Triad Guaranty Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number 0-22342
Triad Guaranty Inc.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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56-1838519
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(State or other jurisdiction
of
incorporation or organization)
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(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)
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Registrants telephone number, including area code:
(336) 723-1282
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title of Each
Class
Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated filer þ
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Non-accelerated filer o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, computed
by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity,
as of the last business day of the registrants most
recently completed second fiscal quarter: $460,174,380 as of
June 30, 2005, which amount excludes the value of all
shares beneficially owned (as defined in
Rule 13d-3
under the Securities Exchange Act of 1934) by officers and
directors of the registrant (however this does not constitute a
representation or acknowledgment that any such individual is an
affiliate of the registrant).
The number of shares of the registrants common stock, par
value $0.01 per share, outstanding as of February 28,
2006, was 14,825,642.
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Portions of the following
documents are incorporated by
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Part of this
Form 10-K
into which the document
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reference into this
Form 10-K:
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is incorporated by
reference
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Triad Guaranty Inc.
Proxy Statement for 2006 Annual Meeting
of Stockholders
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Part III
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PART I
Overview
Triad Guaranty Inc. is a holding company which, through its
wholly-owned subsidiary, Triad Guaranty Insurance Corporation
(Triad), provides private mortgage insurance
(MI) coverage in the United States to residential
mortgage lenders and investors. Triad Guaranty Inc. and its
subsidiaries are collectively referred to as the
Company. The Company when used within
this document refers to the holding company
and/or one
or more of its subsidiaries, as appropriate.
Triad was formed in 1987 as a wholly-owned subsidiary of
Primerica Corporation and began writing private mortgage
insurance in 1988. In September 1989, Triad was acquired by
Collateral Mortgage, Ltd. (CML), a mortgage banking
and real estate lending firm located in Birmingham, Alabama. In
1990, CML contributed the outstanding stock of Triad to its
affiliate, Collateral Investment Corp. (CIC), an
insurance holding company.
The Company was incorporated by CIC in Delaware in August 1993,
for the purpose of holding all the outstanding stock of Triad
and to undertake the initial public offering of the
Companys common stock, which was completed in November
1993. Currently, CML owns 17.4% of the outstanding common stock
of the Company, which it acquired in 1993, prior to the initial
public offering. In November 2005, the Company completed a
transaction in which CIC transferred all of its
2,573,551 shares of the Companys common stock to the
Company in exchange for 2,528,214 newly issued shares of the
Companys common stock. The newly issued shares were then
distributed to CIC shareholders as part of CICs
liquidation.
The principal executive offices of the Company are located at
101 South Stratford Road, Winston-Salem, North Carolina 27104.
Its telephone number is
(336) 723-1282.
Private mortgage insurance, also known as mortgage guaranty
insurance, is issued in many home purchase and refinance
transactions involving conventional residential first mortgage
loans to borrowers with equity of less than 20%. If the
homeowner defaults on the mortgage, private mortgage insurance
reduces, and in some instances eliminates, any loss to the
insured lender. Private mortgage insurance also facilitates the
sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). Under risk-based
capital regulations applicable to most financial institutions,
private mortgage insurance also reduces the capital requirement
for such lenders on residential mortgage loans not sold that
have equity of less than 20%. Mortgage insurance is also
purchased by investors and lenders who seek additional default
protection or capital relief on loans with equity of greater
than 20%.
Distribution
Channels
Our flow channel consists of business originated by lenders and
submitted to us on a
loan-by-loan
basis. Through the bulk channel, we participate in structured
bulk transactions, which involve underwriting and insuring a
group of loans with individual coverage for each loan.
Structured bulk transactions are typically initiated by
underwriters of mortgage-backed securities, mortgage lenders,
and mortgage investors such as Fannie Mae and Freddie Mac, who
seek additional default protection, capital relief, and credit
enhancement on groups of loans sold in the secondary market.
Coverage on structured bulk transactions is determined at the
individual loan level, sufficient to reduce the insureds
exposure on any loan in the transaction down to a stated
percentage of the loan balance (down-to coverage).
We are provided loan-level information on the group of loans
and, based on the risk characteristics of the entire group of
loans and the requirements of the secondary mortgage market
participant, we submit a price for insuring the entire group of
loans. We compete against other mortgage insurers as well as
other forms of credit enhancement provided by capital markets
for these transactions.
Structured bulk transactions frequently include an aggregate
stop-loss limit applied to the entire group of insured loans.
Additionally, 39% of the structured bulk transactions we entered
into in 2005 and 81% in 2004 included deductibles under which we
will pay no losses until the losses exceed the deductible
amount. Through
1
December 31, 2005, insurance written through the structured
bulk channel has not been subject to captive mortgage
reinsurance or other risk-sharing arrangements.
Historically, we have segregated information based only on the
flow and bulk distribution channels. Although we continue to
manage our business through these distribution channels, we
believe that reporting information from a risk exposure
perspective helps clarify our business and the risk factors
associated with our portfolio. We believe risk exposure differs
among our product types, particularly our two main product
classifications. Therefore, where relevant in this
Form 10-K
and in future filings, we will report information using the
Primary insurance and Modified Pool insurance product
classifications defined below.
Mortgage
Insurance Products
Primary
Insurance
Primary insurance provides mortgage default protection to
lenders on individual loans and covers a percentage of unpaid
loan principal, delinquent interest, and certain expenses
associated with the default and subsequent foreclosure
(collectively, the claim amount). The claim amount,
to which the appropriate coverage percentage is applied,
generally ranges from 110% to 115% of the unpaid principal
balance of the loan. Our obligation to an insured lender with
respect to a claim is determined by applying the appropriate
coverage percentage to the claim amount. Under our master
policy, we have the option of paying the entire claim amount and
taking title to the mortgaged property or paying the coverage
percentage in full satisfaction of our obligations under the
insurance written. Insurance written is defined as
the entire loan balance for which a lender has requested
mortgage insurance and is generally utilized as a term to
measure sales production. We classify a policy as Primary
insurance if it provides first dollar loss coverage and
a) has a
loan-to-value
(LTV) ratio greater than 80% or b) is part of a structured
transaction with an LTV ratio less than 80% and does not have a
stop loss or deductible. Primary insurance can be delivered
through our flow or bulk channels, although the majority is
delivered through the flow channel. Primary insurance comprised
approximately 67% and 79% of our total direct insurance in force
at December 31, 2005 and 2004, respectively.
We offer primary coverage generally from 12% to 37% of the claim
amount. The insured lender selects the coverage percentage that
we provide, subject to our underwriting approval, usually in
order to comply with their investors requirements to
reduce investor loss exposure on loans they purchase.
Fannie Mae and Freddie Mac are the ultimate purchasers of a
large percentage of the loans we insure. Generally they require
a coverage percentage that will reduce their loss exposure on
loans they purchase to 75% or less of the propertys value
at the time the loan is originated. Since 1999, Fannie Mae and
Freddie Mac have accepted lower coverage percentages for certain
categories of mortgages when the loan is approved by their
automated underwriting services. The reduced coverage
percentages limit loss exposure to 80% or less of the
propertys value at the time the loan is originated.
Our premium rates vary depending upon various factors including
the LTV ratio, loan type, mortgage term, coverage amount,
documentation required, credit score and use of property, which
all affect the perceived risk of default on the insured mortgage
loan. Usually, premium rates cannot be changed after issuance of
coverage. Consistent with industry practice, we generally
utilize a nationally based, rather than a regional or local,
premium rate structure for business acquired through the flow
channel. However, special risk rates may be utilized as well.
Premiums on mortgage insurance business acquired through the
flow channel are paid by either the borrower (borrower paid) or
the lender (lender paid). Under our borrower paid plan, mortgage
insurance premiums are charged to the mortgage lender or
servicer that collects the premium from the borrower and, in
turn, remits the premiums to us. Under our lender paid plan,
mortgage insurance premiums are charged to the mortgage lender
or loan servicer that pays the premium to us. The lender may
recover the premium through an increase in the borrowers
interest rate. Approximately 68% and 77% of Primary insurance
was written under our borrower paid plan during 2005 and 2004,
respectively. The remainder was written under our lender paid
plan (32% and 23% of flow insurance during 2005 and 2004,
respectively). Our lender paid volume is concentrated among
larger mortgage lender customers.
2
Premiums may be remitted monthly, annually, or in one single
payment. The monthly premium payment plan involves the payment
of one or two months premium at the mortgage loan closing.
Thereafter, level monthly premiums are collected by the loan
servicer for monthly remittance to us. We also offer a plan
under which the first monthly mortgage insurance payment is
deferred until the first loan payment is made. This deferred
monthly premium product decreases the amount of cash required
from the borrower at closing, thereby making home ownership more
affordable. Monthly premium plans represented approximately 96%
and 92% of Primary insurance written through our flow channel in
2005 and 2004, respectively.
The annual premium payment plan requires a first-year premium
paid at mortgage loan closing with annual renewal payments. With
respect to our borrower-paid annual premium plans, renewal
payments are collected monthly from the borrower and held in
escrow by the mortgage lender or servicer for annual remittance
to us in advance of each renewal year. Annual premium plans
represented approximately 4% and 8% of Primary insurance written
through our flow channel in 2005 and 2004, respectively.
The single premium payment plan requires a single payment paid
at loan closing. The single premium payment can be financed by
the borrower by adding it to the principal amount of the
mortgage or can be paid in cash at closing by the borrower.
Single premium plans represented less than 1% of Primary
insurance written through our flow channel in 2005 and 2004.
Modified
Pool Insurance
Modified Pool insurance is written only as part of a structured
bulk transaction to provide credit enhancement to lenders and
investors who seek additional default protection and capital
relief. This type of insurance a) provides coverage that
exceeds the protection provided by existing primary insurance or
b) provides primary coverage on loans with a loan to value
ratio of less than 80% that are part of a structured transaction
with a stop loss or deductible. Modified Pool insurance
comprised approximately 33% and 21% of our total direct
insurance in force at December 31, 2005 and 2004,
respectively.
Traditional
Pool Insurance
Traditional pool insurance generally has been offered by private
mortgage insurers to lenders as an additional credit enhancement
for certain mortgage-backed securities and provides coverage for
the full amount of the net loss on each individual loan included
in the pool, subject to an aggregate stop loss limit
and/or a
deductible. We have not offered traditional pool insurance.
Risk-sharing
Products
We offer mortgage insurance structures designed to allow lenders
to share in the risks of mortgage insurance. One such
arrangement is our captive reinsurance program. Under the
captive reinsurance program, a reinsurance company, generally an
affiliate of the lender, assumes a portion of the risk
associated with the lenders insured book of business in
exchange for a percentage of the premium. Typically, the
reinsurance program is an
excess-of-loss
arrangement with defined aggregate layers of coverage and a
maximum exposure limit for the captive reinsurance company.
Captive reinsurance programs may also take the form of a quota
share arrangement, although we had no quota share arrangements
in force under captive reinsurance programs as of
December 31, 2005. Under our
excess-of-loss
programs, with respect to a given book year of business, Triad
retains the first loss position on the first aggregate layer of
risk and reinsures a second defined aggregate layer with the
reinsurer. Triad generally retains the remaining risk above the
layer reinsured. Of the reinsurance agreements in place at
December 31, 2005, the first layer retained by Triad ranged
from the first 3.0% to 6.5% of risk in force and the second
layer ceded to reinsurers ranged from the next 4.0% to 10.0%.
Ceded premiums, net of ceded commissions, under these
arrangements ranged from 20.0% to 40.0% of premiums.
We require the counterparties to all of Triads reinsurance
agreements to establish trust accounts to support the
reinsurers obligations under the reinsurance agreements.
The captive reinsurer is the grantor of the trust and Triad is
the beneficiary of the trust. The trust agreement includes
covenants regarding minimum and ongoing capitalization, required
reserves, authorized investments, and withdrawal of assets and
is funded by ceded premium and investment earnings on trust
assets as well as capital contributions by the reinsurer.
3
The ultimate impact on our financial performance of an
excess-of-loss
captive structure is primarily dependent on the total level of
losses and the persistency rates during the life of the
business. We define persistency as the percentage of insurance
in force remaining from twelve months prior. We believe that our
excess-of-loss
captive reinsurance programs provide valuable reinsurance
protection by limiting the aggregate level of losses, and, under
normal operating environments, potentially reduce the degree of
volatility in our earnings from the development of such losses
over time. At December 31, 2005 and 2004, 39% and 43% of
insurance in force was subject to captive reinsurance programs.
Cancellation
of Insurance
We cannot cancel mortgage insurance coverage except for
nonpayment of premium or certain material violations of the
master policy, and coverage remains renewable at the option of
the insured lender. Generally, mortgage insurance is renewable
at a rate determined when the insurance on the loan was
initially issued.
Insured lenders may cancel insurance acquired through the flow
channel at any time at their option. Pursuant to the Homeowners
Protection Act, lenders are required to automatically cancel the
borrower paid private mortgage insurance on most loans made on
or after July 29, 1999, when the outstanding loan amount is
78% or less of the propertys original purchase price and
certain other conditions are met. A borrower may request that a
loan servicer cancel borrower-paid mortgage insurance on a
mortgage loan when the loan balance is less than 80% of the
propertys current value, but loan servicers are generally
restricted in their ability to grant those requests by secondary
market requirements and by certain other regulatory restrictions.
Mortgage insurance coverage can also be cancelled when an
insured loan is refinanced. If we provide insurance on the
refinanced mortgage, the policy on the refinanced home loan is
considered new insurance written. Therefore, continuation of
coverage from one of our refinanced loans to a new loan results
in both a cancellation of insurance and new insurance written.
During periods of high refinance activity, our earnings and risk
profile are more subject to fluctuations. Our cancellation rate,
defined as the percentage of insurance in force from twelve
months prior that was cancelled during the twelve month period,
was 31% and 32% for 2005 and 2004, respectively.
Customers
Residential mortgage lenders such as mortgage bankers, mortgage
brokers, commercial banks, and savings institutions are the
principal originators of our insurance written through the flow
channel.
To obtain insurance through our flow channel, a mortgage lender
must first apply for and receive a master policy from us. Our
approval of a lender as a master policyholder is based upon
evaluation of the lenders financial position and
demonstrated adherence to sound lending practices as well as
other factors.
The master policy sets forth the terms and conditions of our
mortgage insurance policy. The master policy does not obligate
the lender to obtain insurance from us, nor does it obligate us
to issue insurance on a particular loan. The master policy
provides that the lender must submit individual loans for
insurance to us, and we must approve each loan, subject to
certain underwriting criteria, to effect coverage (except in the
case of delegated underwriting when the originator has the
authority to approve coverage within certain guidelines).
Consolidation within the mortgage origination industry has
resulted in a greater percentage of production volume being
concentrated among a smaller customer base. According to
industry sources, the top 30 lenders in the United States, as
ranked by mortgage origination volume, accounted for
approximately 88% of originated mortgage volume in 2005 compared
to 84% in 2004. Many of these top 30 lenders are our customers.
In 2005, production from our top 10 lenders accounted for
approximately 77% of insurance written through our flow channel
compared to 71% in 2004. The loss of one or more of these
significant customers could have an adverse effect on our
business.
4
Our premium revenue is comprised of premium from business
originated in the current year plus renewal premium from
insurance originated in prior years. Those customers whose
revenue comprised more than 10% of our consolidated revenue are
listed below:
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Percent of Revenues for
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the Year Ended
December 31
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Customer
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2005
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2004
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Wells Fargo Home Mortgage,
Inc.
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20%
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16%
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Countrywide Credit Industries, Inc
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14%
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14%
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See further discussion regarding significant customers in
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Sales and
Marketing
We currently market our insurance products through a dedicated
sales force of approximately 40 professionals, including sales
management, and an exclusive commissioned general agency serving
a specific geographic market. We are licensed to do business in
all 50 states and the District of Columbia.
Our Executive Vice President of Sales and Operations oversees
all of our sales and marketing activities and reports directly
to our Chief Executive Officer. Our Senior Vice President and
National Sales Manager is responsible for all of our sales
activities and reports to our Executive Vice President of Sales
and Operations. Division managers serve key regional accounts
through area sales directors and account executives and report
to our Senior Vice President and National Sales Manager. Also
reporting to our Senior Vice President and National Sales
Manager are national account executives who are responsible for
sales efforts toward larger national mortgage originators.
The marketing department develops and implements programs in
support of our sales objectives and to promote our image. A
variety of tools and venues are utilized to achieve these goals
including public relations, marketing materials,
internal/external publications, convention trade shows, and the
internet.
Contract
Underwriting
We provide fee-based contract underwriting services that enable
customers to improve the efficiency of their operations by
outsourcing all or part of their mortgage loan underwriting. The
fee charged is intended to cover the cost of providing the
services. Contract underwriting involves examining a prospective
borrowers information contained in a lenders
mortgage application file and making a determination whether the
borrower is approved for a mortgage loan subject to the
lenders underwriting guidelines. In addition, we offer
Fannie Maes Desktop
Originator®
and Desktop
Underwriter®
and Freddie Macs Loan
Prospector®
as a service to our contract underwriting customers. These
products, which are designed to streamline and reduce costs in
the mortgage origination process, supply our customers with fast
and accurate information regarding compliance with underwriting
standards and Fannie Maes or Freddie Macs decision
for loan purchase or securitization. We provide contract
underwriting services through our own employees as well as
independent contractors, and these services are provided for
loans that require mortgage insurance as well as loans that do
not require mortgage insurance. In the event that Triad fails to
properly underwrite a loan subject to the lenders
underwriting guidelines, Triad may be required to provide
monetary or other remedies to the lender customer. The amounts
historically paid and the estimated potential liabilities
associated with this activity are not significant.
Competition
and Market Share
We and other private mortgage insurers compete directly with
federal and state governmental and quasi-governmental agencies,
principally the Federal Housing Administration
(FHA). These agencies sponsor government-backed
mortgage insurance programs under which approximately 24% of all
high LTV loans were insured in 2005 compared to 33% in 2004. In
addition to competition from federal agencies, we and other
private mortgage insurers face competition from state-supported
mortgage insurance funds, some of which are either independent
5
agencies or affiliates of state housing agencies. Indirectly, we
also compete with mortgage lenders that forego private mortgage
insurance to self-insure against the risk of loss from defaults
on all or a portion of their low down payment mortgage loans,
and we compete with products designed to avoid mortgage
insurance such as 80-10-10 structures (a combination of an 80%
first mortgage loan, a 10% second mortgage loan usually issued
by the same lender, and a 10% down payment).
Fannie Mae and Freddie Mac are the beneficiaries of the majority
of our mortgage insurance policies, so their business practices
have a significant influence on us. Changes in their practices
could reduce the number of policies they purchase that are
insured by us and consequently reduce our revenues. Some of
Fannie Mae and Freddie Macs more recent programs require
less insurance coverage than they historically have required,
and they have the ability to further reduce coverage
requirements, which could reduce demand for mortgage insurance
and have a material adverse effect on our business, financial
condition and operating results.
Fannie Mae and Freddie Mac also have the ability to implement
new eligibility requirements for mortgage insurers and to alter
or liberalize underwriting standards on low-down-payment
mortgages they purchase. We cannot predict the extent to which
any new requirements may be enacted or how they may affect the
operations of our mortgage insurance business, our capital
requirements and our products.
Various proposals have been periodically discussed by Congress
and certain federal agencies to reform or modify the charters
under which Fannie Mae and Freddie Mac do business. Management
is unable to predict the scope and content of such proposals, or
whether any such proposals will be enacted into law, and if
enacted, what effect they may have on us.
The private mortgage insurance industry consists of seven major
mortgage insurance companies including Triad, Mortgage Guaranty
Insurance Corporation, PMI Mortgage Insurance Co., United
Guaranty Corporation, Radian Guaranty Inc., Genworth Financial,
Inc. and Republic Mortgage Insurance Company. Triad is the
smallest private mortgage insurer based on 2005 market share
and, according to estimated industry data, had a 7.5% share of
total net new insurance written in 2005 compared to 6.0% in 2004.
We believe we compete favorably with other private mortgage
insurers principally on the basis of personalized and
professional service, a strong management and sales team,
responsive and versatile technology, innovative products in the
flow market and attractive pricing with respect to certain
products. We compete in competitive bid transactions in the
structured bulk market with both the other private mortgage
insurers and providers of other forms of credit enhancements.
Underwriting
Practices
We consider effective risk management to be critical to our
long-term financial stability. Market analysis, prudent
underwriting, the use of automated risk evaluation models,
auditing, and knowledge of our customers are all important
elements of our risk management process.
Underwriting
Personnel
Our Senior Vice President of Underwriting is responsible for the
underwriting of business written through the flow channel in the
home office as well as regional offices in Arizona, California,
Georgia, Illinois, Ohio, Pennsylvania, and Texas. He has been in
his position since shortly after the Company was formed. Our
Senior Vice President of Risk Management is responsible for
assessing the risk factors used in our underwriting procedures.
He has been with the Company since 2001 and has more than
20 years of industry experience.
We employed an underwriting staff of approximately 35 at
December 31, 2005. Our field underwriters and underwriting
managers are limited in their authority to approve programs for
certain mortgage loans. The authority levels are tied to
underwriting position, knowledge, and experience and relate
primarily to loan amounts and property type. All of our loans
insured are subject to quality control reviews.
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Risk
Management Approach
We evaluate risk based on historical performance of risk factors
and utilize automated underwriting systems in the risk selection
process to assist the underwriter with decision-making. This
process evaluates the following categories of risk:
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Mortgage Lender. We review each lenders
financial statements and management experience before issuing a
master policy. We also track the historical risk performance,
including loan level risk characteristics, of all significant
customers that hold a master policy. This information is
factored into determining the loan programs we approve for
various lenders. We assign delegated underwriting authority only
to lenders with substantial financial resources and established
records of originating good quality loans.
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Purpose and Type of Loan. We analyze various
general characteristics of a loan to evaluate its level of risk
including: (i) LTV ratio; (ii) purpose of the loan;
(iii) type of loan instrument; (iv) level of
documentation; and (v) type of property. Generally, we seek
loan types with proven track records for which an assessment of
risk can be readily made and the premium received sufficiently
offsets that risk. Loan types that do not have a proven track
record are charged a higher premium, as are other loans which
have been shown to carry higher risks, such as adjustable rate
mortgages (ARMs), loans with limited or no
documentation, loans on second homes and investment properties,
and loans having higher LTV ratios. We do not actively pursue
certain categories of loans that have a disproportionate amount
of risk, including ARMs with scheduled negative amortization.
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Individual Loan and Borrower. Individual
insurance applications are evaluated based on analysis of the
borrowers ability and willingness to repay the mortgage
loan and the characteristics and value of the mortgaged
property. The analysis of the borrower includes reviewing the
borrowers housing and total debt ratios as well as the
borrowers Fair, Isaac and Co., Inc. (FICO)
credit score, as reported by credit rating agencies. In addition
to the borrowers willingness and ability to repay the
loan, we believe that mortgage default risk is affected by a
variety of other factors, including the borrowers
employment status. We believe insured mortgage loans made to
self-employed borrowers have higher risk of claim, all other
factors being equal, than loans to borrowers employed by third
parties. Individual insurance applications are reviewed by
Triads underwriting personnel except for loans originated
by lenders under delegated underwriting authority or through
automated underwriting services provided by Fannie Mae and
Freddie Mac. In the case of delegated underwriting, we monitor
compliance with program parameters through periodic audits of
delegated business. Through the automated underwriting services
provided by Fannie Mae and Freddie Mac, lenders are able to
obtain approval for mortgage guaranty insurance with any
participating mortgage insurer. Triad works with both
enterprises in offering insurance services through their systems
while monitoring the risk quality of loans insured through such
systems.
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Geographic Selection of Risk. We place
significant emphasis on the condition of the regional housing
markets in determining marketing and underwriting policies.
Using both internal and external data, our risk management
department continually monitors the economic conditions in our
active and potential markets. We may choose not to insure new
loans in geographic areas in which we have a heavy concentration
or that we believe have a higher risk of loss.
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Risk Dispersion. In the early years of the
Company, only certain high quality loans with limited risk were
accepted. As we developed expertise beyond that limited spectrum
on the risk curve and with the advent of delegated underwriting,
we gradually expanded the breadth of risk we view as acceptable.
Alt-A loans
continue to grow as a percentage of our Primary insurance in
force. We have defined
Alt-A as
individual loans having FICO scores greater than 619 that have
been underwritten with reduced or no documentation. The
marketplace has changed and many lenders are promoting
Alt-A loan
programs and other programs with nonconforming loan
characteristics. We have participated in certain of these
programs, primarily through specific lender-paid programs,
through the flow channel. As previously mentioned, loans such as
these have a higher premium rate than fully documented,
conforming loans.
|
7
Underwriting
Process for Our Flow Distribution Channel
We accept applications for insurance under three basic programs:
a fully-documented program, a credit-score driven reduced
documentation program, and a delegated underwriting program
which allows a lenders underwriters to commit insurance to
a loan based on strict, agreed upon underwriting guidelines. We
also accept loans approved through Freddie Macs or Fannie
Maes automated underwriting systems.
We generally utilize nationwide underwriting guidelines to
evaluate the potential risk of default on mortgage loans
submitted for insurance coverage. These guidelines have evolved
over time and take into account the loss experience of the
entire private mortgage insurance industry. They also are
largely influenced by the underwriting guidelines of Fannie Mae
and Freddie Mac. Specific underwriting guidelines applicable to
a given local, state, or regional market are utilized to address
concerns resulting from our review of regional economies and
housing patterns.
Subject to our underwriting guidelines and exception approval
procedures, we expect our internal underwriters and contract
underwriters to utilize their experience and business judgment
in evaluating each loan on its own merits. Accordingly, our
underwriting staff has discretionary authority to insure loans
that deviate in certain minor respects from our underwriting
guidelines. More significant exceptions are subject to
management approval. In all such cases, other compensating
factors must be identified. The predominant deviations involve
instances where the borrowers
debt-to-income
ratio exceeds our guidelines. To compensate for exceptions, our
underwriters give favorable consideration to factors such as
excellent borrower credit history, the availability of
satisfactory cash reserves after closing, and borrower
employment stability.
We also allow lenders to submit insurance applications with
reduced documentation through automated and non-automated
underwriting programs. Under the automated underwriting program,
Triad issues a commitment of insurance based on the
borrowers FICO credit score or the approval of the loan
through either Fannie Maes or Freddie Macs automated
underwriting system. We issue a commitment of insurance without
the standard underwriting process if certain program parameters
are met and the borrower has a credit score above established
thresholds. We audit lenders files on loans submitted
under the automated underwriting program randomly and through
specific identification of selected risk factors. Documentation
submission requirements for non-automated underwritten loans
vary depending on the borrowers credit score.
We utilize a delegated underwriting program to serve many of the
larger, well-established mortgage originators. Under this
program, standards for type of loan, property type, and credit
history of the borrower are established consistent with our risk
strategy, and the lenders underwriters are able to commit
insurance to a loan based on these standards. Re-underwriting,
re-appraisal, and similar procedures are utilized following
issuance of the policy to ensure quality control. Our delegated
underwriting program accounted for 37% of applications received
through the flow distribution channel in 2005 compared to 41% in
2004. To date, the performance of loans insured under the
delegated underwriting program has been comparable to
non-delegated business. The use of Fannie Maes or Freddie
Macs automated underwriting programs or our delegated
underwriting programs with selected lenders could lead to loss
development patterns different than those experienced when we
controlled the entire underwriting process.
Underwriting
Process for Our Structured Bulk Distribution
Channel
Our pricing for structured bulk transactions is commensurate
with a transactions overall risk profile based upon its
individual
loan-by-loan
analysis as well as any associated stop loss level or deductible
amount. We analyze structured bulk transactions during the bid
process to identify the individual loans that pose the greatest
risk of nonperformance. High-risk loans are identified based on
an analysis of multiple risk factors including, but not limited
to, credit score,
loan-to-value
ratio, documentation type, loan purpose, and loan amount. The
pertinent risk characteristics of each loan are evaluated to
determine the impact on the transactions frequency and
severity of loss and persistency. We may utilize an outside due
diligence firm in this process as well as mortgage risk analysis
models such as Standard & Poors Levels. We may
request to remove certain loans from the transaction as a result
of the risk review before we submit a competitive bid. We do not
bid on all structured bulk transactions of which we are notified.
8
Other
Risk Management
As discussed earlier, we have expanded the risk characteristics
that we pursue in both the Primary and Modified Pool
marketplaces. That change has been overseen by our Credit Risk
Committee, which is composed of all members of senior
management. The Credit Risk Committee must approve all new
product offerings and changes in types of risk that we are
willing to assume. This includes approval of the expansion of
credit characteristics and review of the overall underwriting
guidelines utilized.
Additionally, the Committee approves all structured bulk
transactions before a bid is submitted. The Committee reviews
the summary analysis of the transaction and challenges the
conclusions reached concerning the pricing of a given structure
based upon the estimated frequency and severity of projected
losses and persistency. After all of these points are
considered, the Committee decides whether or not to submit the
bid on the transaction.
We employ a comprehensive quality assurance internal audit plan
to determine whether underwriting decisions being made are
consistent with the policies, procedures, and expectations for
quality set forth by management. All areas of business activity
that involve an underwriting decision are examined, with
emphasis on new products, new procedures, contract underwritten
loans, delegated loans, new employees, new master policyholders,
and new branches of an existing master policyholder. The process
used to identify categories of loans selected for audit begins
with identification and evaluation of certain defined and
verifiable risk elements. Each loan is then tested against these
elements to identify loans that fail to meet prescribed policies
or an identified norm. The procedure allows management to
identify concerns that may exist within individual loans as well
as concerns that may exist within a given category of business
and take appropriate action.
Financial
Strength Rating
Credit ratings generally are considered an important element in
a mortgage insurers ability to compete for new business,
indicating the insurers present financial strength and
capacity to pay future claims. Certain national mortgage lenders
and a large segment of the mortgage securitization market,
including Fannie Mae and Freddie Mac, generally will not
purchase high LTV mortgages or mortgage-backed securities
containing high LTV mortgages unless the insurer issuing private
mortgage insurance coverage has a financial strength rating of
at least AA− by either Standard &
Poors Ratings Services (S&P) or Fitch
Ratings (Fitch) or a rating of at least
Aa3 from Moodys Investors Service
(Moodys). Triad is rated AA by
both S&P and Fitch and Aa3 by Moodys.
