, 2007, 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, any applicable stop-loss limits and deductibles. Triads
ratio is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Net risk |
|
$ |
11,349,180 |
|
|
$ |
11,967,179 |
|
|
$ |
11,741,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus |
|
$ |
284,228 |
|
|
$ |
197,713 |
|
|
$ |
33,883 |
|
Statutory contingency reserve |
|
|
1,359 |
|
|
|
387,365 |
|
|
|
626,182 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285,587 |
|
|
$ |
585,078 |
|
|
$ |
660,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio |
|
39.7 to 1 |
|
20.5 to 1 |
|
17.8 to 1 |
|
|
|
|
|
|
|
|
|
|
In run-off, Triad will not be issuing any new commitments for insurance and any new insurance
written will come only from commitments issued up to July 15, 2008. The amount of new risk written
after June 30, 2008 was approximately $54.5 million. As determined in accordance with statutory
accounting practices, Triad experienced a net loss of $399.2 million for the nine months ended
September 30, 2008, compared to a net loss of $121.3 million for the year ended December 31, 2007.
Effective September 30, 2008, Triad changed its method of calculating the reserve for losses
for its statutory financial statements to comply with its State of Domicile (Illinois) code that
requires reserves are to be provided on loans that were in default four months or greater, loans in
foreclosure and real estate owned. Previously, Triad had provided reserves on loans that were two
months or greater in default, loans in foreclosure and real estate owned, which was another
acceptable method of statutory accounting. Triad adopted this change on a prospective basis;
accordingly, the prior year statutory financial statements have not been restated. Triad recorded
the cumulative effect of the change by restating the statutory reserves as of the first day of 2008
as if it had previously utilized the new method. The impact was to decrease reserves and increase
statutory surplus by $107.1 million as of January 1, 2008. This change had no impact on the
Companys methodology for calculating reserves under GAAP.
Triad 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. At September 30, 2008, there
was no surplus available to be paid out in dividends to stockholders. Under a corrective order
issued by the Illinois Division of Insurance, Triad is currently prohibited, and expects to be
prohibited for the foreseeable future, from paying any dividends to the Company. Triad also has a
$25 million outstanding surplus note held by the Company. Under the terms of the corrective order
Triad is also currently prohibited from paying interest on the surplus note.
Loss Reserves
The Company establishes loss reserves to provide for the estimated costs of settling claims on
loans reported in default and estimates of loans in default that are in the process of being
reported to the Company as of the date of the financial statements. Consistent with industry
accounting practices, the Company does not establish
loss reserves for future claims on insured loans that are not currently in default. Amounts
recoverable from the sale
8
of properties acquired in lieu of foreclosure are considered in the
determination of the reserve estimates. Loss reserves are established by management using
historical experience and by making various assumptions and judgments about claim rates (frequency)
and claim amounts (severity) to estimate ultimate losses to be paid on loans in default. The
Companys reserving methodology gives effect to current economic conditions and profiles
delinquencies by such factors as default status, policy year, specific lenders, and the number of
months the policy has been in default, as well as whether the policies in default were underwritten
through the flow channel or as part of a structured bulk transaction. Also, the Company believes
policies originated by certain lenders may have involved misrepresentations, fraud or other
underwriting violations that provide Triad with the right to deny or rescind coverage and,
accordingly, the reserving methodology also accounts for expected rescissions. The assumptions
utilized in the calculation of the loss reserve estimate are continually reviewed, and as
adjustments to the reserve become necessary, such adjustments are reflected in the financial
statements in the periods in which the adjustments are made.
Premium Deficiency
A premium deficiency is required to be recorded if the present value of expected future cash
outflows (consisting of projected paid claims, maintenance expenses and loss adjustment expenses)
net of the present value of expected cash inflows (consisting of renewal premiums) exceeds the
recorded reserves net of any unamortized deferred acquisition costs, or DAC, balance. This
computation is prepared on a gross basis, without consideration of reinsurance (either claim
recoveries or ceded premium), and a determination is made if a premium deficiency exists. The
Company determined that a premium deficiency existed at the end of the first quarter of 2008,
however, no premium deficiency existed at June 30, 2008 or at September 30, 2008 due to subsequent
additions to the Companys loss reserves.
Litigation
On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage
Servicing, Inc. filed an adversary proceeding against Triad in the U.S. Bankruptcy Court for the
District of Delaware. The plaintiffs were debtors and debtors in possession in Chapter 11 cases
pending in the U.S. Bankruptcy Court. The complaint alleged claims for breach of contract and
declaratory judgment. Triad filed a counterclaim for declaratory judgment against the plaintiffs
and American Home Mortgage Corp. arising out of the same dispute. The parties filed a joint
stipulation of voluntary dismissal of the action on September 29, 2008. The stipulation was
granted and the adversary proceeding was dismissed on September 30, 2008 with no payment by Triad.
5. Earnings (Loss) Per Share (EPS)
Basic and diluted EPS are based on the weighted-average daily number of shares outstanding.
For the three months and nine months ended September 30, 2008 and 2007, the basic and diluted EPS
denominators are the same weighted-average daily number of shares outstanding. In computing
diluted EPS, only potential common shares that are dilutive those that reduce EPS or increase
loss per share are included. Exercise of options and unvested restricted stock are not assumed
if the result would be antidilutive, such as when a loss from operations is reported. The
numerator used in basic EPS and diluted EPS is the same for all periods presented. For the three
months and nine months ended September 30, 2008, options to purchase approximately 6,397 shares and
26,007 shares, respectively, of the Companys stock were excluded from the calculation of EPS
because they were antidilutive.
6. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss). For the Company, other comprehensive income (loss) is composed of unrealized gains or
losses on available-for-sale
securities and foreign currency exchange, net of income tax in 2007. For the three months and
nine months ended
9
September 30, 2008, the Companys comprehensive net loss was $170.6 million and
$530.2 million, respectively, while the comprehensive net loss for the three months and nine months
ended September 30, 2007 was $24.3 million and $2.4 million, respectively. The Company recorded a
full valuation allowance related to the deferred tax benefit on the unrealized loss included in the
other comprehensive income (loss) portion of stockholders equity due to the uncertainty
surrounding the net operating loss carryforward at September 30, 2008.
7. Income Taxes
Income tax expense (benefit) 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. The intra-period tax rate utilized in
the nine months ended September 30, 2008 reflects the Companys inability to recognize a benefit
for expected tax loss carry forwards. The effective tax rate for the third quarter of 2008 is lower
than that utilized in the first two quarters of 2008 due to a change in the estimated tax rate for
the full year 2008.
10
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
our consolidated financial condition, changes in financial position, and results of operations for
the three months and nine months ended September 30, 2008 and 2007. This discussion supplements
Managements Discussion and Analysis of Financial Condition and Results of Operations in our annual
report on Form 10-K for the year ended December 31, 2007, and should be read in conjunction with
the interim financial statements and notes contained herein.
Certain of the statements contained in this release are forward-looking statements and are
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements include estimates and assumptions related to economic, competitive,
regulatory, operational and legislative developments. These forward-looking statements are subject
to change, uncertainty and circumstances that are, in many instances, beyond our control and they
have been made based upon our current expectations and beliefs concerning future developments and
their potential effect on us. Actual developments and their results could differ materially from
those expected by us, depending on the outcome of a number of factors, including our ability to
operate our business in run-off, the possibility of general economic and business conditions that
are different than anticipated, legislative, regulatory, and other similar developments, changes in
interest rates, employment rates, the housing market, the mortgage industry and the stock market,
as well as the relevant factors described under Risk Factors and under Safe Harbor Statement
under the Private Securities Litigation Reform Act of 1995 in our Annual Report on Form 10-K for
the year ended December 31, 2007 and in this report and other reports and statements that we file
with the Securities and Exchange Commission. Forward-looking statements are based upon our current
expectations and beliefs concerning future events and we undertake no obligation to update or
revise any forward-looking statements to reflect the impact of circumstances or events that arise
after the date the forward-looking statements are made.
Overview
Triad Guaranty Inc. is a holding company that historically has provided private mortgage
insurance coverage in the United States through its wholly-owned subsidiary, Triad Guaranty
Insurance Corporation (Triad). Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and we are operating our business in run-off. The term
run-off, as used in this report, means writing no new mortgage insurance policies and continuing
to service existing policies. Servicing includes: receiving premiums on policies that remain in
force; cancelling coverage at the insureds request; terminating policies for non-payment of
premium; working with borrowers in default to remedy the default and/or mitigate our loss; and
settling all legitimate filed claims per our contractual obligations. Triad has agreed to a
corrective order from the Illinois Division of Insurance that, among other items, includes
restrictions on the distribution of funds by Triad.
We have historically provided Primary and Modified Pool mortgage guaranty insurance coverage
on U.S. residential mortgage loans. We classify insurance as Primary when we are in the first loss
position and the loan-to-value amount, or LTV, is 80% or greater when the loan is first insured.
We classify all other insurance as Modified Pool. The majority of our Primary insurance has been
delivered through the flow channel, which is defined as loans originated by lenders and submitted
to us on a loan-by-loan basis. We have also historically provided mortgage insurance to lenders
and investors who seek additional default protection (typically secondary coverage or on loans for
which the individual borrower has greater than 20% equity), capital relief, and credit-enhancement
on groups of loans that are sold in the secondary market. These transactions are referred to as
our structured bulk channel business. Those individual loans in the structured bulk channel in
which we are in the first loss position and the LTV ratio is greater than 80% are classified as
Primary. All of our Modified Pool insurance has been delivered through the structured bulk
channel.
11
In run-off, our revenues principally consist of (a) earned premiums from flow insurance in
force (net of reinsurance premiums ceded as part of our risk management strategies and net of
refunds), (b) earned premiums from structured bulk insurance in force (net of refunds), and
(c) investment income on invested assets. We also realize investment gains and investment losses
on the sale and impairment of securities where the net gain or loss is reported as a component of
revenue.
Our expenses consist primarily of (a) amounts paid on claims submitted, (b) changes in
reserves for estimated future claim payments on loans that are currently in default, (c) general
and administrative costs of servicing existing policies, (d) other general business expenses, and
(e) interest expense on long-term debt.
Our future profitability depends largely on (a) the conditions of the housing, mortgage and
capital markets that have a direct impact on default rates, mitigation efforts, cure rates and
ultimately the amount of claims paid, (b) the overall general state of the economy and job market,
(c) persistency levels, (d) operating efficiencies, and (e) the level of investment yield,
including realized gains and losses, on our investment portfolio.
Persistency is an important metric in understanding our premium revenue. The longer a policy
remains on our books, or persists, the greater the amount of renewal premium revenue that we will
derive from the policy. We define persistency as the amount of insurance in force at the
twelve-month end of a financial reporting period as a percentage of the amount of insurance in
force at the beginning of the period. Cancellations of policies originated during the past twelve
months are not included in our calculation of persistency. Cancellations result primarily from the
borrower refinancing or selling insured mortgaged residential properties, from policies being
rescinded due to fraud, misrepresentation or other underwriting violations, from a servicer
choosing to cancel the insurance, from the payment of a claim, and, to a lesser degree, from the
borrower achieving prescribed equity levels, at which point the lender no longer requires mortgage
guaranty insurance.
Recent Developments
On August 5, 2008, we agreed to a corrective order with the Illinois Division of Insurance
regarding restrictions on the distribution of funds from Triad to the holding company as well as
enhanced reporting requirements and other matters. We have agreed to this corrective order as a
result of the following events:
|
|
|
On June 19, 2008, we announced that we had ended negotiations with Lightyear Capital LLC
to form a new mortgage insurance company. |
|
|
|
|
We were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac
effective June 19, 2008. |
|
|
|
|
We voluntarily ceased issuing commitments for mortgage insurance effective July 15, 2008
and entered into a voluntary run-off of our remaining insurance business. |
|
|
|
|
Our level of statutory capital was and remains significantly below the thresholds
required by all state insurance departments to write mortgage guaranty insurance business. |
Under the corrective order, we were required to submit a corrective plan to the Illinois
Division of Insurance. The corrective plan we submitted included, among other items, a five-year
statutory financial projection and a detailed description of our planned course of action to
address our current financial condition. The Illinois Division of Insurance has reviewed our
preliminary corrective plan and, based on initial discussions with the Division of Insurance, we
resubmitted our revised corrective plan on October 10, 2008. We have received approval of the
revised corrective plan from the Illinois Division of Insurance and are in the process of reviewing
the revised plan with both Fannie Mae and Freddie Mac, the two primary beneficiaries of our
insurance coverage.
In connection with the decision to transition Triads business into run-off, we terminated all
agreements with the rating agencies regarding the issuance of ratings for us and our subsidiaries,
including Triad. As a result,
Standard & Poors Ratings Services, Moodys Investor Services and Fitch Ratings withdrew their
counterparty credit and financial strength ratings on Triad and on Triad Guaranty Inc.
12
Effective July 18, 2008, Mark K. Tonnesen, our former President and Chief Executive Officer
and a former director, resigned from those positions and subsequently retired on August 15, 2008.
Also effective July 18, 2008, the Board of Directors appointed William T. Ratliff, III, our
existing Chairman of the Board, as the interim President and Chief Executive Officer in addition to
continuing his role as Chairman. On October 22, 2008, the Board of Directors appointed Kenneth W.
