27
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, 2003
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
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, 2003:
14,274,494 shares.
TRIAD GUARANTY INC.
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002......................................... 3
Consolidated Income Statements for the Three Months
Ended March 31, 2003 and 2002 (Unaudited).................... 4
Consolidated Statements of Cash Flow for the Three Months
Ended March 31, 2003 and 2002 (Unaudited).................... 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................. 21
Item 4. Controls and Procedures................................... 21
Part II. Other Information:
Item 1. Legal Proceedings........................................ 22
Item 2. Changes in Securities and Use of Proceeds................. 22
Item 3. Defaults Upon Senior Securities........................... 22
Item 4. Submission of Matters to a Vote of Security Holders....... 22
Item 5. Other Information......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 22
Signatures and Certifications of the Chief Executive
Officer and Chief Financial Officer of the Company......... 23
TRIAD GUARANTY INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
-------- -----------
(Unaudited)
(Dollars in thousands except per share information)
Assets
Invested assets:
Fixed maturities, available-for-sale, at fair value................ $322,354 $298,470
Equity securities, available-for-sale, at fair value............... 10,152 10,808
Short-term investments............................................. 27,214 35,303
-------- --------
359,720 344,581
Cash ................................................................... 1,337 233
Real estate............................................................. 1,059 1,561
Accrued investment income............................................... 3,909 3,088
Deferred policy acquisition costs....................................... 30,050 28,997
Prepaid federal income taxes............................................ 78,722 77,786
Property and equipment.................................................. 9,232 9,533
Reinsurance recoverable................................................. 1,343 396
Other assets............................................................ 16,762 16,711
-------- --------
Total assets............................................................ $502,134 $482,886
======== ========
Liabilities and stockholders' equity
Liabilities:
Losses and loss adjustment expenses................................. $ 23,066 $ 21,360
Unearned premiums................................................... 8,567 8,539
Amounts payable to reinsurer........................................ 2,771 3,415
Current taxes payable............................................... 919 598
Deferred income taxes............................................... 99,036 94,241
Unearned ceding commission.......................................... 1,206 1,386
Long-term debt...................................................... 34,481 34,479
Accrued interest on debt............................................ 584 1,275
Accrued expenses and other liabilities.............................. 7,120 8,186
-------- --------
Total liabilities....................................................... 177,750 173,479
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 14,272,494 shares
at March 31, 2003 and 14,159,601 at December 31, 2002............ 143 142
Additional paid-in capital.......................................... 82,757 80,169
Accumulated other comprehensive income, net of income
tax liability of $5,185 at March 31, 2003 and $4,646 at
December 31, 2002................................................ 9,636 8,634
Deferred compensation............................................... (1,625) (658)
Retained earnings................................................... 233,473 221,120
-------- --------
Total stockholders' equity.............................................. 324,384 309,407
-------- --------
Total liabilities and stockholders' equity.............................. $502,134 $482,886
======== ========
See accompanying notes.
3
TRIAD GUARANTY INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended
March 31
2003 2002
---- ----
(Dollars in thousands except per share information)
Revenue:
Premiums written:
Direct................................................ $34,026 $27,838
Assumed............................................... 1 2
Ceded................................................. (5,887) (3,348)
------- -------
Net premiums written..................................... 28,140 24,492
Change in unearned premiums.............................. (8) 43
------- -------
Earned premiums.......................................... 28,132 24,535
Net investment income.................................... 4,333 3,764
Realized investment gains (losses)....................... 219 (1,499)
Other income............................................. 12 27
------- -------
32,696 26,827
Losses and expenses:
Losses and loss adjustment expenses...................... 5,268 2,521
Reinsurance recoveries................................... (3) (5)
------- -------
Net losses and loss adjustment expenses.................. 5,265 2,516
Interest expense on debt................................. 693 693
Amortization of deferred policy acquisition costs........ 3,418 2,986
Other operating expenses (net)........................... 5,841 6,069
------- -------
15,217 12,264
Income before income taxes .............................. 17,479 14,563
Income taxes:
Current............................................... 171 160
Deferred.............................................. 4,956 4,365
------- -------
5,127 4,525
------- -------
Net income............................................... $12,352 $10,038
======= =======
Earnings per common and
common equivalent share:
Basic................................................. $ .87 $ .73
======= =======
Diluted............................................... $ .86 $ .71
======= =======
Shares used in computing earnings
per common and common equivalent share:
Basic................................................. 14,221,218 13,834,467
========== ==========
Diluted............................................... 14,398,800 14,197,999
========== ==========
See accompanying notes.
