FORM 10-Q
---------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____ to _____
Commission File Number 0-22342
TRIAD GUARANTY INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1838519
(State of Incorporation) (I.R.S. Employer Identification
Number)
101 SOUTH STRATFORD ROAD, SUITE 500
WINSTON-SALEM, NORTH CAROLINA 27104
(Address of principal executive offices)
(336) 723-1282
(Registrant's telephone number, including area code)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Number of shares of Common Stock, $.01 par value, outstanding as of May 1, 2001:
13,358,610 shares.
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information: ------
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2001 (Unaudited)
and December 31, 2000................................................. 3
Consolidated Income Statements for the Three Month
Periods Ended March 31, 2001 and 2000 (Unaudited)..................... 4
Consolidated Statements of Cash Flow for the Three Month
Periods Ended March 31, 2001 and 2000 (Unaudited).................... 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signatures................................................................15
1
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
------------ ------------
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value ....... $221,510,903 $203,924,652
Equity securities, available-for-sale, at fair value....... 11,417,024 11,088,525
Short-term investments..................................... 12,481,567 17,012,080
------------ ------------
245,409,494 232,025,257
Cash....................................................... 383,136 1,512,578
Real estate................................................ 428,866 99,482
Accrued investment income.................................. 3,135,560 2,896,977
Deferred policy acquisition costs.......................... 23,684,688 22,815,422
Prepaid federal income taxes .............................. 49,954,666 49,374,666
Property and equipment..................................... 10,039,636 9,234,757
Reinsurance recoverable.................................... 739,447 5,587
Other assets............................................... 10,098,961 10,411,877
------------ ------------
Total assets............................................... $343,874,454 $328,376,603
============ ============
Liabilities and stockholders' equity Liabilities:
Losses and loss adjustment expenses.................... $ 16,060,386 $ 14,986,988
Unearned premiums...................................... 7,072,618 6,933,259
Amounts payable to reinsurer .......................... 739,669 1,288,712
Current taxes payable.................................. 85,061 85,062
Deferred income taxes.................................. 66,048,633 60,651,647
Unearned ceding commission............................. 3,184,146 1,481,691
Long-term debt......................................... 34,468,680 34,467,285
Accrued interest on debt............................... 583,722 1,274,972
Accrued expenses and other liabilities................. 4,044,168 7,375,503
------------ ------------
Total liabilities.......................................... 132,287,083 128,545,119
Commitments and contingent liabilities - Note 4
Stockholders' equity:
Preferred stock, par value $.01 per share ---
authorized 1,000,000 shares; no shares issued
and outstanding...................................... --- ---
Common stock, par value $.01 per share ---
authorized 32,000,000 shares; issued and
outstanding 13,356,610 shares at March 31, 2001
and 13,351,694 at December 31, 2000.................. 133,566 133,517
Additional paid-in capital............................. 62,848,965 62,723,667
Accumulated other comprehensive income, net of
income tax liability of $1,683,421 at March 31,
2001 and $1,262,863 at December 31, 2000............ 3,132,101 2,351,065
Deferred compensation.................................. (205,947) (135,041)
Retained earnings...................................... 145,678,686 134,758,276
------------ ------------
Total stockholders' equity................................. 211,587,371 199,831,484
------------ ------------
Total liabilities and stockholders' equity................. $343,874,454 $328,376,603
============ ============
See accompanying notes.