Private mortgage insurers are not rated by any other independent
nationally-recognized insurance industry rating organization or
agency (such as the A.M. Best Company).
When assigning a financial strength rating, S&P, Fitch, and
Moodys generally consider: (i) the specific risks
associated with the mortgage insurance industry, such as
regulatory climate, market demand, growth, and competition;
(ii) management depth, corporate strategy, and
effectiveness of operations; (iii) historical operating
results and expectations of current and future performance of
the insurers specific portfolio; and (iv) long-term
capital structure, the ratio of debt to equity, the ratio of
risk to capital, near-term liquidity, and cash flow levels, as
well as any reinsurance relationships and the financial strength
ratings of such reinsurers. Ratings are based on factors
relevant to policyholders. Such ratings are not directed to the
protection of shareholders and do not apply to any securities
issued by us.
Some rating agencies issue financial strength ratings based, in
part, upon a companys performance sensitivity to various
economic depression scenarios. In determining capital levels
required to maintain a companys rating, the rating
agencies may allow the use of different forms of capital
including statutory capital, reinsurance, and debt. In January
1998, we completed a $35 million private offering of notes
due January 15, 2028. The notes, which were rated
A by S&P and A+ by Fitch at the time
of issuance, were issued to provide additional capital
considered in the rating agencys depression models.
S&P, Fitch and Moodys will periodically review
Triads rating as they do with all rated insurers. Ratings
can be withdrawn or changed at any time by a rating agency. A
reduction in our rating by S&P, Fitch or Moodys, while
not anticipated, could materially impact our ability to write
new business.
9
Reinsurance
Triads product offerings include captive mortgage
reinsurance programs whereby an affiliate of a lender reinsures
a portion of the insured risk on loans originated or purchased
by the lender. These programs are designed to allow the lenders
to share in the risk of the business. See further discussion of
these programs under the Risk-sharing Products section above.
Pursuant to deeper coverage requirements imposed by Fannie Mae
and Freddie Mac, certain loans eligible for sale to such
enterprises with a
loan-to-value
ratio over 90% require insurance with a coverage percentage of
30% or more. Certain states limit the amount of risk a mortgage
insurer may retain with respect to coverage of an insured loan
to 25% of the claim amount, and, as a result, the deeper
coverage portion of such insurance must be reinsured. To
minimize reliance on third-party reinsurers and to permit it to
retain the premiums and related risk on deeper coverage
business, Triad reinsures this deeper coverage business with its
wholly-owned subsidiary, Triad Guaranty Assurance Corporation
(TGAC). As of December 31, 2005 and 2004, TGAC
assumed approximately $81 million and $73 million in
risk from Triad, respectively.
We maintain excess of loss reinsurance arrangements designed to
limit our exposure in the event of a catastrophic level of
losses. We currently maintain $125 million of excess of
loss reinsurance through non-affiliated reinsurers that have
financial strength ratings of AA or better from
Standard & Poors.
The use of reinsurance as a source of capital and as a risk
management tool is well established within the mortgage
insurance industry. Reinsurance does not legally discharge an
insurer from its primary liability for the full amount of the
risk it insures, although it does make the reinsurer liable to
the primary insurer. There can be no assurance that our
reinsurers will be able to meet their obligations under the
reinsurance agreements.
Defaults
and Claims
Defaults
The claim process on private mortgage insurance begins with the
lenders notification to the insurer of a default on an
insureds loan. Default is defined in the primary master
policy as the failure by the borrower to pay, when due, an
amount at least equal to the scheduled monthly mortgage payment
under the terms of the mortgage. The master policy requires
lenders to notify us of default on a mortgage payment within
10 days of either (i) the date on which the borrower
becomes four months in default or (ii) the date on which
any legal proceeding affecting the loan commences, whichever
occurs first. Notification is required within 45 days of
default if it occurs when the first payment is due. The
incidence of default is affected by a variety of factors
including, but not limited to, changes in borrower income,
unemployment, divorce, illness, and the level of interest rates.
Borrowers may cure defaults by making all delinquent loan
payments or by selling the property and satisfying all amounts
due under the mortgage. Defaults that are not cured generally
result in submission of a claim to us. Refer to the
Managements Discussion and Analysis of Financial Condition
and Results of Operations section of this document for default
statistics at December 31 for the last two years.
Claims
Claims result from defaults that are not cured. During the
default period, we work with the insured as well as the borrower
in an effort to reduce losses through the loss mitigation
efforts described below. The frequency of claims may not
directly correlate to the frequency of defaults due, in part, to
our loss mitigation efforts and the borrowers ability to
overcome temporary financial setbacks. The likelihood that a
claim will result from a default, and the amount of such claim,
principally depend on the borrowers equity at the time of
default and the borrowers (or the lenders) ability
to sell the home for an amount sufficient to satisfy all amounts
due under the mortgage, as well as the effectiveness of loss
mitigation efforts. The time frame from when we first receive a
notice of default until the ultimate claim is paid generally
ranges from six to eighteen months. Changes in various
macroeconomic conditions such as house price appreciation,
employment, and other market conditions over that time frame
also positively or negatively impact the amount of the ultimate
claim paid.
The payment of claims is not evenly spread throughout the
insurance coverage period. For Primary insurance, relatively few
claims are paid during the first year following loan
origination. A period of rising claim payments
10
follows, which, based on industry experience, has historically
reached its highest level in the second through fifth years
after loan origination. Thereafter, the number of claim payments
made has historically declined at a gradual rate, although the
rate of decline can be affected by local economic conditions.
For Modified Pool insurance, the claim pattern peaks somewhat
earlier, with the highest claim payment levels reached in the
second through fourth years. There can be no assurance that the
historical pattern of claims will continue in the future.
Generally, we do not pay a claim for loss under the master
policy if the application for insurance for the loan in question
contains fraudulent information, material omissions, or
misrepresentations that increase the risk characteristics of the
loan. Our master policy also excludes any cost or expense
related to the repair or remedy of any physical damage (other
than normal wear and tear) to the property
collateralizing an insured mortgage loan. Such physical damage
may be caused by accident, natural occurrence, or other
conditions.
Under the terms of the master policy, the lender is required to
file a claim with us no later than 60 days after it has
acquired borrowers title to the underlying property
through foreclosure, a negotiated short sale, or a
deed-in-lieu
of foreclosure. A primary insurance claim amount includes
(i) the amount of unpaid principal due under the loan;
(ii) the amount of accumulated delinquent interest due on
the loan (excluding late charges) to the date of claim filing;
(iii) expenses advanced by the insured under the terms of
the master policy, such as hazard insurance premiums, property
maintenance expenses and property taxes prorated to the date of
claim filing; and (iv) certain foreclosure and other
expenses, including attorneys fees. Such claim amount is subject
to review and possible adjustment by us. Our experience
indicates that the claim amount on a policy generally ranges
from 110% to 115% of the unpaid principal amount of a foreclosed
loan.
Within 60 days after the claim has been filed, we have the
option of either (i) paying the coverage percentage of the
claim as specified on the certificate of insurance (usually 12%
to 37% of the claim), with the insured retaining title to the
underlying property and receiving all proceeds from the eventual
sale of the property, or (ii) paying the full claim amount
in exchange for the lenders conveyance of good and
marketable title to the property to us, and selling the property
for our own account. We choose the claim settlement option
believed to cost the least. In most cases, we settle claims by
paying the coverage percentage of the claim amount; however we
have expanded the use of our option to purchase properties in
settlement of claims. At December 31, 2005, we held
48 properties with a combined net realizable value of
approximately $5.7 million that were acquired by electing
to pay the full claim amount compared to two properties with a
combined net realizable value of approximately $0.2 million
held at December 31, 2004. We record the estimated loss
amount on properties purchased in settlement of claims at the
time of acquisition and refine this estimate when appropriate
until the property is sold. During 2005, we added additional
personnel with real estate expertise to enable us to better
utilize the property acquisition option. In general, the claims
severity was lower on properties acquired than on those for
which we paid the settlement option, although the number of paid
claims is far greater than those utilizing the property
acquisition option.
Loss
Mitigation
Once a default notice is received, we attempt to mitigate our
loss. Through proactive intervention with insured lenders and
borrowers, we have been successful in reducing the number and
severity of our claims for loss. Loss mitigation techniques
include
pre-foreclosure
sales, property sales after foreclosure, advances to assist
distressed borrowers who have suffered a temporary economic
setback, and the use of repayment schedules, refinances, loan
modifications, forbearance agreements, and
deeds-in-lieu
of foreclosure. Such mitigation efforts typically result in
reduced losses from the coverage percentage stated in the
certificate of insurance. As a result of loss mitigation
efforts, we paid out approximately 75% and 60% of potential
exposure on claims in 2005 and 2004, respectively.
Loss
Reserves
We establish reserves to provide for the estimated costs of
settling claims on loans reported in default and loans in
default that are in the process of being reported to us.
Consistent with industry practices, we do not establish loss
reserves for future claims on insured loans that are not
currently in default. Our reserving process is based upon the
assumption that long-term historical experience, adjusted for
current economic events that we believe will significantly
impact the long-term loss development, provides a reasonable
basis for estimating future events. See the Financial Position
section of Managements Discussion and Analysis of
Financial Condition and Results of
11
Operations for a more detailed discussion of the loss reserving
process, and see Note 4 to the Consolidated Financial
Statements for a detailed analysis of the activity in this
account for the year.
Analysis
of Direct Risk in Force
A foundation of our business strategy is proactive risk
selection. We analyze our portfolio in a number of ways to
identify any concentrations of risk or imbalances in risk
dispersion. We believe that the quality of our insurance
portfolio is affected predominantly by (i) the quality of
loan originations (including the strength of the borrower and
the marketability of the property); (ii) the attributes of
loans insured (including LTV ratio, purpose of the loan, type of
loan instrument, and type of underlying property securing the
loan); (iii) the seasoning of the loans insured;
(iv) the geographic dispersion of the underlying properties
subject to mortgage insurance; and (v) the quality,
integrity and past performance of lenders from which we receive
loans to insure.
Lender
and Product Characteristics
We had $8.0 billion of direct risk in force as of
December 31, 2005. Direct risk in force includes risk from
both Primary and Modified Pool insurance, adjusted for
applicable stop loss limits and deductibles.
The following table provides information on risk in force (as
determined on the basis of information available on the date of
mortgage origination) by the categories indicated on
December 31, 2005 and 2004. In our 2004
Form 10-K,
risk in force amounts did not reflect deductibles. The table
below adjusts for deductibles in the data for both years
presented.
Risk in
Force(1)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Direct Risk in Force
(dollars in millions)
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
7,471
|
|
|
$
|
7,158
|
|
Modified Pool insurance
|
|
|
545
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,016
|
|
|
$
|
7,532
|
|
|
|
|
|
|
|
|
|
|
Net Risk in Force
(dollars in millions)
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
6,767
|
|
|
$
|
6,587
|
|
Modified Pool insurance
|
|
|
545
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,312
|
|
|
$
|
6,961
|
|
|
|
|
|
|
|
|
|
|
Lender concentration (excludes
structured bulk transactions):
|
|
|
|
|
|
|
|
|
Top 10 lenders (by original
applicant)
|
|
|
69.3
|
%
|
|
|
68.4
|
%
|
LTV:
|
|
|
|
|
|
|
|
|
95.01% and above
|
|
|
8.9
|
%
|
|
|
9.5
|
%
|
90.01% to 95.00%
|
|
|
26.1
|
%
|
|
|
32.0
|
%
|
90.00% and below
|
|
|
65.0
|
%
|
|
|
58.5
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Loan Type:
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
61.3
|
%
|
|
|
72.3
|
%
|
ARM (positive amortization)(2)
|
|
|
36.2
|
%
|
|
|
27.7
|
%
|
ARM (potential negative
amortization)(3)
|
|
|
2.5
|
%
|
|
|
0.0
|
%
|
ARM (scheduled negative
amortization)(3)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Mortgage Term:
|
|
|
|
|
|
|
|
|
15 years and under
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
Over 15 years
|
|
|
96.0
|
%
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Property Type:
|
|
|
|
|
|
|
|
|
Non-condominium (principally
single-family detached)
|
|
|
92.9
|
%
|
|
|
94.5
|
%
|
Condominium
|
|
|
7.1
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Occupancy Status:
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
85.2
|
%
|
|
|
88.7
|
%
|
Secondary home
|
|
|
5.0
|
%
|
|
|
3.7
|
%
|
Non-owner occupied
|
|
|
9.8
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Mortgage Amount:
|
|
|
|
|
|
|
|
|
$200,000 or less
|
|
|
59.6
|
%
|
|
|
66.0
|
%
|
Over $200,000
|
|
|
40.4
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentages represent distribution of direct risk in force on a
per policy basis and does not account for applicable stop-loss
amounts. |
|
(2) |
|
Refers to loans where payment adjustments are the same as
mortgage interest rate adjustments. |
|
(3) |
|
Scheduled negative amortization is defined as the increase in
loan balance that will occur if interest rates do not change.
Loans with potential negative amortization will not have
increasing principal balances unless interest rates increase. |
An important determinant of claim incidence is the relative
amount of borrowers equity in the home. For the industry
as a whole, historical evidence indicates that, in general,
claim incidence on loans with a higher LTV is greater than a
loan with a lower LTV, all else being equal. We believe the
higher premium rates charged on high LTV loans adequately
reflect the additional risk.
At December 31, 2005, approximately 8.9% of our risk in
force was comprised of loans with an LTV greater than 95%. These
high LTV loans are offered primarily to low and moderate-income
borrowers. We believe that these loans have higher risks than
loans with lower LTVs and have often attracted borrowers with
weaker credit histories, generally resulting in higher loss
ratios. In keeping with our established risk strategy, we have
not aggressively solicited this segment of the industry. We do
not routinely delegate the underwriting of high LTV loans.
In 2000, the State of Illinois Insurance Division, as well as
the insurance departments of several other states, began to
permit mortgage insurers to write coverage on loans with LTVs in
excess of 97% up to 100% and, in certain instances, up to 103%.
This determination was made in response to the development by
certain entities in the mortgage securitization market,
including Fannie Mae and Freddie Mac, of programs that allowed
LTVs in excess of 97%. These programs are designed to
accommodate the credit-worthy borrower who lacks the ability or
otherwise chooses not to provide a down payment on a home. We
accept loans with LTVs greater than 97% on a limited basis.
We write policies on ARMs that primarily are positively
amortizing. Payments on these loans are adjusted periodically
with interest rate movements. Many of the ARMs have a fixed rate
for a stated period of time, and accordingly, most have not yet
had payment adjustments. In addition, we insure a small
percentage of interest-only mortgages, a variation of an ARM,
where the borrower pays only the interest charge on a mortgage
for a specified period of time, usually five to ten years, after
which the loan payment increases to include principal payments.
The interest rate charged on these loans is often adjusted to
reflect market interest rate changes. These interest-only loans
may have a heightened propensity to default because of possible
payment shocks due to interest rate increases or the
expiration of the initial period of interest-only payments. In a
period of economic stress, defined as increasing interest rates
and declining housing prices, ARMs and interest-only loans could
perform substantially worse than fixed-rate loans. Although, to
date, we have not seen the delinquency rates on ARMs vary
significantly
13
from fixed-rate loans, we do not believe that we have sufficient
default and claim data under distressed economic conditions to
give assurances of their future performance.
In our normal course of operations, our existing underwriting
policy does not permit coverage of ARMs with
scheduled negative amortization. ARMs with
potential negative amortization characteristics,
because of possible interest rate increases and borrower payment
option changes, are accepted under limited conditions for
approved lenders. If a potential negative
amortization loan does indeed go to a negative amortization
status, there will be a greater risk of default, especially in a
period of rising interest rates.
We believe that
15-year
mortgages present a lower level of risk than
30-year
mortgages, primarily as a result of the faster amortization and
the more rapid accumulation of borrower equity in the property.
Accordingly, we charge lower premium rates on these loans than
on comparable
30-year
mortgages.
We believe that the risk of claim is also affected by the type
of property securing the insured loan. In our opinion, loans on
single-family detached housing are subject to less risk of claim
incidence than loans on other types of properties. We believe
that attached housing types, particularly condominiums and
cooperatives, are a higher risk because, in most areas,
condominiums and cooperatives tend to be more susceptible to
downward fluctuations in value than single-family detached
dwellings in the same market.
Loans on primary residences that were owner occupied at the time
of loan origination constituted approximately 85% of our risk in
force at December 31, 2005. We believe that loans on
non-owner occupied properties represent a substantially higher
risk of claim incidence and are subject to greater value
declines than loans on primary homes. While we do not actively
pursue loans on properties not occupied by the owner, we do
accept these types of loans as a normal part of our business
from our existing customers.
Historical evidence indicates that higher-priced properties
experience wider fluctuations in value than moderately priced
residences. These fluctuations exist primarily because there is
a smaller pool of qualified buyers for higher-priced homes,
which, in turn, reduces the likelihood of achieving a quick sale
at fair market value when necessary to avoid a default. The
majority of our direct risk in force is on mortgages of $200,000
or below.
Our book of business is relatively unseasoned, having a weighted
average life of 2.4 years at December 31, 2005, and
2.2 years at December 31, 2004.
14
The following table shows direct risk in force as of
December 31, 2005 by year of loan origination and the
cumulative loss ratios (calculated as direct losses paid divided
by direct premiums received, in each case for a particular
policy year) that have developed through December 31, 2005
and 2004. It excludes the effects of reinsurance.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Loss
|
|
|
|
|
|
|
|
|
|
Ratios as of
|
|
|
|
Direct Risk
|
|
|
Percent
|
|
|
December 31
|
|
Certificate Year
|
|
in Force
|
|
|
of Total
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
1995 and before
|
|
$
|
30.9
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
1996
|
|
|
16.8
|
|
|
|
0.2
|
|
|
|
13.9
|
|
|
|
13.6
|
|
1997
|
|
|
29.4
|
|
|
|
0.4
|
|
|
|
9.9
|
|
|
|
9.6
|
|
1998
|
|
|
72.7
|
|
|
|
0.9
|
|
|
|
6.4
|
|
|
|
6.0
|
|
1999
|
|
|
60.4
|
|
|
|
0.8
|
|
|
|
9.0
|
|
|
|
7.8
|
|
2000
|
|
|
52.0
|
|
|
|
0.6
|
|
|
|
32.0
|
|
|
|
27.8
|
|
2001
|
|
|
289.4
|
|
|
|
3.6
|
|
|
|
23.7
|
|
|
|
15.9
|
|
2002
|
|
|
687.0
|
|
|
|
8.6
|
|
|
|
22.4
|
|
|
|
10.2
|
|
2003
|
|
|
2,111.7
|
|
|
|
26.3
|
|
|
|
7.8
|
|
|
|
1.2
|
|
2004
|
|
|
2,077.7
|
|
|
|
25.9
|
|
|
|
2.0
|
|
|
|
0.0
|
|
2005
|
|
|
2,588.3
|
|
|
|
32.3
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
8,016.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above reflects relatively higher cumulative ratios of
losses paid to premium received for the 2000 and 2002 policy
years at this stage of development. This is due, in part, to a
large portion of this business refinancing in recent years and
the resulting lower aggregate level of premium received for
these policy years.
Alt-A
continues to grow as a percentage of our Primary insurance in
force, and the majority of our Modified Pool insurance is
classified as
Alt-A. The
following table shows the percentage of our insurance in force
that we have classified as
Alt-A at
December 31, 2005 and 2004:
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2005
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|
|
2004
|
|
|
Primary insurance
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|
|
9.9
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%
|
|
|
7.3
|
%
|
Modified Pool insurance
|
|
|
66.9
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%
|
|
|
56.2
|
%
|
Total insurance
|
|
|
28.6
|
%
|
|
|
17.7
|
%
|
15
Geographic
Dispersion
The following tables reflect the percentage of direct risk in
force on our book of business (by location of property) for the
top ten states and the top ten metropolitan statistical areas
(MSAs) as of December 31, 2005.
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|
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|
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|
Top Ten States
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|
|
|
|
Top Ten MSAs
|
|
|
|
|
California
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|
|
10.1
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%
|
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Chicago, IL
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|
|
4.1
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%
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Florida
|
|
|
9.2
|
|
|
Phoenix/Mesa, AZ
|
|
|
3.3
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Texas
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|
|
7.6
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|
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Atlanta, GA
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|
|
2.8
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Illinois
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|
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4.6
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|
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Los Angeles/Long Beach, CA
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|
|
2.3
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Arizona
|
|
|
4.5
|
|
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Houston, TX
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|
|
2.1
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Georgia
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|
|
4.4
|
|
|
Las Vegas, NV
|
|
|
2.0
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|
North Carolina
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|
|
4.2
|
|
|
Riverside/San Bernardino, CA
|
|
|
1.9
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New Jersey
|
|
|
3.6
|
|
|
New York, NY
|
|
|
1.7
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|
New York
|
|
|
3.5
|
|
|
Denver, CO
|
|
|
1.7
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|
Colorado
|
|
|
3.3
|
|
|
Minneapolis/St. Paul, MN
|
|
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1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
55.0
|
%
|
|
Total
|
|
|
23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
While we continue to diversify our risk in force geographically,
a prolonged regional recession, particularly in high
concentration areas, or a prolonged national economic recession
could significantly increase loss development.
Investment
Portfolio
See a complete discussion of investments in the Investment
Portfolio section in the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section of this document.
Regulation
Direct
Regulation
Our insurance subsidiaries are subject to comprehensive,
detailed regulation, principally for the protection of
policyholders rather than for the benefit of investors, by the
insurance departments of the various states in which each
insurer is licensed to transact business. Although their scope
varies, state insurance laws, in general, grant broad powers to
supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion over almost every
significant aspect of the insurance business. These include the
licensing of companies to transact business and varying degrees
of control over claims handling practices, reinsurance
requirements, premium rates, the forms and policies offered to
customers, financial statements, periodic financial reporting,
permissible investments, and adherence to financial standards
relating to statutory surplus, dividends, and other criteria of
solvency intended to assure the satisfaction of obligations to
policyholders.
All states have enacted legislation that requires each insurance
company in a holding company system to register with the
insurance regulatory authority of its state of domicile and
furnish to the regulator financial and other information
concerning the operations of companies within the holding
company system that may materially affect the operations,
management, or financial condition of the insurers within the
system. Generally, all transactions within a holding company
system between an insurer and its affiliates must be fair and
reasonable and the insurers statutory policyholders
surplus following any transaction with an affiliate must be both
reasonable in relation to its outstanding liabilities and
adequate for its needs. Most states also regulate transactions
between insurance companies and their parents
and/or
affiliates. There can be no assurance that state regulatory
requirements will not become more stringent in the future and
have an adverse effect on us.
Because the Company is an insurance holding company and Triad is
an Illinois domiciled insurance company, the Illinois insurance
laws regulate, among other things, certain transactions in the
Companys common stock and certain transactions between
Triad and the Company or affiliates. Specifically, no person
may, directly or indirectly, offer to acquire or acquire
beneficial ownership of more than 10% of any class of
outstanding securities of the
16
Company or its subsidiaries unless such person files a statement
and other documents with the Illinois Director of Insurance and
obtains the Directors prior approval. These restrictions
generally apply to all persons controlling or under common
control with the insurance companies. Control is
presumed to exist if 10% or more of Triads voting
securities is owned or controlled, directly or indirectly, by a
person, although the Illinois Director may find that
control, in fact, does or does not exist where a
person owns or controls either a lesser or greater amount of
securities. Other states in addition to Illinois may regulate
affiliated transactions and the acquisition of control of the
Company or its insurance subsidiaries.
Triad is required by Illinois insurance laws to provide for a
contingency reserve in an amount equal to at least 50% of earned
premiums in its statutory financial statements. Such reserves
must be maintained for a period of 10 years except in
circumstances where high levels of losses exceed regulatory
thresholds. The contingency reserve, designed to provide a
cushion against the effect of adverse economic cycles, has the
effect of reducing statutory surplus and restricting dividends
and other distributions by Triad. At December 31, 2005,
Triad had statutory policyholders surplus of
$131.6 million and a statutory contingency reserve of
$447.8 million. At December 31, 2004, Triad had
statutory policyholders surplus of $135.7 million and
a statutory contingency reserve of $369.5 million.
Triads statutory earned surplus was $47.9 million at
December 31, 2005, and $51.9 million at
December 31, 2004, reflecting an increase in the statutory
contingency reserve and the deferred tax liability greater than
statutory net income in 2005.
The insurance laws of Illinois provide that Triad may pay
dividends only out of statutory earned surplus and further
establish standards limiting the maximum amount of dividends
that may be paid without prior approval by the Illinois
Director. Under such standards, Triad may pay dividends during
any 12-month period equal to the greater of (i) 10% of the
preceding year-end statutory policyholders surplus or
(ii) the preceding years net income to be paid out of
earned surplus. In addition, insurance regulatory authorities
have broad discretion to limit the payment of dividends by
insurance companies. Triad has never paid dividends to the
Company. In January 2006, the Companys Board of Directors
authorized it to buy back up to 1,000,000 shares of its
common stock dependent on market conditions. Although it is not
currently anticipated that Triad would pay dividends to the
Company in 2006 in order to fund such stock repurchases, there
is no regulatory prohibition preventing the payment of
dividends. Triad could pay dividends of $47.9 million to
the Company in 2006 without prior regulatory approval.
Although not subject to a rating law in Illinois, premium rates
for mortgage insurance are subject to regulation in most states
to protect policyholders against the adverse effects of
excessive, inadequate, or unfairly discriminatory rates and to
encourage competition in the insurance marketplace. Any increase
in premium rates must be justified, generally on the basis of
the insurers loss experience, expenses, and future trend
analysis. The general mortgage default experience also may be
considered.
TGAC, organized as a subsidiary of Triad under the insurance
laws of the state of Illinois in December 1994, is subject to
all Illinois insurance regulatory requirements applicable to
Triad.
Triad Re, organized as a subsidiary of Triad under the insurance
laws of the state of Vermont in November 1999, is subject to all
Vermont insurance regulatory requirements applicable to Triad.
Triad, TGAC, and Triad Re are each subject to examination of
their affairs by the insurance departments of every state in
which they are licensed to transact business. The Illinois
Insurance Director and Vermont Insurance Commissioner
periodically conduct financial condition examinations of
insurance companies domiciled in their states. The most recent
examinations of Triad and TGAC were issued by the Illinois
Insurance Division on June 27, 2005, and covered the period
January 1, 1999, through December 31, 2003. No
adjustments or material recommendations were made as a result of
these examinations. The most recent examination of Triad Re was
issued by the Insurance Division of the State of Vermont on
September 29, 2005, and covered the period of
November 16, 1999 through December 31, 2003. No
adjustments or material recommendations were made as a result of
the examination.
A number of states generally limit the amount of insurance risk
that may be written by a private mortgage insurer to 25 times
the insurers total policyholders surplus. This
restriction is commonly known as the risk-to-capital requirement.
17
State insurance laws and regulations generally restrict mortgage
insurers to writing residential mortgage guaranty insurance
business only. This restriction generally prohibits Triad from
using its capital resources in support of other types of
insurance and restricts its noninsurance business. However,
noninsurance businesses of the Company would not be subject to
regulation under state insurance laws.
Regulation of reinsurance varies by state. Except for Illinois,
Wisconsin, New York, Ohio, and California, most states have no
special restrictions on reinsurance that would apply to private
mortgage insurers other than standard reinsurance requirements
applicable to property and casualty insurance companies. Certain
restrictions, including reinsurance trust fund or letter of
credit requirements, apply under Illinois law to domestic
companies and under the laws of several other states to any
licensed company ceding business to unlicensed reinsurers. If a
reinsurer is not admitted or approved, the company doing
business with the reinsurer cannot take credit in its statutory
financial statements for the risk ceded to such reinsurer absent
compliance with the reinsurance security requirements. In
addition, some states in which Triad does business have limited
private mortgage insurers to a maximum policy coverage limit of
25% of the insureds claim amount and require coverages in
excess of 25% to be reinsured through another licensed mortgage
insurer.
The National Association of Insurance Commissioners
(NAIC) adopted a risk-based capital
(RBC) formula designed to help regulators identify
property and casualty insurers in need of additional capital.
The RBC formula establishes minimum capital needs based upon
risks applicable to individual insurers, including asset risks,
off-balance sheet risks (such as guarantees for affiliates and
contingent liabilities), and credit risks (such as reinsurance
ceded and receivables). The NAIC and the Illinois Insurance
Division currently do not require mortgage guaranty insurers to
file RBC analysis in their annual statements.
As the dominant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage guaranty insurance,
Fannie Mae and Freddie Mac impose eligibility requirements on
private mortgage insurers in order for such insurers to acquire
business from them. These requirements include limitations on
the types of risk insured, standards for geographic and customer
diversification of risk, procedures for claims handling and
acceptable underwriting practices. These requirements generally
mirror the financial requirements of statutory insurance
regulations and are subject to change from time to time.
While Triad is an approved mortgage insurer for both Fannie Mae
and Freddie Mac and meets all existing eligibility requirements,
there can be no assurance that such requirements or the
interpretation of the requirements will not change or that Triad
will continue to meet such requirements. In addition, to the
extent Fannie Mae or Freddie Mac assumes default risk for itself
that would otherwise be insured, changes current guarantee fee
arrangements, allows alternative credit enhancements, alters or
liberalizes underwriting guidelines on low down payment
mortgages it purchases, or otherwise changes its business
practices or processes with respect to such mortgages, private
mortgage insurers may be affected. Triad could be adversely
affected if changes in eligibility requirements regarding
captive arrangements were to impede Triads ability to
offer this form of captive reinsurance.
Fannie Mae and Freddie Mac both accept reduced mortgage
insurance coverage from lenders that deliver loans approved by
their automated underwriting services. Generally, Fannie
Maes and Freddie Macs reduced mortgage insurance
coverage options provide for (i) across-the-board
reductions in required MI coverage on 30-year fixed-rate loans
recommended for approval by their automated underwriting
services to the levels in effect in 1994; (ii) a reduction
in required MI coverage for loans with only a 5% down payment (a
95% LTV) from 30% to 25% of the mortgage loan covered by MI; and
(iii) a reduction in required MI coverage for loans with a
10% down payment (a 90% LTV loan) from 25% to 17% of the
mortgage loan covered by MI. In addition, Fannie Mae and Freddie
Mac have implemented other programs that further reduce MI
coverage upon the payment of an additional fee by the lender.