4
TRIAD GUARANTY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
March 31
--------------------
2003 2002
---- ----
(Dollars in thousands)
Operating activities
Net income...................................................... $12,352 $10,038
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss and unearned premium reserves........................... 1,734 229
Accrued expenses and other liabilities....................... (3,288) (6,687)
Current taxes payable........................................ 321 375
Amounts due to/from reinsurer................................ (1,507) (1,237)
Accrued investment income.................................... (821) 214
Policy acquisition costs deferred............................ (4,471) (4,591)
Amortization of policy acquisition costs..................... 3,418 2,986
Net realized investment (gains) losses....................... (219) 1,499
Provision for depreciation................................... 695 676
Accretion of discount on investments......................... (1,103) (1,025)
Deferred income taxes........................................ 4,956 4,365
Prepaid federal income tax................................... (936) (1,015)
Unearned ceding commission................................... (180) (235)
Real estate acquired in claim settlement..................... 502 98
Accrued interest on debt..................................... (691) (691)
Other assets................................................. (135) 132
Other operating activities................................... 146 94
------- -------
Net cash provided by operating activities....................... 10,773 5,225
Investing activities
Securities available-for-sale:
Purchases - fixed maturities.............................. (37,375) (25,551)
Sales - fixed maturities.................................. 19,142 17,464
Purchases - equities...................................... (120) (817)
Sales - equities.......................................... 210 417
Net change in short-term investments......................... 8,089 531
Purchase of property and equipment........................... (394) (673)
------- -------
Net cash used in investing activities........................... (10,448) (8,629)
Financing activities
Proceeds from exercise of stock options......................... 779 4,426
------- -------
Net cash provided by financing activities....................... 779 4,426
------- -------
Net change in cash ............................................. 1,104 1,022
Cash at beginning of period..................................... 233 853
------- -------
Cash at end of period........................................... $ 1,337 $ 1,875
======= =======
Supplemental schedule of cash flow information
Cash paid during the period for:
Income taxes and United States Mortgage Guaranty
Tax and Loss Bonds........................................ $ 1,017 $ 1,228
Interest..................................................... $ 1,383 $ 1,383
See accompanying notes.
5
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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 and investors to protect the lender or investor against loss from
defaults on low down payment residential mortgage loans.
NOTE 2 -- ACCOUNTING POLICIES AND BASIS OF PRESENTATION
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Triad Guaranty Inc. annual
report on Form10-K for the year ended December 31, 2002.
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. The Company accounts for stock
option grants using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly, recognizes no compensation expense for the stock option grants.
6
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had compensation
expense for stock options been recognized using the fair value method on the
grant date, net income and earnings per share on a pro forma basis would have
been (in thousands, except for earnings per share information):
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net income - as reported $12,352 $ 10,038
Net income - pro forma $12,170 $ 9,826
Earnings per share - as reported:
Basic $ .87 $ .73
Diluted $ .86 $ .71
Earnings per share - pro forma:
Basic $ .86 $ .71
Diluted $ .85 $ .69
NOTE 3 -- CONSOLIDATION
The consolidated financial statements include Triad Guaranty Inc. and its
wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("Triad"), and
Triad's wholly-owned subsidiaries, Triad Guaranty Assurance Corporation and
Triad Re Insurance Corporation (collectively referred to as "the Company"). 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.
7
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
INSURANCE IN FORCE, DIVIDEND RESTRICTIONS, AND STATUTORY RESULTS - Insurance
regulations generally limit the writing of mortgage guaranty insurance to an
aggregate amount of insured risk no greater than 25 times the total of statutory
capital and surplus and the statutory contingency reserve. The amount of net
risk for insurance in force at March 31, 2003 and December 31, 2002, as
presented below, was computed by applying the various percentage settlement
options and applicable stop-loss parameters 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,
2003 2002
(Dollars in thousands)
Net risk.......................... $ 5,698,892 $ 5,534,420
=========== ===========
Statutory capital and surplus..... $ 115,622 $ 112,874
Statutory contingency reserve..... 258,541 245,006
----------- -----------
Total............................. $ 374,163 $ 357,880
=========== ===========
Risk-to-capital ratio............. 15.2-to-1 15.5-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 million. The Code permits dividends to be paid only
out of earned surplus and also requires prior approval of extraordinary
dividends. An extraordinary dividend is any dividend or distribution of cash or
other property, the fair value of which, together with that of other dividends
or distributions made within a period of twelve consecutive months, exceeds the
greater of (a) ten percent of statutory surplus as regards policyholders, or (b)
statutory net income for the calendar year preceding the date of the dividend.