Jones, who had been serving as our Chief Financial Officer, as our new President and Chief
Executive Officer, effective immediately. Mr. Jones retained the responsibilities of Chief
Financial Officer following his appointment as our President and Chief Executive Officer. Mr.
Ratliff continues to serve as our Chairman of the Board following his relinquishment of the
positions of President and Chief Executive Officer and will remain as an executive for the
foreseeable future.
Recent adverse events in the real estate, mortgage and financial markets have been
unprecedented. Steep declines in real estate values, tightening markets for obtaining capital or
credit, and the liquidity concerns of financial institutions have created a significant amount of
uncertainty in the capital markets, which has resulted in significant downward pressure on asset
values, especially single family homes. Like many other financial companies, we have not been
immune to these adverse developments and have seen our financial position and results of operations
deteriorate.
At September 30, 2008, the Company reported a deficiency in assets of $28.4 million compared
to stockholders equity of $140.9 million at June 30, 2008 and $498.9 million at December 31, 2007.
A deficiency in assets occurs when recorded liabilities exceed recorded assets. The deficiency in
assets is the result of five straight quarters of losses totaling $615.7 million. The largest
portion of our losses is the result of an increase in loss and loss adjustment expense reserves of
over $900 million since June 30, 2007, the last quarter for which we reported a profit. In
addition, we have paid in excess of $230 million of claims during these last five quarters, an
amount greater than the total claims paid during the first 18 years of the Companys existence. At
September 30, 2008 we had over $900 million of cash and invested assets, approximately $240 million
more than at June 30, 2007. We reported $150.6 million of cash flow from operations for the first
nine months of 2008, with $116.0 million derived from the early redemption of ten-year non-interest
bearing United States Mortgage Guaranty Tax and Loss Bonds (Tax and Loss Bonds) that will not be
an ongoing source of cash. While we reported a deficiency in assets at September 30, 2008 for GAAP
purposes, the underlying performance of our insurance portfolio was generally consistent with our
run-off plan, which projects significant losses in the early stages of the plan. Additionally, we
expect to recognize additional benefits resulting from the Modified Pool stop losses and captive
reinsurance in future periods that have not been reflected in our financial statements. We expect
to continue to report a deficiency in assets in future periods. While we do not expect the
deficiency in net assets to have a direct impact on our operations, it could adversely impact our
continued listing on The NASDAQ Stock Market.
In addition to the anticipated captive and structured benefits mentioned above, our GAAP
financial statements do not reflect the net benefit from the $95 million Excess-of-Loss reinsurance
treaty that is currently in arbitration. While we believe we will ultimately prevail in the
arbitration proceedings, GAAP currently restricts the recognition of this net benefit. However, in
consultation with the Illinois Division of Insurance, we recorded in our second quarter statutory
financial statements the full net benefit of the reinsurance treaty, which included the $95 million
benefit and an accrual for the present value of the future 10-year premium expense due the
reinsurer.
Our intention is to pay all legitimate claims and expenses. Based on information currently
available to us, we believe the combination of our current cash, investments and anticipated future
premiums will provide sufficient resources to enable Triad to meet these obligations. Our focus
remains on the efficient and effective servicing of our insured portfolio, particularly with
respect to loss mitigation. We continue to improve our processes in this area by examining and
refining all aspects of our default management and claims process, particularly for recent policy
years.
13
Included in Triads policyholders surplus for statutory purposes is a surplus note of $25
million payable to the Company, its parent. In June of 2008, the Illinois Division of Insurance
denied Triads request for the payment of the semi-annual interest of $1.1 million due on the
surplus note. Furthermore, the corrective order issued by the Illinois Division of Insurance
prohibits Triad from paying principal or interest on the surplus note for the foreseeable future.
See the Liquidity and Financial Resources section of this report for additional information
concerning the corrective order.
In July 2008, the Housing and Economic Recovery Act of 2008 was enacted, which established the
Federal Housing and Finance Agency (FHFA) as the successor regulatory agency to both Fannie Mae and
Freddie Mac. FHFA has broad legal and regulatory authority to ensure the safety and soundness of
the GSEs, including the ability to place the GSEs into receivership or conservatorship. On
September 7, 2008, FHFA placed both Fannie Mae and Freddie Mac into conservatorship.
Conservatorship is a process designed to stabilize a troubled institution with the objective of
returning the troubled institution to normal business operations. FHFA will act as the conservator
of both GSEs. FHFA has stated that the purpose of this action is to restore confidence in the GSEs,
to enhance their capacity to fulfill their mission, and to mitigate the systematic risk that has
contributed directly to the instability in the market. The impact of this action on our results of
operations and our financial condition is not clear at this time.
During October 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was enacted.
EESA, among other things, authorizes the Secretary of the United States Department of the Treasury
to purchase from certain financial institutions up to $700 billion of residential and commercial
mortgages and any other financial instrument as deemed necessary to promote financial market
stability. The Treasury already has allocated $250 billion of these funds to purchase securities
issued by certain financial institutions. Additionally, several large lenders have announced plans
to implement programs designed to explore the possibility of modifications to certain loans. The
impact of these events on our results of operations and our financial condition is unclear at this
time.
Consolidated Results of Operations
Following is selected financial information for the three months and nine months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
(dollars in thousands, except per share data) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
Earned premiums |
|
$ |
65,654 |
|
|
$ |
72,090 |
|
|
|
(9 |
)% |
|
$ |
207,583 |
|
|
$ |
205,770 |
|
|
|
1 |
% |
Net losses and loss
adjustment expenses |
|
|
231,194 |
|
|
|
106,813 |
|
|
|
116 |
|
|
|
745,202 |
|
|
|
181,287 |
|
|
|
311 |
|
Net loss |
|
|
(160,095 |
) |
|
|
(31,849 |
) |
|
|
403 |
|
|
|
(508,920 |
) |
|
|
(2,500 |
) |
|
|
20,257 |
|
Diluted loss per share |
|
$ |
(10.69 |
) |
|
$ |
(2.15 |
) |
|
|
398 |
|
|
$ |
(34.14 |
) |
|
$ |
(0.17 |
) |
|
|
20,148 |
|
The primary driver for the net loss for the three months and nine months ended September 30,
2008 continues to be a substantial increase in incurred losses and loss adjustment expenses, or
LAE. The increase in net losses and LAE is comprised of an increase in loss reserves and an
increase in paid losses. Our net loss and LAE reserves increased by $224.8 million during the third
quarter of 2008, primarily as a result of a 21% increase in the number of loans in default and a
23% increase in the risk in default attributable to loans in default. For the nine months ended
September 30, 2008, our net loss and LAE reserves increased by $682.1 million, due primarily to a
91% increase in the number of loans in default while the risk in default on loans in default
increased by 119%. The
greater growth rate of risk in default compared to loans in default is primarily attributable
to the changing characteristics of the default inventory, with new defaults having substantially
higher average risk per loan than a year ago.
14
Certain segments of our insured portfolio are primarily responsible for the growth rate in the
number of defaults and, more specifically, in the risk in default. These segments include: (i)
loans on properties in California, Florida, Arizona and Nevada (which we refer to collectively as
distressed markets), (ii) the adverse development of our 2006 and 2007 books of business, (iii)
our Primary bulk business written in 2006 and 2007, which is showing a significant amount of early
payment defaults and has a significant amount of high LTV loans, and (iv) our 2006 and 2007
Modified Pool business, which also has exhibited a significant amount of early payment defaults.
At September 30, 2008, distressed markets accounted for 49% of the number of loans in default, but
represented 61% of the gross risk in default as these markets have significantly higher loan
amounts, on average, than the remainder of the portfolio. At September 30, 2007, distressed
markets accounted for 27% of the number of loans in default and represented 41% of the gross risk
in default.
Gross paid losses for the third quarter of 2008 were $59.5 million compared to $28.5 million
for the third quarter of 2007. Average paid loss severity was $54,100 during the quarter ended
September 30, 2008, compared to $37,700 during the 2007 third quarter. The increase in average
paid severity is primarily the result of a higher percentage of claims from the more recent vintage
years and from the distressed markets, both of which reflect larger loan balances, and a decline in
our ability to mitigate losses. Gross paid losses decreased from the $68.4 million paid in the
second quarter of 2008. This decrease is due to delayed claim payments resulting from a number of
factors, including state and lender foreclosure moratoriums, delays by the servicers, and continued
efforts on our part to investigate policies for fraud, misrepresentation or other underwriting
violations, as well as an increase in the number of policies rescinded.
Earned premiums in the third quarter of 2008 decreased by 9% compared to the third quarter of
2007, but increased slightly for the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007. Total insurance in force at September 30, 2008 decreased 5% from
the level at September 30, 2007, as increased persistency was offset by a significant decline in
production over the twelve months ended September 30, 2008, as we addressed increasing
risk-to-capital levels and ultimately made the decision to transition our business into run-off.
Total annual persistency increased to 86.3% at September 30, 2008 from 80.1% at September 30, 2007.
Annual persistency for Primary and Modified Pool was 85.8% and 87.1%, respectively, at September
30, 2008; and 79.1% and 81.5%, respectively, at September 30, 2007.
Other operating expenses for the third quarter of 2008 were 25.3% lower compared to the second
quarter of 2008. This was primarily attributable to the termination of more than 40% of our
workforce during the second and third quarters of 2008, in connection with our decision to
transition our business to run-off.
Our effective tax rate decreased to 6.5% and 16.4%, respectively, for the third quarter and
nine months ended September 30, 2008, compared to 27.1% and 41.6% for the same periods of 2007.
The effective tax rate is lower than the marginal rate of 35% due to the inability to recognize any
tax benefits from expected net operating tax loss carryforwards.
We describe our results of operations in greater detail in the discussion that follows. The
information is presented in four categories: Production; Insurance and Risk In Force; Revenues; and
Losses and Expenses.
Production
On July 15, 2008, we ceased issuing commitments for mortgage insurance. Going forward, our
production will consist of certificates issued from commitments for mortgage insurance that were
entered into prior to July 15, 2008. We wrote approximately $420 million and $3.5 billion,
respectively, of new insurance for the three months
and nine months ended September 30, 2008. All production in 2008 was from our Primary flow
channel. For the three and nine months ended September 30, 2007, we wrote approximately $4.4
billion and $20.2 billion of new insurance. We do not expect a material amount of production going
forward.
15
Insurance and Risk in Force
The following table provides detail on our direct insurance in force at September 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
(dollars in millions) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
Primary insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Flow primary insurance |
|
$ |
40,451 |
|
|
$ |
40,610 |
|
|
|
(0 |
)% |
Structured bulk insurance |
|
|
4,065 |
|
|
|
4,700 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance |
|
|
44,516 |
|
|
|
45,310 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance |
|
|
19,823 |
|
|
|
22,737 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
$ |
64,339 |
|
|
$ |
68,047 |
|
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Our Primary insurance in force at September 30, 2008 declined by approximately 2% compared to
September 30, 2007 due to a significant decline in production during that time period. The
persistency rate continued to improve during this period, which served to temper the decline in
Primary insurance in force. Modified Pool insurance in force declined by 12.8% because no new
Modified Pool insurance was written in the twelve months ended September 30, 2008.
Primary insurance persistency increased to 85.8% at September 30, 2008 from 79.1% at September
30, 2007. Modified Pool persistency increased to 87.1% at September 30, 2008 from 81.5% one year
prior. The increase in persistency rates is reflective of the inability of many borrowers to
refinance or sell their homes; the result of tightening credit standards combined with the general
decline in home prices. We currently anticipate that persistency rates will continue near current
levels throughout the remainder of 2008 and into 2009. However, persistency could decline if
interest rates decline significantly, credit becomes more available, or the housing and mortgage
markets begin to improve, which could have a significant impact on future earned premiums. It is
unclear at this time how recent government intervention in the financial markets will affect the
availability of credit or home prices. Furthermore, if persistency were to decline, the decline
may be concentrated in areas experiencing economic expansion and home price appreciation, but may
not decrease or may not decrease to the same degree in distressed markets or other areas
experiencing economic contraction and declining home prices. As a result, our remaining insurance
in force could be more heavily concentrated in areas experiencing economic contraction and
declining home prices, resulting in increased risk and the possibility of a higher percentage of
defaults.