Under this option, a 95% LTV loan will require 18% of the
mortgage loan to have mortgage insurance coverage. Similarly, a
90% LTV loan will require 12% of the mortgage loan to have
mortgage insurance coverage. In order for the homebuyer to have
MI at these levels, such loans would require a payment at
closing or a higher note rate.
Certain national mortgage lenders and a large segment of the
mortgage securitization market, including Fannie Mae and Freddie
Mac, generally will not purchase mortgages or mortgage-backed
securities unless the private mortgage insurance on the
mortgages has been issued by an insurer with a financial
strength rating of at least
18
AA− from S&P or Fitch or a rating of
at least Aa3 from Moodys. Fannie Mae and
Freddie Mac require mortgage guaranty insurers to maintain two
ratings of AA− or better. Triad has a
financial strength rating of AA from S&P and
Fitch and a rating of Aa3 from Moodys.
S&P, Fitch, and Moodys consider Triads
consolidated operations and financial position in determining
the rating. There can be no assurance that Triads ratings,
the methods by which the ratings are determined, or the
eligibility requirements of Fannie Mae and Freddie Mac will not
change.
The Real Estate Settlement and Procedures Act of 1974
(RESPA) applies to most residential mortgages
insured by Triad, and related regulations provide that the
provision of services involving mortgage insurance is a
settlement service for purposes of loans subject to
RESPA. Subject to limited exceptions, RESPA prohibits persons
from accepting anything of value for referring real estate
settlement services to any provider of such services. Although
many states prohibit mortgage insurers from giving rebates,
RESPA has been interpreted to cover many non-fee services as
well.
Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicants race,
nationality, gender, marital status, and census tract to HUD or
the Federal Reserve under the Home Mortgage Disclosure Act of
1975 (HMDA). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure,
to discourage such discrimination. Mortgage insurers are not
required pursuant to any law or regulation to report HMDA data,
although under the laws of several states, mortgage insurers are
currently prohibited from discriminating on the basis of certain
classifications. All but one of the active mortgage insurers
(including Triad), through their trade association, the Mortgage
Insurance Companies of America (MICA), have entered
into an agreement with the Federal Financial Institutions
Examinations Council (FFIEC) to report the same data
on loans submitted for insurance as is required for most
mortgage lenders under HMDA.
The Homeowners Protection Act of 1998 provides for certain
termination and cancellation requirements for borrower-paid
mortgage insurance and requires mortgage lenders to periodically
update borrowers about their private mortgage insurance. Under
the legislation, borrowers may generally request termination of
mortgage insurance once the LTV reaches 80%, provided that
certain conditions are met. The legislation further requires
lenders to automatically cancel borrower-paid private mortgage
insurance when the LTV reaches 78% if certain conditions are
met. The legislation also requires lenders to notify borrowers
that they have private mortgage insurance and requires certain
disclosures to borrowers of their rights under the law. Because
most mortgage borrowers who obtain private mortgage insurance do
not achieve 20% equity in their homes before the homes are sold
or the mortgages are refinanced, we have not lost and do not
expect to lose a significant amount of insurance in force due to
the enactment of this legislation.
Indirect
Regulation
The Company, Triad, and Triads subsidiaries are also
indirectly, but significantly, impacted by regulations affecting
purchasers of mortgage loans, such as Fannie Mae and Freddie
Mac, and regulations affecting governmental insurers, such as
the FHA and the Department of Veterans Affairs (VA),
as well as regulation affecting lenders. Private mortgage
insurers, including Triad, are highly dependent upon federal
housing legislation and other laws and regulations that affect
the demand for private mortgage insurance and the housing
market. FHA loan limits are adjusted in response to changes in
the Freddie Mac/Fannie Mae conforming loan limits. Currently,
the maximum single-family home mortgage that the FHA can insure
is $362,790. The maximum FHA loan amount is subject to
adjustment and may increase in the future. Any future
legislation that increases the number of persons eligible for
FHA or VA mortgages could have an adverse effect on Triads
ability to compete with the FHA or VA.
Pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the Office of
Thrift Supervision (OTS) issued risk-based capital
rules for savings institutions. These rules establish a lower
capital requirement for a low down payment loan that is insured
with private mortgage insurance, as opposed to remaining
uninsured. Furthermore, the guidelines for real estate lending
policies applicable to savings institutions and commercial banks
provide that such institutions should require appropriate credit
enhancement in the form of either mortgage insurance or readily
marketable collateral for any high LTV mortgage. Future changes,
if any, to FIRREAs risk-based capital rules or the
guidelines for real estate lending policies applicable to
savings institutions and commercial banks could affect demand
for private mortgage insurance products.
19
In the first quarter of 2002, the Office of Federal Housing
Enterprise Oversight (OFHEO) released its risk-based capital
rules for Fannie Mae and Freddie Mac. The regulation provides
capital guidelines for Fannie Mae and Freddie Mac in connection
with their use of various types of credit protection
counterparties including a more preferential capital credit for
insurance from a AAA rated private mortgage insurer
than for insurance from a AA rated private mortgage
insurer. The phase-in period for the new rule is ten years. We
do not believe the new rules had an adverse impact on us when
issued or that the new rules will have a significant adverse
impact on us in the future. However, if the new capital
guidelines result in future changes to the preferences of Fannie
Mae and Freddie Mac regarding their use of the various types of
credit enhancements or their choice of mortgage insurers based
on credit rating, our financial condition could be significantly
harmed.
Fannie Mae and Freddie Mac each provide their own automated
underwriting system to be used by mortgage originators selling
mortgages to them. These systems, which are provided by Triad as
a service to the Companys contract underwriting customers,
streamline the mortgage process and reduce costs. The increased
acceptance of these products is driving the automation of the
process by which mortgage originators sell loans to Fannie Mae
and Freddie Mac, a trend that is expected to continue. As a
result, Fannie Mae and Freddie Mac could develop the capability
to become the decision maker regarding selection of a private
mortgage insurer for loans sold to them, a decision
traditionally made by the mortgage originator. We, however, are
not aware of any plans to do so. The concentration of purchasing
power that would be attained if such development, in fact,
occurred could adversely affect, from our perspective, the terms
on which mortgage insurance is written on loans sold to Fannie
Mae and Freddie Mac.
Additionally, proposals have been advanced which would allow
Fannie Mae and Freddie Mac additional flexibility in determining
the amount and nature of alternative recourse arrangements or
other credit enhancements that could be utilized as substitutes
for private mortgage insurance. We cannot predict if or when any
of the foregoing legislation or proposals will be adopted, but
if adopted, and depending upon the nature and extent of
revisions made, demand for private mortgage insurance may be
adversely affected. There can be no assurance that other federal
laws affecting such institutions and entities will not change,
or that new legislation or regulation will not be adopted.
In 1996, the Office of the Comptroller of the Currency
(OCC) granted permission to national banks to have a
reinsurance company as a wholly-owned operating subsidiary for
the purpose of reinsuring mortgage insurance written on loans
originated, purchased, or serviced by such banks. Several
subsequent applications by banks to offer reinsurance have been
approved by the OCC including at least one request to engage in
quota share reinsurance. The OTS, which regulates thrifts and
savings institutions, has approved applications for such captive
arrangements as well. The reinsurance subsidiaries of national
banks or savings institutions could become significant
competitors of ours in the future.
In November 1999, the Gramm-Leach-Bliley Act, also known as the
Financial Services Modernization Act of 1999, became effective
and allows holding companies of banks also to own a company that
underwrites insurance. As a result of this Act, banking
organizations that previously were not allowed to be affiliated
with insurance companies may now do so. This legislation has had
very little impact on us to date. However, the evolution of
federal law making it easier for banks to engage in the mortgage
guaranty business through affiliates may subject mortgage
guaranty insurers to more intense competition and risk-sharing
with bank lender customers in the future.
Web Site
Access to Company Reports
Through our web site we make available, free of charge, our
Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after this material is electronically filed with or
furnished to the Securities and Exchange Commission. This
material may be accessed by visiting the Investors/Financial
Information/SEC Filing Information section of our web site at
www.triadguaranty.com.
Employees
As of December 31, 2005, we employed approximately 230
persons. Employees are not covered by any collective bargaining
agreement. We consider our employee relations to be satisfactory.
20
Executive
Officers
Our executive officers are as follows:
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Name
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Position
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Age
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William T. Ratliff, III
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Chairman of the Board of the
Company and Triad
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Mark K. Tonnesen
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President, Chief Executive
Officer, and Director of the Company and Triad
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Eric B. Dana
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Senior Vice President and Chief
Financial Officer of the Company and Triad
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Kenneth N. Lard
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Executive Vice President of the
Company and Executive Vice President, Sales and Operations of
Triad
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Earl F. Wall
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Senior Vice President, Secretary,
and General Counsel of the Company and Triad
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Kenneth C. Foster
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Senior Vice President, Risk
Management of Triad
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William T. Ratliff, III has been the Chairman of the
Board of the Company since 1993. Mr. Ratliff has also been
Chairman of the Board of Triad since 1989, and was President and
General Partner of CML from 1987 to 1995. Since 1995, he has
served as President of Collat, Inc., CMLs corporate
general partner. Mr. Ratliff has been Chairman of New South
Federal Savings Bank (New South) since 1986 and
President and Director of New South Bancshares, Inc., New
Souths parent company, since 1994. From March 1994 until
December 1996, Mr. Ratliff served as President of Southwide
Life Insurance Corp., of which he had been Executive Vice
President since 1993. Mr. Ratliff joined CML in 1981 after
completing his doctoral degree with a study of planning
processes in an insurance company. Previously, he worked as an
educator, counselor, and organizational consultant.
Mark K. Tonnesen was employed as President, Chief
Executive Officer, and a Director of the Company in September
2005. Previously, Mr. Tonnesen was employed by the Royal
Bank of Canada, Toronto, since 1997, where he held a number of
positions, including Vice Chairman and Chief Financial Officer,
RBC Insurance and Executive Vice President, Card Services and
Point of Sale. From 1987 to 1997, he was associated with Banc
One Corporation, Columbus, Ohio, where he served in a variety of
senior positions, including Chief Development Officer and
President, Banc One Credit Card Services Company.
Eric B. Dana was employed as Senior Vice President and
Chief Financial Officer of the Company in April 2005.
Previously, Mr. Dana was employed by The Bankers Bank,
since July 2004, most recently as Chief Financial Officer. From
2001 to 2004, he was employed by Lighthouse Financial Services
as Chief Operating Officer/Chief Financial Officer.
Mr. Dana was in a variety of senior management positions
with First Union Corporation from 1988 to 2001.
Kenneth N. Lard has been Executive Vice President of the
Company and Executive Vice President, Sales and Operations of
Triad since October 2004. Mr. Lard was Senior Vice
President, Sales and Marketing of Triad from June 2002 to
January 2003. From November 1997 to May 2002, Mr. Lard was
Senior Vice President, National Sales Director of Triad. From
November 1995 to September 1996 Mr. Lard was Vice
President, National Accounts of Triad. Prior to joining Triad,
Mr. Lard was employed by Signet Bank from 1987 to 1995 as
Vice President, Capital Markets Division and most recently as
Vice President, Secondary Marketing. Mr. Lard has been with
Triad for 9 years and has over 20 years experience in
the mortgage industry.
Earl F. Wall has been Senior Vice President of Triad
since November 1999, General Counsel of Triad since January
1996, and Secretary since June 1996. Mr. Wall was Vice
President of Triad from 1996 till 1999. Mr. Wall has been
Senior Vice President of the Company since December 1999, and
Secretary and General Counsel of the Company since September
1996. Mr. Wall was Vice President of the Company from 1996
to 1999. From 1982 to 1995, Mr. Wall was employed by
Integon in a number of capacities including Vice President,
Associate General Counsel, and Director of Integon Life
Insurance Corporation and Georgia International Life Insurance
Corporation, Vice President, and General Counsel of Integon
Mortgage Guaranty Insurance Corporation, and Vice President,
General Counsel, and Director of Marketing One, Inc.
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Kenneth C. Foster has been Senior Vice President, Risk
Management of Triad since April 2002. From June 2001 to April
2002 Mr. Foster was Senior Vice President, Product
Development of Triad. Prior to joining Triad, Mr. Foster
was Principal of Applied Mortgage Solutions from 1994 to 2001.
Previously Mr. Foster was employed by MGIC from 1980 to
1994, most recently as Vice President of Business/Information
Development. Mr. Foster has been associated with Triad for
9 years and in the insurance/mortgage industry for over
30 years.
Officers of the Company serve at the discretion of the Board of
Directors of the Company.
Item 1A. Risk
Factors
Our results could be affected by the risk factors discussed
below. These factors may also cause actual results to differ
materially from the results contemplated by forward-looking
statements in our Managements Discussion and Analysis.
Investors should consider these factors in reading this document.
If
deteriorating economic conditions alter the frequency and
severity patterns utilized in our estimates for reserves for
losses, we may be required to take additional charges to
earnings.
Our reserve for losses is based upon the existing level of
delinquent loans and our estimate of the ultimate amount for
claims that will be paid on those existing delinquent loans. The
estimate of losses is based upon the historical frequency and
severity patterns of the migration from delinquent loan status
to actual claim paid status, adjusted for shifts in the
underlying mix and age of business. To the extent that possible
future adverse economic conditions such as increasing
unemployment rates or declining housing prices alter those
historical frequency and severity patterns, actual paid claims
on the existing delinquent loans may be greater than the
reserves that we have provided and require a charge to earnings.
Since,
consistent with industry practice, we generally provide reserves
only for loans in default that have been reported to us and an
estimate of loans in default not yet reported to us, any
increase in the level of delinquent loans reported would require
an increase to reserves and a charge to earnings.
Reserves are provided 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.
Consistent with industry accounting practices, the Company does
not establish loss reserves for future claims on insured loans
that are not currently in default. We generally do not establish
reserves until we are notified that a borrower has failed to
make at least two payments when due. Deterioration of general
economic conditions such as increasing unemployment rates or
declining housing prices could adversely alter the historical
delinquency patterns resulting in an increase in the level of
loans in default. An increase in the level of loans in default
would require additional reserves and a charge to earnings as
they are reported to us.
Because
our business is concentrated among relatively few major lenders,
our revenues and net income could decline if we lose a
significant customer.
Our business depends on a relatively small number of customers.
Our top ten lenders were responsible for approximately three
quarters of our primary new insurance written during the last
two years. Additionally, our top two lenders were responsible
for approximately half of our Primary new insurance written
during the last two years. This concentration of business may
increase as a result of further consolidation in the lending
industry or other factors. The loss of business from one or more
of our major lenders could have an adverse effect on our
business, financial condition and operating results.
If
housing values fail to appreciate or decline significantly, we
may incur a higher level of losses from paid claims and also be
required to increase reserves.
An essential component of our mitigation efforts on mortgage
insurance claims is our option of paying our coverage percentage
in full satisfaction of our obligations under the policy or
paying off the entire loan amount and taking title to the
mortgaged property underlying a defaulted loan. The critical
assumption behind the purchase option is that the property has
appreciated in value since the loan was originated and that we
will be able to recover some, or the entire amount at risk,
through the acquisition and subsequent sale of the property. We
have been
22
successful to date in our ability to take title to properties
and sell them at prices that mitigate these losses. Further, the
assumptions utilized in our reserve methodology also have
factored in a certain amount of loss mitigation resulting from
the utilization of the purchase option. If housing values fail
to appreciate or begin to decline, our ability to mitigate our
losses on defaulted mortgages may be reduced, which could have
an adverse effect on our business, financial condition and
operating results.
Because a
growing portion our business is sensitive to interest rates, a
significant increase in rates would cause higher monthly
mortgage payments for borrowers that could lead to a greater
number of defaults, which would adversely impact our
business.
A growing portion of our mortgage insurance in force is on
adjustable-rate mortgage loans or ARMs. Monthly payments on
these loans are altered periodically through an adjustment of
the interest rate. Many ARMs have a fixed interest rate for a
stated period of time, and accordingly, have not yet been
subject to an interest rate adjustment. In periods of rising
interest rates, a borrowers monthly payment will increase.
A significant increase in interest rates over a short period of
time could lead to payment shocks for borrowers that
could potentially lead to more reported defaults. In addition,
we insure a small percentage of interest-only mortgages, a
variation of an ARM, where the borrower pays only the interest
charge on a mortgage for a specified period of time, usually
five to ten years, after which the loan payment increases to
include principal payments. These interest-only loans may have a
heightened propensity to default because of possible
payment shocks after the initial low-payment period
expires and because the borrower does not automatically build
equity through loan amortization as payments are made. If
interest rates increase causing payment shock to
borrowers with ARMs, our default rate could increase which could
have a material adverse impact on our business, financial
condition and operating results.
The
premiums we charge for mortgage insurance on non-prime loans,
ARMs and Alt-A loans may not be adequate to compensate for
future losses from these products.
Our new insurance written includes non-prime loans, ARMs and
Alt-A loans that have an increased premium over prime, fixed
rate and fully documented loans. The credit quality, loss
development and persistency on these loans can vary
significantly from our traditional prime loan business. For
example, we have experienced higher delinquency and claims
rates, and higher average claims paid amounts on the Alt-A loans
than in our prime flow portfolios. We expect that we will
continue to experience higher default rates for non-prime loans,
Alt-A loans and ARMs than for our prime fixed rate loans. We
cannot be sure that the premiums including the additional risk
charge that we charge on non-prime, ARMs and Alt-A loans will
adequately offset the associated risk which could adversely
impact operating results.
A growing
portion of our insurance in force consists of loans with high
loan-to-value
ratios or loans that are non-prime or both, which could result
in more and larger claims than loans with lower
loan-to-value
ratios or prime loans.
A growing portion of our mortgage insurance in force consists of
insurance on mortgage loans with LTVs at origination of more
than 95%. When we are required to pay a claim on a higher LTV
loan, it is generally more difficult to recover our costs from
the underlying property, especially in areas with declining
property values. Therefore, if we experience a higher default
rate on higher LTV loans, our results of operations could be
adversely affected.
We also insure non-prime loans. The majority of the non-prime
loans we insure are known as Alt-A loans, which have
credit scores commensurate with prime loans but are processed
with reduced or no documentation. Our Alt-A loans also tend to
have larger loan balances relative to our other loans. Because
we have been insuring non-prime loans for a limited period of
time, we are still developing data regarding the performance of
these loans and there can be no assurance that our estimated
default rates and losses will match our actual results. If our
estimates prove to be inaccurate, our financial condition and
operating results could be adversely affected. Further, we
cannot be sure that the increased premiums that we charge for
mortgage insurance on non-prime loans will be adequate to
compensate us for the losses we incur on these products.
23
A
downgrade or potential downgrade of the financial strength
ratings assigned to our primary insurance subsidiary could
weaken its competitive position.
One or more of S&P, Moodys or Fitch could downgrade
the financial strength ratings assigned to our primary insurance
subsidiary, Triad Guaranty Insurance Corporation, if they
believe that we have experienced adverse developments in our
business, financial condition or operating results. These
ratings are important to our ability to market our products and
to maintain our competitive position and customer confidence in
our products. A downgrade in these ratings could have a material
adverse effect on our business, financial condition and
operating results. If the financial strength rating assigned to
our insurance subsidiary were to fall below Aa3 from
Moodys or the AA− level from S&P and
Fitch, then mortgage lenders would not purchase mortgage
insurance from us and a large segment of the mortgage
securitization market, including Fannie Mae and Freddie Mac,
generally would not purchase mortgages or mortgage-backed
securities insured by us.
Changes
in the business practices or legislation relating to Fannie Mae
and Freddie Mac could significantly impact our
business.
Fannie Mae and Freddie Mac are the beneficiaries of the majority
of our policies, so their business practices have a significant
influence on us. Changes in their practices could reduce the
number of policies they purchase that are insured by us and
consequently reduce our revenues. Some of Fannie Mae and Freddie
Macs newer programs require less insurance coverage than
they historically have required, and they have the ability to
further reduce or eliminate coverage requirements, which would
reduce demand for mortgage insurance and have a material adverse
effect on our business, financial condition and operating
results.
Fannie Mae and Freddie Mac also have the ability to implement
new eligibility requirements for mortgage insurers and to alter
or liberalize underwriting standards on low-down-payment
mortgages they purchase which thereby affect the quality of the
risk insured by the mortgage insurer and the availability of
mortgage loans. Additionally, Fannie Mae and Freddie Mac can
alter the terms on which mortgage insurance coverage can be
canceled before reaching the cancellation thresholds established
by law, and the circumstances in which mortgage servicers must
perform activities intended to avoid or mitigate loss on insured
mortgages that are delinquent. We cannot predict the extent to
which any new requirements may be enacted or how they may affect
the operations of our mortgage insurance business, our capital
requirements and our products.
Legislation
and regulatory changes, including changes impacting the GSEs,
could significantly affect our business and could reduce demand
for private mortgage insurance.
Mortgage origination transactions are subject to compliance with
various federal and state consumer protection laws, including
the Real Estate Settlement Procedures Act of 1974, or RESPA, the
Equal Credit Opportunity Act, the Fair Housing Act, the
Homeowners Protection Act, the Fair Credit Reporting Act, the
Fair Debt Collection Practices Act and others. Among other
things, these laws prohibit payments for referrals of settlement
service business, require fairness and non-discrimination in
granting or facilitating the granting of credit, require
cancellation of insurance and refunding of unearned premiums
under certain circumstances, govern the circumstances under
which companies may obtain and use consumer credit information,
and define the manner in which companies may pursue collection
activities. Changes in these laws or regulations could adversely
affect our operations and profitability.
Congress is currently considering proposed legislation relating
to the regulatory oversight of the GSEs, their affordable
housing initiatives, the GSEs products and marketing
activities, the GSEs minimum capital standards, and their
risk-based capital requirements. If adopted in its present form,
OFHEO would be replaced by a new federal agency, the Federal
Housing Enterprise Regulatory Agency, and its director would be
given significant authority over the GSEs including, among other
things, oversight of the operations of the GSEs, capital
adequacy and internal controls and new program approval. The
proposed legislation encompasses substantially all of the
operations of the GSEs and is intended to be a comprehensive
overhaul of the existing regulatory structure. The proposed
legislation could limit the growth of the GSEs, which could
result in a reduction in the size of the mortgage insurance
market. We do not know what form, if any, such legislation will
take, if any, or, if it is enacted, its impact, if any, on our
financial condition and results of operations.
24
In addition, increases in the maximum loan amount or other
features of the FHA mortgage insurance program can reduce the
demand for private mortgage insurance. Future legislative and
regulatory actions could decrease the demand for private
mortgage insurance, which could harm our consolidated financial
condition and results of operations.
Our
revenues and profits could decline if we lose market share as a
result of industry competition or if our competitive position
suffers as a result of our inability to introduce and
successfully market new products and programs.
There are seven main mortgage insurance providers, of which we
are the smallest. The mortgage insurance industry is highly
dynamic and intensely competitive. The private mortgage
insurance providers are Mortgage Guaranty Insurance Corporation,
PMI Mortgage Insurance Company, Genworth Mortgage Insurance
Corporation, United Guaranty Residential Insurance Company,
Radian Guaranty, Inc and Republic Mortgage Insurance Company.
Two of these are subsidiaries of well-capitalized companies with
stronger insurance financial strength ratings and greater access
to capital than we have.
If we are unable to compete successfully against other private
mortgage insurers, all of which are larger than we are or if we
experience delays in introducing competitive new products and
programs or if these products or programs are less profitable
than our existing products and programs, our business will suffer
If
mortgage lenders and investors select alternatives to private
mortgage insurance, the amount of insurance that we write could
decline, which could reduce our revenues and profits.
Competition for private mortgage insurance premiums occurs not
only among private mortgage insurers but also with mortgage
lenders through captive mortgage reinsurance transactions. In
these transactions, a lenders affiliate reinsures a
portion of the insurance written by a private mortgage insurer
on mortgages originated or serviced by the lender. Our captive
reinsurance program reduces the amount of net premium that we
collect through risk sharing, and if we did not establish proper
terms or rates, our profitability could suffer. In addition,
there are an increasing number of alternatives to traditional
private mortgage insurance, and new alternatives may develop,
which could reduce the demand for our mortgage insurance.
Existing alternatives include:
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mortgage lenders structuring mortgage originations to avoid
private mortgage insurance utilizing 80-10-10 structures; over
the past several years, the volume of these loans, or variations
of them, as alternatives to loans requiring mortgage insurance,
has increased significantly and may continue to do so for the
foreseeable future;
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investors using credit enhancements as a partial or complete
substitute for private mortgage insurance;
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lenders and investors holding mortgages in their portfolios and
self-insuring;
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member institutions providing credit enhancement on loans sold
to a Federal Home Loan Bank, or FHLB, which do not have the
same requirements for mortgage insurance as Fannie Mae and
Freddie Mac.
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Changes
in regulatory requirements could impact captive mortgage
insurance arrangements for all industry participants.
State insurance departments or other officials may conduct
investigations or reviews of our business practices such as our
captive reinsurance or other risk sharing arrangements. The
anti-referral fee provisions of RESPA provide that the
Department of Housing and Urban Development (HUD) as
well as the insurance commissioner or attorney general of any
state may bring an action to enjoin violations of these
provisions of RESPA. The insurance law provisions of many states
prohibit paying for the referral of insurance business and
provide various mechanisms to enforce this prohibition. In the
summer of 2005, we received an inquiry from the New York
Insurance Department relating to captive mortgage insurance
arrangements for which we have responded fully. In January of
2006, we received a request for information from the Minnesota
Insurance Department regarding our lender captive reinsurance
arrangements. While we believe our captive reinsurance
arrangements are in conformity with applicable laws and
regulations, it is not possible to predict the outcome of any
such reviews or investigations nor is it possible to predict
their effect on Triad or the entire mortgage insurance industry.
25
Since we
generally cannot cancel mortgage insurance policies or adjust
renewal premiums, unanticipated claims could cause our financial
performance to suffer.
We generally cannot cancel the mortgage insurance coverage that
we provide or adjust renewal premiums during the life of a
mortgage insurance policy. As a result, the impact of
unanticipated claims generally cannot be offset by premium
increases on policies in force or limited by non-renewal or
cancellation of insurance coverage. The premiums we charge may
not be adequate to compensate us for the risks and costs
associated with the insurance coverage provided to our
customers. An increase in the number or size of unanticipated
claims could adversely affect our financial condition and
operating results.
Our loss
experience is likely to increase as our policies continue to
age.
We expect the majority of claims on insured loans in our current
portfolio to occur during the second through the fifth years
after loan origination. Primary insurance written from the
period of January 1, 2001 through December 31, 2004
represented 64.4% of our Primary risk in force as of
December 31, 2005. Accordingly, a significant majority of
our Primary portfolio is in, or approaching, its peak claim
years. In addition, our 2003 book of business represents 26.3%
of its insurance in force as of December 31, 2005, and we
believe that it entered its peak claim year in 2005 and will
have a continued impact in 2006. We believe our loss experience
is likely to increase as our policies age. If the claim
frequency on our risk in force significantly exceeds the claim
frequency that was assumed in setting our premium rates, our
financial condition and results of operations could be adversely
affected.
Our
revenues and DAC amortization depend on the renewal of policies
that may terminate or fail to renew.
The large majority of our premiums each month have been derived
from the monthly renewal of policies that we previously have
written. Factors that could cause an increase in non-renewals of
our policies include falling mortgage interest rates (which tend
to lead to increased refinancings and associated cancellations
of mortgage insurance), appreciating home values which can lead
to more refinances and mortgage insurance cancellations, and
changes in the mortgage insurance cancellation requirements
applicable to mortgage lenders and homeowners. Additionally, the
amount of DAC amortization expense would be adversely impacted
if policies terminate at a rate faster than was originally
estimated in our DAC models. A decrease in the length of time
that our mortgage insurance policies remain in force reduces our
revenues and could have an adverse effect on our business,
financial condition and operating results.
Our
delegated underwriting program may subject our mortgage
insurance business to unanticipated claims.
A significant percentage of our new insurance written is
underwritten pursuant to a delegated underwriting program. These
programs permit certain mortgage lenders to determine whether
mortgage loans meet our program guidelines and enables these
lenders to commit us to issue mortgage insurance. We may expand
the availability of delegated underwriting to additional
customers. If an approved lender commits us to insure a mortgage
loan, generally, we may not refuse, except in limited
circumstances, to insure, or rescind coverage on, that loan even
if the lender fails to follow our delegated underwriting
guidelines. Even if we terminate a lenders underwriting
authority, we remain at risk for any loans previously insured on
our behalf by the lender before that termination. The
performance of loans insured through programs of delegated
underwriting has not been tested over a period of extended
adverse economic conditions, meaning that the program could lead
to greater losses than we anticipate. Greater than anticipated
losses could have a material adverse effect on our business,
financial condition and operating results.
Item 1B. Unresolved
Staff Comments
None.
26
The Company leases office space in its Winston-Salem
headquarters and its nine underwriting offices located
throughout the country under leases expiring between 2006 and
2012 and which require annual lease payments of approximately
$1.3 million in 2006. With respect to all facilities, the
Company either has renewal options or believes it will be able
to obtain lease renewals on satisfactory terms. The Company
believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.
The Company maintains mid-range and micro-computer systems from
its corporate data center located in its headquarters building
to support its data processing requirements for accounting,
claims, marketing, risk management, and underwriting. The
Company has in place back-up procedures in the event of
emergency situations.
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Item 3.
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Legal
Proceedings
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The Company is involved in litigation in the ordinary course of
business including the named case below. No pending litigation
is expected to have a material adverse affect on the financial
position of the Company.