Net income as determined in accordance with statutory accounting practices
was $16.5 million and $13.4 million for the three months ended March 31, 2003
and 2002, respectively, and $61.8 million for the year ended December 31, 2002.
At March 31, 2003 and December 31, 2002, the amount of Triad's equity that
could be paid out in dividends to stockholders was $31.9 million and $29.2
million, respectively, which was the earned surplus of Triad on a statutory
basis on those dates.
8
TRIAD GUARANTY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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.
Reserves are established by management using estimated claim rates (frequency)
and claim amounts (severity) to estimate ultimate losses. The reserving process
gives effect to current economic conditions and profiles delinquencies by such
factors as policy year, geography, chronic late payment characteristics and age.
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.
LITIGATION - A lawsuit has been filed against the Company in the ordinary course
of the Company's business. 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.
NOTE 5 - - EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted-average
daily number of shares outstanding. For diluted earnings per share, the
denominator includes the dilutive effect of stock options on the
weighted-average shares outstanding. There are no other reconciling items
between the denominator used in basic earnings per share and diluted earnings
per share. 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 consists of net income and other comprehensive income.
For the Company, other comprehensive income is composed of unrealized gains or
losses on available-for-sale securities, net of income tax. For the three-months
ended March 31, 2003 and 2002, the Company's comprehensive income was $13.4
million and $9.2 million, respectively.
NOTE 7 - - INCOME TAXES
Income tax expense differs from the amounts computed by applying the
Federal statutory income tax rate to income before income taxes primarily due to
tax-exempt interest that the Company earns from its investments in municipal
bonds.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the first quarter of 2003 increased 23.1% to $12.4 million
or $0.86 per diluted share, from $10.0 million or $0.71 per diluted share in the
first quarter of 2002. This improvement in net income was led by a 14.7%
increase in earned premiums and a 15.1% increase in net investment income. Net
income for the first quarter of 2003 includes $219,000, or $0.01 per diluted
share, of net realized investment gains, while net income for the first quarter
of 2002 included $1.5 million, or $0.07 per diluted share, of net realized
investment losses.
Operating earnings for the first three months of 2003 increased 10.9% to
$12.2 million from $11.0 million for the first three months of 2002. Operating
earnings per share on a diluted basis were $0.85 for the first three months of
2003 compared to $0.78 per share for the first three months of 2002, an increase
of 9.3%. Operating earnings and operating earnings per diluted share are
non-GAAP measures. The Company defines operating earnings as net income
excluding net realized investment gains and losses, net of related taxes.
Management believes operating earnings and operating earnings per diluted share
are relevant and useful information, and they are primary measurements used by
management in assessing the Company's performance. Net realized investment gains
and losses are dependent on market conditions, and management believes that they
are not strong indicators of trends in operations. Operating earnings and
operating earnings per diluted share results should not be considered as a
substitute for net income prepared in accordance with GAAP and may not be
comparable to similarly titled measures reported by other companies.
The following table shows a reconciliation of net income to operating
earnings, including per share data:
--------------------------------------------------------------------------------
Three months ended Three months ended
March 31, March 31,
(In thousands, except per share data) 2003 2002
--------------------------------------------------------------------------------
Net income $12,352 $10,038
Net realized investment (gains) losses,
net of tax (142) 974
------- -------
Operating earnings $12,210 $11,012
======= =======
Diluted earnings per share $0.86 $0.71
Net realized investment (gains) losses,
net of tax, per share (0.01) 0.07
----- ----
Operating earnings per diluted share $0.85 $0.78
===== =====
--------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Total insurance written was $3.8 billion for the first three months of 2003
compared to $2.8 billion for the first three months of 2002, an increase of
36.1%. Total insurance written includes insurance written attributable to
traditional flow production and insurance written attributable to structured
bulk transactions.
Traditional flow insurance written in the first quarter of 2003 increased
31.2% to $3.6 billion from $2.8 billion in the first quarter of 2002. This
increase was primarily the result of expanding relationships with national
lenders, strong demand for risk-sharing arrangements and other product
offerings, and a lower interest rate environment that contributed to a very
strong refinance market.