The following tables provide information on selected risk characteristics of our business
based on risk in force at September 30, 2008 and 2007. Risk in force is the total amount of
coverage for which we are at risk under our certificates of insurance. Although some of the risk
factors addressed in the table showed slight improvement based upon these risk characteristics, the
following is a list of characteristics we believe are important indicators of increased risk in our
portfolios:
|
|
|
The percentage of business defined as non-prime credit quality; |
|
|
|
|
The percentage of Alt-A business; |
|
|
|
|
The percentage of business with a loan-to-value (LTV) greater than 95%; |
|
|
|
|
The percentage of interest only loans and adjustable rate mortgages (ARMs), particularly
ARMs with potential negative amortization; |
|
|
|
|
The percentage of condominium property types; |
|
|
|
|
The percentage of non-primary residence occupancy status; |
|
|
|
|
The percentage of loans in excess of $250,000; |
16
|
|
|
The concentration of risk in distressed market states; and |
|
|
|
|
The presence of multiple risk factors on a single insured loan. |
Risk in Force (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
Modified Pool |
|
|
September, 30 |
|
September, 30 |
(dollars in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Gross Risk in Force |
|
$ |
11,583 |
|
|
$ |
11,871 |
|
|
$ |
5,776 |
|
|
$ |
6,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
75.9 |
% |
|
|
73.5 |
% |
|
|
27.9 |
% |
|
|
27.8 |
% |
Alt-A |
|
|
20.6 |
|
|
|
22.8 |
|
|
|
71.3 |
|
|
|
71.4 |
|
A-Minus |
|
|
3.1 |
|
|
|
3.2 |
|
|
|
0.7 |
|
|
|
0.7 |
|
Sub Prime |
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 95% |
|
|
24.9 |
% |
|
|
25.2 |
% |
|
|
|
% |
|
|
|
% |
90.01% to 95.00% |
|
|
32.6 |
|
|
|
32.7 |
|
|
|
0.2 |
|
|
|
0.3 |
|
90.00% and below |
|
|
42.5 |
|
|
|
42.1 |
|
|
|
99.8 |
|
|
|
99.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
66.6 |
% |
|
|
63.3 |
% |
|
|
26.3 |
% |
|
|
26.1 |
% |
Interest Only |
|
|
10.4 |
|
|
|
11.0 |
|
|
|
23.3 |
|
|
|
23.1 |
|
ARM (amortizing) fixed period 5 years or greater |
|
|
8.6 |
|
|
|
10.0 |
|
|
|
31.1 |
|
|
|
33.6 |
|
ARM (amortizing) fixed period less than 5 years |
|
|
2.1 |
|
|
|
2.5 |
|
|
|
5.6 |
|
|
|
4.0 |
|
ARM (potential negative amortization) |
|
|
12.3 |
|
|
|
13.2 |
|
|
|
13.7 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium |
|
|
10.7 |
% |
|
|
10.4 |
% |
|
|
9.6 |
% |
|
|
9.3 |
% |
Other (principally single-family detached) |
|
|
89.3 |
|
|
|
89.6 |
|
|
|
90.4 |
|
|
|
90.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence |
|
|
87.8 |
% |
|
|
87.6 |
% |
|
|
73.4 |
% |
|
|
73.6 |
% |
Secondary home |
|
|
7.9 |
|
|
|
7.9 |
|
|
|
6.1 |
|
|
|
6.2 |
|
Non-owner occupied |
|
|
4.3 |
|
|
|
4.5 |
|
|
|
20.5 |
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0 - $50,000 |
|
|
0.8 |
% |
|
|
1.1 |
% |
|
|
0.5 |
% |
|
|
0.3 |
% |
$51,000 - $100,000 |
|
|
9.3 |
|
|
|
11.2 |
|
|
|
5.3 |
|
|
|
3.5 |
|
$100,001 - $250,000 |
|
|
51.8 |
|
|
|
54.9 |
|
|
|
45.4 |
|
|
|
39.6 |
|
$250,001 - $500,000 |
|
|
32.3 |
|
|
|
28.4 |
|
|
|
42.1 |
|
|
|
42.7 |
|
Over $500,000 |
|
|
5.8 |
|
|
|
4.4 |
|
|
|
6.7 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distressed market states (AZ, CA, FL, NV) |
|
|
27.2 |
% |
|
|
26.9 |
% |
|
|
48.9 |
% |
|
|
47.6 |
% |
Non-distressed market states |
|
|
72.8 |
|
|
|
73.1 |
|
|
|
51.1 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
(1) |
|
Gross risk in force is on a per policy basis and does not account for risk ceded to captive
reinsurers or
applicable stop-loss amounts and deductibles on Modified Pool
structured bulk transactions. Percentages represent distribution of gross risk in force. |
17
The above table reflects certain features of loans that may affect levels of risk in our
portfolio. For example, our portfolio contains significant exposure to Alt-A loans as well as
loans with the potential for negative amortization (PNAMs). An inherent risk in a PNAM loan is
the scheduled milestone in which the borrower must begin making amortizing payments. These
payments can be substantially greater than the minimum payments required before the milestone is
met. While most of these PNAMs have interest rates that will reset frequently, these loans
generally have only minimal payment increases until the amortizing payments begin. Therefore, in
many cases, the borrower has not been required to make a significantly increased payment or to
refinance. This feature adds some uncertainty and potential risk. Due in part to recent market
conditions, the Alt-A loans and the PNAM loans, as a group, performed significantly worse than the
remaining prime fixed rate loans through September 30, 2008.
We believe that a policy with a high LTV, all else being equal, will have a greater risk of
default than a policy with a low LTV, especially in periods that experience declining home prices.
In the table above, the percentage of risk in force by LTV is based on the LTV at the time the loan
was originated. We have not been provided with the mark-to-market LTV of our insured portfolio.
To the extent that an insured loan in our portfolio has experienced a decline in the underlying
value, the mark-to-market LTVs of the policy may be substantially higher than that at
origination.
As shown in the table below, business originated in 2006 and 2007 comprises the majority of
our direct risk in force. This is due to the significant growth in our production in these years
and the amount of refinancing that took place in 2003 through 2005 of prior book years. Policies
originated in 2006 and 2007 have significantly higher amounts of average risk per policy than
policies originated in prior years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
|
Modified Pool * |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
Direct Risk |
|
|
|
|
|
|
Direct Risk |
|
|
|
|
(dollars in millions) |
|
in Force |
|
|
Percent |
|
|
in Force |
|
|
Percent |
|
2002 and before |
|
$ |
567.6 |
|
|
|
4.9 |
% |
|
$ |
4.5 |
|
|
|
0.6 |
% |
2003 |
|
|
996.1 |
|
|
|
8.6 |
|
|
|
29.6 |
|
|
|
3.9 |
|
2004 |
|
|
973.0 |
|
|
|
8.4 |
|
|
|
74.3 |
|
|
|
9.8 |
|
2005 |
|
|
1,447.9 |
|
|
|
12.5 |
|
|
|
255.4 |
|
|
|
33.7 |
|
2006 |
|
|
2,455.6 |
|
|
|
21.2 |
|
|
|
285.8 |
|
|
|
37.7 |
|
2007 |
|
|
4,494.2 |
|
|
|
38.8 |
|
|
|
108.4 |
|
|
|
14.3 |
|
2008 |
|
|
648.6 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,583.0 |
|
|
|
100.0 |
% |
|
$ |
758.0 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
For Modified Pool, the Direct Risk in Force is calculated utilizing the particular stop-loss
limits and
deductibles within each specific structure. |
Under captive reinsurance programs, reinsurance companies that are affiliates of the lenders
assume a portion of the risk associated with the lenders insured book of business in exchange for
a percentage of the premium. Under the captive reinsurance program, the risk held by the captive
is supported by assets held in trust with Triad as the beneficiary. At September 30, 2008, we had
approximately $248 million in captive reinsurance trust balances supporting the risk transferred to
captives, helping to limit our future loss exposure. Approximately 58% of our Primary flow
insurance in force at both September 30, 2008 and at September 30, 2007 was subject to these
captive arrangements.
18
Revenues
A summary of the significant individual components of our revenue for the third quarter and
the first nine months of 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Direct premium written |
|
$ |
79,041 |
|
|
$ |
86,946 |
|
|
|
(9 |
)% |
|
$ |
252,987 |
|
|
$ |
248,507 |
|
|
|
2 |
% |
Ceded premium written |
|
|
(14,847 |
) |
|
|
(14,391 |
) |
|
|
3 |
|
|
|
(46,322 |
) |
|
|
(40,081 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium written |
|
|
64,194 |
|
|
|
72,555 |
|
|
|
(12 |
) |
|
|
206,665 |
|
|
|
208,426 |
|
|
|
(1 |
) |
Change in unearned premiums |
|
|
1,460 |
|
|
|
(465 |
) |
|
|
(414 |
) |
|
|
918 |
|
|
|
(2,656 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
65,654 |
|
|
$ |
72,090 |
|
|
|
(9 |
)% |
|
$ |
207,583 |
|
|
$ |
205,770 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
10,349 |
|
|
$ |
8,370 |
|
|
|
24 |
% |
|
$ |
29,071 |
|
|
$ |
23,392 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains |
|
$ |
(6,519 |
) |
|
$ |
85 |
|
|
|
(7,769 |
)% |
|
$ |
(7,615 |
) |
|
$ |
(3,020 |
) |
|
|
152 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
69,486 |
|
|
$ |
80,547 |
|
|
|
(14 |
)% |
|
$ |
229,045 |
|
|
$ |
226,148 |
|
|
|
1 |
% |
For the three months ended September 30, 2008, direct premium written decreased by 9% as total
insurance in force declined 3% from the period one-year prior and premium refunded increased to
$4.8 million from $840,000 in the third quarter of 2007. This increase in premium refunded is
primarily the result of an increase in rescission activity during the third quarter of 2008. When
an investigation finds that fraud, misrepresentation or other specified violations occurred in the
origination of a loan, our master policy provides that we may rescind the insurance certificate.
When this happens, insurance coverage from the date of issuance is cancelled and all of the
previously paid premium is refunded. The year-over-year increase in premium written for the nine
months ended September 30, 2008 is primarily a result of higher levels of insurance in force in the
first half of 2008 compared to the first half of 2007, offset in part by an increase in premiums
refunded.
Ceded premium written is comprised of premiums written under excess of loss reinsurance
treaties with captives as well as non-captive reinsurance companies. Ceded premium during the
three months and nine months ended September 30, 2008 increased over the respective periods of 2007
due to an increase in average insurance in force subject to captive reinsurance. The premium cede
rate for the three months and nine months ended September 30, 2008 increased to 18.8% and 18.3%,
respectively, from 16.6% and 16.1%, respectively, in the periods one-year prior as insurance in
force subject to captive reinsurance comprised a larger percentage of our total insurance in force.
Net investment income grew during the third quarter and the first nine months of 2008 as
compared to the same periods of 2007, primarily due to the growth in average invested assets.
During the third quarter and first nine months of 2008, average invested assets at cost or
amortized cost grew by 21.0% and 21.2%, respectively, compared to the same periods of 2007 as a
result of the investment of positive cash flows from operations, which included $62.3 million and
$114.6 million, respectively, from the redemption of Tax and Loss Bonds. The book yield of the
investment portfolio was 4.55% at September 30, 2008 compared to 4.63% at September 30, 2007. Net
realized investment losses for the third quarter and nine months ended September 30, 2008 increased
to $6.5 million and $7.6 million, respectively, compared to a net realized investment gain of
$85,000 in the third quarter of 2007 and a net realized investment loss of $3.0 million in the nine
months ended September 30, 2007. The increase in net realized investment losses is primarily the
result of other-than-temporary impairment losses on our tax-
preferred portfolio. For a further discussion on the investment portfolio and the
repositioning of the investment portfolio, see Investment Portfolio.
19
Losses and Expenses
A summary of the individual components of losses and expenses for the three months and nine
months ended September 30, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Net losses and loss adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid claims |
|
$ |
59,357 |
|
|
$ |
28,470 |
|
|
|
108 |
% |
|
$ |
167,708 |
|
|
$ |
64,272 |
|
|
|
161 |
% |
Change in reserves |
|
|
165,958 |
|
|
|
76,612 |
|
|
|
117 |
% |
|
|
559,469 |
|
|
|
113,888 |
|
|
|
391 |
% |
Loss adjustment expenses |
|
|
5,879 |
|
|
|
1,731 |
|
|
|
240 |
% |
|
|
18,025 |
|
|
|
3,127 |
|
|
|
476 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
231,194 |
|
|
$ |
106,813 |
|
|
|
116 |
% |
|
$ |
745,202 |
|
|
$ |
181,287 |
|
|
|
311 |
% |
Policy acquisition costs |
|
|
|
|
|
|
4,567 |
|
|
|
(100 |
) |
|
|
39,416 |
|
|
|
13,860 |
|
|
|
184 |
|
Other operating expenses (net of
acquisition
costs deferred) |
|
|
8,726 |
|
|
|
11,686 |
|
|
|
(25 |
) |
|
|
50,070 |
|
|
|
32,733 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
352.1 |
% |
|
|
148.2 |
% |
|
|
138 |
|
|
|
359.0 |
% |
|
|
88.1 |
% |
|
|
307 |
|
Expense ratio |
|
|
13.6 |
% |
|
|
22.4 |
% |
|
|
(39 |
) |
|
|
26.4 |
% |
|
|
22.4 |
% |
|
|
18 |
|
Combined ratio |
|
|
365.7 |
% |
|
|
170.6 |
% |
|
|
114 |
|
|
|
385.4 |
% |
|
|
110.5 |
% |
|
|
249 |
|
Net losses and LAE are comprised of both paid losses and the increase in the loss and LAE
reserve during the period. Net losses and LAE for the third quarter and first nine months of 2008
increased significantly over the same periods of 2007, reflecting significant increases in reserves
as well as growth in paid losses.
