Form 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-22342
Triad Guaranty Inc.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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56-1838519
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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101 South Stratford Road,
Winston-Salem, North Carolina
(Address of principal
executive offices)
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27104
(Zip Code)
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Registrants telephone number, including area code:
(336) 723-1282
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act)
Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, computed
by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity,
as of the last business day of the registrants most
recently completed second fiscal quarter: $10,782,902 as of
June 30, 2008, which amount excludes the value of all
shares beneficially owned (as defined in
Rule 13d-3
under the Securities Exchange Act of 1934) by executive
officers, directors and 10% or greater stockholders of the
registrant (however, this does not constitute a representation
or acknowledgment that any such individual or entity is an
affiliate of the registrant, or that there are not other persons
who may be deemed to be our affiliates).
The number of shares of the registrants common stock, par
value $0.01 per share, outstanding as of March 6, 2009, was
15,206,709.
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Portions of the following document are incorporated
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Part of this Form 10-K into which the portions of the
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by reference into this Form 10-K:
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document are incorporated by reference
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None
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None
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PART I
Overview
of Triad
Triad Guaranty Inc. is a holding company that historically has
provided private mortgage insurance (MI) coverage in
the United States through its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (Triad). Triad
Guaranty Inc. and its subsidiaries are collectively referred to
as the Company.
Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and we are operating
our business in run-off under a Corrective Order issued by the
Illinois Department of Financial and Professional Regulation,
Division of Insurance (the Division). As used in
this annual report, the term run-off refers to Triad
no longer being able to write new mortgage insurance policies,
but continuing to service its existing policies. Servicing
existing policies includes: receiving premiums on policies that
remain in force; cancelling coverage at the insureds
request; terminating policies for non-payment of premium;
working with borrowers in default to remedy the default
and/or
mitigate our loss; and settling all legitimate filed claims per
our contractual obligations. The Corrective Order from the
Division, among other items, allows the executive officers of
the Company to continue to operate Triad under close supervision
and includes restrictions on the distribution of dividends and
payment by Triad of interest on notes payable to its parent.
Triad was formed in 1987 and was acquired by Collateral
Mortgage, Ltd., now called Collateral Holdings, Ltd.
(CHL), a mortgage banking and real estate lending
firm, in 1989. As of December 31, 2008, CHL owns 17.0% of
the outstanding common stock of the Company.
MI is issued in many home purchases and refinance transactions
involving conventional residential first mortgage loans to
borrowers with equity of less than 20%. If the homeowner
defaults on the mortgage, MI reduces, and in some instances
eliminates, any loss to the insured lender. MI also facilitates
the sale of low down payment mortgage loans in the secondary
mortgage market, with the largest percentage of sales being made
to the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), which are collectively referred to as
GSEs. Investors and lenders also purchase MI to
obtain additional default protection or capital relief on loans
with equity of greater than 20%.
Currently, Triad is licensed to do business in all fifty
U.S. states and the District of Columbia. Another
wholly-owned subsidiary, Triad Guaranty Insurance Corporation
Canada (TGICC), was formed in 2007 for the purpose
of exploring opportunities for providing mortgage insurance in
Canada. TGICC was liquidated in the fourth quarter of 2008.
TGICC did not write any business and only incurred
start-up
expenses prior to its liquidation.
Our success in run-off is dependent on our ability to operate
effectively under the Corrective Order, our ability to mitigate
our insurance losses, and our ability to maintain operating
efficiency, as well as a number of external factors including:
the general condition of the economy, the capital markets and
the housing market; legislative and regulatory developments;
interest rates and their effect on our persistency; and
unemployment rates. For a detailed description of the components
of our revenue and expenses, please refer to the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this annual
report on
Form 10-K.
A detailed description of the insurance regulations to which we
are subject is discussed further in this Item 1.
Our principal executive offices are located at 101 South
Stratford Road, Winston-Salem, North Carolina 27104 in
properties that we lease. We do not require a significant amount
of fixed assets for our operations and property and equipment,
consisting primarily of computer equipment and software, are the
extent of our long-lived assets. Our telephone number is
(336) 723-1282.
Our web site is www.triadguaranty.com. Information
contained on, or that can be accessed through, our web site does
not constitute part of this annual report. We have included our
website address as a factual reference and do not intend it as
an active link to our web site. We make available on our web
site our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports. This information is made
available free of charge and as soon as reasonably practicable
after such material is electronically filed with or furnished to
the Securities and Exchange Commission (SEC).
1
Corrective
Order
Triad is an Illinois-domiciled insurance company and the
Division is our primary regulator. Triad Guaranty Assurance
Corporation (TGAC) is a wholly-owned subsidiary of
Triad and is subject to all Illinois insurance regulatory
requirements applicable to Triad. The Illinois Insurance Code
grants broad powers to the Division and its Director to enforce
rules or exercise discretion over almost all significant aspects
of our insurance business.
On August 5, 2008, Triad and TGAC (collectively,
TGIC) entered into an Agreed Corrective Order with
the Division. The Corrective Order was implemented as a result
of our decision to cease writing new mortgage guaranty insurance
and to commence a run-off of our existing insurance in force as
of July 15, 2008. Among other things, the Corrective Order:
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Required TGIC to submit a corrective plan to the Division;
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Prohibited all stockholder dividends from TGIC to its parent
company without the prior approval of the Division;
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Prohibited interest and principal payments on TGICs
surplus note to its parent company without the prior approval of
the Division;
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Restricted TGIC from making any payments or entering into any
transaction that involves the transfer of assets to, or
liabilities from, any affiliated parties without the prior
approval of the Division;
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Required TGIC to obtain prior written approval from the Division
before entering into certain transactions with unaffiliated
parties;
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Required TGIC to meet with the Division in person or via
teleconference as necessary; and
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Required TGIC to furnish to the Division certain reports,
agreements, actuarial opinions and information on an ongoing
basis at specified times.
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We submitted a corrective plan to the Division as required under
the Corrective Order. The corrective plan we submitted included,
among other items, a five-year statutory financial projection
for TGIC and a detailed description of our planned course of
action to address our current financial condition. The financial
statements that form the basis of our corrective plan were
prepared in accordance with Statutory Accounting Principles
(SAP) set forth in the Illinois Insurance Code. SAP
differs from GAAP, which are followed to prepare the financial
statements presented in this annual report on
Form 10-K.
We received approval of the corrective plan from the Division in
October 2008.
Since the approval of our initial corrective plan, we have
revised the assumptions we initially utilized in our run-off
financial forecast model as a result of a number of factors,
including continued deteriorating economic conditions impacting
our financial condition, results of operations and future
prospects. Our new assumptions produce a range of potential
ultimate outcomes for our run-off, but include projections
showing that on a likely case basis and absent additional action
by the Division or favorable changes in our business, we will
report a deficiency in policyholders surplus as calculated
in accordance with SAP as early as March 31, 2009 and
continuing at least through 2011. Although we currently project
that this statutory insolvency will be temporary and our run-off
will ultimately be successful, we believe such insolvency would
likely lead to the institution by the Division of receivership
proceedings against TGIC if not corrected. We are currently
working with the Division to structure a revised corrective plan
to address this issue, although no assurance can be given that
we will be successful in these efforts. If we are unable to gain
approval from the Division for a revised corrective plan that
addresses this issue, the Division could place TGIC into
receivership proceedings, which could force us to seek
protection from creditors through a voluntary bankruptcy
proceeding and we would likely be unable to continue as a going
concern. See Item 1A, Risk Factors for more
information.
Failure to comply with the provisions of the Corrective Order or
any other violation of the Illinois Insurance Code may result in
the imposition of fines or penalties or subject TGIC to further
legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of TGIC. See
Item 1A, Risk Factors for more information.
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Our recurring losses from operations and resulting decline in
policyholders surplus as calculated in accordance with SAP
increases the likelihood that TGIC will be placed into
conservatorship or liquidated and raises substantial doubt about
our ability to continue as a going concern. Our consolidated
financial statements that are presented in this annual report on
Form 10-K
do not include any adjustments that reflect the financial risks
of TGIC entering receivership proceedings and assume that we
will continue as a going concern. We expect losses from
operations to continue and our ability to continue as a going
concern is dependent on the successful development, approval,
and implementation of a revised corrective plan. See
Item 1A, Risk Factors for more information.
Triad is also subject to comprehensive regulation by the
insurance departments of the various other states in which it is
licensed to transact business. Currently, the insurance
departments of the other states are working with the Division in
the implementation of the Corrective Order.
Overview
of Market Conditions
The adverse events in the real estate, mortgage and financial
markets during 2008 were unprecedented. Steep declines in real
estate values, tightening markets for obtaining capital or
credit, and the liquidity concerns of financial institutions
have created a significant amount of uncertainty in the capital
markets, resulting in significant downward pressure on asset
values, including single family homes. Like many other financial
companies, the Company has not been immune to these adverse
developments and has seen its financial position and results of
operations deteriorate substantially.
The profitability and growth of the mortgage insurance industry
is subject to conditions in the residential mortgage market
which, over the long-term, has experienced a substantial amount
of growth and profitability and was particularly strong between
2001 and 2006. Some of the factors that contributed to this
strength, including rapid home price appreciation, the strong
demand for mortgage securitizations in the secondary market, and
the introduction of certain new mortgage products gradually led
to deterioration in underwriting practices by mortgage loan
originators over that five-year period.
Beginning in early 2007, the residential mortgage market began
slowing due in part to rising mortgage delinquencies and
foreclosures. Since then, home prices have declined
significantly, mortgage delinquency and foreclosure rates have
soared, and the availability of capital to potential borrowers
has declined considerably.
During 2008, a number of well-known financial institutions
failed or were acquired by other financial institutions. While
the U.S. government has taken action to improve liquidity,
restore confidence to the capital markets, stem the level of
foreclosures, and improve the employment situation (see
Recent Government Initiatives below), the results to
date have been limited. The U.S. economy is in a recession
and the unemployment rate of 8.1% in January 2009 was the
highest since unemployment was 8.3% in December 1983. Defaults
and foreclosures continue to increase and home prices continue
to decline. Many economists are projecting significant negative
macroeconomic trends, including widespread job losses, higher
unemployment, lower consumer spending, continued declines in
home prices and substantial increases in delinquencies on
consumer debt, including defaults on home mortgages. Moreover,
recent disruptions in the financial markets, particularly the
reduced availability of credit and tightened lending
requirements, have impacted the ability of borrowers to
refinance loans at more affordable rates. In addition, while
tight credit markets facilitate higher persistency, they also
limit the flexibility of borrowers when dealing with a loan in
default, and may lead to a greater number of foreclosures. A
longer or more severe recession will have more negative impacts
on our business.
Recent
Government Initiatives
Over the past several months, several government programs have
been initiated which, in general, are designed to provide relief
to homeowners and the financial markets. Many of these programs
have been expanded since originally developed and may continue
to change.
In July 2008, the Housing and Economic Recovery Act of 2008 was
enacted, which established the Federal Housing and Finance
Agency (FHFA) as the successor regulatory agency to
both Fannie Mae and Freddie Mac. FHFA has broad legal and
regulatory authority to ensure the safety and soundness of both
of the GSEs. On September 7, 2008, both Fannie Mae and
Freddie Mac were placed into conservatorship with FHFA acting as
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conservator. Conservatorship is a process designed to stabilize
a troubled institution with the objective of returning the
troubled institution to normal business operations. FHFA has
stated that the purpose of this action is to restore confidence
in these GSEs, to enhance their capacity to fulfill their
mission, and to mitigate the systemic risk that has contributed
directly to the instability in the market.
The Housing and Economic Recovery Act of 2008 also includes the
HOPE for Homeowners Act, which created a new, temporary,
voluntary program within the Federal Housing Administration
(FHA) to back FHA-insured mortgages to distressed
borrowers. The new mortgages offered by FHA-approved lenders
will refinance distressed loans at a significant discount for
owner-occupants at risk of losing their homes to foreclosure. In
exchange, homeowners will share future appreciation with the FHA.
During October 2008, the Emergency Economic Stabilization Act of
2008 (EESA) was enacted. EESA, among other things,
created the Troubled Asset Relief Program (TARP),
which provides authority for the Federal government to purchase
assets and equity from financial institutions in order to
strengthen the financial sector. The goal of TARP is to
encourage banks to resume lending again at levels seen before
the financial crisis. TARP allows the U.S. Department of
the Treasury to purchase or insure up to $700 billion in
residential or commercial mortgages and securities based on or
related to such mortgages as well as any other financial
instrument that the Secretary of the Treasury determines would
promote stability in the financial market.
The Streamlined Modification Program (SMP) was
adopted by the GSEs in December 2008 and is designed to reduce
foreclosures on mortgage loans owned or guaranteed by the GSEs.
The SMP standardized the modification criteria for such mortgage
loans with the goal of enabling loan servicers to proactively
solicit borrower participation. A number of eligibility criteria
apply to the SMP. Modifications available include the
capitalization of accrued interest and other fees, the extension
of the term of the mortgage loan, the reduction of the interest
rate on the mortgage loan, as well as a provision for principal
forbearance. Additionally, several large lenders have announced
plans to implement their own loan modification programs. The
GSEs also established a moratorium on foreclosures that began in
December 2008 and expired on March 6, 2009.
In February 2009, the Federal government unveiled The Homeowner
Affordability and Stability Plan (HASP), which is
designed to replace the SMP and reduce the number of
foreclosures. HASP, which was detailed in March 2009, includes
the Home Affordable Modification Program (HMP) which
provides incentives to borrowers, servicers, and lenders to
modify loans with the modifications jointly paid for by lenders
and the U.S. government. HASP also includes the Home
Affordable Refinance Program which provides refinance
opportunities to certain borrowers who have conforming mortgage
loans owned or guaranteed by the GSEs. The borrowers targeted
for this refinance opportunity are those who have experienced
significant depreciation in the value of their home, thereby
making refinancing difficult or prohibitive given current
underwriting standards in the marketplace.
Certain members of the Obama administration have discussed
providing TARP funds to private mortgage insurers. No assurance
can be given that TARP funds would be provided to mortgage
insurers or, if funds were provided, that they would be provided
to us or that they would be offered under terms acceptable or
beneficial to our stockholders.
As of the date of this annual report on
Form 10-K,
we are unable to predict the impact that these recent government
initiatives and the conservatorship of Fannie Mae and Freddie
Mac will have on our future results of operations and prospects.
Mortgage
Insurance Products
Prior to the commencement of run-off on July 15, 2008, we
offered principally two products, Primary and Modified Pool
mortgage insurance, which are described below. Insurance on
these products comprised all of our insurance in force as of
December 31, 2008 and 2007. Risk-sharing products are a
component of Primary insurance and serve to reduce our ultimate
risk, which we insure through the payment of premiums to captive
reinsurers (see Reinsurance below). Premium rates
are determined at origination of coverage, based on perceived
risk of the policy at that time, and generally cannot be
subsequently changed. In run-off, we will receive only the
ongoing
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premiums of the remaining insurance in force, which we refer to
as renewal premiums only to differentiate them from premiums on
new business.
Primary
Insurance
Primary insurance provides mortgage default protection to
lenders on individual loans and covers a percentage of unpaid
loan principal, delinquent interest and certain expenses
associated with the default and subsequent foreclosure
(collectively, the insured amount or claim
amount). We classify a policy as Primary insurance when we
are in the first loss position and the
loan-to-value
(LTV) ratio is 80% or greater when the loan is first
insured. Our obligation to an insured lender with respect to a
claim is determined by applying the appropriate coverage
percentage to the claim amount, which generally ranges from 12%
to 37%. Under our master policies, we have the option of paying
the entire claim amount and taking title to the mortgaged
property, or paying the coverage percentage on the claim amount
in full satisfaction of our obligations. Primary insurance was
written through the flow channel and the structured bulk channel
(see Distribution Channel below).
Primary insurance comprised approximately 67% and 66% of our
total direct insurance in force at December 31, 2008 and
2007, respectively. Primary insurance written comprised 100% of
total insurance written during 2008 compared to 85% during 2007.
We ceased issuing commitments for primary insurance on
July 15, 2008. Going forward, our production will consist
of certificates issued from commitments for Primary mortgage
insurance that were entered into prior to July 15, 2008.
Modified
Pool Insurance
Modified Pool insurance, which we have not written since the
quarter ended June 30, 2007, was written only on structured
bulk transactions through the structured bulk channel.