Triad is a defendant in Broessel v. Triad. This
action was commenced on January 15, 2004 with a filing in
Federal District Court for the Western District of Kentucky
seeking class action status on behalf of a nationwide class of
home mortgage borrowers. The complaint alleges that Triad
violated the Fair Credit Reporting Act (FCRA) by
failing to provide notices to certain borrowers when mortgage
insurance was offered to lenders with respect to those
borrowers mortgage loans at a rate in excess of
Triads lowest available rate. Discovery is currently
underway with respect to class certification. While the ultimate
outcome of the FCRA litigation is uncertain, the litigation is
not expected to have a material adverse effect on the financial
position of the Company.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
for Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities
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(a) Market information
The Companys Common Stock trades on The NASDAQ Stock
Market®
under the symbol TGIC. At December 31, 2005,
14,774,153 shares were issued and outstanding. The
following table sets forth the highest and lowest closing prices
of the Companys Common Stock, $0.01 par value, as
reported by NASDAQ during the periods indicated.
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2005
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2004
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High
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Low
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High
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Low
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First Quarter
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$
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59.50
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$
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50.20
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$
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55.87
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$
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49.50
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Second Quarter
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$
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55.04
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$
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49.50
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$
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59.37
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$
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52.53
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Third Quarter
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$
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53.88
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$
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37.74
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$
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59.09
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$
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51.01
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Fourth Quarter
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$
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45.85
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$
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35.75
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$
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60.80
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$
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51.55
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In November of 2005, we completed a transaction with Collateral
Investment Corp. (CIC) in which CIC transferred all
of its 2,573,551 shares of our common stock to the Company
in exchange for 2,528,514 newly issued shares of our common
stock. The 2,573,551 shares transferred by CIC were
subsequently retired by us, resulting in a reduction of our
outstanding shares of 45,037. CIC has since liquidated and
distributed the newly issued Company shares to the CIC
shareholders.
The newly issued shares were issued by the Company in reliance
upon the exemption provided by section 3(a)(9) of the
Securities Act of 1933, as amended (Securities Act)
as an exchange of its common shares with
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its existing common stockholders of the Company where no
commission or other remuneration was paid or given directly or
indirectly for soliciting such exchange.
The distribution of the newly issued shares of Company common
stock to the CIC shareholders upon liquidation of CIC was made
in reliance on section 2(a)(3) under the Securities Act as
not an offer to sell or sale of
securities within the meaning of that section of the Securities
Act. The Division of Corporate Finance of the Securities and
Exchange Commission (the Commission) issued its
letter dated August 12, 2005 stating that on the basis of
the representations made it will not recommend enforcement
action to the Commission.
(b) Holders
As of March 1, 2006, the number of stockholders of record
of the Companys Common Stock was approximately 200. In
addition, there were an estimated 7,800 beneficial owners of
shares held by brokers and fiduciaries.
(c) Dividends
Payments of future dividends are subject to declaration by the
Companys Board of Directors. The dividend policy is
dependent also on the ability of Triad to pay dividends to the
parent company. In January of 2006, the Companys Board of
Directors authorized the repurchase of up to
1,000,000 shares based upon opportunities that may exist
from time to time in the marketplace. Currently, there are no
present intentions to pay dividends.
(d) Issuer purchases of equity securities
None.
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Item 6.
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Selected
Financial Data
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Year Ended
December 31
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2005
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2004
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2003
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2002
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2001
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(Dollars in thousands, except
per share amounts)
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Income Statement Data
(for period ended):
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|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
207,260
|
|
|
$
|
176,696
|
|
|
$
|
154,046
|
|
|
$
|
124,214
|
|
|
$
|
95,551
|
|
Ceded
|
|
|
(40,644
|
)
|
|
|
(35,365
|
)
|
|
|
(27,310
|
)
|
|
|
(18,345
|
)
|
|
|
(10,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,616
|
|
|
$
|
141,331
|
|
|
$
|
126,736
|
|
|
$
|
105,869
|
|
|
$
|
84,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
168,997
|
|
|
$
|
140,992
|
|
|
$
|
119,732
|
|
|
$
|
105,067
|
|
|
$
|
84,356
|
|
Net investment income
|
|
|
22,998
|
|
|
|
19,754
|
|
|
|
17,082
|
|
|
|
16,099
|
|
|
|
14,765
|
|
Net realized gains (losses)
|
|
|
36
|
|
|
|
504
|
|
|
|
3,029
|
|
|
|
(2,519
|
)
|
|
|
297
|
|
Other income
|
|
|
15
|
|
|
|
16
|
|
|
|
24
|
|
|
|
72
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
192,046
|
|
|
|
161,266
|
|
|
|
139,867
|
|
|
|
118,719
|
|
|
|
101,310
|
|
Net losses and loss adjustment
expenses
|
|
|
66,855
|
|
|
|
35,864
|
|
|
|
23,833
|
|
|
|
14,063
|
|
|
|
9,019
|
|
Interest expense on debt
|
|
|
2,773
|
|
|
|
2,772
|
|
|
|
2,772
|
|
|
|
2,771
|
|
|
|
2,771
|
|
Amortization of deferred
acquisition cost
|
|
|
14,902
|
|
|
|
14,256
|
|
|
|
18,112
|
|
|
|
13,742
|
|
|
|
11,712
|
|
Other operating expenses (net of
acquisition cost deferred)
|
|
|
29,610
|
|
|
|
26,483
|
|
|
|
22,776
|
|
|
|
22,900
|
|
|
|
18,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
77,906
|
|
|
|
81,891
|
|
|
|
72,374
|
|
|
|
65,243
|
|
|
|
59,672
|
|
Income taxes
|
|
|
21,093
|
|
|
|
23,474
|
|
|
|
21,283
|
|
|
|
20,140
|
|
|
|
18,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
|
$
|
45,103
|
|
|
$
|
41,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.87
|
|
|
$
|
4.04
|
|
|
$
|
3.57
|
|
|
$
|
3.21
|
|
|
$
|
3.05
|
|
Diluted earnings per share
|
|
$
|
3.84
|
|
|
$
|
3.98
|
|
|
$
|
3.52
|
|
|
$
|
3.15
|
|
|
$
|
2.95
|
|
Weighted average common and common
share equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,691,478
|
|
|
|
14,458,453
|
|
|
|
14,322,216
|
|
|
|
14,060,420
|
|
|
|
13,545,725
|
|
Diluted
|
|
|
14,808,387
|
|
|
|
14,681,228
|
|
|
|
14,509,538
|
|
|
|
14,331,581
|
|
|
|
13,977,435
|
|
Balance Sheet Data
(at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
767,503
|
|
|
$
|
672,035
|
|
|
$
|
575,579
|
|
|
$
|
482,886
|
|
|
$
|
396,455
|
|
Total invested assets
|
|
$
|
547,019
|
|
|
$
|
476,913
|
|
|
$
|
399,571
|
|
|
$
|
326,537
|
|
|
$
|
263,392
|
|
Losses and loss adjustment expenses
|
|
$
|
51,074
|
|
|
$
|
34,042
|
|
|
$
|
27,186
|
|
|
$
|
21,360
|
|
|
$
|
17,991
|
|
Unearned premiums
|
|
$
|
13,494
|
|
|
$
|
15,942
|
|
|
$
|
15,630
|
|
|
$
|
8,539
|
|
|
$
|
7,650
|
|
Long-term debt
|
|
$
|
34,501
|
|
|
$
|
34,493
|
|
|
$
|
34,486
|
|
|
$
|
34,479
|
|
|
$
|
34,473
|
|
Stockholders equity
|
|
$
|
499,191
|
|
|
$
|
437,343
|
|
|
$
|
369,930
|
|
|
$
|
309,407
|
|
|
$
|
246,070
|
|
Statutory
Ratios(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
39.6
|
%
|
|
|
25.4
|
%
|
|
|
19.9
|
%
|
|
|
13.4
|
%
|
|
|
10.7
|
%
|
Expense ratio
|
|
|
25.2
|
%
|
|
|
29.4
|
%
|
|
|
33.0
|
%
|
|
|
38.0
|
%
|
|
|
39.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
64.8
|
%
|
|
|
54.8
|
%
|
|
|
52.9
|
%
|
|
|
51.4
|
%
|
|
|
50.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
39.6
|
%
|
|
|
25.4
|
%
|
|
|
19.9
|
%
|
|
|
13.4
|
%
|
|
|
10.7
|
%
|
Expense ratio
|
|
|
26.7
|
%
|
|
|
28.8
|
%
|
|
|
32.3
|
%
|
|
|
34.6
|
%
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
66.3
|
%
|
|
|
54.2
|
%
|
|
|
52.2
|
%
|
|
|
48.0
|
%
|
|
|
45.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Statutory Data
(dollars in millions)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct insurance in force
|
|
$
|
44,407.0
|
|
|
$
|
36,827.0
|
|
|
$
|
31,747.8
|
|
|
$
|
25,379.1
|
|
|
$
|
21,726.0
|
|
Direct risk in force (gross)
|
|
$
|
8,016.3
|
|
|
$
|
7,627.0
|
|
|
$
|
7,024.0
|
|
|
$
|
5,790.9
|
|
|
$
|
4,581.5
|
|
Risk-to-capital
|
|
|
12.5:1
|
|
|
|
14.0:1
|
|
|
|
15.3:1
|
|
|
|
15.5:1
|
|
|
|
15.0:1
|
|
|
|
|
(1) |
|
Based on statutory accounting practices and derived from
combined statutory financial statements of Triad. |
29
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations analyzes the consolidated financial
condition, changes in financial position, and results of
operations for the three years ended December 31, 2005, of
Triad Guaranty Inc. and its consolidated subsidiaries,
collectively the Company. The discussion should be read in
conjunction with the Consolidated Financial Statements and Notes.
Certain of the statements contained herein, other than
statements of historical fact, are forward-looking statements.
These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and
include estimates and assumptions related to economic,
competitive, and legislative developments. These forward-looking
statements are subject to change and uncertainty, which are, in
many instances, beyond our control and have been made based upon
our 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 certain factors, including the
possibility of general economic and business conditions that are
different than anticipated, legislative developments, changes in
interest rates or the stock markets, stronger than anticipated
competitive activity, as well as the factors described in the
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995 with respect to forward-looking statements
contained herein.
Critical
Accounting Policies and Estimates
Accounting estimates and assumptions discussed in this section
are those that we consider to be the most critical to an
understanding of our financial statements because they
inherently involve significant judgments and uncertainties. In
developing these estimates, we make subjective and complex
judgments that are inherently uncertain and subject to material
change as facts and circumstances develop. Although variability
is inherent in these estimates, we believe the amounts provided
are appropriate based on the facts available upon compilation of
the financial statements. Also, see Note 1 to the
Consolidated Financial Statements, Summary of Significant
Accounting Policies for a complete discussion of our significant
accounting policies.
Reserves
for Losses and Loss Adjustment Expenses
We calculate our best estimate of reserves to provide for the
estimated costs of settling claims on loans reported in default
and loans in default that are in the process of being reported
to us as of the date of our financial statements. Our reserving
process incorporates various components in a model that gives
effect to current economic conditions and profiles delinquencies
by such factors as policy year, geography, chronic late payment
characteristics, the number of months the policy has been in
default, as well as whether the defaults were underwritten as
flow business or as part of a structured bulk transaction. We
monitor the claims paid performance monthly and we assess the
adequacy of our reserve quarterly. The process is based upon the
assumption that long-term historical experience, taking into
consideration factors such as those described above and adjusted
for current economic events that we believe will significantly
impact the long-term loss development, provides a reasonable
basis for estimating projected claim rates (frequency) and claim
amounts (severity). We consider severity and frequency to be the
most significant assumptions in the establishment of our loss
reserves.
The estimation of loss reserves is an inexact process and there
are inherent risks and uncertainties involved in making these
assumptions. Economic conditions that have affected the
development of loss reserves in the past may not necessarily
affect development patterns in the future in either a similar
manner or degree. Due to the inherent uncertainty in estimating
reserves for losses and loss adjustment expenses, there can be
no assurance that reserves will be adequate to cover ultimate
loss developments on loans in default, currently or in the
future. The Companys profitability and financial condition
could be adversely affected to the extent that the
Companys estimated reserves are insufficient to cover
losses on loans in default.
Because the estimate for loss reserves is sensitive to the
estimates of claims frequency and severity, we perform analyses
to test the reasonableness of the best estimate generated by the
loss reserve process. The loss reserve estimation process and
the analyses support the reasonableness of the best estimate of
loss reserves recorded in our financial statements. See Losses
and Expenses under Consolidated Results of operations for a more
detailed discussion of the reserves for losses and loss
adjustment expenses.
30
Investments
Valuing our investment portfolio involves a variety of
assumptions and estimates, particularly for investments that are
not actively traded. We rely on external pricing sources for
highly liquid, publicly traded securities and use an internal
pricing matrix for privately placed securities. This matrix
relies on our judgment concerning a) the discount rate we
use in calculating expected future cash flows, b) credit
quality and c) expected maturity.
We regularly monitor our investment portfolio to ensure that
investments that may be
other-than-temporarily
impaired are identified in a timely fashion, properly valued,
and any
other-than-temporary
impairments are charged against earnings in the proper period.
Our methodology to identify potential impairments is further
described in the Investment Portfolio section below. The timely
identification and valuation of potentially impaired securities
involves many judgments. The most significant judgments that we
make relate to the estimated future cash flows on potentially
impaired securities and our intent and ability to hold a
security to anticipated recovery of value. Inherently, there are
risks and uncertainties involved in making these judgments. See
further discussion of the valuation of our investment portfolio
under the Investment Portfolio section below.
Deferred
Policy Acquisition Costs
The costs of acquiring new business, principally commissions and
certain policy underwriting and issue costs which are primarily
related to the production of new business, are capitalized as
deferred policy acquisition costs (DAC). Amortization of such
policy acquisition costs is charged to expense in proportion to
premium recognized over the estimated policy life. We make
judgments in the determination of estimated policy life utilized
in the amortization assumptions. The most significant judgment
that we make is the estimated life of the DAC. See further
discussion of DAC under the Financial Position section below.
Overview
Through our subsidiaries, we provide Primary and Modified Pool
mortgage guaranty insurance coverage to residential mortgage
lenders and investors as a credit-enhancement vehicle, typically
when individual borrowers have less than 20% equity in the
property. Business originated by lenders and submitted to us on
a
loan-by-loan
basis is referred to as our flow channel business. Mortgage
guaranty insurance facilitates the sale of individual low down
payment loans in the secondary market and provides protection to
lenders who choose to keep the loans in their own portfolios.
Additionally, we provide mortgage insurance to lenders and
investors who seek additional default protection, capital
relief, and credit-enhancement on groups of loans that are sold
in the secondary market. These transactions are referred to as
our structured bulk channel business.
Our revenues principally consist of a) initial and renewal
earned premiums from flow business (net of reinsurance premiums
ceded as part of our risk management strategies),
b) initial and renewal earned premiums from structured bulk
transactions, and c) investment income on invested assets.
We also realize investment gains, net of investment losses,
periodically as a source of revenue when the opportunity
presents itself within the context of our overall investment
strategy.
Our expenses essentially consist of a) amounts ultimately
paid on claims submitted, b) increases in reserves for
estimated future claim payments, c) general and
administrative costs of acquiring new business and servicing
existing policies, d) other general business expenses, and
e) income taxes.
Our profitability depends largely on a) the adequacy of our
product pricing and underwriting discipline relative to the
risks insured, b) persistency levels, c) operating
efficiencies, and d) the level of investment yield,
including realized gains and losses, on our investment
portfolio. We define persistency as the percentage of insurance
in force remaining from twelve months prior. Cancellations of
policies originated during the past twelve months are not
considered in our calculation of persistency. This method of
calculating persistency may vary from that of other mortgage
insurers. We believe that our calculation presents an accurate
measure of the percentage of insurance in force remaining from
twelve months prior. Cancellations result primarily from the
borrower refinancing or selling mortgaged residential properties
and, to a lesser degree, from the borrower achieving prescribed
equity levels at which the lender no longer requires mortgage
guaranty insurance.
31
Consolidated
Results of Operations
Following is selected financial information for the last three
years and the percentage change from
year-to-year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
(In thousands, except
percentages and per share information)
|
|
|
Earned premiums
|
|
$
|
168,997
|
|
|
$
|
140,992
|
|
|
$
|
119,732
|
|
|
|
19.9
|
%
|
|
|
17.8
|
%
|
Net losses and loss adjustment
expenses
|
|
|
66,855
|
|
|
|
35,864
|
|
|
|
23,833
|
|
|
|
86.4
|
|
|
|
50.5
|
|
Net income
|
|
|
56,813
|
|
|
|
58,417
|
|
|
|
51,091
|
|
|
|
(2.7
|
)
|
|
|
14.3
|
|
Diluted earnings per share
|
|
$
|
3.84
|
|
|
$
|
3.98
|
|
|
$
|
3.52
|
|
|
|
(3.5
|
)
|
|
|
13.1
|
|
Net income for 2005 declined from 2004, as losses and loss
adjustment expenses grew faster than earned premium during 2005.
The growth in net losses and loss adjustment expenses in 2005 is
principally a result of the ongoing seasoning of our insurance
portfolio. In 2005, we experienced an increase in the number of
paid claims, the number of reported defaults, and the severity
of paid claims causing us to significantly increase our reserve
for losses to reflect these trends. We experienced growth in
earned premiums in 2005, driven by moderate growth of our risk
in force combined with an increase in premium basis points
related to specific lender programs and a change in the mix of
business.
Comparing 2004 to 2003, losses and loss adjustment expenses grew
at a rate exceeding the growth in earned premium, but at a much
more moderate rate than occurred in 2005. This increase in
losses and loss adjustment expenses reflected the seasoning of
our insurance portfolio as over 80% of the insurance in force
was less than two years old at December 31, 2003. A
substantial increase in persistency in 2004 contributed to both
the increase in earned premiums and a reduction in expenses
through lower DAC amortization when compared to 2003.
The changes in diluted earnings per share in 2005 and 2004 were
consistent with the changes in net income for those years.
Diluted realized investment gains, net of taxes, had no impact
on diluted earnings per share in 2005 compared to an increase of
$0.02 in 2004 and $0.13 in 2003. Diluted realized gains and
losses per share is a non-GAAP measure. We believe this is
relevant and useful information to investors because, except for
write-downs on
other-than-temporarily
impaired securities, it shows the effect that our discretionary
sales of investments had on earnings.
We describe our results in greater detail in the discussions
that follow. The information is presented in three categories:
Production and In Force, Revenues, and Losses and Expenses.
Production
and In Force
A summary of new production broken out between Primary and
Modified Pool and the
year-to-year
percentage changes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
(In millions, except
percentages)
|
|
|
Primary insurance written
|
|
$
|
10,488
|
|
|
$
|
10,709
|
|
|
$
|
17,428
|
|
|
|
(2.1
|
)%
|
|
|
(38.6
|
)%
|
Modified pool insurance written
|
|
|
10,681
|
|
|
|
6,463
|
|
|
|
3,067
|
|
|
|
65.3
|
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance written
|
|
$
|
21,169
|
|
|
$
|
17,172
|
|
|
$
|
20,495
|
|
|
|
23.3
|
%
|
|
|
(16.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall mortgage loan origination market was relatively flat
in 2005 compared to 2004. Additionally, the percentage of loan
originations for which mortgage insurance was provided declined
in 2005. The decline was due primarily to the continued
expansion of alternative credit enhancements such as 80-10-10
structures. In spite of the relatively flat overall loan
origination market in 2005, we were able to show an increase in
production reflected in a net gain in market share. Refinances
were a large part of the overall mortgage loan origination
market in 2003 when borrowers took advantage of historically low
rates during that period, resulting in a record amount of
originations in
32
2003. Refinances comprised 52% of our Primary insurance written
in 2003 compared to 31% in 2005 and 30% in 2004. These factors
caused our Primary insurance written to decline in 2005 and 2004
from levels achieved in 2003.
We anticipate that the overall mortgage loan origination market
will be smaller in 2006 than in 2005, which could further
moderate our Primary new insurance written. Assuming mortgage
interest rates remain constant or continue to slowly increase,
we expect to see production of Primary new insurance written in
2006 to be at levels slightly lower than that achieved in 2005.
Further, we believe that the 80-10-10 loan penetration will
soften in 2006. If short-term interest rates continue to rise,
this type of financing should become less attractive to
borrowers, which could partially mitigate the overall reduction
of Primary insurance written.
Our Modified Pool insurance written grew significantly in 2005
and 2004 due to strong production in that market. We write
Modified Pool insurance only through our structured bulk
channel. We believe there will continue to be additional
opportunities in the structured bulk market in 2006, and we will
pursue those transactions that meet our loan quality and pricing
objectives. Modified Pool insurance written is likely to vary
significantly from period to period due to: a) the limited
number of transactions (but with larger size) occurring in this
market, b) the level of competition from other mortgage
insurers, c) the relative attractiveness in the marketplace
of mortgage insurance versus other forms of credit enhancement,
and d) the changing loan composition and underwriting
criteria of the market.
Although terms vary, the structured bulk market can be broadly
categorized into three different segments, or tiers, depending
on the risk characteristics of the loans comprising a
transaction. The loan characteristics of the three segments are
a) predominantly high credit quality, low loan to value
(LTV), fully underwritten loans that may have niche
characteristics such as non-conforming loan balances and risk
concentrations related to geography, transaction purpose, or
occupancy type; b) loans that generally have high credit
quality and low to moderate LTVs that have been underwritten
with reduced, streamlined, or no documentation; and
c) generally fully underwritten loans with credit impaired
borrowers (FICO credit score less than 575). In general, we
believe that structured bulk business originated in segments
b) and c) will report a higher default rate than our
Primary business. However, we also believe that the lower LTVs
associated with the structured bulk business originated in
segments a) and b) will ultimately generate
lower claim rates as a proportion of the reported defaults and
lower levels of severity than Primary business. We have entered
into structured bulk transactions primarily in the first two
segments mentioned above. At December 31, 2005 and 2004,
only approximately 1% of our insurance in force attributable to
structured bulk transactions was categorized in segment c)
above.
The following table provides estimates of our national market
share of net new insurance written, using industry definitions,
through our flow and structured bulk channels based on
information available from the industry association and other
public sources for the years ended December 31, 2005, 2004
and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Flow channel
|
|
|
5.7
|
%
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
Structured bulk channel
|
|
|
11.5
|
%
|
|
|
11.3
|
%
|
|
|
4.4
|
%
|
Total
|
|
|
7.5
|
%
|
|
|
6.0
|
%
|
|
|
4.9
|
%
|
Our market share of flow business increased in 2005 due to
increased writings with our targeted lenders, specifically with
special lender-paid programs that applied primarily to non-prime
loans. These special lender-paid programs are competitively
priced among mortgage insurers and the production can vary from
period to period, depending upon our willingness to accept the
specific risk characteristics of these products. As mentioned
earlier, our structured bulk market share will vary from period
to period since this market can have significantly larger
transactions and our share of this market is dependent on the
availability of transactions that meet our credit quality and
pricing benchmarks and on our ability to bid successfully for
these transactions.
The risk characteristics applicable to our Primary production
have changed somewhat over the past three years. The most
significant trend over the last three years has been our
increased participation in the
Alt-A
marketplace. We have
defined Alt-A
as individual loans having FICO scores greater than 619 and that
have been underwritten
33
with reduced or no documentation. The following table summarizes
the credit quality characteristics of our Primary new insurance
written over the past three years and reflects the growth in our
Alt-A
production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Prime
|
|
|
76.1
|
%
|
|
|
81.7
|
%
|
|
|
87.1
|
%
|
Alt-A
|
|
|
18.3
|
%
|
|
|
13.6
|
%
|
|
|
6.9
|
%
|
A Minus
|
|
|
4.3
|
%
|
|
|
4.0
|
%
|
|
|
4.4
|
%
|
Sub Prime
|
|
|
1.3
|
%
|
|
|
0.7
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other risk characteristics that we consider in our underwriting
discipline include the percentage of adjustable rate mortgages
(ARMs) and the percentage of loans with LTV greater than 95%.
The following table summarizes the percentage of our Primary
production in ARMs and higher LTV loans over the past three
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
ARMs
|
|
|
37.4
|
%
|
|
|
33.6
|
%
|
|
|
19.3
|
%
|
LTV greater than 95%
|
|
|
12.4
|
%
|
|
|
12.7
|
%
|
|
|
7.5
|
%
|
The majority of our Modified Pool production has been in the
Alt-A
marketplace over the last three years. As mentioned earlier, the
LTVs on policies originated in the structured bulk channels are
generally lower than those on policies we receive via the flow
channel. Those policies may also have other Primary coverage in
front of our risk. The percentages of ARMs included in our
Modified Pool production approximate those included in our
Primary production during the last three years.
Periodically we enter into structured bulk transactions
involving loans that have insurance effective dates within the
current reporting period but for which detailed loan information
regarding the insured loans is not provided by the issuer of the
transaction until later. When this situation occurs, we accrue
premiums that are due but not yet paid based upon the estimated
commitment amount of the transaction in the reporting period
with respect to each loans insurance effective date.
However, these policies are not reflected in our insurance in
force, new insurance written, or related industry data totals
until we verify the loan level detail. At December 31,
2005, we had approximately $979 million of structured
transactions with effective dates within the fourth quarter for
which loan level detail had not been received and, therefore,
are not included in our own data or industry totals. These
amounts will be reported as new production and insurance in
force totals in 2006, when the issuer of the transactions
provides accurate loan level detail to us. We have included in
premium written and premium earned the respective estimated
amounts due and earned during 2005 related to this insurance. At
December 31, 2004 we had $685 million of structured
transactions with effective dates within 2004 for which loan
level detail had not been received.
The following table provides detail on our direct insurance in
force at December 31, 2005, 2004 and 2003 (in millions,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
Primary insurance
|
|
$
|
29,792
|
|
|
$
|
28,964
|
|
|
$
|
27,929
|
|
|
|
2.9
|
%
|
|
|
3.7
|
%
|
Modified Pool insurance
|
|
|
14,615
|
|
|
|
7,863
|
|
|
|
3,819
|
|
|
|
85.9
|
|
|
|
105.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
$
|
44,407
|
|
|
$
|
36,827
|
|
|
$
|
31,748
|
|
|
|
20.6
|
%
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Primary insurance in force grew in 2005 and in 2004 as a
result of continued production and improvements in persistency.
Primary insurance persistency improved to 70.0% at
December 31, 2005 compared to 68.5% at December 31,
2004 and 52.2% at December 31, 2003. The average mortgage
coupon rates in our existing portfolio have declined over the
past three years as a result of relatively heavy refinancings
and lower rates on mortgages for home purchases than our
existing average rate. Additionally, mortgage rates in the
market have recently remained flat or increased slightly which
will deter those borrowers seeking lower coupon rates. These
conditions have caused a reduction in cancellations from
refinancing and, therefore, an increase in persistency. We
anticipate that persistency rates will continue near current
levels or increase moderately for 2006. However, persistency may
be adversely affected if market interest rates decline
significantly from the levels experienced during 2005.
34
Our Modified Pool insurance in force grew significantly in 2005
and in 2004 due to our strong production in that market.
Approximately 39%, 81% and 60% of our insurance written
attributable to our structured bulk channel during 2005, 2004,
and 2003, respectively, was structured with deductibles that put
us in the second loss position. The decline in Modified Pool
insurance written with deductibles in 2005 was the result of
increased business with entities that do not utilize deductibles
in their structures, although the use of deductibles remains an
effective part of our Modified Pool risk management strategy.
Alt-A continues to grow as a percentage of our Primary insurance
in force, and the majority of our Modified Pool insurance is
classified as Alt-A. The following table shows the percentage of
our insurance in force broken out by product and in total that
we have classified as Alt-A at December 31, 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Primary insurance in force
|
|
|
9.9%
|
|
|
|
7.3%
|
|
|
|
5.2%
|
|
Modified Pool insurance in force
|
|
|
66.9%
|
|
|
|
56.2%
|
|
|
|
48.0%
|
|
Total insurance in force
|
|
|
28.6%
|
|
|
|
17.7%
|
|
|
|
10.3%
|
|
We offer mortgage insurance structures designed to allow lenders
to share in the risks of mortgage insurance. One such structure
is our captive reinsurance program under which a reinsurance
company, generally an affiliate of the lender, assumes a portion
of the risk associated with the lenders insured book of
business in exchange for a percentage of the premium. The
following table shows the percentage of our direct insurance in
force that was subject to captive reinsurance arrangements at
December 31, 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Primary direct insurance in force
|
|
|
58.1%
|
|
|
|
55.1%
|
|
|
|
49.6%
|
|
Total direct insurance in force
|
|
|
39.0%
|
|
|
|
43.4%
|
|
|
|
43.6%
|
|
The growth of the percentage of Primary direct insurance in
force that was subject to captive reinsurance arrangements in
2005 and in 2004 was the result of increased production from
lenders that participate in captive reinsurance arrangements.
The declines in the percentage of total direct insurance in
force subject to captive reinsurance in 2005 and in 2004 reflect
the fact that a greater portion of our insurance in force
consists of Modified Pool insurance in force. None of our
Modified Pool insurance in force is subject to captive
reinsurance arrangements.
We believe captive reinsurance arrangements are an effective
risk management tool as selected lenders share in the risk under
these arrangements. Additionally, captive reinsurance
arrangements are structured so that Triad receives credit
against the capital required in certain risk-based capital
models utilized by rating agencies. We remain committed to
structuring captive reinsurance arrangements, including deep
ceded arrangements where the net premium cede rate is greater
than 25%, on a
lender-by-lender
basis as we deem it to be prudent. We will continue to be an
active participant with our lender partners in captive
reinsurance arrangements.