2
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended
March 31
---------------------------
2001 2000
Revenue:
Premiums written:
Direct............................................ $21,792,862 $18,007,841
Assumed........................................... 1,685 3,840
Ceded............................................. (1,982,804) (948,409)
------------ -----------
Net premiums written................................. 19,811,743 17,063,272
Change in unearned premiums.......................... (128,835) 81,176
------------ -----------
Earned premiums...................................... 19,682,908 17,144,448
Net investment income................................ 3,476,665 2,925,993
Realized investment gains............................ 451,767 777,881
Other income......................................... 1,867,000 5,740
------------ -----------
25,478,340 20,854,062
Losses and expenses:
Losses and loss adjustment expenses.................. 2,199,449 1,570,781
Reinsurance recoveries............................... 3,599 25,357
------------ -----------
Net losses and loss adjustment expenses.............. 2,203,048 1,596,138
Interest expense on debt............................. 692,645 692,538
Amortization of deferred policy acquisition costs.... 2,334,277 2,000,147
Other operating expenses (net)....................... 4,351,504 4,111,183
------------ -----------
9,581,474 8,400,006
------------- ------------
Income before income taxes........................... 15,896,866 12,454,056
Income taxes:
Current........................................... 28 --
Deferred.......................................... 4,976,428 3,802,540
------------ -----------
4,976,456 3,802,540
------------ -----------
Net income........................................... $ 10,920,410 $ 8,651,516
============ ===========
Earnings per common and common equivalent share:
Basic............................................. $ .82 $ .65
============ ===========
Diluted........................................... $ .79 $ .63
============ ===========
Shares used in computing earnings per common
and common equivalent share:
Basic............................................ 13,354,873 13,309,961
============ ===========
Diluted.......................................... 13,830,431 13,655,901
============ ===========
See accompanying notes.
4
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
March 31
---------------------------
2001 2000
Operating activities
Net income................................................. $10,920,410 $ 8,651,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss and unearned premium reserves...................... 1,212,757 (370,463)
Accrued expenses and other liabilities.................. (3,331,335) (3,334,844)
Current taxes payable................................... (1) --
Amounts due to/from reinsurer........................... (1,293,428) (1,660)
Accrued investment income............................... (238,583) (301,927)
Policy acquisition costs deferred....................... (3,203,544) (2,790,930)
Amortization of policy acquisition costs................ 2,334,277 2,000,147
Net realized investment gains .......................... (451,767) (777,881)
Provision for depreciation.............................. 517,955 184,045
Accretion of discount on investments.................... (632,486) (262,067)
Deferred income taxes................................... 4,976,428 3,802,540
Prepaid federal income tax.............................. (580,000) (1,146,000)
Unearned ceding commission.............................. 1,702,455 (42,099)
Real estate acquired in claim settlement................ (329,384) --
Accrued interest on debt................................ (691,250) (691,250)
Other assets............................................ 323,441 119,213
Other operating activities.............................. 25,323 22,506
----------- -----------
Net cash provided by operating activities.................. 11,261,268 5,060,846
Investing activities
Securities available-for-sale:
Purchases - fixed maturities........................... (26,251,653) (11,741,828)
Sales - fixed maturities............................... 10,735,307 3,377,678
Purchases - equities................................... (1,511,816) (603,291)
Sales - equities....................................... 1,404,926 1,187,739
Purchase of property and equipment....................... (1,322,834) (1,034,173)
----------- -----------
Net cash used in investing activities...................... (16,946,070) (8,813,875)
Financing activities
Proceeds from exercise of stock options.................... 24,847 45,375
----------- -----------
Net cash provided by financing activities.................. 24,847 45,375
----------- -----------
Net change in cash and short-term investments.............. (5,659,955) (3,707,654)
Cash and short-term investments at beginning of period..... 18,524,658 14,124,219
----------- -----------
Cash and short-term investments at end of period........... $12,864,703 $10,416,565
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty Tax
and Loss Bonds...................................... $ 580,028 $ 1,146,000
Interest............................................... $ 1,382,500 $ 1,382,500
See accompanying notes.
5
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 1 -- THE COMPANY
Triad Guaranty Inc. (the "Company") is a holding company which, through its
wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("Triad"),
provides private mortgage insurance coverage in the United States to mortgage
lenders to protect the lender against loss from defaults on low down payment
residential mortgage loans.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Triad Guaranty Inc.
annual report on form 10-K for the year ended December 31, 2000.
NOTE 3 -- CONSOLIDATION
The consolidated financial statements include Triad Guaranty Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES
REINSURANCE - Triad assumes and cedes certain premiums and losses from/to
reinsurers under various reinsurance agreements. Reinsurance contracts do not
relieve Triad from its obligations to policyholders. Failure of the reinsurer to
honor its obligation could result in losses to Triad; consequently, allowances
are established for amounts when deemed uncollectible.