Structured bulk transactions involve underwriting and insuring a
group of loans with individual coverage for each loan. Coverage
on structured bulk transactions was determined at the individual
loan level, sufficient to reduce the insureds exposure on
any loan in the transaction down to a stated percentage of the
loan balance, which was typically between 50% and 65%.
Structured bulk transactions included an aggregate stop-loss
limit applied to the entire group of insured loans.
Additionally, some of the structured bulk transactions included
deductibles representing a percentage of the total risk
originated under which we pay no claims until the losses exceed
the deductible amount. Modified Pool insurance comprised
approximately 33% and 34% of our total direct insurance in force
at December 31, 2008 and 2007, respectively.
Distribution
Channels
Prior to entering run-off on July 15, 2008, we sold
mortgage insurance through two distribution channels. Our flow
channel consisted of loans originated by lenders and submitted
to us on a
loan-by-loan
basis. All insurance that was delivered through the flow channel
is classified as Primary insurance.
Through the structured bulk channel, we participated in a
competitive bid process for structured bulk transactions that
met our loan quality and pricing criteria. Modified Pool
insurance was only written through the structured bulk channel,
and some Primary insurance was written through the structured
bulk channel.
We formally ceased issuing commitments for mortgage insurance
through both channels on July 15, 2008. Going forward, our
production will consist of certificates issued from commitments
for Primary mortgage insurance entered into prior to
July 15, 2008 that were written through the flow channel,
which is expected to be nominal.
Cancellation
of Insurance
We generally cannot cancel mortgage insurance coverage except
for nonpayment of premiums, misrepresentation or fraud on the
loan application, non-compliance with certain lender programs or
certain other material violations of the master policy. Coverage
generally remains renewable at the option of the insured lender.
In most cases, mortgage insurance is renewable at a premium rate
determined when the insurance on the loan was initially issued.
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Insured lenders may cancel insurance acquired through the flow
channel at any time at their option. Pursuant to the Homeowners
Protection Act, lenders are required to automatically cancel the
borrower-paid MI on most loans made on or after July 29,
1999, when the outstanding loan amount is 78% or less of the
propertys original purchase price and certain other
conditions are satisfied. A borrower may request that a loan
servicer cancel borrower-paid MI on a mortgage loan when the
loan balance is less than 80% of the propertys current
value, but loan servicers are generally restricted in their
ability to grant those requests by secondary market requirements
and by certain other regulatory restrictions.
MI coverage is also cancelled when an insured loan is
refinanced. Because we are a company operating in run-off, a
refinancing will have the impact of reducing future premiums as
we can not replace the refinanced premium with new MI coverage.
Any refinance activity that takes place may occur with better
performing loans or in areas experiencing comparatively better
economic or house price conditions. If this were to occur, the
percentage of our insurance in force covering poor performing
loans or from economically distressed areas or from areas
experiencing unfavorable house price depreciation would
increase. This would adversely affect the amount of premium we
receive as well as our loss ratio and capital position.
Our cancellation rate, defined as the percentage of insurance in
force from twelve months prior that was cancelled during the
preceding twelve-month period, was approximately 13% and 18% for
2008 and 2007, respectively, and was as high as 49% during 2003.
Recent government and industry initiatives to reduce the record
level of foreclosures often include loan modifications whereby
original terms of the mortgage are modified. Generally, in the
case of a loan modification, the original amount of MI coverage
will continue on the mortgage.
Renewal premiums are our primary source of revenue and are
dependent on our insurance policies remaining in force. An
increase in the cancellation rate or, alternatively, a decrease
in the persistency rate reduces the amount of our insurance in
force and our renewal premiums. Our renewal premium on a loan
modification also may be affected due to a change in the insured
balance of a mortgage loan.
Reinsurance
Certain premiums and losses are ceded to other insurance
companies under various reinsurance agreements, the majority of
which are reinsurance agreements with captive reinsurance
affiliates of certain customers. Reinsurance contracts do not
relieve Triad from its obligations to policyholders. Failure of
the reinsurer to honor its obligation could result in losses to
Triad; consequently, allowances are established for amounts
deemed uncollectible.
Prior to run-off, we offered captive reinsurance structures
designed to allow lenders to share in the risks of MI. Under the
typical captive reinsurance program, a reinsurance company,
generally an affiliate of the lender, assumes a portion of the
risk associated with the lenders insured book of business
in exchange for a percentage of the premiums. All of our
existing captive reinsurance programs are
excess-of-loss
arrangements that have defined aggregate layers of coverage and
a maximum exposure limit for the captive reinsurance company.
Under our
excess-of-loss
programs, with respect to a given book year of business, Triad
retains the first loss position on the first aggregate layer of
risk and reinsures a second defined aggregate layer with the
reinsurer. Triad generally retains the remaining risk above the
layer reinsured. Of the reinsurance agreements in place at
December 31, 2008, the first layer retained by Triad ranged
from the first 3.0% to 6.5% of risk originated and the second
layer ceded to reinsurers ranged from the next 4.0% to 10.0%.
Ceded premiums, net of ceded commissions, under these
arrangements ranged from 20.0% to 40.0% of premiums.
We required the counterparties to all of Triads captive
reinsurance agreements to establish trust accounts to support
the reinsurers obligations under the reinsurance
agreements. The captive reinsurer is the grantor of the trust
and Triad is the beneficiary of the trust. The trust agreement
includes covenants regarding minimum and ongoing capitalization,
required reserves, authorized investments and withdrawal of
assets and is funded by ceded premiums and investment earnings
on trust assets as well as capital contributions by the
reinsurer. If certain conditions are met, the captive reinsurers
are allowed to withdraw funds from the account. The captive
reinsurers are also generally allowed to withdraw funds to pay
taxes and certain operating expenses. If certain capitalization
requirements of the
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trust are not maintained we may be allowed to terminate the
trust agreement, although the captive reinsurer would have the
right to dispute such action. Upon termination, we would receive
all remaining trust assets, reassume all remaining risk and
liabilities, and cease ceding premium to the captive reinsurer.
As of December 31, 2008, Triad had two captive reinsurance
arrangements where the total ceded reserves, combined with any
unpaid ceded claims, had exceeded the trust balance and the
recoverable was therefore limited to the trust balance. During
the first quarter of 2009, one of these captive reinsurance
agreements was terminated and we received $8.1 million of
trust assets and reassumed $15.9 million of reserves and
$23.5 million of risk.
At December 31, 2008, we had approximately
$258 million in captive reinsurance trust balances
supporting the risk transferred to captives. At
December 31, 2008, we had ceded $157 million of loss
reserves to these captive reinsurers.
At December 31, 2008 and 2007, approximately 58% and 59% of
our Primary flow insurance in force was subject to captive
reinsurance programs. We did not use captive mortgage
reinsurance or other risk-sharing arrangements with Modified
Pool insurance or Primary bulk insurance.
Certain states limit the amount of risk a mortgage insurer may
retain with respect to coverage of a loan to 25% of the insured
amount and, as a result, the deeper coverage portion of such
insurance must be reinsured. TGAC is a wholly-owned subsidiary
of Triad that was formed to retain the premiums and related risk
on deeper coverage business. As of December 31, 2008 and
2007, TGAC assumed approximately $189 million and
$213 million in risk from Triad, respectively.
Triad maintains a $95 million
Excess-of-Loss
reinsurance treaty that provides a benefit when Triads
risk-to-capital
ratio exceeds 25-to-1 and its combined ratio exceeds 100% (the
attachment point). Once the attachment point has
been reached, following a one-time deductible of
$25 million, the carrier is responsible for reimbursement
of all paid losses in each quarter that the attachment point is
breached up to the one-time $95 million policy limit. The
coverage period is for 10 years. Additionally, terms of the
treaty require Triad to continue the payment of premiums to the
reinsurer amounting to approximately $2 million per year
for the entire ten year period. The reinsurance treaty attached
at the end of the first quarter of 2008, however, the
reinsurance carrier subsequently provided a purported notice of
termination of the agreement. The matter is currently in
arbitration and we expect a decision in the second quarter of
2009.
Customers
We ceased issuing commitments for mortgage insurance on
July 15, 2008. We are not actively selling mortgage
insurance through either the flow channel or bulk channel to any
customers. Going forward, our production will consist of
certificates issued from commitments for Primary mortgage
insurance that were entered into prior to July 15, 2008,
which is expected to be nominal.
Sales
On July 15, 2008, we ceased issuing commitments for
mortgage insurance and transitioned our business to run-off. As
a result, we terminated the employment of approximately
100 employees, including all of our sales, marketing and
underwriting groups. The majority of these terminations were
effective on June 30, 2008.
Contract
Underwriting
Prior to entering into run-off, we provided fee-based contract
underwriting services to certain, approved mortgage originators.
The fee charged was intended to cover the cost of providing the
services. Contract underwriting involved examining a prospective
borrowers information contained in a lenders
mortgage application file and making a determination as to
whether the borrower should be approved for a mortgage loan
subject to the lenders underwriting guidelines. We
provided contract underwriting services through our own
employees as well as independent contractors, and these services
were provided for loans that required MI as well as loans that
did not require MI. If it were determined that Triad failed to
properly underwrite a loan subject to the lenders
underwriting guidelines, Triad could be required to provide
monetary or other remedies to the lender customer. We ceased
providing contract underwriting services in 2008, although we
retain potential liability for our previous
7
underwriting activities. During 2008, expenses for contract
underwriting remedies increased from historical levels to
approximately $1.1 million. We currently do not expect to
incur material contract underwriting remedy expenses in 2009.
Competition
and Market Share
Prior to July 15, 2008, our competition for insurance
written through the flow channel primarily included:
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Federal and state governmental and quasi-governmental agencies,
principally FHA;
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Mortgage lenders that forego MI to self-insure against the risk
of loss from defaults on all or a portion of their low down
payment mortgage loans;
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Products designed to avoid MI such as simultaneous seconds or
piggyback mortgage products (a combination of loans,
usually issued by the same lender, that allows the balance of
each individual loan to be at or below 80% of the
propertys current value); and
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Other MI companies, including Mortgage Guaranty Insurance
Corporation, Radian Guaranty Inc., PMI Mortgage Insurance Co.,
United Guaranty Corporation, Genworth Financial, Inc. and
Republic Mortgage Insurance Company.
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We previously competed in the structured bulk market with both
the other private mortgage insurers and providers of other forms
of credit enhancements.
According to industry data, Triad had an estimated 2.3% share of
total net new insurance written in the first six months of 2008
compared to 6.4% in 2007. Triad ceased issuing commitments for
mortgage insurance on July 15, 2008 and, as a result, our
market share in the second half of 2008 continued to decline and
was not material.
Underwriting
Practices
Effective July 15, 2008, we entered into run-off and we no
longer issue commitments for MI. Prior to run-off, we evaluated
risk based on historical performance and utilized automated
underwriting systems in the risk selection process to assist the
underwriter with decision-making. The process evaluated the
mortgage lender, the geographic area of the property securing
the loan, the borrowers ability and willingness to repay
the mortgage loan, as well as the purpose and type of loan. Loan
characteristics that we analyzed included: (i) LTV ratio;
(ii) type of loan instrument and the amortization schedule;
(iii) purpose of the loan; (iv) level of
documentation; (v) type of property; and
(vi) occupancy. In determining the borrowers ability
and willingness to repay the mortgage loan, we examined the
borrowers Fair, Isaac and Co., Inc. (FICO)
credit score, the borrowers housing and total debt ratios,
as well as the borrowers employment status.
During the fourth quarter of 2007 and first quarter of 2008, we
announced and began to implement adjustments in our underwriting
guidelines specific to our flow business. These adjustments
placed limitations on maximum LTVs, minimum FICO credit scores
and acceptable documentation, among other items. Furthermore,
these limitations were more restrictive in certain geographic
markets that had depressed housing markets and high default
rates. These adjustments led to significant reductions in the
level of new insurance written in the first half of 2008 from
the level written in 2007.
Financial
Strength Rating
We and other mortgage insurers have generally considered a
financial strength rating of AA- or Aa3 from at least two of the
three rating agencies, Standard & Poors Ratings
Services, Moodys Investor Services and Fitch Ratings
(collectively, the rating agencies), as an important
element in a mortgage insurers ability to compete for new
business. In connection with the decision to transition our
business into run-off, we notified the rating agencies that we
were terminating all agreements with them regarding the issuance
of ratings on the Company. As a result, the rating agencies have
since withdrawn their ratings for us and for our subsidiaries,
including Triad.
8
Defaults
and Claims
Defaults
The claim process on mortgage insurance begins with the
lenders notification to the insurer of a default on an
insureds loan. We define a default as an insured loan that
is reported to be in excess of two payments in arrears at the
reporting date and all reported delinquencies that were
previously in excess of two payments in arrears and have not
been brought current. The master policies require lenders to
notify us of default on a mortgage payment within ten days of
either (i) the date on which the borrower becomes four
months in default or (ii) the date on which any legal
proceeding affecting the loan commences, whichever occurs first.
Notification is required within forty-five days of default if it
occurs when the first payment is due.
The incidence of default is affected by a variety of factors
including, but not limited to, declining value in the underlying
property, changes in borrower income, unemployment, divorce,
illness and the level of interest rates. The level of
delinquencies has historically followed a seasonal pattern, in
which delinquencies will generally decrease during the first
part of the year and will generally increase during the latter
part of the year. However, given the current state of the
housing and mortgage market as well as the general state of the
economy, such a decrease in the first part of the year may not
materialize. In addition, the MI industry has little historical
experience in projecting defaults in a market environment
characterized by widespread declining house prices. Such
declines, which could result in the value of the borrowers
home being less than the amount owed under the mortgage, may
cause otherwise financially capable borrowers to stop making
mortgage payments and allow their mortgages to go into default.
Borrowers may cure defaults by making all delinquent loan
payments or by selling the property and satisfying all amounts
due under the mortgage. Defaults that are not cured generally
result in submission of a claim to us. In certain instances, we
may advance the borrower the delinquent loan payments in order
to cure the default. In such cases, we institute a repayment
plan for the borrower. If the insured loan subsequently defaults
and results in a submission of a claim, the unpaid amount of the
advance reduces the claim amount.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations below for a summary of
Triads default statistics at December 31, 2008 and
2007.
Claims
Claims result from defaults that are not cured. During the
default period, we work with the insured as well as the borrower
in an effort to reduce losses through the loss mitigation
efforts described below. The frequency of claims may not
directly correlate to the frequency of defaults due in part to
our loss mitigation efforts, the borrowers ability to
overcome temporary financial setbacks and our ability to rescind
coverage on the loan due to misrepresentation or program
violations at origination. The likelihood that a claim will
result from a default, and the amount of such claim, principally
depend on the borrowers equity at the time of default and
the borrowers (or the lenders) ability to sell the
home for an amount sufficient to satisfy all amounts due under
the mortgage, as well as the effectiveness of loss mitigation
efforts. The time frame from when we first receive a notice of
default until the ultimate claim is paid generally ranges from
six to eighteen months. Recently, the time frame between first
notice of default to ultimate claim payment has increased for a
variety of reasons including:
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government and private industry efforts to prevent foreclosures
through foreclosure moratoriums;
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delays in processing claims by the servicers of the defaulted
loans due to substantial volume increases in defaults; and
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our ongoing effort to identify fraud, misrepresentation or other
underwriting violations on loans that are currently in default.
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Historically, the payment of claims is not evenly spread
throughout the insurance coverage period. Prior to 2007,
relatively few claims were paid during the first year following
loan origination. A period of rising claim payments historically
followed. Thereafter, the number of claim payments historically
declined at a gradual rate, although the rate of decline could
be affected by local economic conditions. We are currently
experiencing increased early default and claim activity on loans
originated in 2006, 2007 and 2008 that differs significantly
from
9
historical levels. We believe this is primarily the result of a
deterioration in the housing market evidenced by a decline in
home prices, as well as a larger percentage of loans originated
with high LTVs during these years, coupled with poor
underwriting standards by mortgage loan originators in the
mortgage market. It is difficult to project the claim pattern
peak of these books of business given the early accelerations,
the risk composition of the underlying loans and the general
conditions in the housing market. Accordingly, we cannot predict
when, if ever, the historical pattern of claims will return in
the future.