The following table provides detail on paid claims and the average severity for our Primary
and Modified Pool insurance for the third quarter and nine months ended September 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Paid claims: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance |
|
$ |
48,766 |
|
|
$ |
23,058 |
|
|
|
111.5 |
% |
|
$ |
126,189 |
|
|
$ |
56,192 |
|
|
|
125 |
% |
Modified Pool
insurance |
|
|
10,755 |
|
|
|
5,413 |
|
|
|
98.7 |
|
|
|
41,799 |
|
|
|
8,080 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,521 |
|
|
$ |
28,471 |
|
|
|
109.1 |
% |
|
$ |
167,988 |
|
|
$ |
64,272 |
|
|
|
161 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of claims paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance |
|
|
950 |
|
|
|
625 |
|
|
|
52.0 |
% |
|
|
2,555 |
|
|
|
1,691 |
|
|
|
51 |
% |
Modified Pool
insurance |
|
|
150 |
|
|
|
131 |
|
|
|
14.5 |
|
|
|
680 |
|
|
|
237 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,100 |
|
|
|
756 |
|
|
|
45.5 |
% |
|
|
3,235 |
|
|
|
1,928 |
|
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of paid claims increased significantly during the third quarter and the first nine
months of 2008 compared to the same periods in 2007. The growth rate in the amount of paid claims
continues to outpace the growth rate in the number of paid claims due to a significant increase in
average severity on claims paid. Average severity on claims paid increased from $37,700 in the
third quarter of 2007 to $54,100 during the third quarter of 2008. This increase was primarily
the result of larger loan sizes on the claims paid and is reflective of (i) the development of the
more recent vintage years, specifically the 2005, 2006 and 2007 vintage years, which have
significantly higher average loan sizes than previous books, (ii) an increase in paid claims
relating to loans originated in the distressed markets, which have significantly higher average
loan sizes in general than other states, and (iii) a reduced ability to mitigate losses.
20
The amount of paid claims decreased in the third quarter compared to the second quarter of
2008. This was due to delays in claim payments resulting from a number of factors, including state
and lender foreclosure moratoriums, delays by the servicers and our ongoing effort to identify
fraud, misrepresentation or other underwriting violations in policies which are currently in
default, as well as increases in rescission activity.
The following table reflects the average loan size and average per policy risk in force by
vintage year. As each of the more recent vintage years season, the amount of risk per default and,
ultimately, the amount of paid claims as well as the average paid claim are expected to increase.
Furthermore, the 2006 and 2007 books are exhibiting adverse development patterns and thus are
expected to impact the amount of paid claims and the average paid claim earlier than what we have
experienced historically. We also expect policies from the 2006 and 2007 books will comprise a
greater percent of our paid claim inventory in the future, which is expected to increase the
average paid claim.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
Modified Pool |
|
|
Average |
|
Average |
|
Average |
|
Average |
Vintage Year |
|
Loan Size |
|
Insured Risk |
|
Loan Size |
|
Insured Risk |
2002 and Prior |
|
$ |
105,000 |
|
|
$ |
26,812 |
|
|
$ |
78,646 |
|
|
$ |
25,485 |
|
2003 |
|
|
116,321 |
|
|
|
28,090 |
|
|
|
142,804 |
|
|
|
42,269 |
|
2004 |
|
|
130,940 |
|
|
|
34,893 |
|
|
|
147,811 |
|
|
|
43,855 |
|
2005 |
|
|
156,352 |
|
|
|
40,991 |
|
|
|
177,428 |
|
|
|
57,766 |
|
2006 |
|
|
208,012 |
|
|
|
53,746 |
|
|
|
262,528 |
|
|
|
69,437 |
|
2007 |
|
|
207,695 |
|
|
|
56,024 |
|
|
|
272,463 |
|
|
|
79,328 |
|
2008 |
|
|
203,440 |
|
|
|
46,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Average |
|
$ |
171,510 |
|
|
$ |
44,628 |
|
|
$ |
208,465 |
|
|
$ |
60,744 |
|
Beginning in late 2006, we experienced a reduction in our ability to reduce the severity of
our claims paid through our traditional mitigation processes, which was a result of weakness in the
housing market at that time. Subsequent declines in home prices across almost all markets with
significant declines in the distressed markets have significantly impacted our ability to mitigate
losses through sales of properties before or during the foreclosure process. When the property does
not sell prior to foreclosure, or sells after foreclosure but prior to when the claim is paid, we
often pay the full amount of our coverage, which we call a full option settlement. Full option
settlements as a percentage of our paid claims have generally increased since the fourth quarter of
2006. Declining home prices combined with the limited availability of credit in the U.S. financial
markets continues to adversely impact our ability to mitigate claims. To the extent these
conditions do not significantly improve, our loss mitigation opportunities will continue to be
adversely impacted.
As illustrated under Insurance and Risk in Force, we have insured a larger percentage of
mortgages in excess of $250,000 in recent years. Claim payments on larger mortgages are greater
even if coverage percentages remain constant. Claim payments on these larger mortgages are
reflected in the increase in average severity during
the first nine months of 2008. We expect severity will continue to trend upward as the more
recent vintage years, which contain the majority of the mortgages in excess of $250,000, continue
to develop.
21
The table below provides the gross cumulative paid loss ratios by book year (calculated as
direct losses paid divided by direct premiums received, in each case for a particular book year)
that have developed through September 30, 2008 and 2007. The data below excludes the effects of
reinsurance.
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss Ratios |
|
|
as of September 30, |
Book Year |
|
2008 |
|
2007 |
1996 |
|
|
14.6 |
% |
|
|
14.5 |
% |
1997 |
|
|
10.4 |
|
|
|
10.2 |
|
1998 |
|
|
6.9 |
|
|
|
6.7 |
|
1999 |
|
|
9.9 |
|
|
|
9.9 |
|
2000 |
|
|
35.7 |
|
|
|
35.3 |
|
2001 |
|
|
32.2 |
|
|
|
30.6 |
|
2002 |
|
|
33.0 |
|
|
|
31.6 |
|
2003 |
|
|
19.2 |
|
|
|
15.7 |
|
2004 |
|
|
23.1 |
|
|
|
15.9 |
|
2005 |
|
|
40.0 |
|
|
|
15.3 |
|
2006 |
|
|
37.3 |
|
|
|
6.0 |
|
2007 |
|
|
9.1 |
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
We generally anticipate making higher claim payments in the second through the fifth years
after the loan is originated. The more recent vintage years have developed at a much faster rate
from a default and paid claim perspective than the historical trends primarily due to the rapid
decline in housing markets. We expect the cumulative paid loss ratios for the 2005, 2006, and 2007
books of business will ultimately be significantly higher than the previous books of business.
Net losses and loss adjustment expenses also include the change in reserves for losses and
loss adjustment expenses. The following table provides further information about our loss reserves
excluding the effects of captive reinsurance at September 30, 2008, December 31, 2007 and September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Primary insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for reported defaults |
|
$ |
656,096 |
|
|
$ |
251,316 |
|
|
$ |
144,189 |
|
Reserves for defaults incurred but not reported |
|
|
86,961 |
|
|
|
40,691 |
|
|
|
19,765 |
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance |
|
|
743,057 |
|
|
|
292,007 |
|
|
|
163,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for reported defaults |
|
|
258,347 |
|
|
|
54,876 |
|
|
|
31,164 |
|
Reserves for defaults incurred but not reported |
|
|
23,735 |
|
|
|
8,340 |
|
|
|
2,619 |
|
|
|
|
|
|
|
|
|
|
|
Total Modified Pool insurance |
|
|
282,082 |
|
|
|
63,216 |
|
|
|
33,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loss adjustment expenses |
|
|
16,914 |
|
|
|
4,716 |
|
|
|
2,718 |
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and loss adjustment
expenses |
|
$ |
1,042,053 |
|
|
$ |
359,939 |
|
|
$ |
200,455 |
|
|
|
|
|
|
|
|
|
|
|
22
The following table shows the change in reserves for losses and LAE for the three and nine
months ended September 30, 2008 and September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
(dollars in thousands) |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
% Change |
Increase in reserve for losses and
loss adjustment expenses |
|
$ |
165,958 |
|
|
$ |
76,612 |
|
|
|
117 |
% |
|
$ |
559,469 |
|
|
$ |
113,888 |
|
|
|
391 |
% |
Reacting to the rapidly changing housing markets and the shifting mix in the composition of
our defaults, such as geographic location, loan size and policy year, we have increased reserves by
420% from a year ago, and 190% since December 31, 2007. The increase in reserves reflects a
growing number of loans in default, an increase in the average risk in default, and a decline in
the cure rate of defaults. Our reserving model incorporates managements judgments and assumptions
regarding the impact of the current housing and economic environment on the estimate of the
ultimate claims we will pay on loans currently in default. To reflect the significant changes in
the housing marketplace and economy that have occurred over the past year, both the frequency and
severity factors utilized in the calculation of the reserve have increased since September 30,
2007, which also impacted the size of the reserve increase. Future economic conditions surrounding
the housing or mortgage markets could significantly impact the development of our default inventory
and the ultimate amount of claims paid.
In general, defaults have increased across the country although the distressed markets have
experienced more significant increases. Defaults in the distressed markets have increased 371% from
September 30, 2007 to September 30, 2008. Defaults related to the remaining states, excluding the
distressed markets, have increased 81% from September 30, 2007 to September 30, 2008.
Additionally, on average, the distressed market states have a higher average loan balance and
average risk in default than the other states. At September 30, 2008, these four states had average
loan balances of approximately $249,000 compared to approximately $161,000 for the remainder of the
portfolio, which increases the potential adverse impact that further defaults in these distressed
markets may have on future growth in risk in default and reserves.
23
The following table indicates the growth in both the gross risk in default in these four
distressed market states and reserves attributable to these states at September 30, 2008, December
31, 2007 and September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(dollars in thousands) |
|
2008 |
|
2007 |
|
2007 |
% of Gross Risk In Force: |
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
14.7 |
% |
|
|
15.1 |
% |
|
|
15.2 |
% |
Florida |
|
|
11.5 |
% |
|
|
12.1 |
% |
|
|
12.2 |
% |
Arizona |
|
|
5.2 |
% |
|
|
5.5 |
% |
|
|
5.6 |
% |
Nevada |
|
|
3.0 |
% |
|
|
3.1 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distressed
Market States |
|
|
34.4 |
% |
|
|
35.9 |
% |
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Gross Risk in Default: |
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
25.5 |
% |
|
|
19.1 |
% |
|
|
15.8 |
% |
Florida |
|
|
23.7 |
% |
|
|
20.0 |
% |
|
|
16.5 |
% |
Arizona |
|
|
6.7 |
% |
|
|
5.6 |
% |
|
|
4.9 |
% |
Nevada |
|
|
4.7 |
% |
|
|
3.9 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distressed
Market States |
|
|
60.6 |
% |
|
|
48.7 |
% |
|
|
41.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Gross Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
24.4 |
% |
|
|
18.3 |
% |
|
|
15.0 |
% |
Florida |
|
|
24.2 |
% |
|
|
20.0 |
% |
|
|
16.3 |
% |
Arizona |
|
|
6.7 |
% |
|
|
5.4 |
% |
|
|
4.7 |
% |
Nevada |
|
|
4.5 |
% |
|
|
3.9 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distressed
Market States |
|
|
59.9 |
% |
|
|
47.6 |
% |
|
|
39.8 |
% |
Certificates originated during 2006 and 2007 comprise 62.7% of our loans in default, but 73.4%
of the risk in default at September 30, 2008. The difference in percentages of loans in default
and risk in default reflects the higher loan amounts and the mix of our business. To illustrate
the impact of the changes in the frequency and severity factors utilized in the reserve model, the
following table details the amount of risk in default and the reserve balance as a percentage of
risk in default at September 30, 2008, December 31, 2007 and September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(dollars in thousands) |
|
2008 |
|
2007 |
|
2007 |
Risk on loans in default |
|
$ |
2,191,743 |
|
|
$ |
1,000,384 |
|
|
$ |
669,839 |
|
Gross Case Reserves
as a percentage of
risk in default (1) |
|
|
45.4 |
% |
|
|
36.6 |
% |
|
|
32.1 |
% |
|
|
|
(1) |
|
Reflects gross case reserves, which excludes IBNR and ceded reserves, as a percent of risk in
default for total primary delinquent loans and total modified pool delinquent loans. |
The number of loans in default 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.
24
The following table shows default statistics as of September 30, 2008, December 31, 2007 and
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(dollars in thousands) |
|
2008 |
|
2007 |
|
2007 |
Total business: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
354,645 |
|
|
|
378,907 |
|
|
|
378,814 |
|
With deductibles |
|
|
53,780 |
|
|
|
59,592 |
|
|
|
61,634 |
|
Without deductibles |
|
|
300,865 |
|
|
|
319,315 |
|
|
|
317,180 |
|
Number of loans in default |
|
|
32,105 |
|
|
|
16,821 |
|
|
|
12,367 |
|
With deductibles |
|
|
7,278 |
|
|
|
4,072 |
|
|
|
3,104 |
|
Without deductibles |
|
|
24,827 |
|
|
|
12,749 |
|
|
|
9,263 |
|
Percentage of loans in default
(default rate) |
|
|
9.05 |
% |
|
|
4.44 |
% |
|
|
3.26 |
% |
Percentage of loans in default
excluding deductibles |
|
|
8.25 |
% |
|
|
3.99 |
% |
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
259,556 |
|
|
|
273,798 |
|
|
|
269,681 |
|
Number of loans in default |
|
|
19,441 |
|
|
|
10,419 |
|
|
|
7,541 |
|
Percentage of loans in default |
|
|
7.49 |
% |
|
|
3.81 |
% |
|
|
2.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force |
|
|
95,089 |
|
|
|
105,109 |
|
|
|
109,133 |
|
With deductibles |
|
|
53,758 |
|
|
|
59,569 |
|
|
|
61,611 |
|
Without deductibles |
|
|
41,331 |
|
|
|
45,540 |
|
|
|
47,522 |
|
Number of loans in default |
|
|
12,664 |
|
|
|
6,402 |
|
|
|
4,826 |
|
With deductibles |
|
|
7,278 |
|
|
|
4,072 |
|
|
|
3,104 |
|
Without deductibles |
|
|
5,386 |
|
|
|
2,330 |
|
|
|
1,722 |
|
Percentage of loans in default |
|
|
13.32 |
% |
|
|
6.09 |
% |
|
|
4.42 |
% |
Percentage of loans in default
excluding deductibles |
|
|
13.03 |
% |
|
|
5.12 |
% |
|
|
3.62 |
% |
The percentage of total loans in default as of September 30, 2008 increased 178% and 104% as
compared to September 30, 2007 and December 31, 2007, respectively.