6
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
INSURANCE IN FORCE, DIVIDEND RESTRICTIONS, AND STATUTORY RESULTS -
Insurance regulations limit the writing of mortgage guaranty insurance to an
aggregate amount of insured risk no greater than twenty-five times the total of
statutory capital and surplus and the statutory contingency reserve. The amount
of net risk for insurance in force at March 31, 2001 and December 31, 2000, as
presented below, was computed by applying the various percentage settlement
options to the insurance in force amounts based on the original insured amount
of the loan. Triad's ratio is as follows:
March 31, December 31,
2001 2000
Net risk........................ $3,878,129,205 $3,738,596,850
============== ==============
Statutory capital and surplus... $ 99,136,694 $ 101,045,355
Statutory contingency reserve... 160,966,961 150,762,722
-------------- --------------
Total........................... $260,103,655 $ 251,808,077
============== ==============
Risk-to-capital ratio........... 14.9-to-1 14.8-to-1
============== ==============
Triad and its wholly-owned subsidiaries, Triad Guaranty Assurance
Corporation and Triad Re Insurance Corporation, are each required under their
respective domiciliary states' insurance code to maintain a minimum level of
statutory capital and surplus. Triad, an Illinois domiciled insurer, is required
under the Illinois Insurance Code (the "Code") to maintain minimum statutory
capital and surplus of $5,000,000. The Code permits dividends to be paid only
out of earned surplus and also requires prior approval of extraordinary
dividends. An extraordinary dividend is any dividend or distribution of cash or
other property, the fair value of which, together with that of other dividends
or distributions made within a period of twelve consecutive months, exceeds the
greater of (a) ten percent of statutory surplus as regards policyholders, or (b)
statutory net income for the calendar year preceding the date of the dividend.
Net income as determined in accordance with statutory accounting practices
was $15,182,103 for the three months ended March 31, 2001 and $47,830,174 for
the year ended December 31, 2000.
At March 31, 2001 and December 31, 2000, the amount of Triad's equity that
could be paid out in dividends to stockholders was $15,420,766 and $17,329,427,
respectively, which was the earned surplus of Triad on a statutory basis on
those dates.
7
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
LOSS RESERVES - The Company establishes loss reserves to provide for the
estimated costs of settling claims with respect to loans reported to be in
default and loans in default which have not been reported to the Company. Due to
the inherent uncertainty in estimating reserves for losses and loss adjustment
expenses, there can be no assurance that the reserves will prove to be adequate
to cover ultimate loss development.
NOTE 5 - - EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
daily number of shares outstanding. For diluted earnings per share, the
denominator includes the dilutive effect of employee stock options on the
weighted-average shares outstanding. There are no other reconciling items
between the denominator used in basic earnings per share and diluted earnings
per share, and the numerator used in basic earnings per share and diluted
earnings per share is the same for all periods presented.
NOTE 6 - - COMPREHENSIVE INCOME
Comprehensive income is divided into net income and other comprehensive
income. For the Company, other comprehensive income is composed of unrealized
gains or losses on available-for-sale securities, net of income tax. For the
three month periods ended March 31, 2001 and 2000, the Company's comprehensive
income was $11.7 million and $9.7 million, respectively.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Net income for the first three months of 2001 increased 26.2% to $10.9
million compared to $8.7 million for the first three months of 2000. This
improvement is attributable primarily to a 14.8% increase in earned premiums, an
18.8% increase in net investment income, and nonrecurring income of
approximately $1.9 million related to an incentive payment received due to the
voluntary cancellation of an excess of loss reinsurance contract.
Net income per share on a diluted basis increased 24.6% to $0.79 for the
first three months of 2001 compared to $0.63 per share for the first three
months of 2000. Operating earnings per share were $0.77 for the first quarter of
2001 compared to $0.60 for the first quarter of 2000. For the first quarter of
2001, operating earnings per share includes $0.09 attributable to the
nonrecurring income related to the cancellation of the reinsurance contract.