Under the terms of Triads master policies, the lender is
required to file a claim with us no later than 60 days
after it has acquired the borrowers title to the
underlying property through foreclosure, a negotiated short sale
or a
deed-in-lieu
of foreclosure. A primary insurance claim amount includes
(i) the amount of unpaid principal due under the loan;
(ii) the amount of accumulated delinquent interest due on
the loan (excluding late charges) to the date of claim filing;
(iii) expenses advanced by the insured under the terms of
the master policies, such as hazard insurance premiums, property
maintenance expenses and property taxes prorated to the date of
claim filing; and (iv) certain foreclosure and other
expenses, including attorneys fees. Such claim amounts are
subject to review and possible adjustment by us. Our experience
indicates that the claim amount on a policy generally ranges
from 105% to 110% of the unpaid principal amount of a foreclosed
loan.
Generally, within 60 days after the claim has been filed,
we have the option of either (i) paying the coverage
percentage of the claim as specified on the certificate of
insurance (generally 12% to 37% of the claim), with the insured
retaining title to the underlying property and receiving all
proceeds from the eventual sale of the property, or
(ii) paying the full claim amount in exchange for the
lenders conveyance of good and marketable title to the
property to us, and selling the property for our own account.
While we continue to use the option to purchase properties in
settlement of claims, given the generally nationwide house price
deterioration, the number of instances in which we chose this
option diminished considerably during 2008. At December 31,
2008, we held 5 properties with a combined fair value of
approximately $713,000 that were acquired by electing to pay the
full claim amount compared to 57 properties with a combined fair
value of approximately $10.9 million held at
December 31, 2007. We record the estimated loss amount on
properties purchased in settlement of claims at the time of
acquisition and refine this estimate, when appropriate, until
the property is sold. Where we choose to purchase the property
in settlement of claims, our risk of loss may increase. There
can be no assurance that our current inventory of purchased
properties can be disposed of for the current fair value nor can
there be any assurance that the purchase option method will be a
viable option for settling claims in 2009.
Generally, our master policies provide that we are not liable to
pay a claim for loss if the application for insurance for the
loan in question contains fraudulent information,
misrepresentations, or other underwriting violations
(underwriting violations). Where we find such
underwriting violations, we may rescind, or cancel, coverage on
the loan retroactive to the date the insurance was written. In
cases where we do rescind coverage, we return all premiums paid
on the policy. During 2008, we completed reviews on
approximately 7,300 policies, and rescinded coverage on
approximately 35% of these policies. In addition, we had 21,169
policies under investigation as of December 31, 2008.
During 2007, we reviewed approximately 3,300 policies and
rescinded coverage on approximately 11% of these policies. This
activity was concentrated in policies originated during 2006 and
2007. We also experienced a higher rescission rate with policies
originated through the structured bulk channel. In late 2008, we
expanded the criteria used to determine whether a default would
be investigated for underwriting violations. We currently expect
that an elevated level of rescission activity will continue in
2009.
Our master policies also exclude any cost or expense related to
the repair or remedy of any physical damage (other than
normal wear and tear) to the property
collateralizing an insured mortgage loan. Such physical damage
may be caused by accident, natural occurrence or other
conditions.
Loss
Mitigation
Once a default notice is received, we attempt to mitigate our
loss. Loss mitigation techniques include pre-foreclosure sales,
property sales after foreclosure, advances to assist distressed
borrowers who have suffered a temporary economic setback and the
use of repayment schedules, refinances, loan modifications,
forbearance agreements and
deeds-in-lieu
of foreclosure. When available, such mitigation efforts
typically result in reduced losses from the coverage percentage
stated in the certificate of insurance. During 2007 and 2008, we
experienced
10
limited opportunity to employ loss mitigation techniques and
when employed, the results generally did not provide the same
degree of savings as we have historically experienced. As a
result, we paid out approximately 88% and 81% of potential
exposure on all claims in 2008 and 2007, respectively, compared
to approximately 77% in 2006. We believe this increase is
primarily the result of the declining prices in the housing
market, the lack of credit in the mortgage market, and an
increase in paid claims from the most recent vintage years.
Recent
Loss Mitigation Initiatives
Success in mitigating losses is important to our success. Given
the level of home price depreciation over the past two years, we
have had limited opportunity to utilize loss mitigation
techniques that previously proved very successful.
As a result, we created a Strategic Initiatives Group to
identify, evaluate, prioritize, implement and measure new loss
mitigation and quality assurance tactics and strategies, and to
identify other opportunities to reduce losses and add value.
Over the past year, new initiatives implemented include:
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A proactive outreach by experienced workout specialists to
contact borrowers in default that are not currently engaged with
the loan servicer on a workout or mitigation effort. Their focus
is on understanding the borrowers financial situation and
developing a recommended loss mitigation path. A variety of
contacts are attempted and may involve
door-to-door
campaigns by field agents. Contacted borrowers are educated on
the alternatives available to them and, when possible, put in
contact with the servicers workout/loss mitigation
departments.
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Providing, in specific situations, preapproved/delegated
authority to servicers to modify Triad-insured loans. This
streamlines the process for the servicer and allows it to
respond to a borrower immediately.
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In certain instances, providing servicer final benefits under
the insurance policy without requiring a foreclosure proceeding.
As a result of settlement, coverage on the policy would be
cancelled, the insured would be provided a performing asset, and
the borrower would retain title.
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Placement of trained Triad loss mitigation personnel at a
servicers operational facility. These onsite personnel are
dedicated to assisting the servicers with workout and mitigation
efforts on all Triad loans.
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We are also active participants in the SMP and HMP and have
provided our delegated approval to the GSEs to make
modifications under these programs.
In addition, we also may obtain deficiency judgments against
borrowers in order to recoup some of our losses from the payment
of a claim. While this loss mitigation technique has previously
been employed, we have expanded use of this technique due to the
current economic environment. The availability and limitations
on obtaining deficiency judgments vary
state-by-state.
We continue efforts to identify, evaluate, and recommend
additional loss mitigation activities.
Loss
Reserves
We calculate our best estimate of the reserve for losses to
provide for the estimated costs of settling claims on loans
reported in default, and loans in default that are in the
process of being reported to us, as of the date of our financial
statements. In accordance with GAAP, we generally do not
establish loss reserves for the estimated cost of settling
claims on insured loans that are not currently in default. Our
reserving process incorporates various components in a model
that gives effect to current economic conditions and segment
defaults by a variety of criteria. The criteria include, among
others, policy year, lender, geography and the number of months
that the loan has been in default, as well as whether the
defaults were underwritten as flow business or as part of a
structured bulk transaction. Beginning in 2007, we incorporated
in the calculation of loss reserves the probability that a
policy may be rescinded for underwriting violations due to
borrower misrepresentation or program violations at origination.
See the Critical Accounting Policies section of
Managements Discussion and Analysis of Financial
Condition and Results of Operations for a more detailed
discussion of our loss reserving process. Detailed analysis of
our activity in loss reserves is provided in the Losses
and Expenses section of Managements Discussion
and Analysis of Financial Condition and Results of
Operations and Note 5 to the Consolidated Financial
Statements.
11
Gross
Risk in Force
We had $16.9 billion of gross risk in force as of
December 31, 2008 compared to $18.5 billion as of
December 31, 2007. Gross risk in force includes risk from
both Primary and Modified Pool insurance, prior to adjustment
for risk ceded to captives in our Primary flow business and
applicable stop loss limits and deductibles for Modified Pool
contracts. An analysis of the quality of our insured portfolio
is provided in the Insurance and Risk in Force
section of Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Geographic
Dispersion
The following tables reflect the percentage of gross risk in
force and the default rates on our book of business by location
of property as of December 31, 2008.
Geographic
Distribution of Risk in Force
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December 31,
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2008
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2007
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Gross Risk
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Rate of
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Gross Risk
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Rate of
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State
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in Force %
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Default
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in Force %
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Default
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California
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14.58
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%
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23.26
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%
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14.48
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%
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5.92
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%
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Florida
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11.56
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%
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25.94
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%
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11.44
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%
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7.36
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%
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Texas
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6.46
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%
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5.27
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%
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6.42
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%
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2.94
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%
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Arizona
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5.20
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%
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17.56
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%
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5.28
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%
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4.27
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%
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Illinois
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3.91
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%
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11.15
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%
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4.02
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%
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4.57
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%
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North Carolina
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3.84
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%
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5.59
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%
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3.79
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%
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3.11
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%
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Georgia
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3.54
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%
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8.47
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%
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3.55
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%
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3.82
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%
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Virginia
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3.28
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%
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9.54
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%
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3.27
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%
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3.36
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%
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Colorado
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3.20
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%
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6.62
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%
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3.27
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%
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3.68
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%
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New Jersey
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3.09
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%
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11.70
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%
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2.99
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%
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4.72
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%
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Nevada
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3.01
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%
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21.47
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%
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2.99
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%
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5.40
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%
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Washington
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2.81
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%
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6.74
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%
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2.88
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%
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1.71
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%
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New York
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2.70
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%
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9.00
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%
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2.56
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%
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4.82
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%
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Pennsylvania
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2.51
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%
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6.71
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%
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2.47
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%
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3.62
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%
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Maryland
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2.41
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%
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11.24
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%
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2.37
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%
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3.54
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%
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All Other States
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27.90
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%
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7.96
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%
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28.22
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%
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4.25
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%
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|
|
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|
|
|
|
|
|
|
|
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|
100.00
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%
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|
100.00
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%
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The table above shows that California, Florida, Arizona, and
Nevada contribute 34.4% of our gross risk in force as of
December 31, 2008. Our policies in these states have higher
default rates than the rest of the country and also have
significantly higher average loan amounts. Furthermore, these
states have also experienced some of the largest declines in
home prices, which reduces the availability of loss mitigation
opportunities for a default.
See the Production and In Force section of
Managements Discussion and Analysis of Financial
Condition and Results of Operations for further detailed
discussion on the characteristics of our direct risk in force.
Regulation
Our insurance subsidiaries are subject to comprehensive,
detailed regulation, principally for the protection of
policyholders rather than for the benefit of stockholders, by
the insurance departments of the various states in which each
insurer is licensed to transact business. Although their scope
varies, state insurance laws, in general, grant broad powers to
supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion over almost every
significant aspect of the insurance business. These include the
licensing of companies to transact business and varying degrees
of control over claims handling practices, reinsurance
requirements, premium rates,
12
the forms and policies offered to customers, financial
statements, periodic financial reporting, permissible
investments and adherence to financial standards relating to
statutory surplus, dividends and other criteria of solvency
intended to assure the satisfaction of obligations to
policyholders.
Because the parent company is an insurance holding company and
Triad is an Illinois-domiciled insurance company, the Illinois
insurance laws regulate, among other things, certain
transactions in the parent companys common stock and
certain transactions between Triad and the Company or its
affiliates. Specifically, no person may, directly or indirectly,
offer to acquire or acquire beneficial ownership of more than
10% of any class of outstanding securities of the Company or its
subsidiaries unless such person files a statement and other
documents with the Division and obtains the Divisions
prior approval. These restrictions generally apply to all
persons controlling or under common control with the insurance
companies. Control is presumed to exist if 10% or
more of Triads voting securities is owned or controlled,
directly or indirectly, by a person, although the Division may
find that control, in fact, does or does not exist
where a person owns or controls either a lesser or greater
amount of securities. Other states in addition to Illinois may
regulate affiliated transactions and the acquisition of control
of the Company or its insurance subsidiaries.
The insurance laws of Illinois generally limit the payments of
dividends by an insurance company unless it has sufficient
capital and surplus. However, under the Corrective Order, Triad
is currently prohibited, and expects to be prohibited for the
foreseeable future, from paying any dividends to its parent.
Triad also has a $25 million outstanding surplus note held
by the Company. Under the terms of the Corrective Order, Triad
is prohibited from paying interest or principal on the surplus
note until otherwise approved by the Division. See Item 1A,
Risk Factors for more information.
Mortgage insurers are required by Illinois insurance laws to
provide for a contingency reserve in an amount equal to at least
50% of earned premiums in its statutory financial statements.
Such reserves must be maintained for a period of 10 years
except in circumstances where prescribed levels of losses exceed
regulatory thresholds. Federal tax law permits mortgage guaranty
insurance companies to deduct from taxable income, subject to
certain limitations, the amounts added to contingency loss
reserves. As a result of operating losses in 2007 and 2008, the
previously established contingency reserve was released earlier
than the scheduled ten years in an amount that offset the
operating loss for federal tax reporting purposes. Accordingly,
the previously purchased ten-year non-interest bearing United
States Mortgage Guaranty Tax and Loss Bonds (Tax and Loss
Bonds) associated with the contingency reserve release
were redeemed earlier than originally scheduled. As of
December 31, 2008, Triad has redeemed substantially all of
its previously purchased Tax and Loss Bonds. Triad expects
operating losses for tax purposes to continue and net operating
loss carry forwards to be generated for federal income tax
reporting purposes for which it will be unable to receive any
immediate benefit in its statement of operations.
TGAC, organized as a subsidiary of Triad under the insurance
laws of the state of Illinois in December 1994, is subject to
all Illinois insurance regulatory requirements applicable to
Triad.
Triad Re, organized as a subsidiary of Triad under the insurance
laws of the state of Vermont in November 1999, is subject to all
Vermont insurance regulatory requirements.
Triad, TGAC and Triad Re are each subject to examination of
their affairs by the insurance departments of every state in
which they are licensed to transact business. The Division and
Vermont Insurance Commissioner periodically conduct financial
condition examinations of insurance companies domiciled in their
states. On March 3, 2008, the Division began examinations
of Triad and TGAC for the fiscal years 2004 through 2007. The
results of the examinations are reports on the condition of the
companies, which are certified by the Division and filed with
all state insurance departments. The examination was concluded
in August 2008, and the reports from this examination have not
yet been issued. We have received preliminary results that
indicate no adjustments or material recommendations are needed
as a result of this examination.
On February 9, 2009, the State of Vermont Department of
Banking, Insurance, Securities and Health Care Administration
began an examination of Triad Re for the fiscal years 2004
through 2008. We have received preliminary results that indicate
no adjustments or material recommendations are needed as a
result of this examination.
13
A number of states prohibit the writing of new business if the
insurers net risk in force is greater than 25 times the
insurers total policyholders surplus. This
restriction is commonly known as the
risk-to-capital
requirement. The Division has additional restrictions that limit
our ability to write new business. At December 31, 2008,
Triads
risk-to-capital
ratio was 125.2-to-1.
The Real Estate Settlement and Procedures Act of 1974
(RESPA) applies to most residential mortgages
insured by Triad, and related regulations provide that the
provision of services involving mortgage insurance is a
settlement service for purposes of loans subject to
RESPA. Subject to limited exceptions, RESPA prohibits persons
from accepting anything of value for referring real estate
settlement services to any provider of such services. Although
many states prohibit mortgage insurers from giving rebates,
RESPA has been interpreted to cover many non-fee services as
well.
The Company, Triad, and Triads subsidiaries are also
indirectly impacted by regulations affecting purchasers of
mortgage loans, such as Fannie Mae and Freddie Mac, and
regulations affecting governmental insurers, such as the FHA and
the Department of Veterans Affairs (VA), as well as
regulations affecting lenders. Triad is highly dependent upon
federal housing legislation and other laws and regulations that
affect the housing market. As previously mentioned, Fannie Mae
and Freddie Mac were placed into conservatorship by the FHFA in
August of 2008. Furthermore, recent government initiatives to
address the disruptions in the capital markets, the decline in
home prices and increasing foreclosures involve the operations
of Fannie Mae, Freddie Mac, and the FHA. As of the date of this
annual report on
Form 10-K,
we are unable to predict the impact that these recent government
initiatives and the conservatorship of Fannie Mae and Freddie
Mac will have on our future results of operations and prospects.
Additional federal or state government regulations could be
announced that may further affect our operations, either
positively or negatively.
See Corrective Order and Recent Government
Initiatives under this Item 1 for additional
information about regulatory restrictions and initiatives.
Available
Information
Through our web site we make available, free of charge, our
Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after this material is electronically filed with or
furnished to the SEC. This material may be accessed by visiting
the Investors/SEC Filings section of our web site at
www.triadguaranty.com. These filings are also accessible
on the SECs website, www.sec.gov. You may read and
copy any materials the Company files with the SEC at the
SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
(800) 732-0330.
Employees
As of March 6, 2009, we employed approximately
150 persons, with 149 persons being employed
full-time. Employees are not covered by any collective
bargaining agreement. We consider our employee relations to be
satisfactory.