We do not provide reserves on Modified Pool defaults with deductibles until the incurred
losses for that transaction reach the deductible threshold. At September 30, 2008, 25 of a total
of 66 structured bulk transactions with deductibles as part of the structure had incurred losses
that had exceeded these individual deductible amounts. On these 25 structured bulk contracts, we
recognized $113.2 million of losses in excess of the $81.3 million in aggregate deductibles.
We also do not provide reserves on Modified Pool defaults where the incurred losses to date
for the related structure have exceeded the stop loss amount for specific contracts. During the
third quarter of 2008, there were four such structures where the incurred losses to date exceeded
the stop loss amount. This had the effect of limiting reserves by $6.6 million at September 30,
2008. We believe that based on the recent development of our modified pool business, we will
continue to provide additional reserves on structured bulk transactions with deductibles and we
will continue to limit the addition of reserves due to modified pool contracts reaching stop loss
limits.
Given the current state of the mortgage and housing market and the composition of our insured
portfolio, we currently expect the overall default rate as well as the number of loans in default
to increase in future periods.
Accordingly, we expect reserves to continue to increase as our business, specifically the 2006
and 2007 vintage years, continues to develop. The default rate is also affected by the number of
policies in force, which is the denominator in the default rate calculation. The decreased
production in the previous 12 months, combined with no longer issuing commitments for mortgage
insurance as of July 15, 2008 and transition to run-off, is also expected to increase the default
rate compared to the rate that would have resulted if our production were consistent with 2007
levels. We also expect default rates to increase for business that has increased risk
characteristics such as Alt-A loans, higher LTV loans and PNAM ARMs.
25
As discussed earlier, we have experienced unprecedented speed and severity in the increase in
both defaults and claims on our 2006 and early 2007 vintage years. Generally, our master policies
provide that we are not liable to pay a claim for loss if the application for insurance regarding
the loan in question contains fraudulent information, material omissions or misrepresentations that
would increase the risk characteristics of the loan. We are currently reviewing the majority of
the claims for losses and defaults that occur soon after loan origination, especially with respect
to the 2006 and 2007 vintage years, to determine whether the limitations on our liability contained
in our master policies are applicable. Beginning in the third quarter 2007, we incorporated an
adjustment to our reserve factors for expected rescissions into our provision for losses and LAE.
The expected rescission factor, for specific sub-sections of our portfolio, has been increased in
each quarter of 2008 as actual rescissions continue to grow.
As part of our overall risk management strategy, we have entered into excess of loss captive
reinsurance agreements with several of our lender customers. As detailed in Item 1, Business in
our annual report on Form 10-K for the year ended December 31, 2007, we retain the first loss
position on the first aggregate layer of risk and reinsure the second finite layer with the captive
reinsurer with each separate policy year standing on its own. During 2007, for the first time
since the establishment of these captives, certain captives exceeded the first loss layer in
incurred losses, which resulted in the ceding of reserves related to specific book years. At
September 30, 2008, we ceded reserves of $134.5 million to fifteen different captive reinsurers,
all of which are supported by trust balances at the individual captives. At September 30, 2008,
actual paid losses exceeded the first layer of two captive reinsurers and we have ceded
approximately $364,000 of paid claims. If the current default and paid claim trends continue, we
expect other vintage year layers and other captives to reach the attachment points on both incurred
losses and paid claims, especially the 2006 and 2007 vintage years that have experienced a higher
default rate at a faster pace than we have seen historically.
Expenses and Taxes
As a result of the need to establish a premium deficiency reserve at March 31, 2008, we wrote
off the remaining DAC asset balance of $34.8 million during the first quarter of 2008.
Furthermore, we did not capitalize any costs to acquire new business subsequent to March 31, 2008.
As such, there was no DAC amortization during the second or third quarter of 2008.
Other operating expenses decreased 25.3% in the third quarter of 2008 as compared to the third
quarter of 2007, primarily the result of lower compensation and benefits expenses and contract
underwriting expenses, which is the result of our reduction in workforce. Other operating expenses
increased 53.0% for the nine months ended September 30, 2008 as compared to the same period of
2007, due primarily to several non-recurring charges totaling $12.1 million recognized in the
second quarter of 2008 that were associated with severance costs and lease termination costs
incurred as we prepared to transition our business to run-off.
Our effective tax rate was 6.5% and 16.4%, respectively, for the three months and nine months
ended September 30, 2008 compared to 27.1% and 41.6% for the same periods of 2007. Accounting for
income taxes for interim financial reporting requires the expected annual tax rate to be applied to
the interim period financial statements. The estimated loss for the full year of 2008 calculated
at September 30, 2008 increased from the estimated loss calculated at June 30, 2008, resulting in a
larger net operating loss carryforward, and therefore a
lower effective tax rate. During the third quarter of 2008 the estimated annual tax rate was
a benefit of 16.4%. This compares to estimated annual tax rates of 27.5% and 20.2%, respectively,
as calculated at the end of the first and second quarters of 2008.
26
Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income,
subject to certain limitations, the amounts added to contingency loss reserves. As a result of
operating losses for 2007 and through the third quarter of 2008, the previously established
contingency reserve was released earlier than the scheduled ten years in an amount that offset the
operating loss for federal tax reporting purposes. Accordingly, the previously purchased Tax and
Loss Bonds associated with the contingency reserve release were redeemed earlier than originally
scheduled. As of September 30, 2008, we have redeemed substantially all of our previously
purchased Tax and Loss Bonds. We expect to continue to incur operating losses for tax purposes and
generate net operating loss carry forwards for federal income tax reporting purposes for which we
will be unable to receive any immediate benefit in our statement of operations.
Financial Position
Total assets at September 30, 2008 declined by $30.9 million from December 31, 2007. The
decline in total assets reflect the liquidation of certain assets in connection with the repayment
of the $80.0 million credit facility and the write-off of the remaining $34.8 million of DAC in
connection with the premium deficiency recognized in the first quarter of 2008, offset in part by
an increase of $106.0 million of ceded reinsurance recoverable from lender captives. Total
liabilities increased to $1.1 billion at September 30, 2008 from $634.0 million at December 31,
2007. The growth in total liabilities included an increase of $682.1 million in gross loss
reserves. This increase was partially offset by the repayment of the $80.0 million credit facility
in the first quarter of 2008 and a $103.3 million decline in deferred income taxes related to the
reversal of previously established deferred taxes as a result of the significant losses incurred in
the first nine months of 2008.
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 the premium deficiency reserve.
The majority of our assets are included in our investment portfolio. A separate Investment
Portfolio section follows the Financial Position section and reviews our investment portfolio, key
portfolio management strategies, and methodologies by which we manage credit risk within the
investment portfolio.
Deferred Policy Acquisition Costs
Prior to the need for the establishment of a premium deficiency initially recognized at March
31, 2008, we capitalized costs to acquire new business as DAC and recognized these as expenses
against future gross profits. In accordance with generally accepted accounting principles, we
regularly prepared an analysis to determine if the DAC asset on our balance sheet was recoverable
against the future profits in the existing book of business. At March 31, 2008, we determined that
the net present value of the estimated future cash flows on the remaining book of business exceeded
the recorded reserves (net of the unamortized DAC) which required the establishment of a premium
deficiency reserve, which is discussed in more detail below under Liquidity and Capital Resources
- Premium Deficiency. The actual mechanics of recording the premium deficiency reserve require
that we first reduce the DAC balance to zero before recording any additional premium deficiency
reserve. Therefore, we wrote down the DAC asset by $34.8 million in the first quarter of 2008. We
have not capitalized any costs to acquire new business subsequent to the first quarter of 2008, but
included such costs in the line item Other operating costs on the statement of operations.
Prepaid Federal Income Taxes and Deferred Income Taxes
While the Company was reporting positive results of operations, we purchased Tax and Loss
Bonds to take advantage of a special contingency reserve deduction that mortgage guaranty companies
are allowed for tax purposes. We recorded 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
that are scheduled to become current in ten years, when the contingency reserve is scheduled to be
released, and the Tax and Loss Bonds are scheduled to mature.
27
The scheduled proceeds from the
maturity of the Tax and Loss Bonds are used to fund the income tax payments that would be due in
the same year as a result of the scheduled reversal of the contingency reserve for tax purposes.
Deferred income taxes are provided for the differences in reporting taxable income in the
financial statements and on the tax return. The largest cumulative difference has historically been
the special contingency reserve deduction for mortgage insurers mentioned above. During the first
nine months of 2008, deferred income taxes declined by $103.3 million, primarily the result of the
reversal of the contingency reserve mentioned above. The remainder of the deferred tax liability
has primarily arisen from book and tax reporting differences related to DAC and unrealized
investment gains (losses).
In years when the taxable income of a mortgage insurer results in a loss before the
application of the special contingency reserve, the prior contingency reserve that was established
can be reversed earlier than originally scheduled (effectively recognizing as taxable income the
prior contingency reserve that had previously been deferred) to offset the current year loss. When
the special contingency reserve for tax purposes is reversed to offset a current year operating
loss, the Tax and Loss Bonds can be redeemed earlier than originally scheduled. In the first nine
months of 2008, we reversed $335.0 million of contingency reserve and redeemed all of the remaining
$116.0 million of Tax and Loss Bonds, including $63.2 million during the third quarter of 2008.
During the second half of 2007, we reversed $113 million of contingency reserve for tax purposes
earlier than originally scheduled and redeemed $51 million of Tax and Loss Bonds related to that
reversal.
If operating losses continue beyond 2008, it is unlikely we will be able to recognize any tax
benefit from these losses in our financial statements.
Premium Deficiency Reserve
As previously discussed, we established a premium deficiency reserve of $96.1 million at March
31, 2008. A premium deficiency is recognized when the present value of the estimated future paid
losses and expenses, net of the present value of the estimated future renewal premiums, exceeds the
existing net reserves. For the purposes of the premium deficiency computation, we assumed a ten
year run-off period for each vintage year and utilized a discount rate of 4.6%, approximating the
pre-tax investment yield of our investment portfolio.
Each subsequent quarter, we recalculate the amount of the premium deficiency reserve, if any,
on our remaining insurance in force. The need to establish a premium deficiency will change from
quarter to quarter primarily as a result of two factors. First, it will change as the actual
premiums, losses and expenses that were previously estimated are recognized. Each period such items
will be reflected in our financial statements as earned premium, losses incurred and expenses. The
difference between the amount and timing of actual earned premiums, losses incurred and expenses
and our previous estimates used to establish the premium deficiency reserves will have an effect
(either positive or negative) on that periods results. Second, the premium deficiency will change
as our assumptions relating to the present value of expected future premiums, losses and expenses
on the remaining in force change. Changes to these assumptions will also have an effect on results
of the period when the change is made.
During the second quarter of 2008, we reversed the premium deficiency reserve, as the recorded
reserves at June 30, 2008 exceeded the projected negative cash flow arising from the remaining
insurance portfolio. During the third quarter of 2008, we did not make any significant changes to
the assumptions utilized in projecting the estimated future cash outflows and inflows as actual
experience was generally consistent with our assumptions.
Therefore, at September 30, 2008, the projected cash shortfall consisting of the present value
of the net outflows and inflows remained relatively consistent with those calculated at March 31,
2008. However, since March 31, 2008, we have added approximately $375.6 million to our GAAP loss
and LAE reserves. This significant addition of reserves reconfirmed the lack of a need to
establish an additional premium deficiency reserve at September 30, 2008.
28
Investment Portfolio
Portfolio Description
Our goal for managing our investment portfolio is to optimize investment returns, provide
liquidity when necessary, preserve capital and adhere to regulatory requirements. We have
established a formal investment policy that describes our overall quality and diversification
objectives and limits. Historically, the majority of our investment portfolio has been comprised of
tax-preferred state and municipal fixed income securities. Given the operating losses reported
since the third quarter of 2007, we do not anticipate the realization of tax benefits normally
associated with state and municipal securities. As a result, we made the decision in the second
quarter of 2008 to restructure the investment portfolio into taxable publicly-traded securities,
primarily corporate debt obligations, asset-backed securities, and mortgage-backed securities.
Furthermore, as we anticipate cash flow from operations to be negative in 2009 due to the increase
in the amount of claims paid, we expect the proceeds from the maturity and sale of securities will
be required to fund the shortfall. In connection with our repositioning of our investment
portfolio, we are positioning the portfolio with a shorter duration in order to match the
maturities with the anticipated cash needs. There are significant risks involved in attempting to
liquidate the remaining tax-preferred portfolio given current market conditions. These risks
include execution risk in the selling and buying of securities during the recent significant market
fluctuations, additional credit risk moving from primarily insured highly rated municipal bonds to
lower rated corporate bonds, and uncertainty surrounding mortgage backed and asset backed
securities.