35
Revenues
A summary of the individual components of our revenue for the
past three years and the
year-to-year
percentage changes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
(In thousands, except
percentages)
|
|
|
Direct premium written
|
|
$
|
207,260
|
|
|
$
|
176,696
|
|
|
$
|
154,046
|
|
|
|
17.3
|
%
|
|
|
14.7
|
%
|
Ceded premium written
|
|
|
(40,644
|
)
|
|
|
(35,365
|
)
|
|
|
(27,310
|
)
|
|
|
14.9
|
|
|
|
29.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium written
|
|
|
166,616
|
|
|
|
141,331
|
|
|
|
126,736
|
|
|
|
17.9
|
|
|
|
11.5
|
|
Change in unearned premiums
|
|
|
2,381
|
|
|
|
(339
|
)
|
|
|
(7,004
|
)
|
|
|
802.4
|
|
|
|
95.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
168,997
|
|
|
|
140,992
|
|
|
|
119,732
|
|
|
|
19.9
|
|
|
|
17.8
|
|
Net investment income
|
|
|
22,998
|
|
|
|
19,754
|
|
|
|
17,082
|
|
|
|
16.4
|
|
|
|
15.6
|
|
Net realized investment gains
|
|
|
36
|
|
|
|
504
|
|
|
|
3,029
|
|
|
|
(92.9
|
)
|
|
|
(83.4
|
)
|
Other income
|
|
|
15
|
|
|
|
16
|
|
|
|
24
|
|
|
|
(6.3
|
)
|
|
|
(33.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
192,046
|
|
|
$
|
161,266
|
|
|
$
|
139,867
|
|
|
|
19.1
|
%
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We experienced strong growth in earned premiums in both 2005 and
2004, primarily due to an increase in net premium written.
Direct premium written is comprised of premium written for both
Primary and Modified Pool business. Our growth in total direct
premiums written in 2005 over 2004 was the result of the growth
of our insurance in force, offset somewhat by a decline in
average basis points as Modified Pool business comprised a
greater percentage of our insurance in force. The premium rate
for Modified Pool business, when calculated on insurance in
force, is generally lower than that of Primary business due to
the structures of the bulk transactions (which may include a
stop loss limit
and/or a
deductible) that serve to reduce the overall risk assumed in the
transaction. Renewal premiums increased $33.8 million or
21.2% in 2005 over 2004 as a result of growth in overall
production and improved persistency. Initial, or new, premiums
declined $3.2 million or 18.2% due to net lower premium
basis points on Modified Pool transactions, especially those
that are subject to deductibles, and a higher percentage of our
production from Modified Pool business. Our growth in total
direct premiums written in 2004 over 2003 was primarily due to a
$31.3 million growth in renewal premiums partially offset
by an $8.6 million decline in direct initial premiums. The
growth of risk in force in 2004, resulting from improved
persistency, drove the increase in renewal premiums over 2003.
The declines in refinancing activity combined with increased
popularity of alternative credit enhancements were the primary
drivers of the decline in initial premiums in 2004 from 2003.
During 2005, the average premium rate on Primary risk in force
increased as the result of a greater percentage of our risk in
force in the
Alt-A and
ARM products that require higher premium rates. The following
tables highlight the percentages of the Primary risk in force by
credit quality and loan type at December 31 for the last
three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Credit quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
84.2
|
%
|
|
|
86.4
|
%
|
|
|
88.1
|
%
|
Alt-A
|
|
|
10.8
|
|
|
|
8.1
|
|
|
|
5.8
|
|
A Minus
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
4.8
|
|
Sub Prime
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
73.8
|
%
|
|
|
76.4
|
%
|
|
|
81.8
|
%
|
ARM
|
|
|
26.2
|
|
|
|
23.6
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Ceded premium written is comprised of premiums written under
excess of loss reinsurance treaties with captive as well as
non-captive reinsurance companies. Ceded premiums written
increased in 2005 and 2004 due to an increase in the amount of
premium subject to captive reinsurance arrangements. The
following table provides further data on ceded premiums for the
years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Premium cede rate (ceded premiums
written as a percentage of direct premiums written)
|
|
|
19.6%
|
|
|
|
20.0%
|
|
|
|
17.7%
|
|
Captive reinsurance premium cede
rate (ceded premiums written under captive reinsurance
arrangements as a percentage of direct premiums written)
|
|
|
18.1%
|
|
|
|
18.0%
|
|
|
|
15.4%
|
|
Average captive premium cede rate
(ceded premiums written under captive reinsurance arrangements
as a percentage of direct premiums written under captive
reinsurance arrangements)
|
|
|
36.7%
|
|
|
|
36.9%
|
|
|
|
35.2%
|
|
The table below provides data on insurance written that was
subject to captive reinsurance arrangements for the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Primary insurance written
|
|
|
54.1%
|
|
|
|
54.4%
|
|
|
|
43.8%
|
|
Total insurance written
|
|
|
26.8%
|
|
|
|
33.9%
|
|
|
|
37.3%
|
|
The percentage of Primary insurance written subject to captive
reinsurance arrangements was relatively flat in 2005 compared to
2004. The increase in the percentage of Primary insurance
written subject to captive reinsurance arrangements in 2004 from
2003 was due to the decline of production of certain lender-paid
programs that were not subject to captive reinsurance
arrangements in 2003. The declines in the percentage of total
insurance written subject to captive reinsurance in 2005 and in
2004 were a result of Modified Pool insurance written comprising
a greater portion of our total insurance written in both of
these years. None of our Modified Pool insurance written in
2005, 2004 and 2003 was subject to captive reinsurance
arrangements.
The difference between net written premiums and earned premiums
is the change in the unearned premium reserve. Our unearned
premium liability declined $2.4 million from
December 31, 2004 to December 31, 2005 compared to an
increase of $0.3 million from December 31, 2003 to
December 31, 2004. An unearned premium reserve is
established primarily on premiums received on annual products,
which prior to 2005 was largely attributed to Modified Pool
transactions. During 2005, many of the new transactions required
the remittance of premium on a quarterly or monthly basis as
opposed to annually, which will further decrease the unearned
premium liability going forward. Direct written premiums from
the annual premium product represented 11.8% of direct premium
written in 2005 compared to 15.5% of direct premium written in
both 2004 and 2003, respectively.
Assuming no significant decline in interest rates, we anticipate
our persistency will remain at current levels with a bias toward
improvement in 2006. This should continue to have a positive
effect on renewal earned premiums and total earned premiums in
2006. Overall, based upon the above production and persistency
assumptions, we expect that earned premiums will continue to
increase in 2006, but at a lower level of growth than was
achieved in 2005.
Net investment income grew in 2005 and in 2004 primarily due to
the growth in average invested assets in both years, partially
offset by declines in portfolio yields. Average invested assets
at cost or amortized cost grew by 17.6% in 2005 and 20.6% in
2004 as a result of the investment of cash flows from operations
throughout those years. Our investment portfolio tax-equivalent
yield was 6.77%, 6.99%, and 7.13% at December 31, 2005,
2004 and 2003, respectively. We expect to see a growth in
invested assets in 2006; however, we anticipate a continuing
decline in the overall portfolio tax-equivalent yield as current
interest rates are still below our average portfolio rate. See
further discussion of the Investment Portfolio later in this
document.
Net realized investment gains, except for write-downs on
other-than-temporarily
impaired securities, are the result of our discretionary
dispositions of investment securities in the context of our
overall portfolio management strategies and are likely to vary
significantly from period to period. We wrote down
other-than-temporarily
impaired
37
securities by approximately $0.2 million in 2005 compared
to $0.5 million in 2004 and $0.8 million in 2003. See
further discussion of impairment write-downs in the Realized
Losses and Impairments section below.
Losses
and Expenses
A summary of the individual components of losses and expenses
and the
year-to-year
percentage change follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
(In thousands, except
percentages)
|
|
|
Net losses and loss adjustment
expenses
|
|
$
|
66,855
|
|
|
$
|
35,864
|
|
|
$
|
23,833
|
|
|
|
86.4
|
%
|
|
|
50.5
|
%
|
Interest expense on debt
|
|
|
2,773
|
|
|
|
2,772
|
|
|
|
2,772
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy
acquisition costs
|
|
|
14,902
|
|
|
|
14,256
|
|
|
|
18,112
|
|
|
|
4.5
|
|
|
|
(21.3
|
)
|
Other operating expenses (net of
acquisition costs deferred)
|
|
|
29,610
|
|
|
|
26,483
|
|
|
|
22,776
|
|
|
|
11.8
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
$
|
114,140
|
|
|
$
|
79,375
|
|
|
$
|
67,493
|
|
|
|
43.8
|
%
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
39.6
|
%
|
|
|
25.4
|
%
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
Expense ratio
|
|
|
26.7
|
%
|
|
|
28.8
|
%
|
|
|
32.3
|
%
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
66.3
|
%
|
|
|
54.2
|
%
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses (LAE) are comprised of
both paid losses and the change in loss and LAE reserves during
the period. Net losses and LAE increased significantly in 2005
over 2004 due to increases in both paid claims and reserves as a
result of the continued seasoning of our portfolio. We will
focus separately on both paid claims and the increase in
defaults.
The following table provides detail on paid claims and the
average severity for our Primary and Modified Pool insurance for
the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
(In thousands, except
percentages)
|
|
|
Paid claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
44,369
|
|
|
$
|
25,695
|
|
|
$
|
16,135
|
|
|
|
72.7
|
%
|
|
|
59.3
|
%
|
Modified Pool insurance
|
|
|
4,457
|
|
|
|
2,640
|
|
|
|
1,406
|
|
|
|
68.8
|
|
|
|
87.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,826
|
|
|
$
|
28,335
|
|
|
$
|
17,541
|
|
|
|
72.3
|
%
|
|
|
61.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average severity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
26.6
|
|
|
$
|
23.3
|
|
|
$
|
24.5
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance
|
|
|
20.5
|
|
|
|
14.2
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25.9
|
|
|
|
22.0
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
Paid claims increased in 2005 and in 2004 due to the overall
growth of the insurance portfolio and the seasoning of our
portfolio as a larger percentage of our insurance in force
reaches its anticipated highest claim frequency period of years
two to five from loan origination. To assist in the
understanding of the seasoning process and the impact on paid
claims, we have provided the following table that presents the
percentage of Primary risk in
38
force at December 31, 2005, 2004 and 2003 by policy year
(which is defined as the year the insurance became effective):
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy year
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2001 and prior
|
|
|
6.9%
|
|
|
|
10.7%
|
|
|
|
19.7%
|
|
2002
|
|
|
8.6%
|
|
|
|
14.0%
|
|
|
|
24.9%
|
|
2003
|
|
|
26.6%
|
|
|
|
40.5%
|
|
|
|
55.4%
|
|
2004
|
|
|
26.1%
|
|
|
|
34.8%
|
|
|
|
|
|
2005
|
|
|
31.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003, 80.3% of the insurance in force was
originated in the prior two years and would not have generated a
significant amount of paid claims in 2003. The percentage of
insurance in force less than two years old decreased to 75.3% at
December 31, 2004 and 57.9% at December 31, 2005 and
thus, more of our insurance in force is currently in its peak
claim paying period.
The increase in average severity also contributed to the growth
in paid losses. The increase is reflective of the larger loan
sizes and, as mentioned earlier, also reflects the growth of
Alt-A loans that generally have a larger average loan balance
than the rest of our portfolio.
We expect the average severity will continue to trend upward as
the newer policy years develop and the average loan amounts rise
with the increase in housing prices. However, our average
severity on paid losses can fluctuate from year to year as a
result of the relatively small number of claims paid in a given
period. The anticipated increase in severity and the further
seasoning of the insurance portfolio indicate that paid losses
will trend upward in 2006.
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 at December 31, 2005, 2004 and 2003 broken out by
Primary and Modified Pool insurance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
Primary insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
$
|
44,198
|
|
|
$
|
28,408
|
|
|
$
|
21,933
|
|
|
|
55.6
|
%
|
|
|
29.5
|
%
|
Reserves for defaults incurred but
not reported
|
|
|
4,536
|
|
|
|
3,493
|
|
|
|
3,114
|
|
|
|
29.9
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance
|
|
|
48,734
|
|
|
|
31,901
|
|
|
|
25,047
|
|
|
|
52.8
|
|
|
|
27.4
|
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
|
1,836
|
|
|
|
1,809
|
|
|
|
1,835
|
|
|
|
1.5
|
|
|
|
(1.4
|
)
|
Reserves for defaults incurred but
not reported
|
|
|
403
|
|
|
|
235
|
|
|
|
206
|
|
|
|
71.5
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Modified Pool insurance
|
|
|
2,239
|
|
|
|
2,044
|
|
|
|
2,041
|
|
|
|
9.5
|
|
|
|
0.1
|
|
Reserve for loss adjustment
expenses
|
|
|
101
|
|
|
|
97
|
|
|
|
98
|
|
|
|
4.1
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and loss
adjustment expenses
|
|
$
|
51,074
|
|
|
$
|
34,042
|
|
|
$
|
27,186
|
|
|
|
50.0
|
%
|
|
|
25.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve for losses and loss adjustment expenses increased in
2005 over 2004, primarily due to an increase in defaults,
changes in the frequency of defaults resulting in claims and an
increase in severity utilized in our reserving methodology. 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.
39
A significant portion of the 2005 increase in defaults occurred
in FEMA-designated areas as a result of hurricanes Katrina and
Rita. Primary and Modified Pool insurance defaults from these
FEMA-designated areas totaled 891 at December 31, 2005. At
December 31, 2005, the number of defaults without
deductibles in these FEMA-designated areas was 693, which
represented approximately 11% of our total number of defaults
without deductibles. The terms of our coverage exclude any cost
or expense related to the repair or remedy of any physical
damage to the property collateralizing an insured mortgage loan.
We have not obtained detailed property assessments that could
limit our exposure where there was significant unrepaired
physical damage. Additionally, we believe that many borrowers
living in certain FEMA-designated areas did not make scheduled
mortgage payments due to forbearance granted by Fannie Mae,
Freddie Mac and lenders, even though the individual borrower was
not significantly harmed. Given the unique circumstances
surrounding that situation and absent any evidence that these
would develop differently, we reserved for these defaults at our
normal level. As a result, we increased reserves approximately
$3.4 million for the hurricane related defaults during the
fourth quarter of 2005. We will continue to monitor this
situation throughout 2006 as the longer-term impacts develop.
The following table shows default statistics as of
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Total business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
302,488
|
|
|
|
266,574
|
|
|
|
236,234
|
|
Number of loans in default
|
|
|
7,163
|
|
|
|
5,445
|
|
|
|
4,242
|
|
With deductibles
|
|
|
1,090
|
|
|
|
410
|
|
|
|
17
|
|
Without deductibles
|
|
|
6,073
|
|
|
|
5,035
|
|
|
|
4,225
|
|
Percentage of loans in default
(default rate)
|
|
|
2.37
|
%
|
|
|
2.04
|
%
|
|
|
1.80
|
%
|
Percentage of loans in default
excluding deductibles
|
|
|
2.01
|
%
|
|
|
1.89
|
%
|
|
|
1.79
|
%
|
Primary insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
217,397
|
|
|
|
218,011
|
|
|
|
211,805
|
|
Number of loans in default
|
|
|
5,336
|
|
|
|
4,203
|
|
|
|
3,397
|
|
Percentage of loans in default
|
|
|
2.45
|
%
|
|
|
1.93
|
%
|
|
|
1.60
|
%
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
85,091
|
|
|
|
48,563
|
|
|
|
24,429
|
|
Number of loans in default
|
|
|
1,827
|
|
|
|
1,242
|
|
|
|
845
|
|
With deductibles
|
|
|
1,090
|
|
|
|
410
|
|
|
|
17
|
|
Without deductibles
|
|
|
737
|
|
|
|
832
|
|
|
|
828
|
|
Percentage of loans in default
|
|
|
2.15
|
%
|
|
|
2.56
|
%
|
|
|
3.46
|
%
|
Percentage of loans in default
excluding deductibles
|
|
|
0.87
|
%
|
|
|
1.71
|
%
|
|
|
3.39
|
%
|
Primary
Alt-A
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
16,378
|
|
|
|
12,714
|
|
|
|
9,212
|
|
Number of loans in default
|
|
|
590
|
|
|
|
442
|
|
|
|
248
|
|
Percentage of loans in default
|
|
|
3.60
|
%
|
|
|
3.48
|
%
|
|
|
2.69
|
%
|
The increase in the default rate for Primary insurance is
attributable to the continued seasoning of our business as a
greater percentage of the insurance in force moves into the peak
claim paying period. Additionally, as the
Alt-A
business becomes a larger percentage of the insurance in force,
we expect default rates to increase.
As shown in the above table, the number of Modified Pool
defaults subject to deductibles continued to increase while the
number of Modified Pool defaults without deductibles declined in
2005 and was relatively flat in 2004. At December 31, 2005,
no individual structured bulk transaction with deductibles as
part of the structure had incurred total losses that approach
these individual deductible amounts. We do not provide reserves
on Modified Pool defaults with deductibles until the incurred
losses for that specific structured bulk transaction reach a
pre-established threshold.
40
Our expectations for future claim amounts (severity) increased
during 2005. This was primarily the result of the higher loan
amounts included in the recent production. In addition to the
increase in reserves due to the impact of the hurricanes, we
increased our reserves in 2005 to reflect the increase in
average severity that we believe will impact the long-term loss
development of our insurance in force. We anticipate that our
number of loans in default for both Primary and Modified Pool
insurance will continue to increase as a larger percentage of
our insurance in force reaches its peak claim paying period and
as a result of overall growth of our insurance in force. We
expect reserves will increase as our business continues to grow
and season.
We are cautious about housing market conditions in certain
regions that have recently experienced rapid house price
appreciation. Changes in the economic environment could
accelerate paid and incurred loss development. Our reserving
model incorporates managements judgments and assumptions
regarding these factors; however, due to the uncertainty of
future premium levels, losses, economic conditions, and other
factors that affect earnings, it is difficult to predict the
impact of such higher claim frequencies on future earnings.
Amortization of DAC increased moderately in 2005, primarily due
to growth in the asset balance. The significant decline in DAC
amortization in 2004 from 2003 was due to improved persistency
in 2004. A full discussion of the impact of persistency on DAC
amortization is included in the Deferred Policy Acquisition
Costs section below.
Other operating expenses increased in 2005 due to growth in our
insurance in force and due to expenses incurred in connection
with the organizational changes following the hiring of a new
chief executive officer and a new chief financial officer in
2005. Because the growth in net premiums written was greater
than the growth in expenses, the expense ratio (ratio of the
amortization of deferred policy acquisition costs and other
operating expenses to net premiums written) for 2005 was 26.7%
compared to 28.8% for 2004 and 32.3% for 2003. The improvement
in the expense ratio for 2004 was due primarily to the decrease
in DAC amortization expense mentioned above.
We anticipate DAC amortization to be up slightly in 2006,
primarily due to an increase in the DAC asset if persistency
levels remain at current levels or improve slightly. We expect
the growth in other operating expenses to moderate in 2006 when
compared to 2005. However, given our expectations for premium
growth, we anticipate continued improvements in our expense
ratio.
Our effective tax rate was 27.1% for 2005 compared to 28.7% for
2004 and 29.4% for 2003. The declines in the effective tax rates
for both 2005 and 2004 were due primarily to an increase in
tax-exempt interest resulting from a higher percentage of assets
invested in tax-preferred municipal securities. We expect our
effective tax rate to remain near current levels or increase
slightly as we expect earned premium to grow faster than
tax-preferred income.
Significant
Customers
Our objective is controlled, profitable growth in both Primary
and Modified Pool business while adhering to our risk management
strategies. Our strategy is to continue our focus on national
lenders while maintaining the productive relationships that we
have built with regional lenders. Competition within the
mortgage insurance industry continues to increase as many large
mortgage lenders have limited the number of mortgage insurers
with whom they do business. At the same time, consolidation
among national lenders has increased the share of the mortgage
origination market controlled by the largest lenders and that
has led to further concentrations of business with a relatively
small number of lenders. Many of the national lenders allocate
Primary business to several different mortgage insurers. These
allocations can go up or down over time. Our ten largest
customers were responsible for 77%, 71%, and 74% of Primary
insurance written during 2005, 2004, and 2003, respectively. Our
two largest customers were responsible for 58%, 55%, and 58% of
Primary insurance written during 2005, 2004, and 2003,
respectively. Through actively seeking business with other
lenders that meet our criteria, we are attempting to broaden our
customer base and limit our concentration with these two largest
lenders. The loss of or considerable reduction in business from
one or more of these significant customers without a
corresponding increase from other lenders would have an adverse
effect on our business.
41
Financial
Position
Total assets increased to $768 million at December 31,
2005, a 14% growth over the same date in 2004, primarily the
result of growth in invested assets. Total liabilities increased
to $268 million at December 31, 2005, from
$235 million in 2004, primarily driven by an increase in
reserves for losses and loss adjustment expenses coupled with an
increase in deferred tax liabilities. This section identifies
several items on our balance sheet that are important in the
overall understanding of our financial position. These items
include deferred policy acquisition costs, prepaid federal
income tax and related deferred income taxes. The majority of
our assets are contained 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.
Deferred
Policy Acquisition Costs
Costs expended to acquire new business are capitalized as DAC
and recognized as expense over the anticipated premium paying
life of the policy in a manner that approximates the estimated
gross profits. We employ a dynamic model that calculates
amortization of DAC separately for each year of policy
origination. The model relies on assumptions that we make based
upon historical industry experience and our own unique
experience regarding the annual persistency development of each
year of policy origination. Persistency is the most important
assumption utilized in determining the timing of reported
amortization expense reflected in the income statement and the
carrying value of DAC on the balance sheet. A change in the
assumed persistency can impact the current and future
amortization expense as well as the carrying value on the
balance sheet. Our model accelerates DAC amortization through a
dynamic adjustment when actual persistency for a particular year
of policy origination is lower than the estimated persistency
originally utilized in the model. This dynamic adjustment is
capped at the levels assumed in the models, and we do not
decrease DAC amortization below the levels assumed in the model
when persistency increases above those levels. When actual
persistency is lower than that assumed in our models, the
dynamic adjustment effectively adjusts the estimated policy life
utilized in the model to a policy life based upon the current
actual persistency.
Our DAC models separate the costs capitalized and the
amortization streams between transactions arising from
structured bulk and flow delivery channels. Generally,
structured bulk transactions have significantly lower
acquisition costs associated with the production of the business
and they also have a shorter original estimated policy life. We
apply the dynamic adjustment to the structured bulk DAC models
utilizing the same methodology. At December 31, 2005 and
2004, net unamortized DAC relating to structured bulk
transactions amounted to 6.8% and 5.4% of the total DAC on the
balance sheet.
The following table shows the DAC asset for the previous three
years and the effect of persistency on amortization (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAC Asset
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance beginning
of year
|
|
$
|
32,453
|
|
|
$
|
29,363
|
|
|
$
|
28,997
|
|
Costs capitalized
|
|
|
16,132
|
|
|
|
17,346
|
|
|
|
18,478
|
|
Amortization normal
|
|
|
(13,190
|
)
|
|
|
(12,194
|
)
|
|
|
(12,569
|
)
|
Amortization dynamic
adjustment
|
|
|
(1,711
|
)
|
|
|
(2,062
|
)
|
|
|
(5,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization
|
|
|
(14,901
|
)
|
|
|
(14,256
|
)
|
|
|
(18,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of
year
|
|
$
|
33,684
|
|
|
$
|
32,453
|
|
|
$
|
29,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Persistency
|
|
|
68.7
|
%
|
|
|
67.6
|
%
|
|
|
50.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low persistency levels during 2003 caused accelerated DAC
amortization as can be seen by the large dynamic adjustment in
that year. As persistency improved during 2004 and 2005, DAC
amortization resulting from the dynamic adjustment leveled off.
Differences in persistency in the flow and structured bulk
delivery channels will not have the same impact on their
respective DAC amortization because of the lower balance and the
shorter estimated policy life of loans included in the typical
structured bulk transactions.
42
Assuming no significant declines in interest rates, we expect
persistency to remain at current levels or to moderately improve
in 2006. Based on this assumption, we anticipate DAC
amortization to increase at a rate similar to growth in the DAC
asset. See further information on the accounting for DAC in
Note 1 in the Notes to Consolidated Financial Statements.
Prepaid
Federal Income Taxes and Deferred Income Taxes
We purchase ten-year non-interest bearing United States Mortgage
Guaranty Tax and Loss Bonds (Tax and Loss Bonds) in
lieu of paying current federal income taxes to take advantage of
a special contingency reserve deduction specific to mortgage
guaranty companies. We record these bonds on our balance sheet
as prepaid federal income taxes. Purchases of Tax and Loss Bonds
are essentially a prepayment of federal income taxes that will
become due in ten years when the contingency reserve is
released, and the Tax and Loss Bonds mature. Prepaid income
taxes were $139.5 million and $119.1 million at
December 31, 2005 and 2004, respectively. The change from
year to year approximates the change in the deferred income tax
liability for the year.
Deferred income taxes are provided for the differences in
reporting taxable income in the financial statements and on the
tax return. These cumulative differences are enumerated in
Note 6 in the Notes to Consolidated Financial Statements.
The largest cumulative difference is the special contingency
reserve deduction for mortgage insurers mentioned above. The
remainder of the deferred tax liability has primarily arisen
from book and tax reporting differences related to DAC and
unrealized investment gains.
Investment
Portfolio
Portfolio
Description
Our strategy for managing our investment portfolio is to
optimize investment returns while preserving capital and
liquidity and adhering to regulatory and rating agency
requirements. We invest for the long term, and most of our
investments are held until they mature. Our investment portfolio
includes primarily fixed income securities, and the majority of
these are tax-preferred state and municipal bonds. We have
established a formal investment policy that describes our
overall quality and diversification objectives and limits. Our
investment policies and strategies are subject to change
depending upon regulatory, economic, and market conditions as
well as our existing financial condition and operating
requirements, including our tax position. While we invest for
the long term and most of our investments are held until they
mature, we classify our entire investment portfolio as available
for sale. This classification allows us the flexibility to
dispose of securities in order to meet our investment strategies
and operating requirements. All investments are carried on our
balance sheet at fair value.
The following table shows the growth and diversification of our
investment portfolio (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Fixed maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
12,124
|
|
|
|
2.2
|
%
|
|
$
|
12,728
|
|
|
|
2.7
|
%
|
State and municipal bonds
|
|
|
500,027
|
|
|
|
91.4
|
|
|
|
415,250
|
|
|
|
87.0
|
|
Corporate bonds
|
|
|
21,855
|
|
|
|
4.0
|
|
|
|
26,063
|
|
|
|
5.5
|
|
Mortgage-backed bonds
|
|
|
58
|
|
|
|
0.0
|
|
|
|
80
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
534,064
|
|
|
|
97.6
|
|
|
|
454,121
|
|
|
|
95.2
|
|
Equity securities
|
|
|
8,159
|
|
|
|
1.5
|
|
|
|
10,272
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
542,223
|
|
|
|
99.1
|
|
|
|
464,393
|
|
|
|
97.4
|
|
Short-term
investments
|
|
|
4,796
|
|
|
|
0.9
|
|
|
|
12,520
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
547,019
|
|
|
|
100.0
|
%
|
|
$
|
476,913
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We seek to provide liquidity in our investment portfolio through
cash equivalent investments and through diversification and
investment in publicly traded securities. We attempt to maintain
a level of liquidity and duration
43
in our investment portfolio consistent with our business outlook
and the expected timing, direction, and degree of changes in
interest rates. See Note 2 in Notes to Consolidated
Financial Statements that describes the scheduled maturity of
our fixed maturity investments. The effective duration of the
fixed maturity portfolio was 7.16 years at
December 31, 2005 compared to 7.59 years at
December 31, 2004 as we invested on a shorter time horizon
during a period of unsettled long-term interest rates of 2005.
We also manage risk and liquidity by limiting our exposure on
individual securities. The following table shows the ten largest
exposures to an individual creditor in our investment portfolio
as of December 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
% of Total
|
|
Name of Creditor
|
|
Value
|
|
|
Invested Assets
|
|
|
Atlanta, Georgia Airport
|
|
$
|
6,856
|
|
|
|
1.25%
|
|
Federal National Mortgage
Association
|
|
|
5,413
|
|
|
|
0.99%
|
|
AAM/ZAZOVE Institutional Income
Fund
|
|
|
5,128
|
|
|
|
0.94%
|
|
Port of Seattle, Washington
|
|
|
4,610
|
|
|
|
0.84%
|
|
Michigan State Housing Development
Authority
|
|
|
4,500
|
|
|
|
0.82%
|
|
Denver, Colorado City and County
Airport
|
|
|
4,249
|
|
|
|
0.78%
|
|
Cook County, Illinois
|
|
|
4,230
|
|
|
|
0.77%
|
|
Charlotte, North Carolina Airport
|
|
|
4,179
|
|
|
|
0.76%
|
|
State of Nevada Water Pollution
Control
|
|
|
4,076
|
|
|
|
0.75%
|
|
University of Texas
|
|
|
4,016
|
|
|
|
0.73%
|
|
As shown above, no investment in the securities of any single
issuer exceeded 2% of our investment portfolio at
December 31, 2005.
The following table shows the results of our investment
portfolio for the last three years (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Average investments at cost or
amortized cost
|
|
$
|
493,256
|
|
|
$
|
419,467
|
|
|
$
|
347,809
|
|
Pre-tax net investment income
|
|
$
|
22,998
|
|
|
$
|
19,754
|
|
|
$
|
17,082
|
|
Effective pre-tax yield
|
|
|
4.7
|
%
|
|
|
4.7
|
%
|
|
|
4.9
|
%
|
Tax-equivalent
yield-to-maturity
|
|
|
6.8
|
%
|
|
|
7.0
|
%
|
|
|
7.1
|
%
|
Pre-tax realized investment gains
|
|
$
|
36
|
|
|
$
|
504
|
|
|
$
|
3,029
|
|
The drop in the tax-equivalent
yield-to-maturity
shown above reflects the impact of the maturity or call of
higher yielding investments and the subsequent investment
purchases at new money rates available, which were lower than
that of our overall portfolio. We anticipate this trend to
continue into 2006.
Unrealized
Gains and Losses
The following table summarizes by category our unrealized gains
and losses in our securities portfolio at December 31, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
12,348
|
|
|
$
|
16
|
|
|
$
|
(240
|
)
|
|
$
|
12,124
|
|
State and municipal bonds
|
|
|
486,014
|
|
|
|
14,993
|
|
|
|
(980
|
)
|
|
|
500,027
|
|
Corporate bonds
|
|
|
19,719
|
|
|
|
2,211
|
|
|
|
(75
|
)
|
|
|
21,855
|
|
Mortgage-backed bonds
|
|
|
56
|
|
|
|
2
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed maturities
|
|
|
518,137
|
|
|
|
17,222
|
|
|
|
(1,295
|
)
|
|
|
534,064
|
|
Equity securities
|
|
|
7,001
|
|
|
|
1,284
|
|
|
|
(126
|
)
|
|
|
8,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
525,138
|
|
|
$
|
18,506
|
|
|
$
|
(1,421
|
)
|
|
$
|
542,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
These unrealized gains and losses do not necessarily represent
future gains or losses that we will realize. Changing conditions
related to specific securities, overall market interest rates,
or credit spreads, as well as our decisions concerning the
timing of a sale, may impact values we ultimately realize. We
monitor unrealized losses through further analysis according to
maturity date, credit quality, individual creditor exposure and
the length of time the individual security has continuously been
in an unrealized loss position. Of the gross unrealized losses
on fixed maturity securities shown above, approximately $727,000
related to bonds with a maturity date in excess of ten years.