Operating earnings exclude net realized investment gains of approximately
$452,000 and $778,000 in the first three months of 2001 and 2000, respectively.
Net new insurance written was $2.4 billion for the first three months of
2001 as compared to $749 million for the first three months of 2000, an increase
of 227%. Net new insurance written in the first quarter of 2001 included
approximately $1.4 billion of traditional flow production and approximately $1.0
billion related to a structured bulk transaction. The Company also produced
approximately $181 million of new insurance written on seasoned loans in the
first quarter of 2001 as compared to approximately $22 million in the same
period of 2000. The increase in new insurance written from traditional flow
production was primarily the result of new and expanding relationships with
national lenders and a lower interest rate environment which increased refinance
activity. According to industry data, Triad's national market share of net
primary new insurance written, which excludes $1.0 billion in new production
associated with Triad's bulk transaction in the first quarter of 2001, was 2.9%
for the first three months of 2001 compared to 2.3% for the first three months
of 2000. Total direct insurance in force reached $16.9 billion at March 31,
2001, compared to $13.4 billion at March 31, 2000, an increase of 26.1%.
Total direct premiums written were $21.8 million for the first three months
of 2001, an increase of 21.0% compared to $18.0 million for the first three
months of 2000. Net premiums written increased by 16.1% to $19.8 million in the
first three months of 2001 compared to $17.1 million for the same period of
2000. Earned premiums increased 14.8% to $19.7 million for the first three
months of 2001 from $17.1 million for the first three months of 2000. This
growth in written and earned premiums resulted from both new insurance written
and strong growth in insurance in force. Growth in written premium was offset
somewhat by the increase in ceded premium written. Driven primarily by increases
in risk-sharing arrangements and excess of loss reinsurance, ceded premium
written increased 109% to $2.0 million for the first three months of 2001
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
compared to $950,000 for the first three months of 2000. Approximately 28% of
new insurance written (52% excluding the bulk transaction) during the first
quarter of 2001 is subject to captive mortgage reinsurance and other
risk-sharing arrangements compared to 42% of new insurance written in the first
quarter of 2000. Management anticipates ceded premiums will continue to increase
as a result of the expected increase in risk-sharing programs.
Refinance activity was 18.1% of new insurance written (33.6% excluding the
bulk transaction) in the first quarter of 2001 compared to 12.7% of insurance
written in the first quarter of 2000, reflecting the decline in mortgage
interest rates. Persistency, or the amount of insurance in force remaining from
one year prior, was 81.4% at March 31, 2001, compared to 82.6% at December 31,
2000, and 82.5% at March 31, 2000. Sales under the Company's monthly premium
plan represented 98.6% of new insurance written (97.4% excluding the bulk
transaction) in the first quarter of 2001 compared to 93.8% in the same period
of 2000.
Net investment income for the first three months of 2001 was $3.5 million,
an 18.8% increase over $2.9 million in the first three months of 2000. This
increase in investment income is the result of growth in the average book value
of invested assets by $44.0 million to $234.3 million at March 31, 2001, from
$190.3 million at March 31, 2000. The growth in invested assets is attributable
to normal operating cash flow. The pre-tax yield on average invested assets
increased slightly to 5.9% for the first three months of 2001, as compared to
5.8% for the first three months of 2000. The portfolio's tax-equivalent yield
was 8.1% for the first quarter of 2001 versus 7.7% for the first quarter of
2000. Based on amortized cost, approximately 69% and 70% of the Company's fixed
maturity portfolio at March 31, 2001 and 2000, respectively, was composed of
state and municipal tax-preferred securities.
In the first quarter of 2001 the Company recognized a nonrecurring
incentive payment of approximately $1.9 million related to the voluntary
cancellation of an excess of loss reinsurance contract maintained by the Company
with a non-affiliated reinsurer. This payment is accounted for as other income.