Our investment policy and strategies are subject to further change depending upon regulatory,
economic and market conditions as well as our existing financial condition and operating
requirements, including our tax position. 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 objectives and operating requirements. All investments are carried on our balance
sheet at fair value.
The following table shows the growth and transition of our investment portfolio as we
reposition our portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
(dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations |
|
$ |
20,424 |
|
|
|
2.3 |
% |
|
$ |
11,762 |
|
|
|
1.5 |
% |
State and municipal bonds |
|
|
215,537 |
|
|
|
24.2 |
% |
|
|
673,264 |
|
|
|
85.8 |
% |
Corporate bonds |
|
|
508,437 |
|
|
|
57.1 |
% |
|
|
40,605 |
|
|
|
5.2 |
% |
Mortgage-backed bonds |
|
|
118,088 |
|
|
|
13.3 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
862,486 |
|
|
|
96.9 |
% |
|
|
725,631 |
|
|
|
92.5 |
% |
Equity securities |
|
|
615 |
|
|
|
0.1 |
% |
|
|
2,162 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
securities |
|
|
863,101 |
|
|
|
97.0 |
% |
|
|
727,793 |
|
|
|
92.8 |
% |
Short-term investments |
|
|
27,619 |
|
|
|
3.0 |
% |
|
|
56,746 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
890,720 |
|
|
|
100.0 |
% |
|
$ |
784,539 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The following table shows the results of our investment portfolio for the three months and
nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
(dollars in thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Average investments at cost or amortized cost |
|
$ |
882,444 |
|
|
$ |
729,519 |
|
|
$ |
834,583 |
|
|
$ |
688,776 |
|
Pre-tax net investment income |
|
$ |
10,349 |
|
|
$ |
8,370 |
|
|
$ |
29,071 |
|
|
$ |
23,392 |
|
Pre-tax yield |
|
|
4.7 |
% |
|
|
4.6 |
% |
|
|
4.6 |
% |
|
|
4.5 |
% |
Pre-tax realized investment (losses) gains |
|
$ |
(6,519 |
) |
|
$ |
85 |
|
|
$ |
(7,615 |
) |
|
$ |
(3,020 |
) |
The pre-tax yield is comparable for all periods as the taxable securities purchased during the
second and third quarter of 2008 generally have a lower duration but a similar yield as the longer
duration municipals that comprised the majority of the portfolio during the first nine months of
2007. The largest portion of the realized investment losses in 2008 are from write downs due to
other-than-temporary impairments.
Unrealized Gains and Losses
The following table summarizes by category our unrealized gains and losses in our securities
portfolio at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(dollars in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations |
|
$ |
20,303 |
|
|
$ |
226 |
|
|
$ |
(105 |
) |
|
$ |
20,424 |
|
State and municipal bonds |
|
|
213,949 |
|
|
|
1,593 |
|
|
|
(5 |
) |
|
|
215,537 |
|
Corporate bonds |
|
|
518,113 |
|
|
|
703 |
|
|
|
(10,379 |
) |
|
|
508,437 |
|
Mortgage-backed bonds |
|
|
117,940 |
|
|
|
562 |
|
|
|
(414 |
) |
|
|
118,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed maturities |
|
|
870,305 |
|
|
|
3,084 |
|
|
|
(10,903 |
) |
|
|
862,486 |
|
Equity securities |
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
615 |
|
Short term investments |
|
|
28,056 |
|
|
|
|
|
|
|
(437 |
) |
|
|
27,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
898,976 |
|
|
$ |
3,084 |
|
|
$ |
(11,340 |
) |
|
$ |
890,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Taxable securities typically exhibit greater volatility in value than
tax-preferred securities and thus we expect greater volatility in unrealized gains and unrealized
losses going forward, especially during the recent market events that have had a significant impact
on valuations. 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. The largest individual unrealized loss on any
one security at September 30, 2008 was approximately $1.4 million on a recently purchased corporate
bond with an amortized cost of $4.2 million. The corporate bond was issued by American General
Finance, a subsidiary of American International Group (AIG), which recently received a large
emergency loan from the Federal Reserve.
Gross unrealized gains and (losses) at September 30, 2008 were $3.1 million and $(11.3)
million, respectively. As the table above reports, unrealized losses are concentrated in the
corporate bonds and, more specifically, with securities in the financial services sector.
30
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 inherent credit risk in the
portfolio is to maintain investments with high ratings. The following table shows our investment
portfolio by credit ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
(dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency bonds |
|
$ |
20,424 |
|
|
|
2.4 |
% |
|
$ |
11,762 |
|
|
|
1.6 |
% |
AAA |
|
|
251,551 |
|
|
|
29.2 |
|
|
|
518,769 |
|
|
|
71.5 |
|
AA |
|
|
224,052 |
|
|
|
26.0 |
|
|
|
150,820 |
|
|
|
20.8 |
|
A |
|
|
344,813 |
|
|
|
40.0 |
|
|
|
25,774 |
|
|
|
3.6 |
|
BBB |
|
|
12,256 |
|
|
|
1.4 |
|
|
|
8,738 |
|
|
|
1.2 |
|
BB |
|
|
1,463 |
|
|
|
0.2 |
|
|
|
1,072 |
|
|
|
0.1 |
|
B |
|
|
242 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
CCC |
|
|
2,301 |
|
|
|
0.3 |
|
|
|
5,591 |
|
|
|
0.8 |
|
CC and lower |
|
|
62 |
|
|
|
0.0 |
|
|
|
2 |
|
|
|
0.0 |
|
Not rated |
|
|
5,322 |
|
|
|
0.6 |
|
|
|
3,103 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
862,486 |
|
|
|
100.0 |
% |
|
$ |
725,631 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
$ |
419 |
|
|
|
68.2 |
% |
|
$ |
745 |
|
|
|
34.5 |
% |
A |
|
|
131 |
|
|
|
21.3 |
|
|
|
883 |
|
|
|
40.8 |
|
BBB |
|
|
65 |
|
|
|
10.6 |
|
|
|
534 |
|
|
|
24.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
|
|
100.0 |
|
|
|
2,162 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
615 |
|
|
|
100.0 |
% |
|
$ |
2,162 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the credit quality of the portfolio is primarily due to the restructuring of the
portfolio out of tax-preferred securities and into taxable securities. Most municipal and state
tax-preferred securities historically carried credit ratings of AAA as a result of credit
enhancements provided by financial guaranty insurers. The credit rating of a bond will carry the
higher of a financial guarantors credit rating or the credit rating on the bonds underlying
credit qualities if such a credit rating exists. Taxable securities generally do not have credit
enhancements and the credit rating reflects the securities underlying credit qualities, which for
certain issuers have been adversely affected recently due to the unprecedented market events.
Financial guaranty insurers have been under pressure due to their guarantee of mortgage-backed
securities. When our portfolio consisted primarily of municipal securities, we relied on the
enhancements provided by the financial guaranty insurers to increase the overall credit quality of
the portfolio. As we transition from a tax-deferred portfolio to a taxable portfolio, the
importance of the credit enhancements becomes less relevant. The following table indicates the
credit quality of our fixed maturity portfolio with and without the benefit of the credit
enhancements as provided by financial guaranty insurers at September 30, 2008:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality With Benefit of |
|
|
Credit Quality Without Benefit |
|
|
|
Credit Enhancements |
|
|
of Credit Enhancements |
|
(dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
U.S. treasury and agency bonds |
|
$ |
8,279 |
|
|
|
1.0 |
% |
|
$ |
8,282 |
|
|
|
1.0 |
% |
AAA |
|
|
242,037 |
|
|
|
28.1 |
|
|
|
205,563 |
|
|
|
23.8 |
|
AA |
|
|
189,310 |
|
|
|
21.9 |
|
|
|
156,946 |
|
|
|
18.2 |
|
A |
|
|
401,213 |
|
|
|
46.5 |
|
|
|
436,944 |
|
|
|
50.7 |
|
BBB |
|
|
12,256 |
|
|
|
1.4 |
|
|
|
17,853 |
|
|
|
2.1 |
|
BB |
|
|
1,463 |
|
|
|
0.2 |
|
|
|
2,389 |
|
|
|
0.3 |
|
B |
|
|
242 |
|
|
|
0.0 |
|
|
|
1,988 |
|
|
|
0.2 |
|
CCC |
|
|
2,301 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
CC and below |
|
|
63 |
|
|
|
0.0 |
|
|
|
63 |
|
|
|
0.0 |
|
Not rated |
|
|
5,322 |
|
|
|
0.6 |
|
|
|
32,458 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
862,486 |
|
|
|
100.0 |
% |
|
$ |
862,486 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, we were not directly exposed to the risk of financial guaranty
insurer default because we did not invest directly in any financial guaranty insurers. We were,
however, indirectly exposed to the risk of financial guaranty insurer default through the credit
enhancements provided on the majority of our state and municipal fixed maturity bond portfolio as
of September 30, 2008.
At September 30, 2008, our state and municipal bond portfolio amounted to $215.5 million, with
approximately $172.4 million containing credit enhancements from financial guaranty insurers. We
attempt to limit our indirect exposure to financial guaranty insurer default by spreading our
exposure among some of the larger, better known financial guaranty insurers. The following table
indicates the approximate exposure to and percentage of our credit enhanced state and municipal
bond portfolio:
Financial Guarantors
|
|
|
|
|
|
|
|
|
|
|
Credit Enhanced State and |
|
|
|
Municipal Portfolio |
|
(dollars in thousands) |
|
Amount |
|
|
Percent |
|
MBIA |
|
$ |
48,140 |
|
|
|
27.9 |
% |
FSA |
|
|
25,474 |
|
|
|
14.8 |
|
FGIC |
|
|
37,894 |
|
|
|
22.0 |
|
AMBAC |
|
|
37,756 |
|
|
|
21.9 |
|
Others (four companies) |
|
|
23,154 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
172,418 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
We regularly review our entire investment portfolio to identify securities that may have
suffered impairments in value that will not be recovered, termed potentially distressed
securities. If a decision is made to sell a security or type of security, we would recognize an
impairment loss on those securities whose book value was greater than the market value. The
impairment loss would be recognized at the time the decision to sell the security was made.
In identifying potentially distressed securities where a decision to sell a security has not
been made, we screen all securities held with a particular emphasis on those 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; |
32
|
|
|
Downgrades by a rating agency; |
|
|
|
|
Past due interest or principal payments or other violation of covenants; and |
|
|
|
|
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 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, 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 other-than-temporary impairment of a
particular security in order to determine whether these conditions have impacted other similar
securities in the same sector. Of the approximate $11.3 million of gross unrealized losses at
September 30, 2008, approximately $8.9 million was related to securities with a fair value to cost
ratio of 90% or greater.
Information about unrealized gains and losses is subject to changing conditions. The values
of securities with unrealized gains and losses will fluctuate, as will the values of securities
that we identify as potentially distressed. Our current evaluation of other-than-temporary
impairments reflects our intent to hold the recently purchased non tax deferred securities for a
reasonable period of time sufficient for a forecasted recovery of fair value or maturity. However,
our intent to hold certain of these securities may change in future periods as a result of facts
and circumstances impacting a specific security. If our intent to hold a security with an
unrealized loss changes, and we do not expect the security to fully recover prior to the expected
time of disposition, we will write down the security to its fair value in the period that our
intent to hold the security changes.
The current financial markets have exhibited a high degree of volatility in recent months. Our
investment advisors have notified us that the market for municipal securities has deteriorated due
to uncertainty regarding the state of the economy, weakening underlying fundamentals of many states
and municipalities, forced selling by other holders of municipal securities, liquidity issues, as
well as the ability of financial guarantors to honor their obligations. Since it is our intention
to reposition the portfolio from a tax-deferred portfolio to a taxable one, we have taken
other-than-temporary impairments on all remaining tax-deferred securities with market values below
our cost. If these conditions persist, we may be required to take further write-downs on our
municipal securities, we may be required to sell these securities at a value less than current book
value, or we may not be able to complete the sale of our municipal portfolio in a timely manner.
Realized Gains (Losses) and Impairments
Realized gains (losses) include both write-downs of securities with other-than-temporary
impairments and gains (losses) from the sales of securities. Net realized losses for the third
quarter of 2008 totaled $6.5 million. The net realized loss was primarily composed of: (1) an
impairment loss of $9.6 million on municipal securities, corporate bonds, and preferred stock, and
(2) a gain of $2.8 million from the sale of securities, primarily the municipal securities, during
the quarter. During the third quarter of 2008, we recognized an impairment loss of approximately
$7.5 million specifically on the municipal portfolio which is in addition to the impairment loss of
approximately $7.5 million recognized in the second quarter of 2008.
33
In addition to the impairment losses on the municipal securities, we recognized an impairment
loss at September 30, 2008 on specific corporate bonds and preferred stock which totaled $2.1
million. This included our investments in Fannie Mae and Lehman Brothers which accounted for
approximately $1.8 million of the total. In addition to these, there were three other preferred
stocks, all in the financial services sector, that we concluded were other-than-temporarily
impaired. We recorded a write-down of approximately $325,000 in total for these three securities.