Insurance written in the first quarter of 2003 attributable to structured
bulk transactions totaled $136 million. There was no insurance written
attributable to structured bulk transactions in the comparable period of 2002.
Structured bulk transactions are generally initiated by secondary mortgage
market participants who wish to use mortgage insurance as a credit enhancement.
The Company competes against other mortgage insurers as well as other forms of
credit enhancement provided by capital markets for these transactions. Insurance
written attributed to structured bulk transactions is likely to vary
significantly from period to period due to the relatively small number of
transactions that encompass this market (as opposed to the traditional flow
market), competitiveness with other mortgage insurers, the attractiveness in the
marketplace of mortgage insurance versus other forms of credit enhancements, and
the changing loan composition of the market. The Company has evaluated all
segments of the bulk market - Prime (predominantly fully underwritten loans,
high FICO credit scores (a credit score provided by Fair, Isaacs and Company),
high percentage of low LTVs), Alternative-A (generally high FICO credit score,
low to moderate LTV loans that have been underwritten with reduced
documentation), and Sub-prime (generally fully underwritten loans with credit
impaired borrowers). Approximately 9.2% of the insurance written in the first
quarter of 2003 attributable to structured bulk transactions was on loans with
sub-prime FICO credit score (scores less than 575). The Company does not expect
sub-prime loans to become a significant portion of its inforce and currently
only insures sub-prime loans with existing lender customers.
Consolidation within the mortgage origination industry and Triad's
continued focus on national lenders has resulted in a greater percentage of
production volume being concentrated among a smaller customer base. The
Company's ten largest customers were responsible for 74.7% of traditional flow
insurance written in the first quarter of 2003 compared to 72.7% in the first
quarter of 2002 and 73.0% in all of 2002. The Company's two largest customers
generated 55.8% of traditional flow insurance written in the first quarter of
2003 compared to 55.1% in the first quarter of 2002 and 53.4% in all of 2002.
The loss of one or more of these major customers could have a significant
adverse effect on the Company's business.
According to industry data, Triad's national market share of net new
primary insurance written, which includes insurance written on a traditional
flow basis as well as that attributed to structured bulk transactions, was 3.9%
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
for the first three months of 2003 compared to 3.6% for the first three months
of 2002. Triad's national market share of net new primary insurance written on a
traditional flow basis was 4.8% for the first three months of 2003 compared to
4.2% for the first three months of 2002. Net new primary insurance written
excludes insurance placed upon loans more than 12 months after loan origination,
insurance placed upon loans already covered by primary mortgage insurance, and
insurance placed upon loans where lender exposure is effectively reduced below
defined minimums.
Total direct insurance in force reached $26.0 billion at March 31, 2003,
compared to $25.4 billion at December 31, 2002, and $22.1 billion at March 31,
2002. Significant refinance activity in 2002 and in the first quarter of 2003
resulted in a high level of policy cancellations that partially offset the
impact that the high level of insurance written had on in force growth. As a
result, insurance in force increased by only $625 million in the first quarter
of 2003, even though insuance written during the quarter was $3.6 billion.
Total direct premiums written were $34.0 million for the first three months
of 2003, an increase of 22.2% from $27.8 million for the first three months of
2002. Net premiums written increased by 14.9% to $28.1 million in the first
quarter of 2003, from $24.5 million for the same period of 2002. Earned premiums
increased 14.7% to $28.1 million for the first three months of 2003 from $24.5
million for the first three months of 2002. This growth in written and earned
premiums resulted from strong levels of new insurance written offset by the
impact of a declining persistency rate due to a high level of mortgage
refinancings and by an increase in ceded premiums.
Driven by an increase in insurance subject to lender risk-sharing
arrangements and also by the continuation of the Company's $125 million of
excess of loss reinsurance coverage, ceded premiums written increased 75.9% to
$5.9 million for the first three months of 2003 from $3.3 million for the first
three months of 2002. The Company's premium cede rate (the ratio of ceded
premiums written to direct premiums written) was 17.3% in the first quarter of
2003 compared to 12.0% in the same period of 2002. The Company's premium cede
rate for captive reinsurance was 14.5% in the first quarter of 2003 compared to
11.0% in the same period of 2002. Approximately 48% of flow insurance written
(47% of total insurance written including structured bulk transactions) during
the first quarter of 2003 is subject to risk-sharing arrangements compared to
49% of flow insurance written in the first quarter of 2002. Through March 31,
2003, insurance written attributable to structured bulk transactions has not
been subject to captive mortgage reinsurance or other risk-sharing arrangements.