Also, in the first quarter of 2001 the Company entered into a new agreement with
a non-affiliated reinsurer to provide excess of loss reinsurance coverage under
terms similar to the cancelled agreement.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 38.0% in the first quarter of 2001 to $2.2 million compared to $1.6
million for the same period of 2000. This increase reflects the growing amount
of the Company's insurance in force and the resulting recognition of a greater
amount of insurance in force reaching its highest claim frequency years.
The Company's loss ratio (the ratio of incurred losses to earned premiums)
was 11.2% for the first quarter of 2001 as compared to 9.3% for the first
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
quarter of 2000 and 10.6% for all of 2000. The Company's favorable loss ratio
reflects the low level of delinquencies compared to the number of insured loans
and the fact that as of March 31, 2001, approximately 74% of the Company's
insurance in force was originated in the last 36 months. Management believes,
based upon its experience and industry data, that claims incidence for it and
other private mortgage insurers is generally highest in the third through sixth
years after loan origination. Although the claims experience on new insurance
written in previous years has been quite favorable, the Company expects its
incurred losses to increase as a greater amount of its insurance in force
reaches its anticipated highest claim frequency years. Due to the inherent
uncertainty of future premium levels, losses, economic conditions, and other
factors that impact earnings, it is impossible to predict with any degree of
certainty the impact of such higher claim frequencies on future earnings.
Amortization of deferred policy acquisition costs increased by 16.7% to
$2.3 million in the first three months of 2001 compared to $2.0 million for the
first three months of 2000. The increase in amortization reflects both a growing
balance of deferred policy acquisition costs to amortize as the Company builds
its total insurance in force and higher cancellations due to refinance activity
in the first quarter of 2001.
Other operating expenses increased 5.8% to $4.4 million for the first
quarter of 2001 compared to $4.1 million for the same period in 2000. This
increase in expenses is primarily attributable to personnel, technology
amortization and equipment costs required to support the Company's product
development, system enhancements, and geographic expansion. The expense ratio
(ratio of underwriting expenses to net premiums written) for the first quarter
of 2001 was 33.7% compared to 35.8% for the first quarter of 2000 and 33.7% for
all of 2000.
The effective tax rate for the first three months of 2001 was 31.3% as
compared to 30.5% for the first three months of 2000. Management expects the
Company's effective tax rate to remain about the same as long as yields from new
funds invested in tax-preferred securities remain favorable in relation to fully
taxable securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of operating funds consist primarily of premiums
written and investment income. Operating cash flow is applied primarily to the
payment of claims, interest, expenses, and taxes.
The Company generated positive cash flow from operating activities for the
first quarter of 2001 of $11.3 million compared to $5.1 million for the same
period of 2000. The increase in Triad's operating cash flow reflects increases
in premiums and investment income, nonrecurring income related to the
cancellation of the excess of loss reinsurance contract, and a decrease in paid
losses that more than offset the increase in operating expenses.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
The Company's business does not routinely require significant capital
expenditures other than for enhancements to its computer systems and
technological capabilities. Positive cash flows are invested pending future
payments of claims and expenses. Cash flow shortfalls, if any, could be funded
through sales of short-term investments and other investment portfolio
securities.
The parent company's cash flow is dependent on interest income and payments
from Triad including cash dividends, management fees, and interest payments
under surplus notes. The insurance laws of the State of Illinois impose certain
restrictions on dividends from Triad. These restrictions, based on statutory
accounting practices, include requirements that dividends may be paid only out
of statutory earned surplus and limit the amount of dividends that may be paid
without prior approval of the Illinois Insurance Department. The Illinois
Insurance Department permits expenses of the parent company to be reimbursed by
Triad in the form of management fees.
Consolidated invested assets were $245.4 million at March 31, 2001,
compared to $232.0 million at December 31, 2000. Fixed maturity securities and
equity securities classified as available-for-sale totaled $232.9 million at
March 31, 2001. Net unrealized investment gains were $1.1 million on equity
securities and $3.7 million on fixed maturity securities at March 31, 2001.
Based on fair value, the fixed maturity portfolio consisted of approximately 69%
municipal securities, 24% corporate securities, 6% U.S. government obligations,
and 1% mortgage-backed bonds at March 31, 2001.