14
Executive
Officers of the Registrant and its Primary
Subsidiaries
Our executive officers are as follows:
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Name
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Position
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Age
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Kenneth W. Jones
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President, Chief Executive Officer, Principal Financial Officer
of the Company and Triad and Director of Triad
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51
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Kenneth S. Dwyer
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Vice President and Chief Accounting Officer of the Company and
Triad
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58
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Shirley A. Gaddy
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Senior Vice President, Operations of Triad
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56
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Steven J. Haferman
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Senior Vice President, Strategic Initiatives and Director of
Triad
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47
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George Jackson
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Vice President, Information Services and Chief Information
Officer of Triad
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42
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William T. Ratliff, III(1)
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Executive Officer of the Company and Triad (through March 10,
2009)
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55
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Earl F. Wall
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Senior Vice President, Secretary, and General Counsel of the
Company and Triad and Director of Triad
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51
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(1) |
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Mr. Ratliff continues to serve as our Chairman of the Board
of Directors in a non-executive capacity (see Part II,
Item 9B., Other Information). |
Kenneth W. Jones has been employed as our President and
Chief Executive Officer since October 2008, and also serves as
our principal financial officer. Prior to his current position,
Mr. Jones served as our Senior Vice President and Chief
Financial Officer from April 2006 to October 2008.
Mr. Jones has over 25 years of experience in the
financial management of companies. Prior to joining Triad, he
was employed by RBC Liberty Insurance Corporation, where he
served as Senior Vice President and Chief Financial Officer from
November 2000 to December 2005. Previously, Mr. Jones was
associated with The Liberty Corporation, where he held a number
of management positions, most recently Vice President,
Controller and Acting Chief Financial Officer. Before joining
The Liberty Corporation, Mr. Jones was employed by
Ernst & Young LLP for 14 years.
Kenneth S. Dwyer has been employed as the Vice President
and Chief Accounting Officer of Triad Guaranty since September
2003. Previously, Mr. Dwyer served as Vice President and
Controller of Jefferson Pilot from 1997 to 2003. Prior to that,
he was the Vice President and Controller of Pan American Life
Insurance and was also employed by Deloitte & Touche
as a senior manager.
Shirley A. Gaddy joined Triad in 1996 and has been Senior
Vice President, Operations since April 2002. Previously,
Ms. Gaddy was employed by Life of the South from 1995 to
1996 as Assistant Vice President. She was with Integon Life
Insurance Corporation from March 1972 to December 1994, most
recently as Assistant Vice President, Manager Credit Insurance.
Ms. Gaddy has been in the insurance/mortgage industry for
over 33 years.
Stephen J. Haferman has been employed as our Senior Vice
President, Strategic Initiatives since July 2008. Previously,
Mr. Haferman served as Vice President, Risk Management and
Information Technology from March 2006 to July 2008.
Mr. Haferman was previously employed by Cheryl and Company
from February 2003 to March 2006, where he served as Senior Vice
President, Chief Operating Officer. From June 2001 to January
2003, Mr. Haferman was employed by American Electric Power
as Vice President, Marketing Information Management. From 1992
to 2001, he worked for Bank One Corporation in a number of
divisions and a variety of senior management positions,
including Senior Vice President, Direct Marketing for Bank One
Retail; Senior Vice President, Technology Program Manager, Bank
One Retail; and Vice President, Risk Department Manager. From
1988 to 1992, he worked for National City Bank where he was Risk
Manager.
George L. Jackson has been Vice President, Information
Services and Chief Information Officer since July 2008.
Mr. Jackson served as our Vice President, Information
Services from January 2005 to July 2008 and Assistant Vice
President, Technology Services from January 2000 to December
2004. He joined Triad in 1998 as a Project Manager.
Mr. Jackson has 23 years of management experience in
the Information Technology industry. Previously,
15
Mr. Jackson held IT management positions at Unifi, ISSI,
Roy F. Weston, and Aquidneck Data Corporation (Kodak).
William T. Ratliff, III served as the interim
President and Chief Executive Officer from July 18, 2008
until October 22, 2008, and continued to serve as an
executive officer from October 22, 2008 until
March 10, 2009. Mr. Ratliff, III has been the
Chairman of the Board of the Company since 1993.
Mr. Ratliff, III was Chairman of the Board of Triad
from 1989 to 2005 and President of Collateral Investment Corp.
from 1990 to 2005. Mr. Ratliff, III has also been
President of Collat, Inc. since 1995 and a director since 1987.
Mr. Ratliff, III has been Chairman of the Board of
Directors of New South Federal Savings Bank since 1986 and
President and a director of New South Bancshares, Inc., New
Souths parent company, since 1994.
Earl F. Wall has been Senior Vice President of Triad
since November 1999, General Counsel of Triad since January
1996, and Secretary since June 1996. Mr. Wall also served
as Vice President of Triad from 1996 until 1999. From 1982 to
1995, Mr. Wall was employed by Integon Life Insurance
Corporation in a number of capacities including Vice President,
Associate General Counsel, and Director of Integon Life
Insurance Corporation and Georgia International Life Insurance
Corporation, Vice President and General Counsel of Integon
Mortgage Guaranty Insurance Corporation, and Vice President,
General Counsel, and Director of Marketing One, Inc.
Officers of the Company serve at the discretion of the Board of
Directors of the Company.
Our results could be affected by the risk factors discussed
below. These factors may also cause our actual results to differ
materially from the results contemplated by forward-looking
statements made by us in Managements Discussion and
Analysis of Financial Condition and Results of Operations
or elsewhere. Investors should consider these factors carefully
in reading this annual report on
Form 10-K.
A deeper or prolonged recession in the United States coupled
with continued tightened credit in mortgage markets may increase
mortgage defaults and limit opportunities for borrowers to cure
defaults or for our company to mitigate its losses, which would
adversely impact the future value of our company.
The United States is in one of the most severe recessions in
modern history and has experienced significant negative
macroeconomic trends, including widespread job losses, higher
unemployment, lower consumer spending, continued declines in
home prices and substantial increases in delinquencies on
consumer debt, including defaults on home mortgages. Moreover,
disruptions in the financial markets during 2008 and continuing
into 2009, particularly the reduced availability of credit and
tightened lending requirements, have impacted the ability of
borrowers to refinance loans or sell their existing homes.
Economists are predicting a longer and more severe recession,
which will have a substantial negative impact on our business.
Similarly, while tight credit markets facilitate higher
persistency, they also limit the flexibility of borrowers when
dealing with a loan in default. In particular, recessionary
forces and tight credit markets can lead to greater defaults in
both number and in severity and otherwise adversely impact the
performance of our existing mortgage insurance in force,
including reducing our default cure rates, increasing the amount
or accelerating the timing of our claims payments, and limiting
our ability to mitigate losses. A recession more severe than we
have anticipated may cause our future performance to vary
significantly from the projections we submitted to the Division
in our corrective plan, which could cause the Division to place
us in rehabilitation or to appoint a receiver to liquidate our
assets, in which case the market value of our common stock would
be reduced or eliminated and little or no funds would ever be
available for distribution to our stockholders.
In October 2008, we received approval of a corrective plan
provided to the Division. The corrective plan, among other
items, provided our best estimate of the financial results of
Triad through December 31, 2012. Substantial adverse
changes in the U.S. economy have occurred since we submitted the
corrective plan, including a continuing decline of home prices,
increasing unemployment rates, and a continuation of tight
credit markets. If we are unable to demonstrate to the
satisfaction of the Division that our financial and operating
plan will likely produce a solvent run-off, the Division may
take additional actions regarding Triad that may have a material
adverse effect on our financial condition or results of
operations.
16
In addition to enforcing the normal regulatory requirements, the
Division has a significant amount of oversight pursuant to the
Corrective Order issued in August 2008. Our corrective plan
approved by the Division in October 2008 anticipated a solvent
run-off based upon our best estimate at the time of future
defaults and claims. The financial statements for our insurance
operating subsidiaries that are provided to the Division and
that form the basis of our corrective plan were prepared in
accordance with Statutory Accounting Principles
(SAP) set forth in the Illinois Insurance Code. SAP
differs from GAAP, which are followed to prepare the financial
statements presented in this annual report on
Form 10-K.
The primary differences between GAAP and SAP for Triad at
December 31, 2008 are the methodology utilized for the
establishment of reserves and the recognition of the net amount
for the excess of loss reinsurance policy that is currently in
arbitration. Triads policyholders surplus calculated
in accordance with SAP declined from $220 million at
September 30, 2008 to $88 million at December 31,
2008. We have already recorded a deficit in assets calculated in
accordance with GAAP as of December 31, 2008.
Since the submission of the corrective plan, the worsening
recession has negatively impacted the number of Triads
reported defaults and caused increased losses from operations,
in each case in amounts greater than the amounts originally
forecasted in our corrective plan. We are currently refining our
projections based upon updated assumptions concerning a number
of factors, including higher default rates, further declines in
home prices, and increases in unemployment rates. Our new
assumptions produce a range of potential ultimate outcomes for
our run-off, but include projections showing that on a likely
case basis and absent additional action by the Division or
favorable changes in our business, we will report a deficiency
in policyholders surplus in our SAP balance sheet as early
as March 31, 2009 and continuing at least through 2011.
Although we currently project that this insolvency under SAP
will be temporary and our run-off will ultimately be successful,
we believe such insolvency would likely lead to the institution
by the Division of receivership proceedings against TGIC if not
corrected, which would have a material adverse effect on our
business and stockholders and likely would cause us to cease to
continue as a going concern.
If the Division does not believe that our financial and
operating plan is likely to produce a solvent run-off, it may
appoint a conservator or liquidator of Triad for the protection
of its existing policyholders. Any receivership proceeding
involving Triad could effectively eliminate all value associated
with the parent companys ownership of Triad.
We are currently working with the Division to structure a
revised corrective plan to address our projected SAP deficiency
in policyholders surplus, although no assurance can be
given that we will be successful in these efforts. If we are
unable to gain approval from the Division for a revised
corrective plan that addresses this issue, the Division could
place TGIC into receivership proceedings, including the
placement of Triad in rehabilitation, the appointment of a
conservator for Triad or the appointment of a receiver to
liquidate Triads assets. Any receivership proceeding
involving Triad could effectively eliminate all value associated
with our ownership of this operating subsidiary, in which case
the market value of our common stock would be reduced or
eliminated and little or no funds would ever be available for
distribution to our stockholders. If Triad were placed in
receivership proceedings by the Division or if we were unable to
pay our indebtedness or other obligations when due, we would
cease to continue as a going concern and we could be forced to
seek protection from creditors under Chapter 11 of the
United States Bankruptcy Code, and little or no funds would ever
be available for distribution to our stockholders.
Under terms of the Corrective Order with the Division and the
terms of the original surplus note, Triad is prohibited from
making interest payments on its $25 million surplus note to
the holding company. If the financial condition of Triad
continues to deteriorate, then the Division will be unable to
lift that restriction for the foreseeable future, which would
jeopardize the ability of the holding company to make the
required interest payments on its $35 million outstanding
long-term debt.
The terms of the $25 million surplus note at Triad restrict
the accrual or payment of interest if the statutory surplus at
the time the scheduled interest payment is due falls below the
level of the statutory surplus at origination of this note. In
the second quarter of 2008, the statutory surplus fell below the
balance at origination of the note, effectively prohibiting the
payment of interest for the foreseeable future. Additionally,
the Corrective Order prohibits the payment of interest or
principal on the surplus note. The holding company has limited
assets and even more limited sources of revenues. Current
financial projections do not anticipate any growth in surplus
through the foreseeable future that would enable the payment of
interest on the surplus note nor do we expect to seek to obtain
17
the approval from the Division to lift this restriction under
the Corrective Order. Without the payment of interest from Triad
on the $25 million surplus note, the Companys ability
to service its existing debt would be limited and would
eventually result in a default on its existing long-term debt.
There is substantial doubt about our ability to continue as a
going concern.
We have prepared our financial statements on a going concern
basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course
of business. However, there is substantial doubt as to our
ability to continue as a going concern. This uncertainty is
based on the ability of Triad to comply with the provisions of
the Corrective Order, our recurring losses from operations and a
deficit in assets at December 31, 2008. Our financial
statements included in this annual report do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts of liabilities that might be
necessary should we be unable to continue in existence.
The report of our independent registered public accounting firm
dated March 13, 2009 on our consolidated financial
statements for the two years ended December 31, 2008 and
2007 notes that there is substantial doubt about our ability to
continue as a going concern.
Triad has historically reimbursed its parent company for
operating expenses incurred on behalf of the operating
subsidiary under terms of a capital management agreement. Terms
of the Corrective Order require the approval of the Division for
all intercompany transactions. If we are unable to obtain the
Divisions approval for Triad to reimburse certain
operating costs of the parent company, then the limited assets
of the parent company will dissipate at a much greater pace,
which would further jeopardize the ability of the parent company
to make the required interest payments on its $35 million
outstanding long-term debt.
During 2008, Triad reimbursed its parent in excess of
$4 million for certain operating expenses. Examples of
items reimbursed in 2008 include directors fees, legal and
accounting fees and certain insurance premiums. The parent
company has minimal investment income and a limited amount of
assets and is currently paying the debt service on its
$35 million long-term debt from these assets. If the
holding company is unable to recoup the majority of its cash
expenses from Triad, the length of time in which the holding
company will be able to make the required debt service payments
on the $35 million outstanding long-term debt will be
reduced.
Our operating cash flow consists of net premium received plus
investment income less losses and expenses paid. We expect a
deficit in our operating cash flow in 2009 and beyond. During
2008, we began to reposition our existing investment portfolio
reflecting our inability to benefit from tax-advantaged
securities and to match maturities in the investment portfolio
to expected operating cash flow deficits in 2009 and beyond. In
2008, the financial markets, including the fixed-maturity debt
markets, experienced unprecedented turbulence, causing prices to
drop precipitously from period to period. While we successfully
completed the repositioning of the majority of the portfolio at
December 31, 2008, we had approximately $159 million
of municipal securities remaining in our portfolio that we plan
to sell in the future. If the proceeds from maturities of
securities are not sufficient to cover operating cash flow
deficits we could be forced to liquidate securities which,
depending on market conditions, may result in realized
investment losses.
As it became evident early in 2008 that we would no longer be
able to achieve tax benefits from the tax-exempt income provided
by municipal securities due to the significant tax losses being
generated from operations, we developed a strategy to liquidate
those securities and convert to higher-yielding taxable bonds.
During 2008, the additional credit enhancement provided by
financial guarantors on approximately 60% of our municipal
portfolio proved to be of limited value due primarily to the
guarantors involvement in the subprime mortgage crisis,
causing the fair value of these securities to decline. While we
transitioned approximately 80% of our municipal portfolio to
taxable securities by the end of 2008, falling prices and
illiquidity in the marketplace contributed to our inability to
execute our strategy completely.
At the same time we were repositioning the portfolio to a higher
yielding taxable portfolio, we also shortened the maturity of
our portfolio to better match our anticipated cash needs
resulting from the anticipated increase in claims. If our
planned matching of investment maturities to anticipated cash
needs fails to provide sufficient cash flow, then we could be
forced to liquidate securities which may result in realized
investment losses.
18
The Company is currently listed on The NASDAQ Stock Market.
The NASDAQ Stock Market has certain continued listing
requirements regarding public float, minimum bid price, and net
worth, among others. If we are unable to meet these continued
listing requirements, our common stock may be delisted in which
case trading would be available only in
over-the-counter
markets and stockholder liquidity would be adversely
affected.
The Company is currently listed on the NASDAQ Stock Market. The
financial crisis that has developed over the past year has had a
severe impact on the stock markets. Generally, most stock market
indices have reported declines in the 40% to 50% range over the
past year. Due to the significant decline in stock prices,
NASDAQ has temporarily suspended certain of its listing
requirements. If these temporary suspensions are lifted, we may
be in violation of certain listing requirements and may be
delisted. While NASDAQ does provide for an appeals process that
could enable us to remain listed on NASDAQ, there is no
guarantee that we would be successful in an appeal or that we
would choose to appeal. If we are delisted from the NASDAQ stock
market, our common stock likely would be traded only in the
over-the-counter
markets and stockholder liquidity would be adversely affected.