If market, industry, and/or issuer conditions deteriorate, we may incur further impairments.
Liquidity and Capital Resources
Generally, our sources of operating funds consist of premiums written and investment income.
Operating cash flow has historically been applied to the payment of claims, interest, expenses and
prepaid federal income taxes in the form of Tax and Loss Bond purchases. However, in recent
quarters, the early redemption of Tax and Loss Bonds due to our operating losses has provided a
source of funds. See Prepaid Federal Income Taxes and Deferred Income Taxes for additional
information concerning the Tax and Loss Bonds. We redeemed $62.3 million of Tax and Loss Bonds in
the third quarter of 2008 related to the operating loss in the second quarter of 2008 following the
redemption of $52.3 million in the second quarter of 2008. As of September 30, 2008, our remaining
holdings of Tax and Loss Bonds are insignificant.
We generated positive cash flow from operating activities of $150.1 million during the first
nine months of 2008 compared to $109.2 million in the first nine months of 2007. The positive cash
flow for the first nine months of 2008 is primarily due to the redemption of Tax and Loss Bonds of
$116.0 million. Going forward, Tax and Loss Bonds are not expected to be a source of operating cash
flow.
In the first nine months of 2008, we experienced significant operating losses, primarily due
to an increase in net loss reserves of $682.1 million, which did not impact our operating cash
flow. Generally, there is about a 12 to 18 month delay from when reserves are initially
established on a default to when a claim is ultimately paid. In the first nine months of 2008,
direct paid losses amounted to $168.0 million compared to $64.3 million for the first nine months
of 2007. The level of paid claims in the third quarter of 2008 was slightly lower than the level
in the second quarter of 2008. We believe this decrease was due to a number of factors that have
delayed claim payments, including state and lender foreclosure moratoriums, delays by the
servicers, and a continued effort on our part in investigating policies for fraud,
misrepresentation or other underwriting violations, especially those that have defaulted within 24
months of origination, leading to an increase in rescission activity.
During the fourth quarter of 2008 and in 2009, we expect the payment of claims and expenses
will be greater than premium and investment income received and we expect to report negative cash
flow from operations. We anticipate that the cash necessary to meet any negative operating cash
flow will be funded by the scheduled short-term maturities of invested assets and sales of invested
assets.
As described under Investment Portfolio, we are in the process of repositioning our
investment portfolio to convert from a primarily tax-preferred portfolio to a taxable portfolio.
Furthermore, maturities within our fixed income investment portfolio are being structured to
provide options to reinvest those funds or have such funds available to meet operating cash needs,
such as the payment of claims. An operating cash flow shortfall could be
funded through sales of short-term investments and other investment portfolio securities. See
Investment Portfolio for more information concerning the repositioning.
At September 30, 2008, the Company reported a deficiency in assets of $28.4 million compared
to stockholders equity of $140.9 million at June 30, 2008 and $498.9 million at December 31, 2007.
A deficiency in assets occurs when recorded liabilities exceed recorded assets. The deficiency in
assets is the result of five straight quarters of losses totaling $615.7 million. The largest
portion of our losses is the result of an increase in loss and loss adjustment expense reserves of
over $900 million since June 30, 2007, the last quarter for which we reported a profit. In
addition, we have paid in excess of $230 million of claims during these last five quarters, an
amount
34
greater than the total claims paid during the first 18 years of the Companys existence. At
September 30, 2008 we had over $900 million of cash and invested assets, approximately $240 million
more than at June 30, 2007. We reported $150.6 million of cash flow from operations for the first
nine months of 2008, with $116.0 million derived from the redemption of Tax and Loss Bonds that
will not be an ongoing source of cash. While we reported a deficiency in assets at September 30,
2008 for GAAP purposes, the underlying performance of our insurance portfolio was generally
consistent with our run-off plan, which projects significant losses in the early stages of the
plan. Additionally, we expect to recognize additional benefits resulting from the Modified Pool
stop losses and captive reinsurance in future periods that have not been reflected in our financial
statements. We expect to continue to report a deficiency in assets in future periods. While we do
not expect the deficiency in net assets to have a direct impact on our operations, it could
adversely impact our continued listing on The NASDAQ Stock Market.
The insurance laws of the State of Illinois impose certain restrictions on dividends that an
insurance subsidiary can pay its parent company. As discussed previously, the corrective order from
the Illinois Division of Insurance prohibits the payment of dividends by our insurance subsidiary
to the parent corporation without prior approval from the Illinois Division of Insurance.
Included in policyholders surplus of the U.S. insurance subsidiary, Triad, is a surplus
note of $25 million payable to the registrant, its parent. The accrual of and payment of the
interest on the surplus note must be approved by the Illinois Division of Insurance, which has
broad discretion to approve or disapprove any such payment. In June 2008, we requested permission
to accrue and pay the interest on the $25 million surplus note from the Illinois Division of
Insurance. Our request was formally denied. The corrective order from the Illinois Division of
Insurance prohibits Triad from paying interest on the surplus note to its parent corporation
without prior approval from the Illinois Division of Insurance. We do not expect Triad will be able
to pay any principal or interest on this note for the foreseeable future.
The parent company has limited sources of cash flow. The $35 million long-term debt
outstanding is the obligation of the parent company and not of Triad. Debt service amounts to $2.8
million per year and is paid by the parent company. The primary source of funds for the parent
company debt service has historically been the interest paid on the $25 million surplus note by our
insurance subsidiary, which has provided $2.2 million on an annual basis. We do not expect this
source of cash to be available for the foreseeable future. At September 30, 2008, the parent
company had cash and invested assets of approximately $8.2 million. During the third quarter of
2008, the Company repatriated approximately $3.8 million of cash from its Canadian subsidiary that
is in the process of liquidation. At September 30, 2008, cash and invested assets remaining at the
Canadian subsidiary total approximately $1.7 million. We anticipate the repatriation of these
remaining funds from Canada, net of any expenses to be paid, in the fourth quarter of 2008. While
we currently believe that the cash resources on hand at the parent company will be sufficient to
cover the required debt service for 2009 on the $35 million long-term debt, we cannot provide any
assurance that this or any future debt service payments will be made and the ultimate ability of
the parent to repay the entire $35 million is subject to substantial risks and cannot be assured
unless a source of funds is secured. The ability of the parent company to pay the debt service
with funds obtained from Triad, whether in the form of dividends, payments on the surplus note or
otherwise, will require the approval of the Illinois Division of Insurance, and it is unlikely that
such approval will be obtained in the foreseeable future.
Triad has historically reimbursed the parent company for a majority of its operating expenses
under a management agreement. As part of the corrective order, we have submitted to the Illinois
Division of Insurance a request for reimbursement of expenses for the third quarter of 2008, but as
of the date of this filing, we have not received approval for this reimbursement. If the Illinois
Division of Insurance prohibits or limits the reimbursement by Triad of the parent companys
operating expenses, the cash resources of the parent company will be adversely affected.
35
We cede business to captive reinsurance affiliates of certain mortgage lenders, primarily
under excess of loss reinsurance agreements. Generally, reinsurance recoverables on loss reserves
and unearned premiums ceded to these captives are backed by trust accounts where we are the sole
beneficiary. When ceded loss reserves exceed the trust balances, we address the counter-party
credit risk of the reinsurance recoverable on a case-by-case basis and provide for a provision for
uncollectible accounts where appropriate. At September 30, 2008, total trust balances were
approximately $241.4 million compared to $185.1 million at September 30, 2007 and $201.5 million at
December 31, 2007.
Statutory capital, for the purpose of computing the net risk in force to statutory capital
ratio, includes both policyholders surplus and the contingency reserve. The following table
provides information regarding our statutory capital position at September 30, 2008, December 31,
2007 and September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(dollars in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Statutory policyholders surplus |
|
$ |
284.2 |
|
|
$ |
197.7 |
|
|
$ |
33.9 |
|
Statutory contingency reserve |
|
|
1.4 |
|
|
|
387.4 |
|
|
|
626.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285.6 |
|
|
$ |
585.1 |
|
|
$ |
660.1 |
|
|
|
|
|
|
|
|
|
|
|
For statutory reporting purposes, we adopted the reserve requirements as outlined in the
Illinois Insurance Code that requires loss reserves be established for all loans that are four or
more payments in arrears or in foreclosure. The use of these standards results in a smaller
reserve recorded for statutory purposes than the reserve recorded in the Companys GAAP financial
statements, which provide reserves on all loans that are three or more months in default. The
difference in the two methodologies is approximately $192 million as of September 30, 2008. This
accounting change was deemed to be a change in statutory accounting method adopted on a prospective
basis, and, accordingly, we recorded a cumulative effect to surplus as of the beginning of 2008 of
approximately $107 million. As a result, beginning with the quarter ended September 30, 2008, the
net loss and loss adjustment expense reserve reported in Triads statutory financial statements
will be different than that reported in our GAAP financial statements.
During the second quarter of 2008, we recorded the full impact of the Excess of Loss
reinsurance treaty for statutory reporting purposes. We recorded a reinsurance recoverable, ceded
loss reserves and accrued premiums in accordance with the terms of the contract, which had the
effect of increasing policyholders surplus in Triads statutory financial statements at June 30,
2008 by approximately $78 million.
Historically, one of the primary differences between statutory policyholders surplus and
equity computed under GAAP is the statutory contingency reserve. Generally, mortgage insurance
companies are required to add to the statutory contingency reserve through a charge to surplus an
amount equal to 50% of calendar year earned premiums and retain the contingency reserve in the
statutory statements for a period of ten years. The contingency reserve can be released earlier
than the scheduled ten years if the loss ratio exceeds 35%. Triads loss ratio substantially
exceeded 35% in the first nine months of 2008 and in the first nine months of 2007. Accordingly,
we
released approximately $386.0 million of contingency reserve in the first nine months of 2008
and $275.0 million for all of 2007. As of September 30, 2008, the amount held in the statutory
contingency reserve is approximately $15 thousand.
Triad ceased accepting commitments to write new mortgage commitments on July 15, 2008 and has
begun the transition of its business to run-off. The risk-to-capital ratio, which is utilized as a
measure by many states and regulators of an insurers capital adequacy and ability to underwrite
new business, is no longer relevant for this purpose to Triad. Generally, states limit a mortgage
insurers statutory risk-to-capital ratio to 25-to-1. At March 31, 2008, Triads statutory
risk-to-capital ratio had already exceeded that level and substantially exceeded that level at
September 30, 2008.
36
Off Balance Sheet Arrangements and Aggregate Contractual Obligations
We had no material off-balance sheet arrangements at September 30, 2008.
We lease office facilities, automobiles, and office equipment under operating leases with
minimum lease commitments that range from one to five years. We have no capitalized leases or
material purchase commitments.
Our long-term debt has a single maturity date in 2028. There have been no material changes to
the aggregate contractual obligations shown in our annual report on Form 10-K for the year ended
December 31, 2007.
Update on Critical Accounting Policies and Estimates
Our annual report on Form 10-K for the year ended December 31, 2007 describes the accounting
estimates and assumptions that we consider to be the most critical to an understanding of our
financial statements because they inherently involve significant judgments and uncertainties.
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 DAC and subsequent adjustments to that amortization.
Since the filing of our Form 10-K, we determined that our existing insurance portfolio has a
premium deficiency that required the elimination of the recorded DAC. Therefore, the establishment
of initial DAC amortization schedules is no longer a critical accounting policy requiring
significant judgment on our part. However, we have now identified the computation of the premium
deficiency as a new critical accounting policy that requires a significant amount of judgment by
management with respect to the estimates utilized in the computation.
Premium Deficiency
A premium deficiency is recognized when the present value of the embedded estimated future
loss from the existing insurance portfolio is greater than the existing net reserves. Computations
of premium deficiency reserves requires the use of significant judgments and estimates to determine
the present value of future premiums and present value of expected losses and expenses on our
business. The present value of future premiums relies on, among other things, assumptions about
persistency and repayment patterns on underlying loans. The present value of expected losses and
expenses depends on assumptions relating to severity of claims and claim rates on current defaults,
and expected defaults in future periods. Assumptions used in calculating the deficiency reserves
can be affected by volatility in the current housing and mortgage lending industries. To the
extent premium patterns and actual loss experience differ from the assumptions used in calculating
the premium deficiency, the differences between the actual results and our estimate will affect
future period earnings.
The most critical assumptions that we utilize in the computation of the premium deficiency is
the amount and timing of estimated future claim payments and the persistency assumptions related to
the amount of future renewal premiums. We have made our best estimate of the future estimated
claim payments, future estimated expenses paid, and future estimated renewal premiums received
based upon the recent trends in our existing portfolio, our assumptions concerning the condition of
the current and future housing markets, our understanding of the current economic conditions in the
housing markets, and our projections about future changes that would impact the housing market.
Home prices will have the most significant impact on the frequency and severity of future claims as
well as the level of persistency impacting renewal premiums. Additional factors that could impact
the assumption utilized in the premium deficiency computation include unemployment rates, interest
rates, worsening general economic conditions, especially in certain geographic regions, and
governmental intervention in the housing markets, among others. There have been a number of
projections concerning house price depreciation and widely ranging views regarding the eventual
economic impact of any potential recession. We evaluate relevant information and make our best
estimate of the assumptions used to estimate future claims, expenses and claims.