The Company's loss reserves were $16.1 million at March 31, 2001, compared
to $15.0 million at December 31, 2000. This growth is the result of the
increases in new insurance written and the maturing of the Company's risk in
force. Consistent with industry practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.
The Company's delinquency ratio, the ratio of delinquent insured loans to total
insured loans, was 0.65% at March 31, 2001, compared to 0.60% at December 31,
2000.
Total stockholders' equity increased to $211.6 million at March 31, 2001,
from $199.8 million at December 31, 2000. This increase resulted primarily from
net income of $10.9 million for the first quarter of 2001 and net unrealized
gains and losses on invested assets classified as available-for-sale of $781,000
(net of income tax).
Triad's total statutory policyholders' surplus decreased to $99.1 million
at March 31, 2001, from $101.0 million at December 31, 2000. Triad's statutory
earned surplus decreased to $15.4 million at March 31, 2001 from $17.3 million
at December 31, 2000. The decrease in Triad's statutory policyholders' surplus
and statutory earned surplus resulted from the adoption of new statutory
accounting principles that went into effect on January 1, 2001. Absent the
adoption of these new principles, total statutory policyholders surplus would
have increased to $105.7 million at March 31, 2001, and statutory earned surplus
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
would have increased to approximately $22.0 million at March 31, 2001, both
resulting from increases in statutory net income greater than increases in the
statutory contingency reserve. The balance in the statutory contingency reserve
was $161.0 million at March 31, 2001, compared to $150.8 million at December 31,
2000.
Triad's ability to write insurance depends on the maintenance of its
claims-paying ability ratings and the adequacy of its capital in relation to
risk in force. A significant reduction of capital or a significant increase in
risk may impair Triad's ability to write additional insurance. A number of
states also generally limit Triad's risk-to-capital ratio to 25-to-1. As of
March 31, 2001, Triad's risk-to-capital ratio was 14.9-to-1, as compared to
14.8-to-1 at December 31, 2000, and 13.5-to-1 for the industry as a whole at
December 31, 1999, the latest industry data available.
During the first quarter of 2001, Triad received its initial financial
strength rating of Aa3 from Moody's Investors Service. Triad is also rated "AA"
by both Standard & Poor's Rating Services and Fitch, Inc.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis and this Report contain forward
looking statements relating to future plans, expectations, and performance which
involve various risks and uncertainties, including but not limited to the
following: interest rates may increase from their current levels; housing
transactions and mortgage issuance may decrease for many reasons including
changes in interest rates or economic conditions; the Company's market share may
change as a result of changes in underwriting criteria, or competitive products
or rates; the amount of new insurance written could be affected by changes in
federal housing legislation, including changes in the Federal Housing
Administration loan limits and coverage requirements of Freddie Mac and Fannie
Mae; the Company's financial condition and competitive position could be
affected by legislation impacting the mortgage guaranty industry specifically
and the financial services industry in general; rating agencies may revise
methodologies for determining the Company's claims-paying ability ratings and
may revise or withdraw the assigned ratings at any time; decreases in
persistency, which are affected by loan refinancings in periods of low interest
rates, may have an adverse effect on earnings; the amount of new insurance
written and the growth of insurance in force or risk in force as well as the
performance of the Company may be adversely impacted by the competitive
environment in the private mortgage industry, including the type, structure, and
pricing of products and services offered by the Company and its competitors; the
Company's performance may be impacted by changes in the performance of the
financial markets and general economic conditions. Economic downturns in regions
where Triad's risk is more concentrated could have a particularly adverse effect
on Triad's financial condition and loss development. Accordingly, actual results
may differ from those set forth in the forward- looking statements. Attention is
also directed to other risk factors set forth in documents filed by the Company
with the Securities and Exchange Commission.
14
PART II
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. A. EXHIBITS - None
B. REPORTS ON FORM 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIAD GUARANTY INC.
Date: May 14, 2001
/s/ Michael R. Oswalt
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Michael R. Oswalt
Senior Vice President and Controller,
Principal Accounting Officer