Fannie Mae and Freddie Mac were both placed under the
conservatorship of FHFA, an agency of the United States
Government in 2008. They are currently in the process of
re-examining their capitalization, business practices, rules
surrounding modifications of existing mortgages, and other items
that could impact our business during run-off. Changes in the
business practices or legislation relating to Fannie Mae and
Freddie Mac could significantly impact our results in
run-off.
Fannie Mae and Freddie Mac are the beneficiaries of the majority
of our policies, and their business practices have a significant
influence on us. Additionally, Fannie Mae and Freddie Mac can
alter the terms on which mortgage insurance coverage can be
canceled before reaching the cancellation thresholds established
by law, and the circumstances in which mortgage servicers must
perform activities intended to avoid or mitigate loss on insured
mortgages that are delinquent. FHFA has placed both Fannie Mae
and Freddie Mac in conservatorship. Furthermore, the recent
housing turmoil has prompted a number of actions by the federal
government to support the housing market in general as well as
specifically supporting distressed borrowers. These actions and
future federal government actions may impact Fannie Mae and
Freddie Mac. If the business practices of Fannie Mae and Freddie
Mac change as a result of conservatorship or legislation or
other federal government initiatives, our financial condition
and results of operations could be adversely impacted.
Risks
Related to Economic Conditions
If deteriorating economic conditions alter the frequency and
severity patterns utilized in our estimates for reserves for
losses, we may be required to take additional charges to results
of operations.
We calculate our best estimate of the reserve for losses to
provide for the estimated costs of settling claims on loans
reported in default, and loans in default that are in the
process of being reported to us, as of the date of our financial
statements. Our reserving process incorporates various
components in a model that gives effect to current economic
conditions and segment defaults by a variety of criteria. The
criteria include, among others, policy year, lender, geography,
the number of months and number of times the policy has been in
default, the probability the policy may be rescinded for
underwriting violations, as well as whether the defaults were
underwritten as flow business or as part of a Primary or
structured bulk transaction.
Frequency and severity are the two most significant assumptions
in the establishment of our loss reserves. Frequency is used to
estimate the ultimate number of paid claims associated with the
current defaulted loans. The frequency estimate assumes that
historical experience, taking into consideration criteria such
as those described in the preceding paragraph, and adjusted for
current economic conditions that we believe will significantly
impact the long-term loss development, provides a reasonable
basis for forecasting the number of claims that will be paid. An
important consideration in determining the frequency factor is
the cure rate. In general, the cure rate is the percentage of
reported defaults that ultimately are brought current
(1) through payments of all past due payments or
(2) by disposing of the property securing the mortgage
before foreclosure with no claim ever filed because the proceeds
of the sale satisfied the mortgage. During 2007 and 2008, our
cure rate declined as home prices declined and the ability to
dispose of the property through a sale before foreclosure
diminished. If our assumptions regarding anticipated cure rates
as well as other considerations used in the frequency factor
vary from those actually
19
experienced in the future, actual paid claims on the existing
delinquent loans may exceed the reserves that we have
established and require an additional charge to results of
operations.
A growing consideration in the establishment of our frequency
factor assumptions during 2008 was the impact of rescissions.
Loans that are four or more months past due within the first
twenty three months since origination are classified as an Early
Payment Default (EPD). Terms of our master policies allow Triad
to rescind coverage on an EPD for fraud or program violations
that occurred during the mortgage loan origination process. When
a certificate is rescinded, the treatment is similar to a cure
for reserving purposes and we no longer calculate a reserve on
that loan. Due to the unusually high levels of rescissions on
those EPDs for which we completed our investigation, our
reserving methodology incorporates an expected rescission
percentage on the EPDs that we are in the process of
investigating. In the fourth quarter of 2008, in response to
increased rescission activity we expanded the criteria used to
determine whether a default would be investigated for
underwriting violations in accordance with our master policy
provisions. If our assumptions regarding anticipated rescission
rates used in the frequency factor vary from those actually
experienced in the future, actual paid claims on the existing
delinquent loans may exceed the reserves that we have
established and require an additional subsequent charge to
results of operations. Any impediment to our ability to rescind
coverage for underwriting violations would be detrimental to our
success in run-off.
Severity is the estimate of the dollar amount per claim that
will be paid. The severity factors are estimates of the
percentage of the risk in default that will ultimately be paid.
The severity factors used in setting loss reserves are based on
an analysis of the severity rates of recently paid claims,
applied to the risk in force of the loans currently in default.
An important component in the establishment of the severity
factor is the expected value of the underlying home for loans in
default compared to the outstanding mortgage loan amount. If our
assumptions regarding anticipated house price depreciation as
well as other considerations used in the severity factor vary
from those actually experienced in the future, actual paid
claims on the existing delinquent loans may exceed the reserves
that we have established and require an additional charge to
results of operations.
The frequency and severity factors are updated quarterly to
respond to the most recent data. The estimation of loss reserves
requires assumptions as to future events, and there are inherent
risks and uncertainties involved in making these assumptions.
Economic conditions that have affected the development of loss
reserves in the past may not necessarily affect development
patterns in the future in either a similar manner or degree. To
the extent that possible future adverse economic conditions such
as declining cure rates or declining housing prices alter those
historical frequency and severity patterns, actual paid claims
on the existing delinquent loans may be greater than the
reserves that we have provided and require a charge to results
of operations.
Consistent with industry practice, we provide reserves only
for loans in default that have been reported to us rather than
on our estimate of the ultimate loss. As such, our results of
operations in certain periods could be disproportionately
affected by the timing of reported defaults.
Reserves are provided for the estimated ultimate costs of
settling claims on both loans reported in default and loans in
default that are in the process of being reported to us.
Generally accepted accounting principles preclude us from
establishing loss reserves for future claims on insured loans
that are not currently in default. We generally do not establish
reserves until we are notified that a borrower has failed to
make at least two payments when due. During 2008, the loans in
default for which we provide reserves grew 139% to 40,286 at
December 31, 2008. A prolonged deterioration of general
economic conditions such as increasing unemployment rates or
declining housing prices could adversely alter the historical
delinquency patterns, resulting in an even larger percentage
increase in the level of loans in default than that experienced
in 2008. An increase in the number of loans in default would
require additional reserves and a charge to results of
operations as they are reported to us.
During 2008 the United States housing market experienced a
significant amount of home price depreciation, which had a
direct negative impact on our loss reserves and paid claims
during 2008. If home prices continue to decline on a more
significant or larger geographic basis than what we experienced
in 2008, we may incur a higher level of losses from paid claims
and also be required to increase our loss reserves.
Primary components of our loss mitigation efforts include
selling a property prior to foreclosure as well as purchasing
the property in lieu of paying the coverage percentage specified
in the insurance policy. Home prices
20
affect both these mitigation options. The
S&P/Case-Shiller©
Home Price Index for the 20-City Composite as of December 2008
indicated an annual 18.6% decline in home prices from one year
ago, the largest annual decline since the index was first
published. There were declines in every city comprising the
index during 2008, indicating that home price depreciation is
not limited to certain geographical locations in the United
States. This high level of home price depreciation has
negatively affected our ability to mitigate losses. If housing
values fail to appreciate or decline on a more significant and
larger geographic basis, the frequency of loans going into
default and eventually to a paid claim could increase and our
ability to mitigate our losses on defaulted mortgages may be
further reduced, which could have a material adverse effect on
our business, financial condition and operating results.
Because a significant portion of our business is sensitive to
interest rates, a large increase in rates would cause higher
monthly mortgage payments for borrowers that could potentially
lead to a greater number of defaults, which would adversely
impact our business.
At December 31, 2008, approximately 33% of our Primary
gross risk in force and approximately 74% of our Modified Pool
gross risk in force was comprised of adjustable-rate mortgage
loans or ARMs. Monthly payments on these loans are
altered periodically through an adjustment of the interest rate.
Many ARMs have a fixed interest rate for a stated period of
time, and accordingly, have not yet been subject to an interest
rate adjustment. In periods of rising interest rates, a
borrowers monthly payment will increase. A large increase
in interest rates over a short period of time could lead to
payment shocks for borrowers that could potentially
lead to more reported defaults.
At December 31, 2008, approximately 12% of our Primary
gross risk in force and 14% of our Modified Pool gross risk in
force was comprised of pay option ARMs with the potential for
negative amortization on the loan. These loans provide borrowers
the option, for a stated period of time, to make monthly
payments that do not cover the interest due on the loan. If the
borrower chooses this payment option, the unpaid interest is
added to the outstanding loan amount, which creates negative
amortization. These pay option ARM loans may have a heightened
propensity to default because of possible payment
shocks after the initial low-payment period expires and
because the borrower does not automatically build equity through
loan amortization as payments are made. We already have
experienced a substantially higher default rate on pay option
ARMs than the remainder of our portfolio, even before many of
these loans were scheduled to shift to amortizing payments. The
risk of default may be further increased if the interest rate
paid during the payment option period is significantly below
current market rates. Additionally, the lack of long-term
historical performance data associated with pay option ARMs
across all market conditions makes it difficult to project
performance and could increase the volatility of the estimates
used in our reserve models. If interest rates increase and cause
payment shocks to borrowers with ARMs, our default
rate could increase, which could have a material adverse impact
on our business, financial condition and operating results.
Geographic concentration of our risk in force in certain
distressed markets has resulted in increased defaults and higher
risk in default from the significantly larger loans in these
states. Ongoing house price depreciation in these distressed
markets could lead to further increases in reserves and paid
claims, which could further negatively impact our financial
performance.
At December 31, 2008, our risk in force for California,
Florida, Arizona and Nevada, which we classify as
distressed markets, represented approximately 34% of
our gross risk in force on a per policy basis. These distressed
markets have experienced some of the most rapid home price
depreciation in 2007 and 2008 and disruption in the housing
markets when compared to the rest of the country. Moreover, they
represented 60% of both our risk in default and our loss
reserves. The default rate at December 31, 2008 in these
distressed markets amounted to 22.7% compared to 11.7% for the
remainder of our portfolio. If the housing markets continue to
decline at a steep rate or for an extended period of time in
these distressed markets, we could experience additional adverse
effects on our operating results and financial condition due to
the large concentration of our business in these distressed
markets.
We experienced a significant increase in reported defaults
and paid claims during 2008. If the pace of declining home
prices and ongoing credit problems in the mortgage marketplace
continues or remains unsettled, we anticipate an increased
number of defaults and paid claims, which would have a negative
impact on our results of operations.
21
Beginning in 2006 and continuing in 2007 and 2008, home prices
in most geographic areas declined. Many borrowers that had
qualified for mortgages under less restrictive credit standards
have found it difficult to meet their ongoing mortgage payments.
Faced with declining home values and a tight market for credit,
borrowers unable to meet their payment obligations often cannot
refinance, and are not able to sell their homes for an amount
sufficient to pay off their mortgage. These conditions have
resulted in greater borrower defaults, contributing to a 139%
increase in our default rate during 2008. The default rates on
the 2006 and 2007 vintage years, which contain increased risk
factors such as Alt-A and pay option ARMs, especially in the
distressed market states of California, Florida, Arizona and
Nevada, have been particularly high. These factors contributed
significantly to the substantial increase in our reserves during
the year and, if they continue, are expected to result in
additional and significant increases in our reserves in the
future.
The inability of borrowers to sell their homes or refinance
their mortgages in the current environment has resulted in a
greater percentage of defaulted loans becoming claims by lenders
against mortgage insurers. As a result, we have lowered our
assumptions regarding the cure rates for the purpose of our
reserve models, which causes an increase in our frequency
factor. The decrease in the cure rate was a significant reason
for the increase in our reserves during the year. If the factors
described above continue, we expect further increases in actual
defaults, further decreases in our cure rates and corresponding
increases in our reserves that would significantly and adversely
affect our results of operations.
Due to the fact that we are in run-off and cannot replace our
existing business, an extended period of low mortgage interest
rates and relaxed credit terms for our existing borrowers could
lead to increased refinance activity that could have a negative
impact on persistency, which would lead ultimately to reduced
premiums.
In an effort to stimulate the housing markets, the Obama
administration has announced plans to attempt to lower mortgage
interest rates. Interest rates fell over the last several months
of 2008 and are generally expected to remain at historical low
levels for some period of time. This could allow certain
borrowers with sufficient LTV and credit scores to refinance
their mortgages at a lower rate. Additionally, an extended
period of low interest rates presents borrowers with an ARM
product the opportunity to refinance to a fixed rate product.
When borrowers refinance, our coverage terminates and we cannot
provide coverage on the refinanced loan because we are in
run-off. An extended period of low mortgage interest rates could
lead to increased refinancings, which would have a negative
impact on persistency and could result in decreased revenues due
to a reduction of insurance in force. Additionally, those that
could qualify for refinancing would be deemed to be the better
credit risks and thereby create anti-selection for the remaining
portfolio as those remaining would be deemed to be a worse
credit risk.
Risks
Related to Products
A large portion of our insurance in force consists of loans
with high
loan-to-value
ratios, which could result in a greater number of defaults and
larger claims than loans with lower
loan-to-value
ratios during periods of declining home prices.
At December 31, 2008, approximately 14% of our mortgage
insurance in force consisted of insurance on mortgage loans with
LTVs at origination greater than 95%. In periods of declining
home prices such as 2007 and 2008, these loans have a greater
propensity to default due to the limited equity investment of
the borrower. Loans with greater than 95% LTV at origination
have experienced a significantly greater default rate than lower
LTVs as of December 31, 2008. Many of the high LTV loans
also contain other risk factors such as geographic location in
distressed markets and were originated with reduced
documentation. Faced with mortgages that are greater than the
value of the home, a number of borrowers are simply abandoning
the property and walking away from the mortgage, without regard
to their ability to pay. This limits the ability of the servicer
to work with the borrowers to avoid defaults and foreclosure and
increases the imbalance of the housing inventory for sale, which
in turn further depresses home prices. If we are required to pay
a claim on a high LTV loan, our loss mitigation opportunities
are limited during these periods of declining home prices and we
generally are required to pay the full option payment, which is
the highest amount that we could pay under our contracts with
lenders. If we experience an increased default rate and paid
claims on high LTV loans, our results of operations could be
adversely affected.
22
Risks
Related to Operations
Because we generally cannot cancel mortgage insurance
policies or adjust renewal premiums due to changing economic
conditions, unanticipated defaults and claims could cause our
financial performance to suffer significantly.
We generally cannot cancel the mortgage insurance coverage that
we provide or adjust renewal premiums during the life of a
mortgage insurance policy, even as economic factors change. As a
result, the impact of unanticipated changes, such as the
dramatic decline in home prices resulting in increased defaults
and claims like those experienced in 2008, generally cannot be
offset by premium increases on policies in force or cancellation
of insurance coverage. The premiums we charge may not be
adequate to compensate us for the risks and costs associated
with the insurance coverage provided to our customers,
especially in distressed financial markets. An increase in the
number or size of unanticipated defaults and claims could
adversely affect our financial condition and operating results
because we could not cancel existing policies or increase
renewal premiums.
Our loss
experience is likely to increase as our policies continue to
age.
Historically, we expect the majority of claims on insured loans
in our current portfolio to occur during the second through the
fifth years after loan origination. However, in recent years, we
experienced an earlier default and claim pattern, with 74% of
our risk in default at December 31, 2008 coming from the
2006 and 2007 vintage years. While we experienced an earlier
default rate among our 2006 and 2007 vintages, we are still
experiencing the normal seasoning on our older vintage years
that are now in the peak default and claim paying period. Total
insurance written from the period of January 1, 2004
through December 31, 2007 (vintage years within the
historical highest default and claim paying period) represented
86% of our risk in force as of December 31, 2008.
Accordingly, a significant majority of our portfolio is in, or
approaching, its peak claim years. We believe our loss
experience is likely to increase as our policies age. If the
claim frequency on our risk in force significantly exceeds the
claim frequency that was assumed in setting our premium rates,
our financial condition and results of operations could be
adversely affected.
Insurance written under our delegated underwriting program
may subject our mortgage insurance business to unanticipated
claims.