The largest individual unrealized loss on any one security at
December 31, 2005 was approximately $78,000 on a corporate
bond with an amortized cost of $5.0 million. Gross
unrealized gains and losses at December 31, 2004 were
$20.9 million and $(0.6) million, respectively.
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 (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency bonds
|
|
$
|
12,124
|
|
|
|
2.3
|
%
|
|
$
|
12,808
|
|
|
|
2.8
|
%
|
AAA
|
|
|
420,489
|
|
|
|
78.7
|
|
|
|
332,929
|
|
|
|
73.3
|
|
AA
|
|
|
52,812
|
|
|
|
9.9
|
|
|
|
53,285
|
|
|
|
11.7
|
|
A
|
|
|
30,176
|
|
|
|
5.7
|
|
|
|
33,530
|
|
|
|
7.4
|
|
BBB
|
|
|
9,780
|
|
|
|
1.8
|
|
|
|
12,680
|
|
|
|
2.8
|
|
BB
|
|
|
781
|
|
|
|
0.1
|
|
|
|
254
|
|
|
|
0.1
|
|
B
|
|
|
|
|
|
|
0.0
|
|
|
|
205
|
|
|
|
0.0
|
|
CCC and lower
|
|
|
|
|
|
|
0.0
|
|
|
|
215
|
|
|
|
0.1
|
|
Not rated
|
|
|
7,902
|
|
|
|
1.5
|
|
|
|
8,215
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
534,064
|
|
|
|
100.0
|
%
|
|
$
|
454,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
1,709
|
|
|
|
20.9
|
%
|
|
$
|
1,519
|
|
|
|
14.8
|
|
A
|
|
|
1,559
|
|
|
|
19.1
|
|
|
|
2,165
|
|
|
|
21.1
|
|
BBB
|
|
|
1,125
|
|
|
|
13.8
|
|
|
|
1,155
|
|
|
|
11.2
|
|
Not rated
|
|
|
490
|
|
|
|
6.0
|
|
|
|
525
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,883
|
|
|
|
59.8
|
|
|
|
5,364
|
|
|
|
52.2
|
|
Common stocks
|
|
|
3,276
|
|
|
|
40.2
|
|
|
|
4,908
|
|
|
|
47.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
$
|
8,159
|
|
|
|
100.0
|
%
|
|
$
|
10,272
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further, we regularly review our investment portfolio to
identify securities that may have suffered impairments in value
that will not be recovered, termed potentially distressed
securities. In identifying potentially distressed securities, we
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
|
|
|
|
Downgrades by a rating agency
|
|
|
|
Past due interest or principal payments or other violation of
covenants
|
|
|
|
Deterioration of the overall financial condition of the specific
issuer
|
45
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 or outside consultants, improving financial
performance of the issuer, or valuation of underlying assets
specifically pledged to support the credit.
When we conclude that a decline is other than temporary, the
security is written down to fair value through a charge to
realized investment gains and losses. We adjust the amortized
cost for securities that have experienced
other-than-temporary
impairments to reflect fair value at the time of the impairment.
We consider factors that lead to an
other-than-temporary
impairment of a particular security in order to determine
whether these conditions have impacted other similar securities.
Of the approximate $1.4 million of gross unrealized losses
at December 31, 2005, no securities had a fair value to
cost or amortized cost ratio of less than 90%.
Information about unrealized gains and losses is subject to
changing conditions. Securities with unrealized gains and losses
will fluctuate, as will those securities that we identify as
potentially distressed. Our current evaluation of
other-than-temporary
impairments reflects our intent to hold securities for a
reasonable period of time sufficient for a forecasted recovery
of fair value. 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.
Realized
Losses and Impairments
Realized losses include both write-downs of securities with
other-than-temporary
impairments and losses from the sales of securities. During
2005, we wrote down three securities by a total of approximately
$170,000. Further details on the two most significant
write-downs in 2005 are as follows:
|
|
|
|
|
Approximately $75,000 was a write-down on preferred stock of a
U.S. car manufacturer for which the fair value had
fluctuated below 80% of amortized cost and was in an unrealized
loss position for a continuous six-month period. The issuer had
posted weak operating results throughout 2005, lowered earnings
projections, and had been downgraded by rating agencies. We sold
this security following the write-down in 2005 and realized a
small loss on the sale.
|
|
|
|
We also owned bonds of a financing company related to this same
U.S. car manufacturer at the time of our assessment of this
impairment. Although the bonds had a fair value above 90% of
amortized cost, we determined the impairment was
other-than-temporary
due to the circumstances surrounding the related car
manufacturer and wrote down the bonds by approximately $60,000.
We still hold this security at December 31, 2005, and its
fair value approximated its amortized cost at that time. No
other securities were impacted by the circumstances surrounding
these impairments.
|
During 2004 we wrote down six securities by a total of
approximately $480,000. Further details on the two most
significant write-downs in 2004 are as follows:
|
|
|
|
|
Approximately $192,000 was a write-down on preferred stock in an
international airline for which the value had fluctuated below
80% of amortized cost for over a year. The write-down resulted
from our assessment that the security was
other-than-temporarily
impaired because of a reduction in credit quality by rating
agencies. We sold this security in 2004 following the write-down
and realized a small gain. The circumstances surrounding this
impairment did not impact other securities in our portfolio.
|
|
|
|
Approximately $176,000 was a write-down in the third quarter on
common stock of a pharmaceutical company for which the value had
fluctuated below 80% of amortized cost after the company was
required to
|
46
|
|
|
|
|
cease sales of one of its major products due to alleged health
risks. Rating agencies then reduced the credit ratings for this
company. We sold this security in the next quarter following the
write-down at an amount that approximated its carrying value
after the write-down. The circumstances surrounding this
impairment did not impact other securities in our portfolio.
|
During 2003, we wrote down five securities by a total of
approximately $779,000. Further details on the four most
significant write-downs in 2003 are as follows:
|
|
|
|
|
Approximately $216,000 was a write-down on common stock of an
automobile manufacturer for which the value had fluctuated below
85% of amortized cost for more than six months. Our assessment
deemed that the security would not significantly recover in
value over our anticipated holding period. This security was
later sold at an amount that approximated its carrying value
after the write-down. The circumstances surrounding this
impairment did not impact other securities in our portfolio.
|
|
|
|
Approximately $173,000 was a write-down on common stock of an
energy provider for which the value had fluctuated below 85% of
amortized cost for more than six months. Our assessment deemed
that the security would not significantly recover in value over
our anticipated holding period. The circumstances surrounding
this impairment did not impact other securities in our portfolio.
|
|
|
|
Approximately $175,000 was a write-down on a bond issue
collateralized by high-yield securities that continued to
experience excessive defaults on its underlying securities. The
circumstances surrounding this impairment did not impact other
securities in our portfolio.
|
|
|
|
Approximately $165,000 was a write-down on common stock of a
pharmaceutical company for which patents on various products
were expiring. The market value of the equity had fluctuated
below 55% of its cost. We subsequently sold these securities at
an amount that approximated its carrying value after the
write-down. The circumstances surrounding this impairment did
not impact other securities in our portfolio.
|
Liquidity
and Capital Resources
Our sources of operating funds consist primarily of premiums
written and investment income. Operating cash flow is applied
primarily to the payment of claims, interest, expenses, and
prepaid federal income taxes in the form of Tax and Loss Bonds.
We generated positive cash flow from operating activities of
$70.8 million in 2005 compared to $68.9 million for
2004 and $59.3 million for 2003. The slight increase in
cash flow from operating activities in 2004 reflects the growth
in premiums and investment income received, largely offset by an
increase in paid losses. Our business does not routinely require
significant capital expenditures other than for enhancements to
our computer systems and technological capabilities. Positive
cash flows are invested pending future payments of claims and
expenses. Cash flow shortfalls, if any, could be funded through
sales of short-term investments and other investment portfolio
securities. We have no existing lines of credit due to the
sufficiency of the operating funds from the sources described
above.
In January of 2006, the Board of Directors authorized the
repurchase of up to 1,000,000 shares of common stock. We
view this authorization as another capital management option
available when we believe it is prudent to be purchasing our
stock. While we believe that the best opportunities available to
Triad for the deployment of capital are for future growth and
expansion, this authorization will enable the Company to
purchase shares opportunistically depending on market
conditions. Currently, our plans would be to liquidate some of
the short-term and other investments at the holding company
level to fund future stock purchases, if any. Our current
intention would be to immediately retire any shares repurchased.
The insurance laws of the State of Illinois impose certain
restrictions on dividends that an insurance subsidiary can pay
the parent company. These restrictions, based on statutory
accounting practices, include requirements that dividends may be
paid only out of statutory earned surplus and that limit the
amount of dividends that may be paid without prior approval of
the Illinois Insurance Department. There have been no dividends
paid by the insurance subsidiaries to the parent company.
Further, there are no restrictions or requirements for capital
support arrangements between the parent company and Triad or its
subsidiaries.
47
We cede business to captive reinsurance affiliates of certain
mortgage lenders (captives), primarily under excess
of loss reinsurance agreements. Generally, reinsurance
recoverables on loss reserves and unearned premiums ceded to
these captives are backed by trust funds or letters of credit.
Total stockholders equity increased to $499.2 million
at December 31, 2005, from $437.3 million at
December 31, 2004. This increase resulted primarily from
2005 net income of $56.8 million and additional
paid-in-capital
of $5.4 million resulting from activity related to equity
awards to employees and the associated tax benefit.
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 December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Statutory policyholders
surplus
|
|
$
|
131.6
|
|
|
$
|
135.7
|
|
Statutory contingency reserve
|
|
|
447.8
|
|
|
|
369.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
579.4
|
|
|
$
|
505.1
|
|
|
|
|
|
|
|
|
|
|
The decline in statutory policyholders surplus reflects an
increase in the statutory contingency reserve and a change in
the deferred tax liability greater than statutory net income in
2005. The primary difference between statutory
policyholders surplus and equity computed under generally
accepted accounting principles is the statutory contingency
reserve. Mortgage insurance companies are required to add to the
contingency reserve an amount equal to 50% of calendar year
earned premiums and retain the reserve for 10 years, even
if the insurance is no longer in force. Therefore, a growing
company such as Triad normally has an increase its contingency
reserve rather than in statutory surplus.
Triads ability to write insurance depends on the
maintenance of its financial strength ratings and the adequacy
of its capital in relation to risk in force. A significant
reduction of capital or a significant increase in risk may
impair Triads ability to write additional insurance. A
number of states also generally limit Triads
risk-to-capital
ratio to
25-to-1. As
of December 31, 2005, Triads
risk-to-capital
ratio was
12.6-to-1 as
compared to
14.0-to-1 at
December 31, 2004. The
risk-to-capital
ratio is calculated using net risk in force as the numerator and
statutory capital as the denominator. Net risk in force accounts
for risk ceded under reinsurance arrangements, including captive
risk-sharing arrangements as well as any applicable stop-loss
limits and deductible amounts.
Triad is rated AA by both Standard &
Poors Ratings Services and Fitch Ratings and
Aa3 by Moodys Investors Service. S&P has
not changed its Negative rating outlook for the
U.S. private mortgage insurance industry that was issued in
July of 2003. In December 2004, Fitch maintained its
Negative rating outlook for the U.S. private
mortgage insurance industry. Currently, Fitch, S&P, and
Moodys all report a Stable ratings outlook for
Triad. A reduction in Triads rating or outlook could
adversely affect our operations.
Fannie Mae has revised its approval requirements for mortgage
insurers. The new rules require prior approval by Fannie Mae for
many of Triads activities and new products, allow for
other approved types of mortgage insurers rated less than
AA, and give Fannie Mae increased rights to revise
the eligibility standards of mortgage insurers. We do not see
any material impact on our current or future operations as a
result of the new rules, although a material impact could still
occur if Fannie Mae were to begin to utilize mortgage insurers
rated below AA or revise eligibility standards of
mortgage insurers in a way that would be adverse to Triad.
The Office of Federal Housing Enterprise Oversight (OFHEO)
issued its risk-based capital rules for Fannie Mae and Freddie
Mac in the first quarter of 2002. The regulation provides
capital guidelines for Fannie Mae and Freddie Mac in connection
with their use of various types of credit protection
counterparties including a more preferential capital credit for
insurance from a AAA rated private mortgage insurer
than for insurance from a AA rated private mortgage
insurer. The phase-in period for OFHEOs risk-based capital
rules is ten years. We do not believe the new risk-based capital
rules had an adverse impact on our financial condition through
2005 or that these rules will have a significant adverse impact
on our financial condition in the future. However, if the
risk-based capital rules result in future changes to the
preferences of Fannie Mae and Freddie Mac regarding their use of
the
48
various types of credit enhancements or their choice of mortgage
insurers based on their credit rating, our financial condition
could be significantly harmed.
Off
Balance Sheet Arrangements and Aggregate Contractual
Obligations
We have no material off-balance arrangements at
December 31, 2005.
We lease office facilities, automobiles, and office equipment
under operating leases with minimum lease commitments that range
from one to ten years. We have no capitalized leases or material
purchase commitments.
Our long-term debt has a single maturity date of 2028. The
following table represents our aggregate contractual obligations
as of December 31, 2005 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 3
|
|
|
3 5
|
|
|
More Than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt
|
|
$
|
35,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,000
|
|
Operating leases
|
|
|
8,916
|
|
|
|
1,689
|
|
|
|
2,663
|
|
|
|
2,296
|
|
|
|
2,268
|
|
Other long-term liabilities
reflected on the Registrants balance sheet under GAAP
|
|
|
51,074
|
|
|
|
45,967
|
|
|
|
5,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,990
|
|
|
$
|
47,656
|
|
|
$
|
7,770
|
|
|
$
|
2,296
|
|
|
$
|
37,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other long-term liabilities reflected on the
Registrants balance sheet under GAAP category above is
comprised of our reserve for losses and loss adjustment
expenses. The establishment of loss reserves is subject to
inherent uncertainty and requires significant judgment by
management. The future loss payment periods are estimated based
upon historical experience.
Market
Risk Exposure
Fixed maturity securities represented approximately 98% of our
invested assets at December 31, 2005. While the fair value
of these fixed rate securities generally bears an inverse
relationship to changes in prevailing market interest rates, a
change in market interest rates would not immediately impact
earnings because we generally hold these securities until
maturity. However, a decrease in market interest rates 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 earnings. Our
long-term debt matures in 2028 with no early call or put
provisions and bears interest at a fixed rate of 7.9% per
annum. The fair value of this debt is sensitive to changes in
prevailing interest rates; however, a change in rates would not
impact earnings. We believe that a 20% increase or decrease in
market interest rates is reasonable for the upcoming year. A 20%
relative increase or decrease in market interest rates that
affect our financial instruments would not have a material
impact on earnings during the next fiscal year.
Safe
Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Managements Discussion and Analysis and this Report
contain forward-looking statements relating to future plans,
expectations, and performance, which involve various risks and
uncertainties, including, but not limited to, the following:
|
|
|
|
|
interest rates may increase or decrease from their current
levels;
|
|
|
|
housing prices may increase or decrease from their current
levels;
|
|
|
|
housing transactions requiring mortgage insurance may decrease
for many reasons including changes in interest rates or economic
conditions or alternative credit enhancement products;
|
|
|
|
our market share may change as a result of changes in
underwriting criteria or competitive products or rates;
|
49
|
|
|
|
|
the amount of insurance written could be adversely affected by
changes in federal housing legislation, including changes in the
Federal Housing Administration loan limits and coverage
requirements of Freddie Mac and Fannie Mae (Government Sponsored
Enterprises);
|
|
|
|
our financial condition and competitive position could be
affected by legislation or regulation impacting the mortgage
guaranty industry or the Government Sponsored Entities,
specifically, and the financial services industry in general;
|
|
|
|
rating agencies may revise methodologies for determining our
financial strength ratings and may revise or withdraw the
assigned ratings at any time;
|
|
|
|
decreases in persistency, which are affected by loan
refinancings in periods of low interest rates, may have an
adverse effect on earnings;
|
|
|
|
the amount of insurance written and the growth in insurance in
force or risk in force as well as our performance may be
adversely impacted by the competitive environment in the private
mortgage insurance industry, including the type, structure, and
pricing of our products and services and our competitors;
|
|
|
|
if we fail to properly underwrite mortgage loans under contract
underwriting service agreements, we may be required to assume
the costs of repurchasing those loans;
|
|
|
|
with consolidation occurring among mortgage lenders and our
concentration of insurance in force generated through
relationships with significant lender customers, our margins may
be compressed and the loss of a significant customer or a change
in their business practices affecting mortgage insurance may
have an adverse effect on our earnings;
|
|
|
|
our performance may be impacted by changes in the performance of
the financial markets and general economic conditions;
|
|
|
|
economic downturns in regions where our risk is more
concentrated could have a particularly adverse effect on our
financial condition and loss development;
|
|
|
|
revisions in risk-based capital rules by the Office of Federal
Housing Enterprise Oversight for Fannie Mae and Freddie Mac
could severely limit our ability to compete against various
types of credit protection counterparties, including
AAA rated private mortgage insurers;
|
|
|
|
changes in the eligibility guidelines of Fannie Mae or Freddie
Mac could have an adverse effect on the Company;
|
|
|
|
proposed regulation by the Department of Housing and Urban
Development to exclude packages of real estate settlement
services, which may include any required mortgage insurance
premium paid at closing, from the anti-referral provisions of
the Real Estate Settlement Procedures Act could adversely affect
our earnings;
|
|
|
|
our financial and competitive position could be affected by
regulatory activity requiring changes to mortgage industry
business practices, such as captive reinsurance.
|
Accordingly, actual results may differ from those set forth in
the forward-looking statements. Attention also is directed to
other risk factors set forth in documents filed by the Company
with the Securities and Exchange Commission.
|
|
Item 7A.
|
Qualitative
and Quantitative Disclosures about Market Risks
|
See information in this report under the heading Market
Risk Exposures in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The Financial Statements and Supplementary Data are presented in
a separate section of this report.
50
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
Triad Guaranty Inc. maintains disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in its periodic reports to the Securities and Exchange
Commission (SEC) is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated
to Triad Guaranty Inc.s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure based
upon the definition of disclosure controls and
procedures as defined under
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934. In designing and evaluating
the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily was
required to apply its judgment to the cost-benefit relationship
of possible controls and procedures.
As of December 31, 2005, an evaluation was performed under
the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based upon
that evaluation, management has concluded that disclosure
controls and procedures as of December 31, 2005 were
effective in ensuring that material information required to be
disclosed in this
Form 10-K
was recorded, processed, summarized, and reported on a timely
basis. Additionally, there were no changes in the Companys
internal controls over financial reporting that occurred during
the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.
Changes
in Internal Control over Financial Reporting
There have been no significant changes in Triad Guaranty
Inc.s internal control over financial reporting during the
quarter ended December 31, 2005 that would have materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting in an
adverse manner.
Managements
Annual Report on Internal Control over Financial
Reporting
Management of Triad Guaranty Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities and Exchange Act of 1934. Triad Guaranty
Inc.s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of Triad
Guaranty Inc.; (2) provide reasonable assurance that the
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States; (3) provide
reasonable assurance that receipts and expenditures of Triad
Guaranty Inc. are being made in accordance with authorization of
management and directors of Triad Guaranty Inc; and
(4) provide reasonable assurance regarding the prevention
of or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on the
consolidated financial statements. Internal control over
financial reporting includes the controls themselves, monitoring
(including internal auditing practices) and actions taken to
correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
51
Management assessed the effectiveness of Triad Guaranty
Inc.s internal control over financial reporting as of
December 31, 2005. Management based this assessment on
criteria for effective internal control over financial reporting
described in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon this
assessment, management determined that, as of December 31,
2005, Triad Guaranty Inc. maintained effective internal control
over financial reporting.
Ernst & Young, LLP, Triad Guaranty Inc.s
independent registered public accounting firm that audits the
consolidated financial statements of Triad Guaranty Inc.
included in this report has audited managements assessment
of the effectiveness of internal control over financial
reporting as of December 31, 2005 as stated in their report
which appears below.
52
Report of
Independent Registered Public Accounting Firm on Internal
Control
Over Financial Reporting
The Board of Directors and Stockholders of Triad Guaranty
Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal
Control over Financial Reporting, that Triad Guaranty Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Triad Guaranty Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Triad Guaranty
Inc. maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Triad Guaranty Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Triad Guaranty Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2005 of Triad Guaranty Inc. and our report
dated March 8, 2006 expressed an unqualified opinion
thereon.
Greensboro, North Carolina
March 8, 2006
53
Item 9B.
Other Information
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information regarding our directors and nominees for directors
is included in our Proxy Statement for the 2006 Annual Meeting
of Stockholders, and is hereby incorporated by reference.
For information regarding our executive officers, reference is
made to the section entitled Executive Officers in
Part I, Item 1 of this Report.
The Board of Directors has adopted a Code of Ethics for the
Companys principal executive and senior financial
officers. This Code supplements the Companys Code of
Conduct applicable to all employees and directors and is
intended to promote honest and ethical conduct, full and
accurate reporting, and compliance with laws as well as other
matters. Both of these documents can be found on the
Companys website at
http://www.triadguaranty.com on the Corporate Governance page or
will be provided free of charge upon written request.
|
|
Item 11.
|
Executive
Compensation
|
This information is included in our Proxy Statement for the 2006
Annual Meeting of Stockholders, and is hereby incorporated by
reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
This information is included in our Proxy Statement for the 2006
Annual Meeting of Stockholders, and is hereby incorporated by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
This information is included in our Proxy Statement for the 2006
Annual Meeting of Stockholders, and is hereby incorporated by
reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
This information is included in our Proxy Statement for the 2006
Annual Meeting of Stockholders, and is hereby incorporated by
reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) and (2) The response to this portion of
Item 15 is submitted as a separate section of this report.
(a) (3) Listing of Exhibits The
response to this portion of Item 15 is submitted as a
separate section of this report.
(b) Reports on Form 8 K filed or
furnished during the fourth quarter of 2005 and through the date
of this
Form 10-K
filing.
October 27, 2005 Triad Guaranty Inc.
issued a news release announcing its financial results for the
three-month and nine-month periods ending September 30,
2005.
November 2, 2005 Triad Guaranty Inc.
completed a common stock exchange transaction with Collateral
Investment Corp. and the shareholders of Collateral Investment
Corp. (Exhibit 10.30).
54
November 4, 2005 Triad Guaranty Inc.
stated that the common stock exchange transaction with
Collateral Investment Corp. (CIC) and the
shareholders of CIC was completed with unregistered shares being
exchanged.
January 11, 2006 Triad Guaranty Inc.
entered into an employment agreement with Mr. Ron D.
Kessinger (Exhibit 10.33).
January 26, 2006 Triad Guaranty Inc.
issued a news release announcing its financial results for the
three-month and twelve-month periods ending December 31,
2005.
March 2, 2006 Triad Guaranty Inc. entered
into a plan of compensation with Triad directors, the
non-executive chairman of the board of directors, and members of
the committees of the Triad board of directors (Exhibit 10.34).
(c) Exhibits The response to this portion
of Item 15 is submitted as a separate section of this
report.
(d) Financial Statement Schedules The
response to this portion of Item 15 is submitted as a
separate section of this report.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 8th day of March 2006.
Mark K. Tonnesen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the 8th day of
March, 2006 by the following persons on behalf of the Registrant
in the capacities indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ William T.
Ratliff, III
William
T. Ratliff, III
|
|
Chairman of the Board
|
|
|
|
/s/ Mark K. Tonnesen
Mark
K. Tonnesen
|
|
President, Chief Executive
Officer, and Director
|
|
|
|
/s/ Eric B. Dana
Eric
B. Dana
|
|
Senior Vice President, Chief
Financial Officer
|
|
|
|
/s/ Kenneth S. Dwyer
Kenneth
S. Dwyer
|
|
Vice President, and Chief
Accounting Officer
|
|
|
|
/s/ David W.
Whitehurst
David
W. Whitehurst
|
|
Director
|
|
|
|
/s/ Robert T. David
Robert
T. David
|
|
Director
|
|
|
|
/s/ Michael A. F.
Roberts
Michael
A. F. Roberts
|
|
Director
|
|
|
|
/s/ Richard S.
Swanson
Richard
S. Swanson
|
|
Director
|
|
|
|
/s/ Glenn T.
Austin, Jr.
Glenn
T. Austin, Jr.
|
|
Director
|
56
ANNUAL REPORT ON
FORM 10-K
ITEM 8, ITEM 15(a)(1) and (2), (3), (c), and (d)
INDEX TO EXHIBITS
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2005
TRIAD GUARANTY INC.
WINSTON-SALEM, NORTH CAROLINA
57
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 15(a) 1 and 2)
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
Financial Statement
Schedules
|
|
|
|
|
Schedules at and for each of the
three years in the period ended December 31, 2005
|
|
|
|
|
|
|
|
82
|
|
|
|
|
83
|
|
|
|
|
88
|
|
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements
and notes thereto.
58
INDEX TO
EXHIBITS
(Item 15(a) 3)
|
|
|
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Certificate of Incorporation of
the Registrant, as amended (5) (Exhibit 3.1)
|
|
3
|
.2
|
|
By-Laws of the Registrant as
amended March 21, 2003 (10)(Exhibit 3.2(c))
|
|
4
|
.1
|
|
Form of Common Stock
certificate (1) (Exhibit 4(a))
|
|
4
|
.2
|
|
Indenture Between Triad Guaranty
Inc. and Bankers Trust Co. (6) (Exhibit 4.2)
|
|
10
|
.1
|
|
1993 Long-Term Stock Incentive
Plan (1) (3) (Exhibit 10(a))
|
|
10
|
.6
|
|
Registration Agreement among the
Registrant, Collateral Investment Corp. and Collateral Mortgage,
Ltd. (2) (Exhibit 10.6)
|
|
10
|
.16
|
|
Economic Value Added Incentive
Bonus Program (Senior Management) (4) (Exhibit 10.16)
|
|
10
|
.21
|
|
Excess of Loss Reinsurance
Agreement between Triad Guaranty Insurance Corporation, Capital
Mortgage Reinsurance Company, and Federal Insurance Company. (7)
(Exhibit 10.21)
|
|
10
|
.22
|
|
Excess of Loss Reinsurance
Agreement between Triad Guaranty Insurance Corporation and Ace
Capital Mortgage Reinsurance Company. (8) (Exhibit 10.22)
|
|
10
|
.23
|
|
Employment Agreement between the
Registrant and Earl F. Wall (3) (9)
(Exhibit 10.23)
|
|
10
|
.25
|
|
Employment Agreement between the
Registrant and Kenneth N. Lard (3)(10) (Exhibit 10.25)
|
|
10
|
.26
|
|
Employment Agreement between the
Registrant and Kenneth C. Foster (3)(10)
(Exhibit 10.26)
|
|
10
|
.27
|
|
Consulting Agreement between the
Registrant, Triad Guaranty Insurance Corporation, Triad Guaranty
Assurance Company and Collateral Mortgage, Ltd. Providing advice
and counsel regarding the investment strategy and tactics of
Conning Asset Management Company, the Registrants new
investment advisor. (11) (Exhibit 10.27)
|
|
10
|
.28
|
|
Administrative Services Agreement
between the Registrant, Triad Guaranty Insurance Corporation,
Collateral Mortgage, Ltd., Collat, Inc., and New South Federal
Savings Bank. (11) (Exhibit 10.28)
|
|
10
|
.29
|
|
Employment Agreement between the
Registrant and Eric B. Dana. (3)(12)(Exhibit 10.29)
|
|
10
|
.30
|
|
Exchange Agreement by and among
the Registrant, Collateral Investment Corp. and the Shareholders
of Collateral Investment Corp. Listed on the Signature Pages
Hereto.(12)(Exhibit 10.30)
|
|
10
|
.31
|
|
Amendment to Employment Agreement
between the Registrant and Kenneth N. Lard.
(3)(12)(Exhibit 10.31)
|
|
10
|
.32
|
|
Employment Agreement and Related
Document between the Registrant and Mark K. Tonnesen.
(3)(13)(Exhibit 10.32)
|
|
10
|
.33
|
|
Employment Agreement between the
Registrant and Ron D. Kessinger replacing previous
Exhibits 10.11 and 10.20. (3) (14)(Exhibit 10.33)
|
|
10
|
.34
|
|
Summary of plan of compensation
for directors of the Registrant (3)(15)
|
|
21
|
.1
|
|
Subsidiaries of the
Registrant (7) (Exhibit 21.1)
|
|
*23
|
.1
|
|
Consent of Ernst & Young
LLP (Exhibit 23.1)
|
|
*31
|
.1
|
|
Chief Executive Officer
Sarbanes-Oxley Act Section 302 Certification dated
March 8, 2006, for the Triad Guaranty Inc.s Annual
report on
Form 10-K
for the year ended December 31, 2005
|
|
*31
|
.2
|
|
Chief Financial Officer
Sarbanes-Oxley Act Section 302 Certification dated
March 8, 2006, for the Triad Guaranty Inc.s Annual
report on
Form 10-K
for the year ended December 31, 2006
|
|
*32
|
.1
|
|
Chief Executive Officer
Sarbanes-Oxley Act Section 906 Certification dated
March 8, 2006, for the Triad Guaranty Inc.s Annual
report on
Form 10-K
for the year ended December 31, 2005
|
|
*32
|
.2
|
|
Chief Financial Officer
Sarbanes-Oxley Act Section 906 Certification dated
March 8, 2006, for the Triad Guaranty Inc.s Annual
report on
Form 10-K
for the year ended December 31, 2005
|
|
|
|
* |
|
Filed Herewith. |
|
(1) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the Registrants
Registration Statement on
Form S-1
filed October 22, 1993 and amendments thereto. |
59
|
|
|
(2) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 1993
Form 10-K. |
|
(3) |
|
Denotes management contract or compensatory plan of arrangement
required to be filed as an exhibit to this report pursuant to
Item 601 of
Regulation S-K. |
|
(4) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 1996
Form 10-K. |
|
(5) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the June 30, 1997
Form 10-Q. |
|
(6) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 1997
Form 10-K. |
|
(7) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 1999
Form 10-K. |
|
(8) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 2000
Form 10-K. |
|
(9) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the June 30, 2002
Form 10-Q. |
|
(10) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 2002
Form 10-K. |
|
(11) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the 2004
Form 10-K. |
|
(12) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the June 30, 2005
Form 10-Q. |
|
(13) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the September 30, 2005
Form 10-Q. |
|
(14) |
|
Incorporated by reference to the exhibit identified in
parentheses, filed as an exhibit in the January 11, 2006
Form 8-K
Current Report. |
|
(15) |
|
Incorporated by reference to the Form 8-K Current Report
filed March 2, 2006. |
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of Triad Guaranty Inc.