37
An initial premium deficiency was noted and recorded at March 31, 2008, with the net impact of
writing off the remaining DAC of $34.8 million and a change in the premium deficiency reserve of
$15.0 million. At June 30, 2008, we recalculated the premium deficiency reserve based upon the
amount and timing of actual earned premiums, losses incurred (including actual paid losses and the
increase in reserves during the second quarter) and expenses compared to our updated estimates of
the embedded net loss in the existing portfolio. At June 30, we determined that a premium
deficiency no longer existed primarily due to the significant increase in the reserves during the
second quarter of 2008. As a result, we reversed the $15 million net change in the premium
deficiency reserve. However, once the DAC has been written off, we are not allowed to restore it
under generally accepted accounting practices.
Each quarter, we will recalculate the premium deficiency reserve on the remaining insurance in
force. The premium deficiency reserve will primarily change from quarter to quarter as a result of
two factors. First, it will change as the actual premiums, losses and expenses that were
previously estimated are recognized. Each period such items will be reflected in our financial
statements as earned premiums, losses incurred and expenses. The difference between the amount and
timing of actual earned premiums, losses incurred and expenses and our previous estimates used to
establish the premium deficiency reserves will have an effect (either positive or negative) on that
periods results. Second, the need for a premium deficiency reserve will change as our assumptions
relating to the present value of expected future premiums, losses and expenses on the remaining in
force change. Changes to these assumptions could also have an effect on that periods results.
See Premium Deficiency Reserve under Financial Position above for further discussion of the
premium deficiency reserve.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Managements Discussion and Analysis of Financial Condition and Results of Operations and
other portions of this report contain forward-looking statements relating to future plans,
expectations and performance, which involve various risks and uncertainties. Because we ceased
issuing new mortgage commitments effective July 15, 2008 and are in the process of transitioning
our business into run-off, certain risk factors, primarily those associated with our ability to
write new business and our competitive position as a mortgage insurer, which we previously included
in our Exchange Act filings are no longer relevant to our business. Risks and uncertainties
relating to Triad operating in run-off include, but are not limited to, the following:
|
|
|
if we are unable to satisfy the enhanced regulatory obligations imposed on us in
run-off, the Illinois Division of Insurance could impose penalties on us, place us in
rehabilitation and impose further restrictions on our business or appoint a receiver
to liquidate our insurance subsidiary; |
|
|
|
|
if the significant assumptions utilized in the corrective plan related to the
timing and amount of claims, the persistency of renewal premiums, and the expenses
related to servicing the remaining
portfolio prove to be materially and adversely inaccurate, the Illinois Division of
Insurance may be forced to place Triad in rehabilitation or appoint a receiver to
liquidate our business; |
|
|
|
|
our ability to lower operating expenses to the most efficient level while still
providing the ability to mitigate losses effectively as we transition to run-off
status will have an impact on our financial performance in run-off; |
|
|
|
|
whether we ultimately prevail in arbitration with the Excess-of-Loss reinsurance
treaty will have an impact on our financial performance in run-off; |
|
|
|
|
if housing prices continue to fall, additional borrowers may default and claims
could be higher than anticipated; |
|
|
|
|
if unemployment rates continue to rise, especially in those areas that have
already experienced significant declines in home prices, defaults and claims could be
higher than anticipated; |
38
|
|
|
a significant decline in interest rates coupled with an increase in available
credit could increase refinancings and decrease the persistency of renewal premiums
and the quality of our insurance in force; |
|
|
|
|
ongoing credit tightening in the mortgage marketplace may continue and cause an
increased number of defaults and, ultimately, paid claims due to the unavailability
of refinancing options; |
|
|
|
|
the appointment of FHFA as the conservator of both Fannie Mae and Freddie Mac may
result in changes in the business practices of the GSEs that could adversely impact
our financial performance in run-off; |
|
|
|
|
our financial condition and performance in run-off could be affected by new
legislation, such as EESA, or regulations impacting the mortgage industry or the GSEs
specifically and the financial services industry in general; |
|
|
|
|
if GSEs or our lender customers choose to cancel the insurance on policies that we
insure, our financial performance in run-off could be adversely affected; |
|
|
|
|
if we have failed to properly underwrite mortgage loans under contract
underwriting service agreements, we may be required to assume the costs of
repurchasing those loans or face other remedies; |
|
|
|
|
if we are unable to satisfy its continued listing requirements, we may be delisted
from The NASDAQ Stock Market; |
|
|
|
|
our performance may be impacted by changes in the performance of the financial
markets and general economic conditions; and |
|
|
|
|
further economic downturns in regions where we have larger concentrations of risk
and in markets already distressed could have a particularly adverse effect on our
financial condition and loss development. |
Accordingly, our actual results may differ from those set forth in the forward-looking
statements. Attention also is directed to other risk factors set forth in this report and other
reports and statements that we file from time to time with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information in this section updates the information filed in Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for
the year ended December 31, 2007.
Historically, the majority of our investment portfolio has been comprised of tax-preferred
state and municipal fixed income securities in which we had the ability and intent to hold until
maturity. Given our operating losses since the third quarter of 2007, we do not expect to realize
the tax advantages historically provided by state and municipal fixed income securities. As a
result, we made the decision in the second quarter of 2008 to transition the tax-preferred state
and municipal fixed income portfolio to a taxable portfolio. Furthermore, we anticipate cash
flow from operations to be negative in 2009 due to a substantial increase in paid claims and
we expect the proceeds from the maturity and sale of securities will be required to fund the
shortfall. In connection with our transitioning of our investment portfolio, we are repositioning
the portfolio with a shorter duration in an attempt to more closely match the maturities with the
anticipated cash needs. Estimates below are not necessarily indicative of future performance, and
actual results may differ materially.
39
Interest Rate Risk on Investments
We are exposed to interest rate risk related to our investment portfolio and this risk has
been heightened by our decision to transition the state and municipal fixed income portfolio.
Additionally, due to our expected shortfall in operating cash flow in 2009, we no longer have the
intent and ability to hold temporarily impaired securities until maturity. At September 30, 2008,
our invested assets were comprised of approximately 97% fixed maturity securities and approximately
25% of the fixed maturity security portfolio was comprised of state and municipal securities. The
fair value of these fixed maturity securities generally bears an inverse relationship to changes in
prevailing market interest rates. Given the current economic and interest rate environment, we
believe interest rates could decrease over the next 15 months rather than increase. A decrease in
market interest rates, all else being equal, generally will have the effect of initiating an early
call provision of those securities possessing such provisions. The proceeds relating to the early
called securities in a decreasing interest rate environment generally are invested in lower
yielding investments that would ultimately decrease results of operations. However, given the
repositioning of the portfolio and anticipated deficit in cash flow from operations, we do not
believe that a decrease in market interest rates that affect our financial instruments will have a
material impact on results of operations during the remainder of 2008 and 2009.
An increase in market interest rates generally will negatively affect the fair value of our
fixed income securities. While we believe, given the current uncertain economic and interest rate
environment, a decrease in interest rates is more likely in the short term than an increase,
interest rates are near historically low levels and if the economic situation improves or inflation
increases, an interest rate increase in 2009 is possible. Due to the fact that we are in run-off
and are relying on the matching of maturities to our cash flow funding needs in 2009 and beyond, an
increase in interest rates would lower the fair value of our fixed income securities at a time when
we could be required to dispose of longer-term securities to meet current cash flow needs. A
hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the
market value of our fixed income portfolio by approximately 3% as of September 30, 2008. The
fluctuations in fair value of our investment portfolio reflect only the direct impact of the change
in interest rates. Other economic variables, such as fixed security market fluctuations and changes
in relative credit risk, could result in a significantly higher decline in our net investment
portfolio.
Market Risk
The current market environment for fixed income maturity securities is subject to a high
degree of short-term volatility. An economic recession or liquidity issues may exacerbate the
level of volatility. We have made the decision to liquidate the tax-preferred state and municipal
fixed income portfolio. As we liquidate this portfolio, if a tax-preferred state and municipal
fixed income security has a book value greater than its market value, we will incur a loss on the
sale. This could have an adverse effect on our results of operations, the value of our investment
portfolio, and the cash available to fund the anticipated shortfall in cash from operations.
Item 4. Controls and Procedures
|
a) |
|
We carried out an evaluation, under the supervision and with the participation of our
management, including the Principal Executive Officer (PEO) and Principal Financial Officer
(PFO), of the effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934 (Act). Based on that evaluation, our
management, including our PEO and PFO, concluded, as of the end of the period covered by
this report, that our disclosure controls and procedures were effective to enable us to
record, process, summarize and report in a timely manner the information that we are
required to disclose in our reports under the Act. Disclosure controls and procedures
include controls and procedures designed to ensure that management, including our PEO and
PFO, 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. |
40
|
b) |
|
There were no changes to our internal control over financial reporting during the third
quarter of 2008 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage
Servicing, Inc. filed an adversary proceeding against Triad in the U.S. Bankruptcy Court for the
District of Delaware. The plaintiffs were debtors and debtors in possession in Chapter 11 cases
pending in the U.S. Bankruptcy Court. The complaint alleged claims for breach of contract and
declaratory judgment. Triad filed a counterclaim for declaratory judgment against the plaintiffs
and American Home Mortgage Corp. arising out of the same dispute. The parties filed a joint
stipulation of voluntary dismissal of the action on September 29, 2008. The stipulation was
granted and the adversary proceeding was dismissed on September 30, 2008 with no payment by Triad.
Item 1A. Risk Factors
A deep or prolonged recession in the United States and continued tightened credit in mortgage
markets may increase mortgage defaults and limit opportunities for borrowers to cure defaults or
for our company to mitigate its losses, which would adversely impact the future value of our
company.
Many economists now believe the United States economy has entered into a recessionary period
and are projecting significant negative macroeconomic trends, including widespread job losses,
higher unemployment, lower consumer spending, continued declines in home prices and substantial
increases in delinquencies on consumer debt, including defaults on home mortgages. Moreover,
recent disruptions in the financial markets, particularly the reduced availability of credit and
tightened lending requirements, have impacted the ability of borrowers to refinance loans at more
affordable rates. We cannot predict the length and severity of a recession, but as with most
businesses, we believe a longer or more severe recession will have more negative impacts on our
business. Similarly, while tight credit markets facilitate higher persistency, they also limit the
flexibility of borrowers when dealing with a loan in default. In particular, recessionary forces
and tight credit markets can lead to greater defaults in both number and in severity and otherwise
adversely impact the performance of our existing mortgage insurance in force, including reducing
our default cure rates, increasing the amount or accelerating the timing of our claims payments,
and limiting our ability to mitigate losses. A severe or prolonged recession may cause our future
performance to vary significantly from the projections we submitted to the Illinois Division of
Insurance in our corrective plan, which could cause the Division to place us in rehabilitation or
to appoint a receiver to liquidate our assets, in which case the market value of our common stock
would be reduced or eliminated and little or no funds would ever be available for distribution to
our stockholders.
41
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on September 11, 2008. Shares entitled to vote at
the Annual Meeting totaled 15,116,259 of which 12,113,414 shares were represented.
The following five directors were elected at the Annual Meeting. Shares voted for and
authorized withheld for each nominee were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Shares |
Election of Directors |
|
in Favor |
|
Withheld |
Robert T. David |
|
|
11,817,402 |
|
|
|
296,012 |
|
H. Lee Durham, Jr. |
|
|
11,434,864 |
|
|
|
678,550 |
|
William T. Ratliff, III |
|
|
11,925,731 |
|
|
|
187,683 |
|
Richard S. Swanson |
|
|
11,319,047 |
|
|
|
794,367 |
|
David W. Whitehurst |
|
|
11,930,219 |
|
|
|
183,195 |
|
Shareholders also voted to ratify the selection of Ernst & Young LLP as the independent
registered public account firm for Triad Guaranty Inc. for 2008. This proposal was approved by the
votes set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Shares Voted |
|
Shares |
Other Proposals |
|
in Favor |
|
Against |
|
Withheld |
Ratification of the selection of Ernst
& Young LLP
as the independent registered public
accounting
firm for Triad Guaranty Inc. for 2008. |
|
|
12,017,230 |
|
|
|
54,443 |
|
|
|
41,741 |
|
Item 6. Exhibits
The exhibits filed with this quarterly report on Form 10-Q are set forth in the Exhibit Index
on page 44 and are incorporated herein by reference.
42
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 10, 2008 |
|
|
|
|
|
|
|
|
|
|
|
/s/ Kenneth S. Dwyer |
|
|
|
|
|
|
|
|
|
Kenneth S. Dwyer |
|
|
|
|
Vice President and Chief Accounting Officer
(Duly Authorized Officer and Principal Accounting Officer) |
|
|
43
EXHIBIT INDEX
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
10.54 |
|
|
Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and Mark K. Tonnesen, previously filed as
Exhibit 10.54 to the Companys Current Report on Form 8-K
filed on July 17, 2008, and incorporated herein by
reference.* |
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10.55 |
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|
Letter agreement, dated July 17, 2008, between Triad
Guaranty Inc. and William T. Ratliff, III, previously filed
as Exhibit 10.55 to the Companys Current Report on Form
8-K filed on July 17, 2008, and incorporated herein by
reference.* |
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31.1 |
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Certification
of Principal Executive Officer and Principal
Financial Officer pursuant to Exchange Act Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
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32.1 |
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Certification
of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
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* |
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Management contract or compensatory arrangement. |
44