A significant percentage of our insurance in force was
underwritten pursuant to a delegated underwriting program. These
programs permitted certain mortgage lenders to determine whether
mortgage loans meet our program guidelines and enabled these
lenders to commit us to issue mortgage insurance. If an approved
lender committed us to insure a mortgage loan, we may rescind
coverage on that loan if the lender failed to follow our
delegated underwriting guidelines. We generally remain at risk
for any loans previously insured on our behalf by the lender,
absent fraud or other similar circumstances. The performance of
loans insured through programs of delegated underwriting has not
been tested over a period of extended adverse economic
conditions such as we currently find ourselves in, meaning that
the program could lead to greater losses than we anticipate. If
losses are significantly greater than anticipated, our delegated
underwriting program could have a material adverse effect on our
business, financial condition and operating results.
If we failed to properly underwrite mortgage loans when we
provided contract underwriting services, we may be required to
provide monetary and other remedies to the customer.
Under the terms of our contract underwriting agreements with
certain lenders, we agreed to indemnify the lender against
losses incurred in the event that we make material errors in
determining whether loans processed by our contract underwriters
meet specified underwriting or purchase criteria, subject to
contractual limitations on liability. The indemnification may be
in the form of monetary or other remedies. As a result, we
assumed risk in connection with our contract underwriting
services. Factors that could affect the performance of loans for
which we contract underwrote, including but not limited to
worsening economic conditions and falling home prices, could
cause our contract underwriting liabilities to increase and have
an adverse effect on our financial condition and results of
operations. Although we have established a reserve to provide
for potential claims in connection with our contract
underwriting services, we have limited historical experience in
establishing reserves for these potential liabilities, and these
reserves may not be adequate to cover liabilities that may arise.
23
If many of our lender partners for which we have entered into
risk-sharing agreements, such as captive reinsurance treaties,
continue under financial stress for an extended period of time,
then the ability of these lenders to meet their financial
obligations under the captive reinsurance treaties may be
limited to the trust balances maintained within the reinsurance
structures, which could have an adverse impact on our future
results of operations.
Several of the lenders for which we had established captive
reinsurance programs are in bankruptcy or have been taken over
by Governmental agencies or lenders and many more are suffering
financial stress. An integral component of the reinsurance
treaties include trust balances, which remain under our control,
to support a portion of the risk assumed by the reinsurer. As
defaults increase and we reach the point where the attachment
point is exceeded for individual vintage years, we cede reserves
to the captive. When reserves are initially ceded to the
captive, the requirement for additional trust balances generally
increases. When the need for additional trust balances cannot be
met through ceded reinsurance premiums, then additional capital
contributions could be required by the lender. The ability of
the lenders that are currently under financial stress to meet
their future financial obligations under the captive reinsurance
agreements beyond the existing trust balances may be limited,
which could have an adverse impact on future results of
operations. If for any reason a lender is unable to fund its
reinsurance obligations, Triad would remain obligated to pay the
claims, which would increase our losses.
We have not recorded any of the benefits or liabilities of
the $95 million Excess of Loss reinsurance treaty in our
GAAP financial statements. If we are unsuccessful in our
arbitration hearings with the reinsurer, this could have a
significant adverse impact on our ability to complete a
successful run-off.
Triad maintains a $95 million
Excess-of-Loss
reinsurance treaty that provides a benefit when Triads
risk-to-capital
ratio exceeds 25-to-1 and its combined ratio exceeds 100% (the
attachment point). Once the attachment point has
been reached, following a one-time deductible of
$25 million, the carrier is responsible for reimbursement
of all paid losses in each quarter that the attachment point is
breached up to the one-time $95 million policy limit. The
coverage period is for 10 years. Additionally, terms of the
treaty require Triad to continue the payment of premiums to the
reinsurer amounting to approximately $2 million per year
for the entire ten year period. The reinsurance treaty attached
at the end of the first quarter of 2008, however, the
reinsurance carrier subsequently provided a purported notice of
termination of the agreement. The matter is currently in
arbitration and we expect a decision in the second quarter of
2009. If we are unsuccessful in our arbitration hearings with
the reinsurer, this could have a significant adverse impact on
future viability for a successful run-off.
Loan servicers have recently experienced a significant
increase in their workload due to the rapid growth in defaults
and foreclosures. If the loan servicer fails to act proactively
with delinquent borrowers in an effort to avoid foreclosure,
then the number of delinquent loans eventually going to claim
status could increase.
The loan servicer maintains the primary contact with the
borrowers throughout the life of the loan but we can become
involved with any potential loss mitigation. During periods of
declining home prices and increased delinquencies, such as that
currently being experienced in the mortgage business, it is
important to us that the servicer be proactive in dealing with
borrowers rather than simply allowing the loan to go to
foreclosure. Historically, when a servicer becomes involved at
an earlier stage of delinquency with workout programs and credit
counseling, there is a greater likelihood that the loan will not
go to foreclosure and will not result in a claim. During periods
of increased delinquencies, it becomes extremely important that
the servicer be properly staffed and trained to assist borrowers
to avoid foreclosure. From our perspective, it is also extremely
important to involve us as part of the loss mitigation effort as
early as possible. If loan servicers do not properly staff and
train their personnel or enlist our assistance in loss
mitigation efforts, then the number of loans going to
foreclosure may increase, resulting in a greater number of
claims that we are required to pay, which will have an adverse
impact on our future operating results.
Triad is operating in run-off under a Corrective Order from
the Division and the outlook for the entire mortgage insurance
industry remains uncertain. Maintaining experienced staff is
critical to achieving a successful run-off.
We took significant actions in 2008 to eliminate all sales,
marketing, and underwriting personnel as well as a number of
personnel supporting those functions as we transitioned into
run-off. The very nature of run-off as well as
24
the recent negative news concerning the financial markets,
especially the mortgage markets, has introduced some level of
stress and uncertainty among our remaining employees. We
established severance and retention plans to help retain our key
personnel that are scheduled to expire at the end of 2009. If we
fail to adopt or gain approval from the Division of replacement
plans, we may be unable to keep key personnel from moving to
other industries that may offer better short-term opportunities
and a more promising outlook. The loss of any key personnel
could limit our ability to properly execute an efficient and
effective run-off.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our principal executive offices are located at 101 South
Stratford Road, Winston-Salem, NC 27104. This five-story office
building totals 79,254 square feet and we currently lease
approximately 71,007 square feet under a lease that will
expire in 2012. All staff functions are located within this
office complex. Due to the reduction in force in June 2008, we
are actively attempting to sublease at least one floor; however,
the local market for commercial property is weak due to the
recession. We believe this property is suitable and adequate for
its present circumstances.
We have closed all of our remote underwriting offices. We exited
the lease for our facility in Toronto, Canada in the third
quarter of 2008 and we liquidated our Canadian subsidiary in the
fourth quarter of 2008.
We maintain mid-range and micro-computer systems in our
corporate data center located in our headquarters building to
support our data processing requirements for accounting, policy
administration, claims, and risk management. We have
back-up
procedures in place in the event of emergency situations.
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Item 3.
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Legal
Proceedings
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The Company is involved in litigation in the ordinary course of
business as well as the case named below. No pending litigation
is expected to have a material adverse effect on the financial
position of the Company.
On February 6, 2008, James L. Phillips served a complaint
against Triad Guaranty Inc., Mark K. Tonnesen and Kenneth W.
Jones in the United States District Court, Middle District of
North Carolina. The plaintiff purports to represent a class of
persons who purchased or otherwise acquired the common stock of
the Company between October 26, 2006 and November 10,
2008 and the complaint alleges violations of federal securities
laws by the Company and two of its present or former officers.
An extension to answer the complaint has been granted. We intend
to contest the lawsuit vigorously.
Triad maintains a $95 million Excess-of-Loss reinsurance
treaty that provides a benefit when Triads risk-to-capital
ratio exceeds 25-to-1 and the combined ratio exceeds 100% (the
attachment point). Once the attachment point has
been reached, following a one-time deductible of
$25 million, the carrier is responsible for the
reimbursement of all paid losses in each quarter that the
attachment point is breached up to the one-time $95 million
policy limit. The coverage period is for 10 years.
Additionally, terms of the treaty require Triad to continue the
payment of premiums to the reinsurer amounting to approximately
$2 million per year for the entire ten year period. The
reinsurance treaty attached at the end of the first quarter of
2008; however, in April 2008, the reinsurance carrier provided a
purported notice of termination of the agreement. By letter
dated May 5, 2008, Triad notified the reinsurer that we
considered the treaty to still be in effect and that we demanded
arbitration seeking a ruling that the reinsurance remained in
effect and requested that the reinsurer comply with terms of the
treaty. The arbitration took place in front of a three-person
panel in December 2008 and January 2009, with post-hearing
briefs and oral arguments in February 2009. We expect a decision
to be rendered by the arbitration panel in the second quarter of
2009.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
25
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
information
The Companys common stock trades on The NASDAQ Global
Select
Market®
under the symbol TGIC. At December 31, 2008,
15,161,259 shares were issued and outstanding. The
following table sets forth the high and low sales prices of the
Companys common stock as reported by NASDAQ during the
periods indicated.
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2008
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2007
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High
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Low
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High
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Low
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First Quarter
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$
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10.19
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$
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4.10
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$
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58.62
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$
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39.31
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Second Quarter
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$
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5.43
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$
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0.73
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$
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47.35
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$
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38.45
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Third Quarter
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$
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4.49
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$
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0.35
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$
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41.05
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$
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14.84
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Fourth Quarter
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$
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2.00
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$
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0.28
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$
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20.63
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$
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5.50
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Holders
As of February 27, 2009, the number of stockholders of
record of the Companys common stock was approximately 326.
In addition, there were approximately 4,400 beneficial owners of
shares held by brokers and fiduciaries.
Dividends
Payments of future dividends are subject to declaration by the
Companys Board of Directors. Payment of dividends is
dependent on the ability of Triad to pay dividends to the parent
company. Under the Corrective Order, Triad is prohibited from
paying dividends to the parent company without the prior
approval of the Division. In addition, the insurance laws of the
State of Illinois impose certain restrictions on dividends that
an insurance subsidiary can pay its parent company. These
restrictions, based on SAP, 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 Division. In addition to these statutory limitations on
dividends, Illinois regulations provide that a mortgage guaranty
insurer may not declare any dividends except from undivided
profits remaining on hand over and above the amount of its
policyholder reserve. Currently, there are no intentions to pay
dividends. See Liquidity and Capital Resources in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations for a more
detailed discussion of dividend payment restrictions.
Issuer
purchases of equity securities and unregistered sales of equity
securities
None.
26
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Item 6.
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Selected
Financial Data
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The information required by this Item 6 is not required to
be provided by issuers that satisfy the definition of
smaller reporting company under SEC rules.
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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The following discussion is intended to provide information that
the Company believes is relevant to an assessment and
understanding of the Companys consolidated financial
position, results of operations and cash flows and should be
read in conjunction with the Consolidated Financial Statements
and Notes contained herein. In addition, the current adverse
market conditions in the home mortgage and residential housing
markets are unprecedented from an historical standpoint and have
subjected our business, financial condition and results of
operations to substantial risks, many of which are summarized
under Risk Factors above, which should be read in
conjunction with the following discussion.
Certain of the statements contained in this release are
forward-looking statements and are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements include estimates and
assumptions related to economic, competitive, regulatory,
operational and legislative developments. These forward-looking
statements are subject to change, uncertainty and circumstances
that are, in many instances, beyond our control and they have
been made based upon our current expectations and beliefs
concerning future developments and their potential effect on us.
Actual developments and their results could differ materially
from those expected by us, depending on the outcome of a number
of factors, including our ability to operate our business in
run-off, the possibility of general economic and business
conditions that are different than anticipated, legislative,
regulatory, and other similar developments, changes in interest
rates, employment rates, the housing market, the mortgage
industry and the stock market, as well as the relevant factors
described under Risk Factors and in the Safe
Harbor Statement under the Private Securities Litigation Reform
Act of 1995 section below with respect to forward-looking
statements contained herein. Forward-looking statements are
based upon our current expectations and beliefs concerning
future events and we undertake no obligation to update or revise
any forward-looking statements to reflect the impact of
circumstances or events that arise after the date the
forward-looking statements are made.
Overview
Triad Guaranty Inc. is a holding company that historically
provided private mortgage insurance coverage in the United
States through its wholly-owned subsidiary, Triad Guaranty
Insurance Corporation (Triad). Triad ceased issuing
new commitments for mortgage guaranty insurance coverage on
July 15, 2008 and we are operating our business in run-off.
As used in this annual report on
Form 10-K,
the term run-off means writing no new mortgage
insurance policies and continuing to service existing policies.
Servicing includes: receiving premiums on policies that remain
in force; cancelling coverage at the insureds request;
terminating policies for non-payment of premium; working with
borrowers in default to remedy the default
and/or
mitigate our loss; and settling all legitimate filed claims per
our contractual obligations. Triad has agreed to a Corrective
Order from the Illinois Department of Financial and Professional
Regulation, Division of Insurance (the Division)
that, among other items, includes restrictions on the
distribution of funds by Triad.
We have historically provided Primary and Modified Pool mortgage
guaranty insurance coverage on U.S. residential mortgage
loans. We classify insurance as Primary when we are in the first
loss position and the loan-to-value amount, or LTV, is 80% or
greater when the loan is first insured. We classify all other
insurance as Modified Pool. The majority of our Primary
insurance has been delivered through the flow channel, which is
defined as loans originated by lenders and submitted to us on a
loan-by-loan
basis. We have also historically provided mortgage insurance to
lenders and investors who seek additional default protection
(typically secondary coverage or on loans for which the
individual borrower has greater than 20% equity), capital
relief, and credit-enhancement on groups of loans that are sold
in the secondary market. These transactions are referred to as
our structured bulk channel business. Those individual loans in
the structured bulk channel in which we are in the first loss
position and the LTV ratio is greater than 80% are classified as
Primary. All of our Modified Pool insurance has been delivered
through the structured bulk channel. Our insurance remains
effective until one of the following
27
events occurs: the policy is cancelled at the insureds
request; we terminate the policy for non-payment of premium; the
policy defaults and we satisfy all amounts due under the
insurance contact; or we rescind the policy for violations of
provisions of a master policy.
In run-off, our revenues principally consist of:
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earned renewal premiums from the remaining insurance in force,
net of:
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reinsurance premiums ceded, primarily for captive
reinsurance, and
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refunds paid or accrued resulting from the cancellation of
insurance in force or for coverage rescinded due to violations
of certain provisions of a master policy; and
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We also realize investment gains and investment losses on the
sale and impairment of securities, with the net gain or loss
reported as a component of revenue.
Our expenses consist primarily of:
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paid claims;
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changes in reserves for estimated future claim payments on loans
that are currently in default;
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general and administrative costs of servicing existing policies;
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other general business expenses; and
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interest expense on long-term debt.
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Our results of operations in run-off depend largely on:
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the conditions of the housing, mortgage and capital markets that
have a direct impact on default rates, mitigation efforts, cure
rates and ultimately the amount of claims paid;
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the overall general state of the economy and job market;
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persistency levels on our remaining insurance in force;
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operating efficiencies; and
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the level of investment yield, including realized gains and
losses, on our investment portfolio.
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Our results of operations in run-off could also be impacted
significantly by recent Federal government and private
initiatives to stabilize the housing and financial markets. See
Item I, Business and the discussion below for
further details on these initiatives.
Persistency is an important metric in understanding our premium
revenue, especially in run-off as no new business is being
written, so our overall premium base is essentially fixed and
will decline over time. The longer a policy remains on our
books, or persists, the greater the amount of
renewal premium revenue that we will earn from the policy.
Cancellations result primarily from the borrower refinancing or
selling insured mortgaged residential properties, from policies
being rescinded due to fraud, misrepresentation or other
underwriting violations, from a servicer choosing to cancel the
insurance, from the payment of a claim, and, to a lesser degree,
from the borrower achieving prescribed equity levels, at which
point the lender no longer requires mortgage guaranty insurance.
Recent
Events Affecting our Business
Triad is an Illinois-domiciled insurance company and the
Division is our primary regulator. Triad Guaranty Assurance
Corporation (TGAC) is a wholly-owned subsidiary of
Triad and is subject to all Illinois insurance regulatory
requirements applicable to Triad. The Illinois Insurance Code
grants broad powers to the Division and its Director to enforce
rules or exercise discretion over almost all significant aspects
of our insurance business.