Approximately 48.4% of direct insurance in force is subject to risk-sharing
arrangements at March 31, 2003, compared to 38.7% at March 31, 2002. This
increase in insurance in force subject to risk-sharing arrangements is due
primarily to the increased market penetration of the Company's risk-sharing
arrangements and the high level of refinance activity during the past twelve
months, as policies that were previously not subject to risk-sharing
arrangements refinanced and new policies issued were subject to risk-sharing
arrangements. Management anticipates ceded premiums will continue to increase as
a result of the expected increase in risk-sharing programs.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company currently participates in excess of loss risk sharing
arrangements in which the reinsurer may elect a risk band with a flexible entry
and exit point. One of the Company's competitors has announced that as of March
31, 2003, it will not participate in excess of loss risk-sharing arrangements
where the net premium cede rate is greater than 25% ("deep ceded"). The Company
believes that its risk-sharing arrangements provide it valuable reinsurance
protection and potentially reduce the risk of volatility in the Company's
earnings. The Company plans to continue to participate in excess of loss
risk-sharing arrangements. It is uncertain at this time what impact, if any, the
competitor's decision to not participate in deep ceded excess of loss risk
sharing arrangements will have on the Company's direct insurance in force
subject to risk-sharing arrangements and the Company's market share.
Refinance activity was 57.6% of total insurance written (57.2% excluding
structured bulk transactions) in the first quarter of 2003 compared to 48.6% of
total insurance written (48.6% excluding structured bulk transactions) in the
first quarter of 2002. Persistency, or the percentage of insurance in force
remaining from 12 months prior, was 59.1% at March 31, 2003 compared to 60.9% at
December 31, 2002, and 60.9% at March 31, 2002. The high level of refinance
activity and the resulting decrease in persistency is reflective of the low
interest rate environment that has been in place during the past year. Low
persistency results in an acceleration of the amortization of deferred policy
acquisition costs and a reduction in renewal premiums. The annualized quarterly
persistency run rate for the first quarter of 2003 was 50.8% compared to 57.1%
for the first quarter of 2002.
The Company defines persistency as the percentage of insurance in force
remaining from 12 months prior. Run off, defined as cancelled or terminated
policies, of production originated during the past 12 months is not considered
in the Company's calculation of persistency. The Company calculates persistency
by determining the run off over the prior 12 months of each individual policy
year (exclusive of current year production). This method of calculating
persistency may vary from that of other mortgage insurers. The Company believes
that its calculation presents an accurate measure of the percentage of insurance
in force remaining from 12 months prior. The Company's current method of
calculating persistency is consistent with the methodology used by the Company
in prior years.
Net investment income for the first three months of 2003 was $4.3 million,
a 15.1% increase over $3.8 million in the first three months of 2002. This
increase is the result of growth in the average book value of invested assets by
$57.1 million to $338.1 million at March 31, 2003 from $281.0 million at March
31, 2002, which is attributable to the investment of normal operating cash flow.
The pre-tax yield on average invested assets, calculated on the basis of
amortized cost, decreased to 5.1% for the first three months of 2003 compared to
5.4% for the first three months of 2002. This decrease reflects the low interest
rate environment for new money investments made over the past several quarters,
the disposal of a number of higher yielding securities during the past twelve
months to enhance the overall quality of the portfolio, and a higher percentage
of the fixed income portfolio invested in municipal securities. The portfolio's
tax-equivalent yield-to-maturity was 7.7% for the first quarter of 2003 versus
7.8% for the first quarter of 2002. Based on fair value, approximately 84% and
75% of the Company's fixed maturity portfolio at March 31, 2003 and 2002,
respectively, was composed of state and municipal tax-preferred securities. At
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
March 31, 2003, based on fair value, approximately 95% of the Company's fixed
maturity portfolio was either a U.S. government or U.S. agency obligation or was
rated investment grade by at least one nationally recognized securities rating
organization compared to approximately 94% of the Company's fixed maturity
portfolio at March 31, 2002. U.S. government, U.S. agency, and investment grade
securities generally have a lower yield, in return for less default risk, than
securities rated below investment grade.