We have audited the accompanying consolidated balance sheets of
Triad Guaranty Inc. as of December 31, 2005 and 2004, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. Our audits
also included the financial statement schedules listed in the
Index at item 15(a). These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Triad Guaranty Inc. at December 31,
2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2005 in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the effectiveness of Triad Guaranty Inc.s internal control
over financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2006 expressed an unqualified
opinion thereon.
Greensboro, North Carolina
March 8, 2006
61
TRIAD
GUARANTY INC.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share
data)
|
|
|
ASSETS
|
Invested assets:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
at fair value:
|
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost:
2005 $518,137; 2004 $435,432)
|
|
$
|
534,064
|
|
|
$
|
454,121
|
|
Equity securities (cost:
2005 $7,001; 2004 $8,626)
|
|
|
8,159
|
|
|
|
10,272
|
|
Short-term investments
|
|
|
4,796
|
|
|
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547,019
|
|
|
|
476,913
|
|
Cash and cash equivalents
|
|
|
8,934
|
|
|
|
10,440
|
|
Real estate acquired in claim
settlement
|
|
|
5,721
|
|
|
|
211
|
|
Accrued investment income
|
|
|
7,237
|
|
|
|
6,229
|
|
Deferred policy acquisition costs
|
|
|
33,684
|
|
|
|
32,453
|
|
Property and equipment, at cost
less accumulated depreciation (2005 $18,628;
2004 $15,172)
|
|
|
7,827
|
|
|
|
8,945
|
|
Prepaid federal income tax
|
|
|
139,465
|
|
|
|
119,132
|
|
Income taxes recoverable
|
|
|
181
|
|
|
|
977
|
|
Reinsurance recoverable
|
|
|
948
|
|
|
|
1,164
|
|
Other assets
|
|
|
16,487
|
|
|
|
15,571
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
767,503
|
|
|
$
|
672,035
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
51,074
|
|
|
$
|
34,042
|
|
Unearned premiums
|
|
|
13,494
|
|
|
|
15,942
|
|
Amounts payable to reinsurer
|
|
|
4,810
|
|
|
|
4,467
|
|
Deferred income taxes
|
|
|
155,189
|
|
|
|
137,925
|
|
Unearned ceding commission
|
|
|
4
|
|
|
|
200
|
|
Long-term debt
|
|
|
34,501
|
|
|
|
34,493
|
|
Accrued interest on debt
|
|
|
1,275
|
|
|
|
1,275
|
|
Accrued expenses and other
liabilities
|
|
|
7,965
|
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
268,312
|
|
|
|
234,692
|
|
Commitments and contingencies
(Notes 5, 7, and 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.01 per share authorized
1,000,000 shares, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.01 per share authorized
32,000,000 shares, issued and outstanding
14,774,153 shares at December 31, 2005, and 14,631,678
at December 31, 2004
|
|
|
148
|
|
|
|
146
|
|
Additional paid-in capital
|
|
|
103,657
|
|
|
|
94,852
|
|
Accumulated other comprehensive
income, net of income tax liability of $5,980 at
December 31, 2005, and $7,117 at December 31, 2004
|
|
|
11,106
|
|
|
|
13,218
|
|
Deferred compensation
|
|
|
(3,161
|
)
|
|
|
(1,501
|
)
|
Retained earnings
|
|
|
387,441
|
|
|
|
330,628
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
499,191
|
|
|
|
437,343
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
767,503
|
|
|
$
|
672,035
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
TRIAD
GUARANTY INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share
data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
207,260
|
|
|
$
|
176,696
|
|
|
$
|
154,046
|
|
Ceded
|
|
|
(40,644
|
)
|
|
|
(35,365
|
)
|
|
|
(27,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
166,616
|
|
|
|
141,331
|
|
|
|
126,736
|
|
Change in unearned premiums
|
|
|
2,381
|
|
|
|
(339
|
)
|
|
|
(7,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
168,997
|
|
|
|
140,992
|
|
|
|
119,732
|
|
Net investment income
|
|
|
22,998
|
|
|
|
19,754
|
|
|
|
17,082
|
|
Net realized investment gains
|
|
|
36
|
|
|
|
504
|
|
|
|
3,029
|
|
Other income
|
|
|
15
|
|
|
|
16
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,046
|
|
|
|
161,266
|
|
|
|
139,867
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses
|
|
|
66,855
|
|
|
|
35,864
|
|
|
|
23,833
|
|
Interest expense on debt
|
|
|
2,773
|
|
|
|
2,772
|
|
|
|
2,772
|
|
Amortization of deferred policy
acquisition costs
|
|
|
14,902
|
|
|
|
14,256
|
|
|
|
18,112
|
|
Other operating expenses (net of
acquisition costs deferred)
|
|
|
29,610
|
|
|
|
26,483
|
|
|
|
22,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,140
|
|
|
|
79,375
|
|
|
|
67,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
77,906
|
|
|
|
81,891
|
|
|
|
72,374
|
|
Income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,805
|
|
|
|
2,295
|
|
|
|
716
|
|
Deferred
|
|
|
18,288
|
|
|
|
21,179
|
|
|
|
20,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,093
|
|
|
|
23,474
|
|
|
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common and common
equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.87
|
|
|
$
|
4.04
|
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.84
|
|
|
$
|
3.98
|
|
|
$
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings
per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,691,478
|
|
|
|
14,458,453
|
|
|
|
14,322,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,808,387
|
|
|
|
14,681,228
|
|
|
|
14,509,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
63
TRIAD
GUARANTY INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Retained
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(In thousands, except share
data)
|
|
|
Balance at December 31, 2002
|
|
$
|
142
|
|
|
$
|
80,169
|
|
|
$
|
8,634
|
|
|
$
|
(658
|
)
|
|
$
|
221,120
|
|
|
$
|
309,407
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,091
|
|
|
|
51,091
|
|
Other comprehensive
income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,647
|
|
Issuance of common stock under
stock incentive plan
|
|
|
2
|
|
|
|
4,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,053
|
|
Tax effect of exercise of
non-qualified stock options
|
|
|
|
|
|
|
2,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,133
|
|
Net issuance of restricted stock
under stock incentive plan
|
|
|
|
|
|
|
1,160
|
|
|
|
|
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690
|
|
|
|
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
144
|
|
|
|
87,513
|
|
|
|
11,190
|
|
|
|
(1,128
|
)
|
|
|
272,211
|
|
|
|
369,930
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,417
|
|
|
|
58,417
|
|
Other comprehensive
income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain
|
|
|
|
|
|
|
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,445
|
|
Issuance of common stock under
stock incentive plan
|
|
|
2
|
|
|
|
3,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,741
|
|
Tax effect of exercise of
non-qualified stock options
|
|
|
|
|
|
|
1,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,995
|
|
Net issuance of restricted stock
under stock incentive plan
|
|
|
|
|
|
|
1,605
|
|
|
|
|
|
|
|
(1,605
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,232
|
|
|
|
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
146
|
|
|
|
94,852
|
|
|
|
13,218
|
|
|
|
(1,501
|
)
|
|
|
330,628
|
|
|
|
437,343
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,813
|
|
|
|
56,813
|
|
Other comprehensive
income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain
|
|
|
|
|
|
|
|
|
|
|
(2,112
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,701
|
|
Issuance of common stock under
stock incentive plan
|
|
|
2
|
|
|
|
3,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,269
|
|
Tax effect of exercise of
non-qualified stock options and vesting of restricted stock
|
|
|
|
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,090
|
|
Net issuance of restricted stock
under stock incentive plan
|
|
|
|
|
|
|
3,448
|
|
|
|
|
|
|
|
(3,448
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,788
|
|
|
|
|
|
|
|
1,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
148
|
|
|
$
|
103,657
|
|
|
$
|
11,106
|
|
|
$
|
(3,161
|
)
|
|
$
|
387,441
|
|
|
$
|
499,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
64
TRIAD
GUARANTY INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses
and unearned premium reserves
|
|
|
14,584
|
|
|
|
7,169
|
|
|
|
12,916
|
|
Accrued expenses and other
liabilities
|
|
|
1,617
|
|
|
|
(1,348
|
)
|
|
|
215
|
|
Current taxes payable
|
|
|
|
|
|
|
(6
|
)
|
|
|
(592
|
)
|
Income taxes recoverable
|
|
|
796
|
|
|
|
(977
|
)
|
|
|
|
|
Amounts due to/from reinsurer
|
|
|
559
|
|
|
|
941
|
|
|
|
(743
|
)
|
Accrued investment income
|
|
|
(1,008
|
)
|
|
|
(1,654
|
)
|
|
|
(1,487
|
)
|
Policy acquisition costs deferred
|
|
|
(16,133
|
)
|
|
|
(17,346
|
)
|
|
|
(18,478
|
)
|
Amortization of deferred policy
acquisition costs
|
|
|
14,902
|
|
|
|
14,256
|
|
|
|
18,112
|
|
Net realized investment gains
|
|
|
(36
|
)
|
|
|
(504
|
)
|
|
|
(3,029
|
)
|
Provision for depreciation
|
|
|
3,456
|
|
|
|
3,319
|
|
|
|
2,941
|
|
Accretion of discount on
investments
|
|
|
(118
|
)
|
|
|
(836
|
)
|
|
|
(3,212
|
)
|
Deferred income taxes
|
|
|
18,288
|
|
|
|
21,179
|
|
|
|
20,567
|
|
Prepaid federal income taxes
|
|
|
(20,333
|
)
|
|
|
(21,008
|
)
|
|
|
(20,338
|
)
|
Unearned ceding commission
|
|
|
(196
|
)
|
|
|
(469
|
)
|
|
|
(717
|
)
|
Real estate acquired in claim
settlement, net of write-downs
|
|
|
(5,510
|
)
|
|
|
(65
|
)
|
|
|
1,415
|
|
Other assets
|
|
|
(916
|
)
|
|
|
3,050
|
|
|
|
(1,450
|
)
|
Other operating activities
|
|
|
4,082
|
|
|
|
4,800
|
|
|
|
2,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
70,847
|
|
|
|
68,918
|
|
|
|
59,314
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases fixed
maturities
|
|
|
(130,475
|
)
|
|
|
(153,262
|
)
|
|
|
(186,509
|
)
|
Sales fixed
maturities
|
|
|
35,900
|
|
|
|
57,864
|
|
|
|
101,472
|
|
Maturities fixed
maturities
|
|
|
11,715
|
|
|
|
20,097
|
|
|
|
16,436
|
|
Purchases equities
|
|
|
|
|
|
|
(809
|
)
|
|
|
(2,044
|
)
|
Sales equities
|
|
|
1,853
|
|
|
|
2,674
|
|
|
|
1,525
|
|
Net change in short-term
investments
|
|
|
7,724
|
|
|
|
(817
|
)
|
|
|
5,555
|
|
Purchases of property and equipment
|
|
|
(2,339
|
)
|
|
|
(2,895
|
)
|
|
|
(3,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(75,622
|
)
|
|
|
(77,148
|
)
|
|
|
(66,716
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
3,269
|
|
|
|
3,741
|
|
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,269
|
|
|
|
3,741
|
|
|
|
4,053
|
|
Net change in cash and cash
equivalents
|
|
|
(1,506
|
)
|
|
|
(4,489
|
)
|
|
|
(3,349
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
10,440
|
|
|
|
14,929
|
|
|
|
18,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
8,934
|
|
|
$
|
10,440
|
|
|
$
|
14,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes and United States
Mortgage Guaranty Tax and Loss Bonds
|
|
$
|
24,733
|
|
|
$
|
23,692
|
|
|
$
|
21,588
|
|
Interest
|
|
$
|
2,765
|
|
|
$
|
2,765
|
|
|
$
|
2,765
|
|
See accompanying notes.
65
TRIAD
GUARANTY INC.
December 31,
2005
Nature
of Business
Triad Guaranty Inc. (the Company) is a holding
company which, through its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (Triad), provides
private mortgage insurance coverage in the United States to
mortgage lenders or investors to protect the lender or investor
against loss from defaults on low down payment residential
mortgage loans.
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with United States generally accepted
accounting principles, which vary in some respects from
statutory accounting practices which are prescribed or permitted
by the various state insurance departments.
Consolidation
The consolidated financial statements include the amounts of
Triad Guaranty Inc. and its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (Triad) and
Triads wholly-owned subsidiaries, Triad Guaranty Assurance
Corporation (TGAC) and Triad Re Insurance
Corporation (Triad Re). All significant intercompany
accounts and transactions have been eliminated.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with United States generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Cash
and Cash Equivalents
The Company considers cash equivalents to be short-term, highly
liquid investments with original maturities of three months or
less that are used to fund operational cash flow needs.
Investments
All fixed maturity and equity securities are classified as
available-for-sale
and are carried at fair value. Unrealized gains and losses on
available-for-sale
securities, net of tax, are reported as a separate component of
accumulated other comprehensive income.
Fair value generally represents quoted market value prices for
securities traded in the public market or prices analytically
determined using bid or closing prices for securities not traded
in the public marketplace. Realized investment gains or losses
are determined on a specific identification basis. The Company
evaluates its investments regularly to determine whether there
are declines in value that are
other-than-temporary.
When the Company determines that a security has experienced an
other-than-temporary
impairment, the impairment loss is recognized as a realized
investment loss. Short-term investments are defined as
short-term, highly liquid investments both readily convertible
to known amounts of cash and having maturities of twelve months
or less upon acquisition by the Company and are not used to fund
operational cash flows of the Company.
Real
Estate Acquired in Claim Settlement
Real estate is acquired in settlement of claims as part of the
Companys effort to mitigate losses. The real estate is
carried at lower of cost or net realizable value. Gains or
losses from the holding or disposition of real estate
66
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquired in claim settlement are recorded in net losses and loss
adjustment expenses. At December 31, 2005 and 2004, the
Company held 48 and two properties, respectively, that it
acquired in settlement of claims.
Deferred
Policy Acquisition Costs
The costs of acquiring new business, principally sales
compensation and certain policy underwriting and issue costs,
which vary with and are primarily related to the production of
new business, are deferred. Amortization of such policy
acquisition costs is charged to expense in proportion to premium
revenue recognized over the estimated policy life.
The Company reviews the persistency of policies in force and
makes appropriate adjustments to the amortization of deferred
policy acquisition costs to reflect policy cancellations. In
addition, the recoverability of deferred costs is tested by
calculating an estimated future gross profit on the existing
book of business and comparing that to the unamortized deferred
policy acquisition asset balance. If this comparison indicates a
premium deficiency, any unamortized acquisition cost to the
extent of that deficiency is charged to expense.
Property
and Equipment
Property and equipment is recorded at cost and is depreciated
principally on a straight-line basis over the estimated useful
lives, generally three to five years, of the depreciable assets.
Property and equipment primarily consists of computer hardware,
software, furniture, and equipment.
Loss
and Loss Adjustment Expense Reserves
Reserves are provided 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.
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 for salvage
recoverable 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 age, policy year, geography, and chronic late
payment characteristics. The estimates are continually reviewed
and, as adjustments to these liabilities become necessary, such
adjustments are reflected in current operations.
Reinsurance
Certain premiums and losses are assumed from and ceded to other
insurance companies under various reinsurance agreements.
Reinsurance premiums, loss reimbursement, and reserves related
to reinsurance business are accounted for on a basis consistent
with that used in accounting for the original policies issued
and the terms of the reinsurance contracts. The Company may
receive a ceding commission in connection with ceded
reinsurance. If so, the ceding commission is earned on a monthly
pro rata basis in the same manner as the premium and is recorded
as a reduction of other operating expenses.
Income
Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and deferred tax liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on
67
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Federal tax law permits mortgage guaranty insurance companies to
deduct from taxable income, subject to certain limitations, the
amounts added to contingency loss reserves. Generally, the
amounts so deducted must be included in taxable income in the
tenth subsequent year. This deduction is allowed only to the
extent that non-interest bearing United States Mortgage Guaranty
Tax and Loss Bonds are purchased and held in an amount equal to
the tax benefit attributable to such deduction. The Company
accounts for these purchases as a prepayment of federal income
taxes. Current income tax expense is primarily associated with
the addition to taxable income in the current year of the
contingency reserve deduction from ten years prior.
Income
Recognition
The Company writes policies that are guaranteed renewable
contracts at the policyholders option on single premium,
annual premium, and monthly premium bases. The Company does not
have the option to re-underwrite these contracts. Premiums
written on a monthly basis are earned in the month coverage is
provided. Premiums written on annual policies are earned on a
monthly pro rata basis. Single premium policies covering more
than one year are amortized over the estimated policy life in
accordance with the expiration of risk.
Cancellation of a policy generally results in the unearned
portion of the premium paid being refunded to the policyholder.
However, many of the annual paying policies are paid by the
lender and are non-refundable. The cancellation of one of these
policies would impact earned premium through the release of the
unearned premium reserve at the time of the cancellation. The
amounts earned through the cancellation of annual paying
policies are not significant to earned premium.
Significant
Customers
During 2005, one customer accounted for approximately 20% and
another customer accounted for approximately 14% of total
revenue. In 2004, these same two customers accounted for
approximately 16% and 14% of total revenue. In 2003, these same
two customers accounted for approximately 14% each of the
Companys revenue.
Stock
Options
The Company grants stock options to employees and directors for
a fixed number of shares with an exercise price equal to or
greater than the fair value of the shares at the date of grant.
Through December 31, 2005, the Company has accounted for
stock option grants using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
accordingly, recognized no compensation expense for the stock
option grants.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options
vesting period. The following table represents the net income
and earnings per share on pro forma basis had
68
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense for stock options been recognized using the
fair value method on the grant date (in thousands, except for
earnings per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income as
reported
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
Net income pro
forma
|
|
$
|
56,155
|
|
|
$
|
57,915
|
|
|
$
|
50,434
|
|
Earnings per
share as reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.87
|
|
|
$
|
4.04
|
|
|
$
|
3.57
|
|
Diluted
|
|
$
|
3.84
|
|
|
$
|
3.98
|
|
|
$
|
3.52
|
|
Earnings per
share pro forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.82
|
|
|
$
|
4.01
|
|
|
$
|
3.52
|
|
Diluted
|
|
$
|
3.79
|
|
|
$
|
3.94
|
|
|
$
|
3.48
|
|
Earnings
Per Share
Basic and diluted earnings per share are based on the
weighted-average daily number of shares outstanding. For diluted
earnings per share, the denominator includes the dilutive effect
on the weighted-average shares outstanding of employee stock
options and nonvested restricted stock. There are no other
reconciling items between the denominator used in basic earnings
per share and diluted earnings per share. There are no
reconciling items between the numerator used in basic earnings
per share and diluted earnings per share. At December 31,
2005, 2004 and 2003 options to purchase approximately 107,000,
4,000 and 53,000 shares, respectively, of the
Companys stock were excluded from the calculation of
earnings per share because they were antidilutive.
Comprehensive
Income
The only element of other comprehensive income applicable to the
Company is the change in unrealized gains and losses on
securities classified as
available-for-sale,
which is displayed in the following table, along with related
tax effects (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Unrealized (losses) gains arising
during the period, before taxes
|
|
$
|
(3,213
|
)
|
|
$
|
3,624
|
|
|
$
|
6,964
|
|
Income tax benefit (expense)
|
|
|
1,124
|
|
|
|
(1,268
|
)
|
|
|
(2,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains arising
during the period, net of taxes
|
|
|
(2,089
|
)
|
|
|
2,356
|
|
|
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains realized in net income
|
|
|
36
|
|
|
|
504
|
|
|
|
3,029
|
|
Income tax expense
|
|
|
(13
|
)
|
|
|
(176
|
)
|
|
|
(1,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gains realized in net income
|
|
|
23
|
|
|
|
328
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
$
|
(2,112
|
)
|
|
$
|
2,028
|
|
|
$
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R requires the compensation cost relating to
stock-based payment transactions to be recognized in financial
statements. That cost will be measured based on the fair value
of the equity instruments issued on the grant date of such
instruments, and will be recognized over the period during which
an individual is required to provide service in exchange for the
award (typically the vesting period). SFAS 123R covers a
wide range of stock-based compensation arrangements including
stock options, restricted stock plans, performance-based awards,
stock appreciation rights, and employee stock purchase
69
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plans. SFAS 123R replaces SFAS 123 and supersedes APB
Opinion 25. The Company will adopt SFAS 123R effective
January 1, 2006.
SFAS 123R permits public companies to adopt its requirement
using one of two methods: 1) the modified
prospective method in which compensation cost is
recognized beginning with the effective date (a) based on
the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the
requirements of SFAS 123R for all awards granted to
employees prior to the effective date of SFAS 123R that
remain unvested on the effective date; or 2) the
modified retrospective method which includes the
requirements of the modified prospective method described above,
and also requires entities to restate based on the amounts
previously recognized under SFAS 123R for purposes of pro
forma disclosures either (a) all prior periods presented or
(b) prior interim periods of the year of adoption. The
Company plans to adopt SFAS 123R using the modified
prospective method.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using APB Opinion
25s intrinsic value method and, as such, recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123Rs fair value method will impact
the Companys results of operations, although it will have
no impact on its overall financial position. The impact of
adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted SFAS 123R
in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share in the
Stock Options section of this note. SFAS 123R also requires
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. The Company cannot estimate what those amounts will be
in the future because they depend on, among other things, when
employees exercise stock options, and whether the Company will
be in a taxable position.
Reclassifications
During 2005, the Company reclassified overnight investment sweep
bank accounts from short-term investments to cash and cash
equivalents. Accordingly, $3.6 million, $14.0 million
and $18.0 million as of December 31, 2004, 2003 and
2002, respectively, was reclassified from short-term investments
to cash and cash equivalents to conform to the current year
presentation, with conforming reclassifications in the statement
of cash flows.
70
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost or amortized cost and the fair value of investments are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
At December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
12,348
|
|
|
$
|
16
|
|
|
$
|
(240
|
)
|
|
$
|
12,124
|
|
State and municipal
|
|
|
486,014
|
|
|
|
14,993
|
|
|
|
(980
|
)
|
|
|
500,027
|
|
Corporate
|
|
|
19,719
|
|
|
|
2,211
|
|
|
|
(75
|
)
|
|
|
21,855
|
|
Mortgage-backed
|
|
|
56
|
|
|
|
2
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
518,137
|
|
|
|
17,222
|
|
|
|
(1,295
|
)
|
|
|
534,064
|
|
Equity securities
|
|
|
7,001
|
|
|
|
1,284
|
|
|
|
(126
|
)
|
|
|
8,159
|
|
Short-term investments
|
|
|
4,796
|
|
|
|
|
|
|
|
|
|
|
|
4,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
529,934
|
|
|
$
|
18,506
|
|
|
$
|
(1,421
|
)
|
|
$
|
547,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
12,873
|
|
|
$
|
67
|
|
|
$
|
(212
|
)
|
|
$
|
12,728
|
|
State and municipal
|
|
|
399,329
|
|
|
|
16,157
|
|
|
|
(236
|
)
|
|
|
415,250
|
|
Corporate
|
|
|
23,157
|
|
|
|
2,906
|
|
|
|
|
|
|
|
26,063
|
|
Mortgage-backed
|
|
|
73
|
|
|
|
7
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
435,432
|
|
|
|
19,137
|
|
|
|
(448
|
)
|
|
|
454,121
|
|
Equity securities
|
|
|
8,626
|
|
|
|
1,779
|
|
|
|
(133
|
)
|
|
|
10,272
|
|
Short-term investments
|
|
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
456,578
|
|
|
$
|
20,916
|
|
|
$
|
(581
|
)
|
|
$
|
476,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005 and 2004, the Company had 81 and 32
securities with gross unrealized losses, respectively. The
following tables show the gross unrealized losses and fair
value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss
position at December 31, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
8,376
|
|
|
$
|
(123
|
)
|
|
$
|
2,883
|
|
|
$
|
(117
|
)
|
|
$
|
11,259
|
|
|
$
|
(240
|
)
|
State and municipal
|
|
|
57,969
|
|
|
|
(718
|
)
|
|
|
9,572
|
|
|
|
(262
|
)
|
|
|
67,541
|
|
|
|
(980
|
)
|
Corporate
|
|
|
731
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
731
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67,076
|
|
|
|
(916
|
)
|
|
|
12,455
|
|
|
|
(379
|
)
|
|
|
79,531
|
|
|
|
(1,295
|
)
|
Equity securities
|
|
|
1,105
|
|
|
|
(19
|
)
|
|
|
1,347
|
|
|
|
(107
|
)
|
|
|
2,452
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
68,181
|
|
|
$
|
(935
|
)
|
|
$
|
13,802
|
|
|
$
|
(486
|
)
|
|
$
|
81,983
|
|
|
$
|
(1,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
970
|
|
|
$
|
(31
|
)
|
|
$
|
2,815
|
|
|
$
|
(181
|
)
|
|
$
|
3,785
|
|
|
$
|
(212
|
)
|
State and municipal
|
|
|
6,539
|
|
|
|
(42
|
)
|
|
|
7,858
|
|
|
|
(194
|
)
|
|
|
14,397
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
7,509
|
|
|
|
(73
|
)
|
|
|
10,673
|
|
|
|
(375
|
)
|
|
|
18,182
|
|
|
|
(448
|
)
|
Equity securities
|
|
|
1,319
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
1,319
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
8,828
|
|
|
$
|
(206
|
)
|
|
$
|
10,673
|
|
|
$
|
(375
|
)
|
|
$
|
19,501
|
|
|
$
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews its investments quarterly to identify and
evaluate whether any investments have indications of possible
impairment and whether any impairments are other than temporary.
Factors considered in determining whether a loss is other than
temporary include the length of time and extent to which fair
value has been less than the cost basis, the financial condition
and near-term prospects of the issuer, and the Companys
intent and ability to hold the investment for a period of time
sufficient to allow for recovery in market value. The Company
believes at this point in time that the positive evidence far
outweighs the negative evidence and all of the unrealized losses
shown above are temporary. The majority of the gross unrealized
losses at December 31, 2005 related to fixed maturities
that have been in a continuous loss position less than
12 months and for 12 months or more are the result of
changes in interest rates. None of the fixed maturity securities
with unrealized losses have ever missed or been delinquent on a
scheduled principal or interest payment. The unrealized losses
on equity securities are related to several different securities
and are individually not material. During 2005 and 2004, the
Company wrote down securities by $170,000 and $480,000,
respectively, to reflect
other-than-temporary
declines in fair value.
72
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and estimated fair value of investments in
fixed maturity securities, at December 31, 2005, are
summarized by stated maturity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
13,294
|
|
|
$
|
13,616
|
|
After one year through five years
|
|
|
106,091
|
|
|
|
110,695
|
|
After five years through ten years
|
|
|
329,161
|
|
|
|
337,159
|
|
After ten years
|
|
|
69,535
|
|
|
|
72,536
|
|
Mortgage-backed securities
|
|
|
56
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
518,137
|
|
|
$
|
534,064
|
|
|
|
|
|
|
|
|
|
|
The details of net realized investment gains including
other-than-temporary
impairments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
25
|
|
|
$
|
626
|
|
|
$
|
4,579
|
|
Gross realized losses
|
|
|
(305
|
)
|
|
|
(146
|
)
|
|
|
(885
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
396
|
|
|
|
416
|
|
|
|
101
|
|
Gross realized losses
|
|
|
(80
|
)
|
|
|
(435
|
)
|
|
|
(742
|
)
|
Covered call options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
|
|
|
43
|
|
|
|
4
|
|
Gross realized losses
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
$
|
36
|
|
|
$
|
504
|
|
|
$
|
3,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on fixed maturity securities (decreased)
increased by ($2,762,000), $3,477,000, and $1,479,000 in 2005,
2004, and 2003, respectively; the corresponding amounts for
equity securities were ($488,000), ($356,000), and $2,460,000.