28
On August 5, 2008, Triad and TGAC (collectively,
TGIC) entered into an Agreed Corrective Order with
the Division. The Corrective Order was implemented as a result
of our decision to cease writing new mortgage guaranty insurance
and to commence a run-off of our existing insurance in force as
of July 15, 2008. Among other things, the Corrective Order:
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Required TGIC to submit a corrective plan to the Division;
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Prohibited all stockholder dividends from TGIC to its parent
company without the prior approval of the Division;
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Prohibited interest and principal payments on TGICs
surplus note to its parent company without the prior approval of
the Division;
|
|
|
|
Restricted TGIC from making any payments or entering into any
transaction that involves the transfer of assets to, or
liabilities from, any affiliated parties without the prior
approval of the Division;
|
|
|
|
Required TGIC to obtain prior written approval from the Division
before entering into certain transactions with unaffiliated
parties;
|
|
|
|
Required TGIC to meet with the Division in person or via
teleconference as necessary; and
|
|
|
|
Required TGIC to furnish to the Division certain reports,
agreements, actuarial opinions and information on an ongoing
basis at specified times.
|
We submitted a corrective plan to the Division as required under
the Corrective Order. The corrective plan we submitted included,
among other items, a five-year statutory financial projection
for TGIC and a detailed description of our planned course of
action to address our current financial condition. The financial
statements that form the basis of our corrective plan were
prepared in accordance with Statutory Accounting Principles
(SAP) set forth in the Illinois Insurance Code. SAP
differs from GAAP, which are followed to prepare the financial
statements presented in this annual report on
Form 10-K.
We received approval of the corrective plan from the Division in
October 2008.
Since the approval of our initial corrective plan, we have
revised the assumptions we initially utilized in our run-off
financial forecast model as a result of a number of factors,
including continued deteriorating economic conditions impacting
our financial condition, results of operations and future
prospects. Our new assumptions produce a range of potential
ultimate outcomes for our run-off, but include projections
showing that on a likely case basis and absent additional action
by the Division or favorable changes in our business, we will
report a deficiency in policyholders surplus as calculated
in accordance with SAP as early as March 31, 2009 and
continuing at least through 2011. Although we currently project
that this statutory insolvency will be temporary and our run-off
will ultimately be successful, we believe such insolvency would
likely lead to the institution by the Division of receivership
proceedings against TGIC if not corrected. We are currently
working with the Division to structure a revised corrective plan
to address this issue, although no assurance can be given that
we will be successful in these efforts. If we are unable to gain
approval from the Division for a revised corrective plan that
addresses this issue, the Division could place TGIC into
receivership proceedings, which could force us to seek
protection from creditors through a voluntary bankruptcy
proceeding and we would likely be unable to continue as a going
concern. See Item 1A, Risk Factors for more
information.
Failure to comply with the provisions of the Corrective Order or
any other violation of the Illinois Insurance Code may result in
the imposition of fines or penalties or subject TGIC to further
legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of TGIC. See
Item 1A, Risk Factors for more information.
Our recurring losses from operations and resulting decline in
policyholders surplus as calculated in accordance with SAP
increases the likelihood that TGIC will be placed into
conservatorship or liquidated and raises substantial doubt about
our ability to continue as a going concern. Our consolidated
financial statements that are presented in this annual report on
Form 10-K
do not include any adjustments that reflect the financial risks
of TGIC entering receivership proceedings and assume that we
will continue as a going concern. We expect losses from
29
operations to continue and our ability to continue as a going
concern is dependent on the successful development, approval,
and implementation of a revised corrective plan. See
Item 1A, Risk Factors for more information.
Triad is also subject to comprehensive regulation by the
insurance departments of the various other states in which it is
licensed to transact business. Currently, the insurance
departments of the other states are working with the Division in
the implementation of the Corrective Order.
Mark K. Tonnesen, our former President and Chief Executive
Officer and a former director, resigned from those positions
effective July 18, 2008 and subsequently retired on
August 15, 2008. The Board of Directors appointed William
T. Ratliff, III, the Chairman of the Board, as the interim
President and Chief Executive Officer effective July 18,
2008. On October 22, 2008, the Board of Directors appointed
Kenneth W. Jones, who had been serving as our Chief Financial
Officer, as our new President and Chief Executive Officer.
Mr. Jones retained the responsibilities of Chief Financial
Officer following his appointment as our President and Chief
Executive Officer. Mr. Ratliff continues to serve as our
Chairman of the Board and served as an executive officer
following his relinquishment of the role of President and Chief
Executive Officer until March 10, 2009.
At December 31, 2008, the Company reported a deficit in
assets of $136.7 million compared to a deficit in assets of
$28.4 million at September 30, 2008 and
stockholders equity of $498.9 million at
December 31, 2007. A deficit in assets occurs when recorded
liabilities exceed recorded assets and is not necessarily a
measure of insolvency. The deficit in assets is primarily the
result of an increase in loss reserves of over $800 million
since December 31, 2007. In addition, we have paid in
excess of $230 million of claims during the last
12 months. Although we have reported a deficit in assets at
December 31, 2008, we had approximately $935 million
of cash and invested assets at December 31, 2008 compared
to $910 million at December 31, 2007. We expect to
continue to report a deficit in assets in future periods. While
we do not expect the deficit in assets to have a direct impact
on our operations, it could adversely impact our continued
listing on The NASDAQ Stock Market.
We have discovered a substantial number of underwriting or
program violations and misrepresentations in defaults reported
to us and we have subsequently rescinded or cancelled coverage
on these policies at a rate substantially greater than we have
historically experienced. In the fourth quarter of 2008, we
expanded the criteria used to determine whether a default would
be investigated for underwriting violations in accordance with
our master policy provisions. While we will continue to settle
legitimate claims, we expect an increase in rescission activity
in 2009 based on the number of policies under review and the
number of occurrences of underwriting violations discovered
during 2008. Any impediment to our ability to rescind coverage
for underwriting violations would be detrimental to our success
in run-off.
Triad maintains a $95 million Excess-of-Loss reinsurance
treaty that is currently in arbitration. The arbitration hearing
began in 2008 and we expect to have a decision in the second
quarter of 2009. As the matter is in dispute as a gain
contingency, we have not recorded any benefit from this
reinsurance treaty in our GAAP financial statements. However, in
consultation with the Division, we recorded in our statutory
financial statements for the year ended December 31, 2008
the net benefit of the reinsurance treaty of $51.5 million,
which included the $95 million benefit and an accrual for
the present value of the future
10-year
premium expense due the reinsurer, reduced by a required reserve
reflecting the dispute and aging of the recoverables.
Our focus remains on the efficient and effective servicing of
our insured portfolio, particularly with respect to loss
mitigation, as well as to adherence to the August 2008
Corrective Order.
Over the past several months, several government programs have
been initiated which, in general, are designed to provide relief
to homeowners and the financial markets. Many of these programs
have been expanded since originally developed and may continue
to change.
In July 2008, the Housing and Economic Recovery Act of 2008 was
enacted, which established the Federal Housing and Finance
Agency (FHFA) as the successor regulatory agency to
both Fannie Mae and Freddie Mac. FHFA has broad legal and
regulatory authority to ensure the safety and soundness of both
of the GSEs. On September 7, 2008, both Fannie Mae and
Freddie Mac were placed into conservatorship with FHFA acting as
conservator. Conservatorship is a process designed to stabilize
a troubled institution with the objective of returning the
troubled institution to normal business operations. FHFA has
stated that the purpose of this action is to restore
30
confidence in these GSEs, to enhance their capacity to fulfill
their mission, and to mitigate the systemic risk that has
contributed directly to the instability in the market.
The Housing and Economic Recovery Act of 2008 also includes the
HOPE for Homeowners Act, which created a new, temporary,
voluntary program within the Federal Housing Administration
(FHA) to back FHA-insured mortgages to distressed
borrowers. The new mortgages offered by FHA-approved lenders
will refinance distressed loans at a significant discount for
owner-occupants at risk of losing their homes to foreclosure. In
exchange, homeowners will share future appreciation with the FHA.
During October 2008, the Emergency Economic Stabilization Act of
2008 (EESA) was enacted. EESA, among other things,
created the Troubled Asset Relief Program (TARP),
which provides authority for the Federal government to purchase
assets and equity from financial institutions in order to
strengthen the financial sector. The goal of TARP is to
encourage banks to resume lending again at levels seen before
the financial crisis. TARP allows the U.S. Department of
the Treasury to purchase or insure up to $700 billion in
residential or commercial mortgages and securities based on or
related to such mortgages as well as any other financial
instrument that the Secretary of the Treasury determines would
promote stability in the financial market.
The Streamlined Modification Program (SMP) was
adopted by the GSEs in December 2008 and is designed to reduce
foreclosures on mortgage loans owned or guaranteed by the GSEs.
The SMP standardized the modification criteria for such mortgage
loans with the goal of enabling loan servicers to proactively
solicit borrower participation. A number of eligibility criteria
apply to the SMP. Modifications available include the
capitalization of accrued interest and other fees, the extension
of the term of the mortgage loan, the reduction of the interest
rate on the mortgage loan, as well as a provision for principal
forbearance. Additionally, several large lenders have announced
plans to implement their own loan modification programs. The
GSEs also established a moratorium on foreclosures that began in
December 2008 and expired on March 6, 2009.
In February 2009, the Federal government unveiled The Homeowner
Affordability and Stability Plan (HASP), which is
designed to replace the SMP and reduce the number of
foreclosures. HASP, which was detailed in March 2009, includes
the Home Affordable Modification Program (HMP) which
provides incentives to borrowers, servicers, and lenders to
modify loans with the modifications jointly paid for by lenders
and the U.S. government. HASP also includes the Home
Affordable Refinance Program which provides refinance
opportunities to certain borrowers who have conforming mortgage
loans owned or guaranteed by the GSEs. The borrowers targeted
for this refinance opportunity are those who have experienced
significant depreciation in the value of their home, thereby
making refinancing difficult or prohibitive given current
underwriting standards in the marketplace.
Certain members of the Obama administration have discussed
providing TARP funds to private mortgage insurers. No assurance
can be given that TARP funds would be provided to mortgage
insurers or, if funds were provided, that they would be provided
to us or that they would be offered under terms acceptable or
beneficial to our stockholders.
As of the date of this annual report on
Form 10-K,
we are unable to predict the impact that these recent government
initiatives and the conservatorship of Fannie Mae and Freddie
Mac will have on our future results of operations and prospects.
Consolidated
Results of Operations
Following is selected financial information for the last two
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Earned premiums
|
|
$
|
257,423
|
|
|
$
|
278,900
|
|
|
|
(8
|
)
|
Net losses and loss adjustment expenses
|
|
|
923,301
|
|
|
|
372,939
|
|
|
|
148
|
|
Net loss
|
|
|
(631,127
|
)
|
|
|
(77,458
|
)
|
|
|
715
|
|
Diluted loss per share
|
|
$
|
(42.27
|
)
|
|
$
|
(5.22
|
)
|
|
|
710
|
|
Incurred losses and loss adjustment expenses (LAE)
increased by $550 million during 2008 and is primarily
responsible for the substantial increase in our net loss. The
incurred losses in 2008 were composed of an increase in
31
the reserve for losses and LAE of $828 million and direct
paid losses and LAE of $245 million, offset partially by an
increase in reinsurance recoverables of $151 million.
The growth in the reserve for losses and LAE is the result of an
increase in the number of reported loans in default as well as
the characteristics of the loans in default. The number of loans
in default increased by 139% during the year. However, risk in
default increased by 173% as new defaults had a substantially
higher average risk per loan than the default inventory at
December 31, 2007.
Certain segments of our insured portfolio have contributed more
than others to the growth rate in the number of defaults and
risk in default. These segments include:
|
|
|
|
|
Loans on properties in California, Florida, Arizona and Nevada
(which we refer to collectively as distressed
markets). Defaults in these distressed markets comprised
49% of our default inventory and 60% of our gross risk in
default at December 31, 2008, compared to 33% and 48%,
respectively, at December 31, 2007;
|
|
|
|
The adverse development of our 2006 and 2007 books of business,
which, on average, have significantly higher default rates than
our other books of business and also have a higher average risk
per policy than our other books of business;
|
|
|
|
Our Primary bulk business written in 2006 and 2007, which has
shown a significant amount of early payment defaults and has a
significant amount of high LTV loans; and
|
|
|
|
Our 2006 and 2007 Modified Pool business, which also has
exhibited a significant amount of early payment defaults.
|
Gross paid losses for 2008 were $238 million compared to
$101 million for 2007, an increase of 135%. The average
paid loss was approximately $54,000 in 2008 compared to $37,000
in 2007. The increase in the average paid loss is primarily the
result of a higher percentage of claims from the more recent
vintage years and from the distressed markets, both of which
reflect larger loan balances, as well as a decline in our
ability to mitigate losses. During the third and fourth quarters
of 2008, we experienced a moderation in claim paid activity due
to a number of factors including state and lender foreclosure
moratoriums, delays by the servicers, continued efforts on our
part to investigate policies for fraud, misrepresentation or
other underwriting violations, as well as an increase in the
number of policies rescinded.
Revenue decreased by 12% during 2008, primarily the result of a
decrease in premium earned as our insurance in force declined 8%
from a year ago. The decline in insurance in force resulted from
reduced production in the first half of 2008 and our decision to
cease issuing new commitments for insurance and enter into
run-off on July 15, 2008.
Other operating expenses increased by 35% during 2008, primarily
due to the transition to run-off, which resulted in a number of
non-recurring charges principally related to severance.
Additionally, we wrote off all existing deferred acquisition
costs of approximately $34 million during 2008.
We describe our results of operations in greater detail in the
discussion that follows. The information is presented in four
categories: Production; Insurance and Risk in Force; Revenues;
and Losses and Expenses.
Production
For the twelve months ended December 31, 2008, we wrote
$3.5 billion of new insurance compared to
$22.9 billion for the same period of 2007. All production
in 2008 was from our Primary flow channel, while insurance
written in 2007 was comprised of $15.9 billion from the
flow channel and $7.0 billion from the bulk channel. We
ceased issuing commitments for mortgage insurance on
July 15, 2008 and the minimal production subsequent to
July 15, 2008 consisted of commitments for mortgage
insurance that were entered into prior to that date. We do not
expect any material amount of production going forward.
32
The following table provides a summary of new insurance written
for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Primary insurance written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow
|
|
$
|
3,529
|
|
|
$
|
15,861
|
|
|
|
(78
|
)
|
Structured bulk
|
|
|
|
|
|
|
3,723
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance written
|
|
$
|
3,529
|
|
|
$
|
19,584
|
|
|
|
(82
|
)
|
Modified Pool insurance written
|
|
|
|
|
|
|
3,331
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance written
|
|
$
|
3,529
|
|
|
$
|
22,915
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Risk in Force
The following table provides detail on our direct insurance in
force at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Primary insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow primary insurance
|
|
$
|
39,370
|
|
|
$
|
41,840
|
|
|
|
(6
|
)
|
Structured bulk insurance
|
|
|
3,902
|
|
|
|
4,525
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance
|
|
|
43,272
|
|
|
|
46,365
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Pool insurance
|
|
|
19,312
|
|
|
|
21,863
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
$
|
62,584
|
|
|
$
|
68,228
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in insurance in force is primarily due to the low
amount of insurance written during the year, although the
decline was offset somewhat by continued improvements in
persistency.
Primary insurance persistency improved to 86.6% at
December 31, 2008 compared to 81.4% at December 31,
2007. Modified pool insurance persistency improved to 88.3% at
December 31, 2008 compared to 82.6% at December 31,
2007. We believe the increase in our persistency reflects the
general inability of borrowers to refinance or sell their homes
due to stricter underwriting guidelines by lenders, as well as
the nationwide decline in home prices. We anticipate that
persistency rates will be maintained near these levels for 2009.
However, mortgage interest rates are at historically low levels
and the majority of our insurance in force has associated
interest rates greater than the prevailing rates. Recent
government and private industry initiatives were developed, in
part, to promote liquidity in the mortgage markets. Given the
interest rate environment and these initiatives, persistency
could fall in 2009, which could have a significant adverse
impact on our future earned premiums.