The Company reported $219,000 of net realized investment gains in the first
quarter of 2003 and net realized investment losses of $1.5 million in the first
quarter of 2002. The Company actively monitors investment securities considered
to be at risk for impairment. When the Company determines that a decline in the
value of a security below its amortized cost is other-than-temporary, an
impairment loss has occurred. In the event of impairment, the Company writes
down the cost basis of the security to its fair value and recognizes a realized
loss for the amount of the writedown. Net realized gains of $219,000 during the
first quarter of 2003 included approximately $400,000 of impairment writedowns
on equity securities. Net realized losses of $1.5 million in the first quarter
of 2002 included a $755,000 impairment writedown on a bond held in the Company's
portfolio.
Net losses and loss adjustment expenses (net of reinsurance recoveries)
increased by 109.3% in the first quarter of 2003 to $5.3 million from $2.5
million for the same period of 2002. This rise reflects an increase in paid
losses and delinquent loans as the Company's insurance in force grows and the
condition of the economy remains weak. Net paid losses and loss adjustment
expenses were $3.6 million in the first quarter of 2003 compared to $2.3 million
in the first quarter of 2002. The Company's loss ratio (the ratio of incurred
losses to earned premiums) was 18.7% for the first quarter of 2003 compared to
10.3% for the first quarter of 2002 and 13.4% for all of 2002.
As of March 31, 2003, approximately 85% 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 insurance written in
previous years has been quite favorable, management expects losses to increase
from current levels. The Company expects its incurred losses to increase as a
greater amount of its insurance in force reaches its anticipated highest claim
frequency years. Furthermore, changes in the economic environment could
accelerate paid and incurred loss development. Due to the inherent uncertainty
of future premium levels, losses, economic conditions, and other factors that
affect earnings, it is difficult to predict with any degree of certainty the
impact of such higher claim frequencies on future earnings.
Amortization of deferred policy acquisition costs increased by 14.5% to
$3.4 million in the first three months of 2003 from $3.0 million for the first
three months of 2002. The increase in amortization reflects growth in deferred
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
policy acquisition costs related to the expansion of the Company's insurance in
force and accelerated amortization due to higher cancellations from refinance
activity in the first quarter of 2003. The Company's model calculates the
amortization of deferred policy acquisition costs separately for each book year.
The model accelerates the amortization of deferred policy acquisition costs
through a dynamic adjustment when persistency for a book year is lower than a
historical baseline level in order to match the amortization expense with the
life of the policies on which the acquisition costs were originally deferred.
Low persistency levels during the past two years resulted in additional
amortization of deferred policy acquisition costs through dynamic adjustments
totaling $297,000 in the first quarter of 2003 and $126,000 in the first quarter
of 2002.
Other operating expenses decreased 3.8% to $5.8 million for the first
quarter of 2003 from $6.1 million for the same period of 2002. The decline in
other operating expenses is primarily the result of operational efficiencies
achieved through the use of technology. The Company has made substantial
investments in technology that allows increased insurance writings without a
proportional increase in operating expenses. The expense ratio (ratio of the
amortization of deferred policy acquisition costs and other operating expenses
to net premiums written) for the first quarter of 2003 was 32.9% compared to
37.0% for the first quarter of 2002 and 34.6% for all of 2002.
The effective tax rate for the first three months of 2003 was 29.3%
compared to 31.1% for the first three months of 2002. The decrease in the
effective tax rate is due primarily to an increase in tax-exempt interest
resulting from a higher percentage of assets being invested in tax-preferred
securities. Management expects the Company's effective tax rate to remain near
current levels or decline slightly 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, operating expenses, and taxes.
The Company generated positive cash flow from operating activities for the
first quarter of 2003 of $10.8 million compared to $5.2 million for the same
period of 2002. The increase in operating cash flow in the first quarter of 2003
reflects the growth in premiums and investment income and a decrease in
underwriting expenses paid offset partially by an increase in losses paid. 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 management fees and interest payments under surplus notes.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Illinois Insurance Department permits expenses of the parent company to be
reimbursed by Triad in the form of management fees. Payment of dividends is also
permitted, although none have been paid to date.
The insurance laws of the State of Illinois impose certain restrictions on
dividends that Triad 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.