Major categories of the Companys net investment income are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
22,956
|
|
|
$
|
19,829
|
|
|
$
|
16,929
|
|
Preferred stocks
|
|
|
334
|
|
|
|
385
|
|
|
|
368
|
|
Common stocks
|
|
|
173
|
|
|
|
176
|
|
|
|
197
|
|
Cash, cash equivalents and
short-term investments
|
|
|
422
|
|
|
|
135
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,885
|
|
|
|
20,525
|
|
|
|
17,757
|
|
Expenses
|
|
|
887
|
|
|
|
771
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
22,998
|
|
|
$
|
19,754
|
|
|
$
|
17,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005 and 2004, investments with an
amortized cost of $6,432,000 and $6,463,000, respectively, were
on deposit with various state insurance departments to satisfy
regulatory requirements.
|
|
3.
|
Deferred
Policy Acquisition Costs
|
An analysis of deferred policy acquisition costs is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance at beginning of year
|
|
$
|
32,453
|
|
|
$
|
29,363
|
|
|
$
|
28,997
|
|
Acquisition costs deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales compensation
|
|
|
6,296
|
|
|
|
7,340
|
|
|
|
7,038
|
|
Underwriting and issue expenses
|
|
|
9,837
|
|
|
|
10,006
|
|
|
|
11,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,133
|
|
|
|
17,346
|
|
|
|
18,478
|
|
Amortization of acquisition
expenses
|
|
|
14,902
|
|
|
|
14,256
|
|
|
|
18,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
1,231
|
|
|
|
3,090
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
33,684
|
|
|
$
|
32,453
|
|
|
$
|
29,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Reserve
for Losses and Loss Adjustment Expenses
|
Activity for the reserve for losses and loss adjustment expenses
for 2005, 2004, and 2003 is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Reserve for losses and loss
adjustment expenses at January 1, net of reinsurance
recoverables
|
|
$
|
34,040
|
|
|
$
|
27,183
|
|
|
$
|
21,355
|
|
Incurred losses and loss
adjustment expenses net of reinsurance recoveries (principally
in respect of default notices received in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
43,215
|
|
|
|
25,942
|
|
|
|
24,376
|
|
Deficiency (redundancy) on prior
years
|
|
|
23,640
|
|
|
|
9,922
|
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss
adjustment expenses
|
|
|
66,855
|
|
|
|
35,864
|
|
|
|
23,833
|
|
Loss and loss adjustment expense
payments net of reinsurance recoveries (principally in respect
of default notices received in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
3,734
|
|
|
|
2,033
|
|
|
|
3,652
|
|
Prior years
|
|
|
46,088
|
|
|
|
26,974
|
|
|
|
14,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment
expense payments
|
|
|
49,822
|
|
|
|
29,007
|
|
|
|
18,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
adjustment expenses at December 31, net of reinsurance
recoverables of $1, $2, and $3 in 2005, 2004, and 2003,
respectively
|
|
$
|
51,073
|
|
|
$
|
34,040
|
|
|
$
|
27,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing reconciliation indicates loss and loss adjustment
reserve deficiencies that emerged in 2005 and 2004 related to
unfavorable loss development in claims incurred for prior years.
During 2005, paid losses on loans that were in default at
December 31, 2004 developed at a higher severity than
anticipated when reserves were established at the end of 2004,
despite the Companys loss mitigation efforts. Also, a
greater proportion of defaults existing at December 31,
2004 developed into pending claims and ultimately into paid
claims than originally estimated. The increase in pending claims
resulted in a claims backlog that was processed throughout 2005,
further increasing the overall frequency above the level
anticipated. As a result of hiring additional claims specialists
and
74
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
implementing system improvements in 2005, the Companys
loss mitigation capabilities were improved and the claims
backlog was substantially reduced. Any remaining backlog was
included in December 31, 2005 reserves. Additionally,
losses related to certain bulk transactions from the 2001 and
2002 book years developed adversely which contributed to the
higher 2005 frequency. During 2004, almost the entire deficiency
resulted from an increase in frequency from the estimates
utilized at the end of 2003. A small redundancy in reserves is
shown for 2003, which resulted principally from settling
case-base reserves on default notices occurring in prior years
for amounts less than expected.
The Company leases certain office facilities, autos, and
equipment under operating leases. Rental expense for all leases
was $2,058,000, $2,061,000, and $1,950,000, for 2005, 2004, and
2003, respectively. Future minimum payments under noncancellable
operating leases at December 31, 2005, are as follows (in
thousands):
|
|
|
|
|
2006
|
|
$
|
1,689
|
|
2007
|
|
|
1,404
|
|
2008
|
|
|
1,259
|
|
2009
|
|
|
1,150
|
|
2010
|
|
|
1,146
|
|
Thereafter
|
|
|
2,268
|
|
|
|
|
|
|
|
|
$
|
8,916
|
|
|
|
|
|
|
The Company leases facilities for its corporate headquarters
under an operating lease that is to expire in 2012. The Company
has options to renew this lease for up to ten additional years
at the fair market rental rate at the time of the renewal.
Income tax expense differed from the amounts computed by
applying the Federal statutory income tax rate to income before
taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income tax computed at statutory
rate
|
|
$
|
27,267
|
|
|
$
|
28,662
|
|
|
$
|
25,331
|
|
(Decrease) increase in taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(7,199
|
)
|
|
|
(6,048
|
)
|
|
|
(4,730
|
)
|
Other
|
|
|
1,025
|
|
|
|
860
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
21,093
|
|
|
$
|
23,474
|
|
|
$
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2005 and 2004, are presented
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax
liabilities
|
|
|
|
|
|
|
|
|
Contingency loss reserve deduction
|
|
$
|
137,512
|
|
|
$
|
118,903
|
|
Deferred policy acquisition costs
|
|
|
11,789
|
|
|
|
11,359
|
|
Unrealized investment gain
|
|
|
5,980
|
|
|
|
7,117
|
|
Other
|
|
|
2,260
|
|
|
|
3,144
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
157,541
|
|
|
|
140,523
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
|
1,026
|
|
|
|
1,216
|
|
Losses and loss adjustment expenses
|
|
|
1,017
|
|
|
|
820
|
|
Other
|
|
|
309
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,352
|
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
155,189
|
|
|
$
|
137,925
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, Triad had purchased $2,100,000 of Tax
and Loss Bonds in excess of its current obligations.
|
|
7.
|
Insurance
in Force, Dividend Restriction, and Statutory Results
|
At December 31, 2005, approximately 55% of Triads
direct risk in force was concentrated in 10 states, with
approximately 10% in California, 9% in Florida, 8% in Texas, 5%
in Illinois, 4% each in Georgia, North Carolina, Arizona, New
York, and New Jersey, and 3% in Colorado. While Triad continues
to diversify its risk in force geographically, a prolonged
economic deterioration in its high concentration areas could
result in higher incurred losses and loss adjustment expenses.
Insurance regulations limit the writing of mortgage guaranty
insurance to an aggregate amount of insured risk no greater than
twenty-five times the total of statutory capital and surplus and
the statutory contingency reserve. The amount of net risk for
insurance in force at December 31, 2005 and 2004 as
presented below, was computed by applying the various percentage
settlement options to the insurance in force amounts, adjusted
by risk ceded under reinsurance agreements, any applicable
aggregate stop-loss limits and deductibles. Net risk as
presented in our 2004
Form 10-K
did not adjust for deductibles, and has been adjusted to conform
to the current year calculation. Triads ratio is as
follows (in thousands, except ratio):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net risk
|
|
$
|
7,312,697
|
|
|
$
|
6,961,565
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
131,582
|
|
|
$
|
135,662
|
|
Contingency reserve
|
|
|
447,826
|
|
|
|
369,484
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
579,408
|
|
|
$
|
505,146
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital
ratio
|
|
|
12.6 to 1
|
|
|
|
13.8 to 1
|
|
|
|
|
|
|
|
|
|
|
Triad and its wholly-owned subsidiaries, TGAC and Triad Re, are
each required under their respective domiciliary states
insurance code to maintain a minimum level of statutory capital
and surplus. Triad, an Illinois domiciled insurer, is required
under the Illinois Insurance Code (the Code) to
maintain minimum capital and surplus of $5,000,000.
76
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Code permits dividends to be paid only out of earned surplus
and also requires prior approval of extraordinary dividends. An
extraordinary dividend is any dividend or distribution of cash
or other property, the fair market value of which, together with
that of other dividends or distributions made within a period of
twelve consecutive months, exceeds the greater of (a) ten
percent of statutory surplus as regards policyholders or
(b) statutory net income for the calendar year preceding
the date of the dividend. Consolidated net income as determined
in accordance with statutory accounting practices was
$77,083,000, $78,202,000, and $69,848,000, for the years ended
December 31, 2005, 2004, and 2003, respectively. At
December 31, 2005, the amount of the Companys equity
that can be paid out in dividends to the stockholders is
$47,866,000, which is the earned surplus of Triad on a statutory
basis.
|
|
8.
|
Related
Party Transactions
|
The Company pays unconsolidated affiliated companies for
management, investment, and other services. The total expense
incurred for such items was $307,000, $869,000 and $711,000 in
2005, 2004, and 2003, respectively. The decline in the expense
incurred in 2005 from 2004 represents the outsourcing of a
significant amount of the investment services to a third party.
Most of the Companys employees are eligible to participate
in its 401(k) Profit Sharing Plan. Under the plan, employees
elect to defer a portion of their wages, with the Company
matching deferrals at the rate of 50% of the first 8% of the
employees salary deferred. The Companys expense
associated with the plan totaled $476,000, $463,000, and
$462,000 for the years ended December 31, 2005, 2004, and
2003, respectively.
Certain premiums and losses are assumed from and ceded to other
insurance companies under various reinsurance agreements. The
ceding agreements principally provide Triad with increased
capacity to write business and achieve a more favorable
geographic dispersion of risk.
The effects of reinsurance for the years ended December 31,
2005, 2004 and 2003 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
209,708
|
|
|
$
|
176,383
|
|
|
$
|
146,956
|
|
Assumed
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Ceded
|
|
|
(40,712
|
)
|
|
|
(35,392
|
)
|
|
|
(27,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
168,997
|
|
|
$
|
140,992
|
|
|
$
|
119,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
66,852
|
|
|
$
|
35,876
|
|
|
$
|
23,836
|
|
Assumed
|
|
|
4
|
|
|
|
(14
|
)
|
|
|
(2
|
)
|
Ceded
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses
|
|
$
|
66,855
|
|
|
$
|
35,864
|
|
|
$
|
23,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company cedes business to captive reinsurance subsidiaries
or affiliates of certain mortgage lenders (captives)
primarily under excess of loss reinsurance agreements.
Reinsurance recoverables on loss reserves and unearned premiums
ceded to these captives are backed by trust funds or letters of
credit.
77
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company maintains $125,000,000 of excess of loss reinsurance
through non-affiliated reinsurers. The excess of loss
reinsurance agreements are designed to protect the Company in
the event of a catastrophic level of losses.
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.
Triad evaluates the financial condition of its reinsurers and
monitors credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers to
minimize its exposure to significant losses from reinsurer
insolvency.
|
|
11.
|
Long-Term
Stock Incentive Plan
|
Under the Companys 1993 Long-Term Stock Incentive Plan
(the Plan), certain directors, officers, and key
employees are eligible to be granted various stock-based awards.
The number of options or restricted shares of common stock
authorized to be granted or issued under the Plan is
2,600,000 shares. The options issued under the Plan in
2005, 2004, and 2003 generally vest over three years. Certain of
the options will immediately vest in the event of a change in
control of the Company. Options granted under the Plan terminate
no later than 10 years following the date of grant.
Information concerning the stock options under the plan is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Option
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
|
|
|
Exercise Price
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
950,305
|
|
|
$
|
4.58 - 49.08
|
|
|
$
|
25.94
|
|
Granted
|
|
|
73,500
|
|
|
|
33.18 - 47.01
|
|
|
|
34.57
|
|
Exercised
|
|
|
244,156
|
|
|
|
5.33 - 39.49
|
|
|
|
16.60
|
|
Canceled
|
|
|
20,939
|
|
|
|
28.00 - 39.49
|
|
|
|
33.03
|
|
Outstanding, end of year
|
|
|
758,710
|
|
|
|
4.58 - 49.08
|
|
|
|
29.58
|
|
Exercisable, end of year
|
|
|
657,748
|
|
|
|
4.58 - 49.08
|
|
|
|
28.44
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
758,710
|
|
|
|
4.58 - 49.08
|
|
|
|
29.58
|
|
Granted
|
|
|
29,750
|
|
|
|
53.61 - 73.74
|
|
|
|
55.67
|
|
Exercised
|
|
|
163,342
|
|
|
|
4.58 - 49.08
|
|
|
|
22.90
|
|
Canceled
|
|
|
6,336
|
|
|
|
29.65 - 53.61
|
|
|
|
41.24
|
|
Outstanding, end of year
|
|
|
618,782
|
|
|
|
5.96 - 73.74
|
|
|
|
32.48
|
|
Exercisable, end of year
|
|
|
558,074
|
|
|
|
5.96 - 53.61
|
|
|
|
31.20
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
618,782
|
|
|
|
5.96 - 73.74
|
|
|
|
32.48
|
|
Granted
|
|
|
128,065
|
|
|
|
41.12 - 54.11
|
|
|
|
42.29
|
|
Exercised
|
|
|
150,882
|
|
|
|
5.96 - 47.01
|
|
|
|
21.66
|
|
Canceled
|
|
|
7,185
|
|
|
|
30.00 - 57.30
|
|
|
|
47.34
|
|
Outstanding, end of year
|
|
|
588,780
|
|
|
|
10.17 - 73.74
|
|
|
|
37.21
|
|
Exercisable, end of year
|
|
|
453,568
|
|
|
|
10.17 - 73.74
|
|
|
|
35.46
|
|
78
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information concerning stock options outstanding and exercisable
at December 31, 2005, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Number
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Number of
|
|
|
Exercisable
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Price
|
|
|
Life
|
|
|
Shares
|
|
|
Price
|
|
|
|
61,855
|
|
|
$
|
10.17 - 23.24
|
|
|
$
|
17.41
|
|
|
|
1.7
|
|
|
|
61,855
|
|
|
$
|
17.41
|
|
|
127,066
|
|
|
|
27.95 - 33.18
|
|
|
|
29.95
|
|
|
|
4.7
|
|
|
|
127,066
|
|
|
|
29.95
|
|
|
99,551
|
|
|
|
34.80 - 39.00
|
|
|
|
38.23
|
|
|
|
4.0
|
|
|
|
99,551
|
|
|
|
38.23
|
|
|
186,977
|
|
|
|
39.19 - 41.12
|
|
|
|
40.49
|
|
|
|
7.5
|
|
|
|
76,752
|
|
|
|
39.59
|
|
|
101,575
|
|
|
|
41.40 - 53.61
|
|
|
|
48.80
|
|
|
|
4.8
|
|
|
|
84,321
|
|
|
|
48.86
|
|
|
11,756
|
|
|
|
54.11 - 73.74
|
|
|
|
58.83
|
|
|
|
8.8
|
|
|
|
4,023
|
|
|
|
58.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588,780
|
|
|
|
|
|
|
|
37.21
|
|
|
|
5.3
|
|
|
|
453,568
|
|
|
|
35.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, 726,192 shares of the
Companys common stock were reserved and
137,412 shares were available for issuance under the Plan.
Pro forma information required by Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based
Compensation, has been estimated as if the Company had
accounted for stock-based awards under the fair value method of
that Statement. The fair value of options granted in 2005, 2004,
and 2003 was estimated at the date of the grant using a
Black-Scholes option pricing model with the following
weighted-average input assumptions: risk-free interest rate of
4.10% for 2005, 3.62% for 2004, and 3.34% for 2003; dividend
yield of 0.0% for all three years; expected volatility of 0.34
for 2005, 0.40 for 2004, and 0.38 for 2003; and a
weighted-average expected life of the option of 7.7 years
for 2005 and 7.0 years for 2004 and 2003. The following
table summarizes the fair value of options granted in 2005,
2004, and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Fair
Value
|
|
Type of Option
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Stock Price = Exercise Price
|
|
$
|
42.29
|
|
|
$
|
54.02
|
|
|
$
|
34.57
|
|
|
$
|
19.79
|
|
|
$
|
25.89
|
|
|
$
|
15.77
|
|
Stock Price < Exercise Price
|
|
$
|
|
|
|
$
|
73.74
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21.84
|
|
|
$
|
|
|
Information about restricted stock granted under the plan for
the years ended December 31, 2005, 2004 and 2003 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Number of shares granted
|
|
|
73,195
|
|
|
|
30,100
|
|
|
|
35,160
|
|
Weighted-average fair value
|
|
$
|
47.45
|
|
|
$
|
53.88
|
|
|
$
|
33.33
|
|
The majority of these restricted stock grants vest over three
years. Total compensation cost for these stock-based awards
recognized in the accompanying consolidated statements of income
was approximately $1,789,000 in 2005, $1,232,000 in 2004, and
$690,000 in 2003.
In 1998, the Company completed a $35,000,000 private offering of
notes due January 15, 2028. Proceeds from the offering, net
of debt issue costs, totaled $34,453,000. The notes, which
represent unsecured obligations of the Company, bear interest at
a rate of 7.9% per annum and are non-callable.
79
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Fair
Value of Financial Instruments
|
The carrying values and fair values of financial instruments as
of December 31, 2005 and 2004 are summarized below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
available-for-sale
|
|
$
|
534,064
|
|
|
$
|
534,064
|
|
|
$
|
454,121
|
|
|
$
|
454,121
|
|
Equity securities
available-for-sale
|
|
|
8,159
|
|
|
|
8,159
|
|
|
|
10,272
|
|
|
|
10,272
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
34,501
|
|
|
|
40,514
|
|
|
|
34,493
|
|
|
|
39,315
|
|
The fair values of cash, cash equivalents and short-term
investments approximate their carrying values due to their
short-term maturity or availability.
The fair values of fixed maturity securities and equity
securities have been determined using quoted market prices for
securities traded in the public market or prices using bid or
closing prices for securities not traded in the public
marketplace.
The fair value of the Companys long-term debt is estimated
using discounted cash flow analysis based on the Companys
current incremental borrowing rates for similar types of
borrowing arrangements.
A lawsuit was filed against the Company in January 2004 in the
ordinary course of the Companys business alleging
violations of the Fair Credit Reporting Act. The Company is
vigorously defending the lawsuit. In the opinion of management,
the ultimate resolution of this pending litigation will not have
a material adverse effect on the financial position or results
of operations of the Company.
|
|
15.
|
Unaudited
Quarterly Financial Data
|
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2005 and 2004.
The sum of the quarterly basic earnings per share may not equal
the amount for the year as the basis for calculating average
outstanding number of shares differs (dollars in thousands
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
Net premiums written
|
|
$
|
38,711
|
|
|
$
|
40,611
|
|
|
$
|
42,973
|
|
|
$
|
44,321
|
|
|
$
|
166,616
|
|
Change in unearned premiums
|
|
|
66
|
|
|
|
510
|
|
|
|
1,155
|
|
|
|
650
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
38,777
|
|
|
|
41,121
|
|
|
|
44,128
|
|
|
|
44,971
|
|
|
|
168,997
|
|
Net investment income
|
|
|
5,415
|
|
|
|
5,743
|
|
|
|
5,896
|
|
|
|
5,944
|
|
|
|
22,998
|
|
Net losses incurred
|
|
|
10,630
|
|
|
|
17,288
|
|
|
|
16,958
|
|
|
|
21,979
|
|
|
|
66,855
|
|
Underwriting and other expenses
|
|
|
11,567
|
|
|
|
11,405
|
|
|
|
11,902
|
|
|
|
12,411
|
|
|
|
47,285
|
|
Net income
|
|
|
15,760
|
|
|
|
13,199
|
|
|
|
15,294
|
|
|
|
12,560
|
|
|
|
56,813
|
|
Basic earnings per share
|
|
|
1.08
|
|
|
|
0.90
|
|
|
|
1.04
|
|
|
|
0.85
|
|
|
|
3.87
|
|
Diluted earnings per share
|
|
|
1.07
|
|
|
|
0.89
|
|
|
|
1.03
|
|
|
|
0.85
|
|
|
|
3.84
|
|
80
TRIAD
GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
Net premiums written
|
|
$
|
32,346
|
|
|
$
|
34,277
|
|
|
$
|
36,316
|
|
|
$
|
38,392
|
|
|
$
|
141,331
|
|
Change in unearned premiums
|
|
|
1,466
|
|
|
|
(94
|
)
|
|
|
(497
|
)
|
|
|
(1,214
|
)
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
33,812
|
|
|
|
34,183
|
|
|
|
35,819
|
|
|
|
37,178
|
|
|
|
140,992
|
|
Net investment income
|
|
|
4,586
|
|
|
|
4,598
|
|
|
|
5,255
|
|
|
|
5,315
|
|
|
|
19,754
|
|
Net losses incurred
|
|
|
8,883
|
|
|
|
7,701
|
|
|
|
9,234
|
|
|
|
10,046
|
|
|
|
35,864
|
|
Underwriting and other expenses
|
|
|
10,218
|
|
|
|
10,872
|
|
|
|
11,062
|
|
|
|
11,359
|
|
|
|
43,511
|
|
Net income
|
|
|
14,044
|
|
|
|
14,375
|
|
|
|
14,796
|
|
|
|
15,202
|
|
|
|
58,417
|
|
Basic earnings per share
|
|
|
0.97
|
|
|
|
0.99
|
|
|
|
1.02
|
|
|
|
1.05
|
|
|
|
4.04
|
|
Diluted earnings per share
|
|
|
0.96
|
|
|
|
0.98
|
|
|
|
1.00
|
|
|
|
1.03
|
|
|
|
3.98
|
|
81
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS
IN RELATED PARTIES
TRIAD GUARANTY INC.
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
Amount at
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Which Shown
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
in Balance Sheet
|
|
|
|
(In thousands)
|
|
|
Fixed maturity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
12,348
|
|
|
$
|
12,124
|
|
|
$
|
12,124
|
|
Mortgage-backed securities
|
|
|
56
|
|
|
|
58
|
|
|
|
58
|
|
State and municipal bonds
|
|
|
486,014
|
|
|
|
500,027
|
|
|
|
500,027
|
|
Corporate bonds
|
|
|
19,719
|
|
|
|
21,855
|
|
|
|
21,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
518,137
|
|
|
|
534,064
|
|
|
|
534,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust, and insurance
|
|
|
739
|
|
|
|
1,120
|
|
|
|
1,120
|
|
Public utilities
|
|
|
174
|
|
|
|
329
|
|
|
|
329
|
|
Industrial and miscellaneous
|
|
|
1,279
|
|
|
|
1,826
|
|
|
|
1,826
|
|
Preferred stock
|
|
|
4,809
|
|
|
|
4,884
|
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,001
|
|
|
|
8,159
|
|
|
|
8,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
4,796
|
|
|
|
4,796
|
|
|
|
4,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments other than
investments in related parties
|
|
$
|
529,934
|
|
|
$
|
547,019
|
|
|
$
|
547,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
SCHEDULE II CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
ASSETS:
|
Fixed maturities,
available-for-sale
|
|
$
|
32,250
|
|
|
$
|
24,069
|
|
Equity securities,
available-for-sale
|
|
|
252
|
|
|
|
513
|
|
Notes receivable from subsidiary
|
|
|
25,000
|
|
|
|
25,000
|
|
Investment in subsidiary
|
|
|
478,310
|
|
|
|
421,259
|
|
Short-term investments
|
|
|
681
|
|
|
|
842
|
|
Cash
|
|
|
1,996
|
|
|
|
1,736
|
|
Accrued investment income
|
|
|
1,532
|
|
|
|
1,482
|
|
Income taxes recoverable
|
|
|
176
|
|
|
|
1,139
|
|
Other assets
|
|
|
95
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
540,292
|
|
|
$
|
477,291
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY:
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
34,501
|
|
|
$
|
34,493
|
|
Accrued interest on long-term debt
|
|
|
1,275
|
|
|
|
1,275
|
|
Deferred income taxes
|
|
|
5,305
|
|
|
|
4,110
|
|
Accrued expenses and other
liabilities
|
|
|
20
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
41,101
|
|
|
|
39,948
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
148
|
|
|
|
146
|
|
Additional paid-in capital
|
|
|
103,657
|
|
|
|
94,852
|
|
Accumulated other comprehensive
income
|
|
|
11,106
|
|
|
|
13,218
|
|
Deferred compensation
|
|
|
(3,161
|
)
|
|
|
(1,501
|
)
|
Retained earnings
|
|
|
387,441
|
|
|
|
330,628
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
499,191
|
|
|
|
437,343
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
540,292
|
|
|
$
|
477,291
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
83
SCHEDULE II CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,510
|
|
|
$
|
3,251
|
|
|
$
|
3,120
|
|
Realized investment gains (losses)
|
|
|
(87
|
)
|
|
|
142
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,423
|
|
|
|
3,393
|
|
|
|
3,606
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
|
2,772
|
|
|
|
2,772
|
|
|
|
2,772
|
|
Operating expenses
|
|
|
1,783
|
|
|
|
1,230
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,555
|
|
|
|
4,002
|
|
|
|
3,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal
income taxes and equity in undistributed income of subsidiary
|
|
|
(1,132
|
)
|
|
|
(609
|
)
|
|
|
82
|
|
Income taxes (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
28
|
|
|
|
|
|
Deferred
|
|
|
(505
|
)
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505
|
)
|
|
|
28
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in
undistributed income of subsidiary
|
|
|
(627
|
)
|
|
|
(637
|
)
|
|
|
(60
|
)
|
Equity in undistributed income of
subsidiary
|
|
|
57,440
|
|
|
|
59,054
|
|
|
|
51,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
84
SCHEDULE II CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,813
|
|
|
$
|
58,417
|
|
|
$
|
51,091
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of
subsidiary
|
|
|
(57,440
|
)
|
|
|
(59,054
|
)
|
|
|
(51,151
|
)
|
Accrued investment income
|
|
|
(50
|
)
|
|
|
(174
|
)
|
|
|
(14
|
)
|
Other assets
|
|
|
1,156
|
|
|
|
(823
|
)
|
|
|
(78
|
)
|
Deferred income taxes
|
|
|
(505
|
)
|
|
|
|
|
|
|
142
|
|
Current taxes
|
|
|
963
|
|
|
|
(1,139
|
)
|
|
|
(52
|
)
|
Accretion of discount on
investments
|
|
|
2
|
|
|
|
(61
|
)
|
|
|
(91
|
)
|
Amortization of deferred
compensation
|
|
|
1,788
|
|
|
|
1,232
|
|
|
|
690
|
|
Amortization of debt issue costs
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
Realized investment (gains) losses
on securities
|
|
|
87
|
|
|
|
(142
|
)
|
|
|
(486
|
)
|
Other liabilities
|
|
|
(50
|
)
|
|
|
70
|
|
|
|
|
|
Other operating activities
|
|
|
2,049
|
|
|
|
3,595
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
4,821
|
|
|
|
1,928
|
|
|
|
56
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(8,795
|
)
|
|
|
(10,246
|
)
|
|
|
(14,468
|
)
|
Sales and maturities
|
|
|
641
|
|
|
|
3,319
|
|
|
|
11,748
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
163
|
|
|
|
|
|
|
|
256
|
|
Change in short-term investments
|
|
|
161
|
|
|
|
1,722
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(7,830
|
)
|
|
|
(5,205
|
)
|
|
|
(3,033
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
3,269
|
|
|
|
3,741
|
|
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,269
|
|
|
|
3,741
|
|
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
260
|
|
|
|
464
|
|
|
|
1,076
|
|
Cash at beginning of year
|
|
|
1,736
|
|
|
|
1,272
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
1,996
|
|
|
$
|
1,736
|
|
|
$
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
85
SCHEDULE II CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
TRIAD GUARANTY INC.
(Parent Company)
SUPPLEMENTARY NOTES
|
|
1.
|
Basis of
Presentation and Significant Accounting Policies
|
In the parent company financial statements, the Companys
investment in its subsidiaries is stated at cost plus equity in
undistributed earnings of the subsidiaries. The Companys
share of net income of its subsidiaries is included in income
using the equity method. The accompanying Parent Company
financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated
Financial Statements included as part of this
Form 10-K.
Triad Guaranty Inc. (the Company) is a holding
company which, through its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (Triad), provides
private mortgage insurance coverage in the United States to
mortgage lenders to protect the lender against loss from
defaults on mortgage loans.
The cost or amortized cost and the fair value of investments,
other than the investment in its subsidiary held by the parent
company, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
At December 31,
2005
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
499
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
520
|
|
U.S. Government
|
|
|
250
|
|
|
|
|
|
|
|
9
|
|
|
|
241
|
|
Municipal
|
|
|
30,560
|
|
|
|
1,044
|
|
|
|
115
|
|
|
|
31,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31,309
|
|
|
|
1,065
|
|
|
|
124
|
|
|
|
32,250
|
|
Equity securities
|
|
|
250
|
|
|
|
2
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,559
|
|
|
$
|
1,067
|
|
|
$
|
124
|
|
|
$
|
32,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
SCHEDULE II CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
TRIAD GUARANTY INC.
(Parent Company)
SUPPLEMENTARY NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
At December 31,
2004
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
1,140
|
|
|
$
|
49
|
|
|
$
|
|
|
|
$
|
1,189
|
|
U.S. Government
|
|
|
250
|
|
|
|
|
|
|
|
13
|
|
|
|
237
|
|
Municipal
|
|
|
21,767
|
|
|
|
885
|
|
|
|
9
|
|
|
|
22,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,157
|
|
|
|
934
|
|
|
|
22
|
|
|
|
24,069
|
|
Equity securities
|
|
|
500
|
|
|
|
13
|
|
|
|
|
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,657
|
|
|
$
|
947
|
|
|
$
|
22
|
|
|
$
|
24,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major categories of the parent companys investment income
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
1,309
|
|
|
$
|
1,017
|
|
|
$
|
889
|
|
Equity securities
|
|
|
32
|
|
|
|
36
|
|
|
|
36
|
|
Cash and short-term investments
|
|
|
36
|
|
|
|
6
|
|
|
|
26
|
|
Note receivable from subsidiary
|
|
|
2,231
|
|
|
|
2,225
|
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,608
|
|
|
|
3,284
|
|
|
|
3,176
|
|
Expenses
|
|
|
98
|
|
|
|
33
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,510
|
|
|
$
|
3,251
|
|
|
$
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1998, the Company completed a $35,000,000 private offering of
notes due January 15, 2028. Proceeds from the offering, net
of debt issue costs, totaled $34,453,000. The notes, which
represent unsecured obligations of the Company, bear interest at
a rate of 7.9% per annum and are non-callable.
87
SCHEDULE IV REINSURANCE
TRIAD GUARANTY INC.
MORTGAGE INSURANCE PREMIUM EARNED
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
Percentage of
|
|
|
|
Gross
|
|
|
Other
|
|
|
From Other
|
|
|
Net
|
|
|
Amount Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
to Net
|
|
|
|
(In thousands)
|
|
|
2005
|
|
$
|
209,708
|
|
|
$
|
40,712
|
|
|
$
|
1
|
|
|
$
|
168,997
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
176,383
|
|
|
$
|
35,392
|
|
|
$
|
1
|
|
|
$
|
140,992
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
146,956
|
|
|
$
|
27,226
|
|
|
$
|
2
|
|
|
$
|
119,732
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88