Consolidated invested assets were $359.7 million at March 31, 2003 compared
to $344.6 million at December 31, 2002. Fixed maturity securities and equity
securities classified as available-for-sale totaled $332.5 million at March 31,
2003 compared to $309.3 million at December 31, 2002. Contributing to this
increase in invested assets and securities classified as available-for-sale was
an increase in net unrealized investment gains on fixed maturity securities and
a decrease in net unrealized investment losses on equity securities from
year-end levels. Net unrealized investment gains on fixed maturity securities
were $15.1 million at March 31, 2003 compared to $13.7 million at December 31,
2002. Net unrealized investment losses on equity securities were $245,000 at
March 31, 2003 compared to $458,000 at December 31, 2002. Based on fair value,
the fixed maturity portfolio consisted of approximately 83% municipal
securities, 14% corporate securities, and 3% U.S. government obligations at
March 31, 2003 compared to a composition of 81% municipal securities, 15%
corporate securities, and 4% U.S. government obligations at December 31, 2002.
The Company's loss and loss adjustment expense reserves were $23.1 million
at March 31, 2003 compared to $21.4 million at December 31, 2002. Loss and loss
adjustment expense reserves are established for all insured loans reported as
delinquent to the Company by the loan servicer. Reserves also are established
for estimated losses incurred on notices of default not yet reported by the
servicer. Consistent with industry practices, the Company does not establish
loss reserves for future claims on insured loans that are not currently in
default. The growth in loss reserves is the result of the increase in reported
defaults and the maturing of the Company's risk in force. The Company expects
loss reserves and the number of flow and bulk loans in default to continue to
grow, reflecting the growth and aging of its insurance in force.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following table shows default statistics as of March 31, 2003 and
December 31, 2002:
DEFAULT STATISTICS
March 31, December 31,
2003 2002
-------- ----------
Number of insured loans in force....................... 195,928 190,480
Number of loans in default............................. 3,009 2,379
Percentage of loans in default (default rate).......... 1.54% 1.25%
Number of insured loans in force excluding bulk loans.. 178,868 171,723
Number of loans in default excluding bulk loans........ 2,280 2,120
Percentage of loans in default excluding bulk loans.... 1.27% 1.23%
Number of bulk loans in force.......................... 17,060 18,757
Number of bulk loans in default........................ 729 259
Percentage of bulk loans in default.................... 4.27% 1.38%
The number of loans in default includes all reported delinquencies that are
three or more payments in arrears at the reporting date and all reported
delinquencies that were previously three or more payments in arrears and have
not made payments to the current due date. While the default rate for
traditional flow business remained relatively flat between periods, the increase
in the default rate for bulk loans is partially due to a change in servicers for
certain bulk policies that resulted in a delay in the reporting of delinquencies
to the Company in the fourth quarter of 2002. The Company had established an
incurred but not reported reserve amount for this estimated exposure in the
fourth quarter of 2002. Also contributing to the increase in the default rate
for bulk loans is the decline in the number of bulk policies in force as a
result of significant refinance activity. The number of policies in force is the
denominator in the default rate calculation and, all else being equal, a decline
in this number results in a higher default rate. The default rate for both
traditional flow business and structured bulk business is consistent with
management's expectation.
Reserves are established by management using estimated claim rates
(frequency) and claim amounts (severity) to estimate ultimate losses. The
reserving process incorporates numerous factors in a formula that gives effect
to current economic conditions and profiles delinquencies by such factors as
policy year, geography, chronic late payment characteristics, and the number of
months the policy has been in default. Because the estimate for loss reserves is
sensitive to the estimates of claims frequency and severity, management performs
sensitivity analyses to test the reasonableness of the best estimate generated
by the loss reserve process. These sensitivity analyses allow management to use
alternative assumptions related to claims frequency and claims severity to
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
develop a range of reasonably possible loss reserve outcomes that can be used to
challenge the best estimate. The loss reserve estimation process and the
sensitivity analyses support the reasonableness of the best estimate of loss
reserves recorded as a liability in the financial statements. Management
periodically reviews the loss reserve process in order to improve its estimate
of ultimate losses on loans currently in default. Adjustments to reserve
estimates are reflected in the financial statements in the periods in which the
adjustments are made.
Triad cedes business to captive reinsurance subsidiaries and/or 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 $324.4 million at March 31, 2003
from $309.4 million at December 31, 2002. This increase resulted primarily from
net income of $12.4 million for the first quarter of 2003 and from an increase
in unrealized gains on investments, net of tax, of $1.0 million.
Triad's total statutory policyholders' surplus increased to $115.6 million
at March 31, 2003 from $112.9 million at December 31, 2002. Triad's statutory
earned surplus increased to $31.9 million at March 31, 2003 from $29.2 million
at December 31, 2002. The increase in Triad's statutory policyholders' surplus
and statutory earned surplus resulted, primarily, from statutory net income of
$16.5 million which exceeded the net increase in the statutory contingency
reserve of $13.5 million. The balance in the statutory contingency reserve was
$258.5 million at March 31, 2003 compared to $245.0 million at December 31,
2002.
Triad's 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 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,
2003, Triad's risk-to-capital ratio was 15.2-to-1 compared to 15.5-to-1 at
December 31, 2002, and to 11.1-to-1 for the industry as a whole at December 31,
2001, the latest industry data available. The risk-to-capital ratio is
calculated using net risk in force, which takes into account risk ceded under
reinsurance arrangements including captive risk-sharing arrangements, as the
numerator and statutory capital, which includes statutory policyholders' surplus
and the balance in the contingency reserve, as the denominator. The decrease in
Triad's risk-to-capital ratio is due to a higher growth rate in statutory
capital than that in net risk in force.
Triad is rated "AA" by both Standard & Poor's Ratings Services and Fitch
Ratings and "Aa3" by Moody's Investors Service.
Fannie Mae is in the process of revising its approval requirements for
mortgage insurers. The new requirements, which have not yet been finalized,
would require prior approval by Fannie Mae for many of Triad's activities and
new products, allow for other approved types of mortgage insurers rated less
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
than "AA," and give Fannie Mae increased rights to revise the eligibility
standards of mortgage insurers. The final form the eligibility guidelines will
take is unknown at this time, but new guidelines, if issued, could have an
adverse effect on the Company.
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 the new rules is ten years.
The Company does not believe the new rules had an adverse impact on it in the
first quarter of 2003 nor that the new rules will have a significant adverse
impact on the Company 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 their credit rating, the Company's financial
condition could be significantly harmed.
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:
o interest rates may increase or decrease from their current levels;
o housing transactions requiring mortgage insurance may decrease for
many reasons including changes in interest rates or economic
conditions;
o the Company's market share may change as a result of changes in
underwriting criteria or competitive products or rates;
o the amount of insurance writtencould 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;
o 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;
o rating agencies may revise methodologies for determining the Company's
financial strength ratings and may revise or withdraw the assigned
ratings at any time;
o decreases in persistency, which are affected by loan refinancings in
periods of low interest rates, may have an adverse effect on earnings;
o the amount of insurance written and the growth in insurance in force
or risk in force as well as the performance of the Company may be
adversely impacted by the competitive environment in the private
mortgage insurance industry, including the type, structure, and
pricing of products and services offered by the Company and its
competitors;
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
o if the Company fails to properly underwrite mortgage loans under
contract underwriting service agreements, the Company may be required
to assume the costs of repurchasing those loans;
o with consolidation occurring among mortgage lenders and the Company's
concentration of insurance in force generated through relationships
with significant lender customers, the loss of a significant customer
may have an adverse effect on earnings;
o the Company's performance may be impacted by changes in the
performance of the financial markets and general economic conditions;
o 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;
o OFHEO risk-based capital rules could severely limit the Company's
ability to compete against various types of credit protection
counterparties, including "AAA" rated private mortgage insurers;
o changes in the eligibility guidelines of Fannie Mae or Freddie Mac
could have an adverse effect on the Company.
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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures at March 31, 2003 have not materially
changed from those identified at December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to the Exchange Act of 1934, Rule 13a-15. The
evaluation was conducted under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO). Based on that evaluation, management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the Company's reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company's internal
controls subsequent to the date management carried out its evaluation.
21
PART II
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6A. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certification of Periodic Financial Report Pursuant to 18
U.S.C. Section 1350
(b) REPORTS ON FORM 8-K
On April 28, 2003, the Company filed a current report on Items 7
and 9 of Form 8-K relating to the issuance of its results of
operations for the first quarter ended March 31, 2003 in an
earnings release.
Signatures and Certifications of the Chief Executive Officer and Chief Financial
Officer of the Company
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, 2003
/s/ Michael E. Crow
-------------------------
Michael E. Crow
Vice President and Controller,
Principal Accounting Officer
22
Form 10-Q
CERTIFICATIONS
I, Darryl W. Thompson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triad Guaranty
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
23
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 14, 2003
/s/Darryl W. Thompson
-----------------------------
Darryl W. Thompson
President, Chief Executive Officer
24
Form 10-Q
CERTIFICATIONS
I, Ron D. Kessinger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triad Guaranty
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
25
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 14, 2003
/s/Ron D. Kessinger
-----------------------------
Ron D. Kessinger
Executive Vice President and
Chief Financial Officer
26