The following tables provide information on selected risk
characteristics of our business based on gross risk in force at
December 31, 2008 and 2007. The following is a list of
characteristics we believe are important indicators of increased
risk in our portfolios:
|
|
|
|
|
The percentage of business defined as non-prime credit quality;
|
|
|
|
The percentage of Alt-A business;
|
|
|
|
The percentage of business with a loan-to-value (LTV) greater
than 95%;
|
|
|
|
The percentage of interest only loans and adjustable rate
mortgages (ARMs), particularly ARMs with potential negative
amortization;
|
|
|
|
The percentage of condominium property types;
|
|
|
|
The percentage of non-primary residence occupancy status;
|
|
|
|
The percentage of loans in excess of $250,000;
|
|
|
|
The concentration of risk in distressed market states; and
|
|
|
|
The presence of multiple risk factors on a single insured loan.
|
33
Risk in
Force(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
|
December, 31
|
|
|
December, 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Gross Risk in Force
|
|
$
|
11,259
|
|
|
$
|
12,136
|
|
|
$
|
5,614
|
|
|
$
|
6,398
|
|
Credit Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
76.3
|
%
|
|
|
74.4
|
%
|
|
|
28.0
|
%
|
|
|
27.9
|
%
|
Alt-A
|
|
|
20.3
|
|
|
|
21.9
|
|
|
|
71.2
|
|
|
|
71.3
|
|
A-Minus
|
|
|
3.0
|
|
|
|
3.2
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Sub Prime
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 95%
|
|
|
24.8
|
%
|
|
|
25.7
|
%
|
|
|
|
%
|
|
|
|
%
|
90.01% to 95.00%
|
|
|
32.7
|
|
|
|
32.5
|
|
|
|
0.2
|
|
|
|
0.3
|
|
90.00% and below
|
|
|
42.5
|
|
|
|
41.8
|
|
|
|
99.8
|
|
|
|
99.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
66.9
|
%
|
|
|
64.7
|
%
|
|
|
26.5
|
%
|
|
|
26.2
|
%
|
Interest Only
|
|
|
10.2
|
|
|
|
10.7
|
|
|
|
23.1
|
|
|
|
23.3
|
|
ARM (amortizing) fixed period 5 years or greater
|
|
|
8.5
|
|
|
|
9.4
|
|
|
|
30.9
|
|
|
|
31.4
|
|
ARM (amortizing) fixed period less than 5 years
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
5.6
|
|
|
|
6.1
|
|
ARM (potential negative amortization)
|
|
|
12.3
|
|
|
|
12.8
|
|
|
|
13.9
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium
|
|
|
10.7
|
%
|
|
|
10.4
|
%
|
|
|
9.6
|
%
|
|
|
9.4
|
%
|
Other (principally single-family detached)
|
|
|
89.3
|
|
|
|
89.6
|
|
|
|
90.4
|
|
|
|
90.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
87.8
|
%
|
|
|
87.7
|
%
|
|
|
73.3
|
%
|
|
|
73.5
|
%
|
Secondary home
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
6.1
|
|
|
|
6.2
|
|
Non-owner occupied
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
20.6
|
|
|
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0 $50,000
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
$51,000 $100,000
|
|
|
9.3
|
|
|
|
9.7
|
|
|
|
5.3
|
|
|
|
5.4
|
|
$100,001 $250,000
|
|
|
51.9
|
|
|
|
52.0
|
|
|
|
45.3
|
|
|
|
45.6
|
|
$250,001 $500,000
|
|
|
32.2
|
|
|
|
31.5
|
|
|
|
42.1
|
|
|
|
42.1
|
|
Over $500,000
|
|
|
5.8
|
|
|
|
5.9
|
|
|
|
6.8
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distressed market states (AZ, CA, FL, NV)
|
|
|
27.1
|
%
|
|
|
27.0
|
%
|
|
|
48.9
|
%
|
|
|
47.9
|
%
|
Non-distressed market states
|
|
|
72.9
|
|
|
|
73.0
|
|
|
|
51.1
|
|
|
|
52.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentages represent distribution of gross risk in force on a
per policy basis and does not account for risk ceded to captive
reinsurers or applicable stop-loss amounts and deductibles on
Modified Pool structured bulk transactions. |
34
Given the lack of production during 2008 and the high level of
persistency, the risk composition of our portfolio has remained
relatively constant. Our portfolio contains significant exposure
to Alt-A loans, loans with the potential for negative
amortization (PNAMs), as well as interest only
loans. An inherent risk in both PNAMs and interest only loans is
the scheduled milestone in which the borrower must begin making
amortizing payments. These payments can be substantially greater
than the minimum payments required before the milestone is met.
An additional risk to PNAMs is the payment being made may be
less than the amount of interest due, creating negative
amortization on the outstanding principal of the loan. These
features add uncertainty and potential risk. Due in part to
recent market conditions, the Alt-A loans, PNAM loans, and
interest only loans have, as a group, performed significantly
worse than the remaining prime fixed rate loans through
December 31, 2008.
We believe that a policy with a high LTV, all else being equal,
will have a greater risk of default than a policy with a low
LTV, especially in periods such as we are in currently with
declining home prices. In the table above, the percentage of
risk in force by LTV is based on the LTV at the time the loan
was originated. We have not been provided with the
mark-to-market LTV of our insured portfolio. To the
extent that an insured loan in our portfolio has experienced a
decline in the underlying value, and we believe this to be the
case for a large percentage of our insured portfolio, the
mark-to-market LTV of the policy may be
substantially higher than that at origination.
The premium rates we charge vary depending on the perceived risk
of a loan and generally cannot be changed after issuance of
coverage. We do not believe that the premium rates charged for
business originated in 2005, 2006 and 2007, and specifically for
high risk products including PNAMs and Alt-A loans, will
generate premium revenue sufficient to cover future losses.
The following table shows direct risk in force as of
December 31, 2008 and December 31, 2007 by year of
loan origination. Business originated in 2006 and 2007 continues
to comprise the majority of our risk in force. This is due to
the significant amounts of production during these two years as
well as the amount of refinancing that took place in 2002
through 2005. In general, policies originated during these years
have significantly higher amounts of average risk per policy
than policies originated prior to 2006. Furthermore, policies
originated during these vintage years have also exhibited higher
default rates than preceding vintage years. For additional
information regarding these vintage years, see Losses and
Expenses, below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Risk in
|
|
|
|
|
|
Risk in
|
|
|
|
|
|
Risk in
|
|
|
|
|
|
Risk in
|
|
|
|
|
|
|
Force *
|
|
|
Percent
|
|
|
Force *
|
|
|
Percent
|
|
|
Force *
|
|
|
Percent
|
|
|
Force *
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
2002 and before
|
|
$
|
539.1
|
|
|
|
4.8
|
%
|
|
$
|
34.4
|
|
|
|
0.6
|
%
|
|
$
|
667.5
|
|
|
|
5.5
|
%
|
|
$
|
332.7
|
|
|
|
5.2
|
%
|
2003
|
|
|
958.3
|
|
|
|
8.5
|
|
|
|
214.7
|
|
|
|
3.8
|
|
|
|
1,165.1
|
|
|
|
9.6
|
|
|
|
895.7
|
|
|
|
14.0
|
|
2004
|
|
|
938.3
|
|
|
|
8.3
|
|
|
|
552.0
|
|
|
|
9.8
|
|
|
|
1,116.5
|
|
|
|
9.2
|
|
|
|
1,042.9
|
|
|
|
16.3
|
|
2005
|
|
|
1,405.6
|
|
|
|
12.5
|
|
|
|
1,899.0
|
|
|
|
33.8
|
|
|
|
1,638.4
|
|
|
|
13.5
|
|
|
|
1,913.0
|
|
|
|
29.9
|
|
2006
|
|
|
2,386.0
|
|
|
|
21.2
|
|
|
|
2,111.6
|
|
|
|
37.7
|
|
|
|
2,718.5
|
|
|
|
22.4
|
|
|
|
1,977.0
|
|
|
|
30.9
|
|
2007
|
|
|
4,376.5
|
|
|
|
38.9
|
|
|
|
802.6
|
|
|
|
14.3
|
|
|
|
4,830.1
|
|
|
|
39.8
|
|
|
|
236.7
|
|
|
|
3.7
|
|
2008
|
|
|
654.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,258.5
|
|
|
|
100.0
|
%
|
|
$
|
5,614.3
|
|
|
|
100.0
|
%
|
|
$
|
12,136.0
|
|
|
|
100.0
|
%
|
|
$
|
6,398.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Gross risk in force is on a per policy basis and does not
account for risk ceded to captive reinsurers or applicable
stop-loss amounts and deductibles on Modified Pool structured
bulk transactions. |
Approximately 58% of our Primary flow insurance in force was
subject to captive reinsurance arrangements at December 31,
2008 and 2007. Under captive reinsurance programs, reinsurance
companies that are affiliates of the lenders assume a portion of
the risk associated with the lenders insured book of
business in exchange for a percentage of the premium. The risk
reinsured by the captive is supported by assets held in trust
with Triad as the beneficiary. At December 31, 2008, we had
approximately $258 million in captive reinsurance trust
balances with $157 million of reserves ceded to those
captives, which helps limit our future loss exposure.
35
Revenues
A summary of the individual components of our revenue for the
past two years follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Direct premium written
|
|
$
|
316,310
|
|
|
$
|
339,007
|
|
|
|
(7
|
)
|
Ceded premium written
|
|
|
(60,777
|
)
|
|
|
(55,784
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium written
|
|
|
255,533
|
|
|
|
283,223
|
|
|
|
(10
|
)
|
Change in unearned premiums
|
|
|
1,890
|
|
|
|
(4,323
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
257,423
|
|
|
$
|
278,900
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
39,580
|
|
|
$
|
32,936
|
|
|
|
20
|
|
Net realized investment losses
|
|
$
|
(26,559
|
)
|
|
$
|
(3,049
|
)
|
|
|
771
|
|
Total revenues
|
|
$
|
270,452
|
|
|
$
|
308,795
|
|
|
|
(12
|
)
|
The decrease in direct premium written in 2008 is reflective of
the decline in insurance in force and was partially due to lower
premium written from new production. Rescission activity had a
significant impact on both direct premium written and earned
premium during 2008. When we rescind coverage due to
underwriting violations in the origination of a loan, we refund
all of the premium previously paid to us. During 2008, cash
premiums refunded amounted to $10.3 million compared to
$2.9 million in 2007. Rescissions have also impacted the
frequency factor that we utilize in providing reserves. We
provide an accrual for the estimated partial refunds of premiums
based upon the early payment defaults that are currently under
investigation and historical rescission rates. At
December 31, 2008 we had accrued $17.1 million of
premium refunds, the majority of which was accrued in the fourth
quarter as we expanded our definition of early payment defaults.
The accrual for premium refunds related to rescissions at
December 31, 2007 was negligible.
Ceded premium written is comprised of premiums written under
excess of loss reinsurance treaties with captives as well as
non-captive reinsurance companies. The growth in ceded premium
during 2008 over 2007 was primarily due to an increase in
average insurance in force subject to captive reinsurance. The
premium cede rate increased to 19.2% for 2008 compared to 16.5%
for 2007 reflecting, primarily, the impact of refunds on direct
premium written. We did not establish a corresponding accrual to
account for the potential impact of expected refunds on ceded
premium previously paid to captives.
Net investment income grew primarily due to the growth in
average invested assets. Average invested assets at cost or
amortized cost grew by 21.4% in 2008 as a result of the
investment of positive operating cash flows, which included
$116.0 million from the redemption of Tax and Loss Bonds.
The book yield on our investment portfolio was 4.62% at
December 31, 2008 compared to 4.56% at December 31,
2007. Realized investment losses were $26.6 million during
2008 compared to a loss of $3.0 million for 2007, primarily
due to an increase in other-than-temporary impairment losses.
For a further discussion, see Investment Portfolio.
36
Losses
and Expenses
A summary of the significant individual components of losses and
expenses and the year-to-year percentage changes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid claims
|
|
$
|
237,080
|
|
|
$
|
100,612
|
|
|
|
136
|
|
Change in reserves
|
|
|
665,549
|
|
|
|
264,576
|
|
|
|
152
|
|
Loss adjustment expenses
|
|
|
20,672
|
|
|
|
7,751
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
923,301
|
|
|
|
372,939
|
|
|
|
148
|
|
Policy acquisition costs
|
|
|
39,416
|
|
|
|
18,497
|
|
|
|
113
|
|
Other operating expenses (net of acquisition costs deferred)
|
|
|
58,709
|
|
|
|
43,628
|
|
|
|
35
|
|
Loss ratio
|
|
|
358.7
|
%
|
|
|
133.7
|
%
|
|
|
168
|
|
Expense ratio
|
|
|
24.8
|
%
|
|
|
21.9
|
%
|
|
|
13
|
|
Combined ratio
|
|
|
383.5
|
%
|
|
|
155.6
|
%
|
|
|
146
|
|
Net losses and LAE are comprised of paid losses and LAE as well
as the increase in the loss and LAE reserve during the period.
The following paragraphs look at some of the specifics of the
individual components of net losses and LAE.
The following table provides details on both the amount and the
number of paid claims of both Primary and Modified Pool
insurance prior to the effect of ceded paid claims for the years
ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Paid claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
190,836
|
|
|
$
|
83,204
|
|
|
|
129
|
|
Modified Pool insurance
|
|
|
46,742
|
|
|
|
17,408
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237,578
|
|
|
$
|
100,612
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of claims paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
|
3,662
|
|
|
|
2,341
|
|
|
|
56
|
|
Modified Pool insurance
|
|
|
758
|
|
|
|
398
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,420
|
|
|
|
2,739
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although we experienced a large increase in the dollar amount
and number of paid claims during 2008, these increases were
tempered somewhat in the second half of 2008 primarily due to
foreclosure moratoriums, rescission activity and policy
investigations. Average severity increased to $53,800 in 2008
from $36,700 in 2007 reflecting a larger percentage of our paid
claims from (i) the more recent vintage years, specifically
the 2005, 2006 and 2007 vintage years, and (ii) the
distressed markets.
37
The following table shows the average loan size and average risk
per policy by vintage year. The 2006 and 2007 books are
exhibiting adverse development patterns and thus are expected to
impact the amount of paid claims and the average paid claim
earlier than what we have experienced historically. We expect
average severity to continue to increase in 2009 as policies
originated during 2006 and 2007 continue to comprise a greater
proportion of our paid claims.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Vintage Year
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
2002 and Prior
|
|
$
|
104,480
|
|
|
$
|
26,805
|
|
|
$
|
77,370
|
|
|
$
|
25,043
|
|
|
$
|
106,003
|
|
|
$
|
26,809
|
|
|
$
|
80,387
|
|
|
$
|
26,105
|
|
2003
|
|
|
115,646
|
|
|
|
27,989
|
|
|
|
141,496
|
|
|
|
41,875
|
|
|
|
119,668
|
|
|
|
28,709
|
|
|
|
145,348
|
|
|
|
42,856
|
|
2004
|
|
|
130,819
|
|
|
|
34,939
|
|
|
|
146,972
|
|
|
|
43,596
|
|
|
|
132,591
|
|
|
|
35,042
|
|
|
|
150,444
|
|
|
|
44,610
|
|
2005
|
|
|
156,011
|
|
|
|
40,983
|
|
|
|
177,143
|
|
|
|
57,679
|
|
|
|
156,975
|
|
|
|
40,821
|
|
|
|
178,946
|
|
|
|
58,198
|
|
2006
|
|
|
207,918
|
|
|
|
53,710
|
|
|
|
263,356
|
|
|
|
69,310
|
|
|
|
207,324
|
|
|
|
53,534
|
|
|
|
259,678
|
|
|
|
69,286
|
|
2007
|
|
|
207,159
|
|
|
|
55,755
|
|
|
|
272,745
|
|
|
|
79,194
|
|
|
|
208,429
|
|
|
|
56,509
|
|
|
|
270,932
|
|
|
|
79,163
|
|
2008
|
|
|
204,341
|
|
|
|
46,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Average
|
|
$
|
171,463
|
|
|
$
|
44,612
|
|
|
$
|
208,361
|
|
|
$
|
60,572
|
|
|
$
|
169,340
|
|
|
$
|
44,324
|
|
|
$
|
208,004
|
|
|
$
|
60,875
|
|
The increase in paid severity was also influenced by our reduced
ability to mitigate claims. Beginning in late 2006, we began to
experience a significant reduction in our ability to reduce the
severity of our claims paid through the sale of properties.
Subsequent declines in home prices across almost all markets,
with significant declines in the distressed markets, has
continued to negatively impact our ability to mitigate losses
through the sale of properties. We expect our ability to
mitigate losses will continue to be adversely affected by the
continued pressure on home prices combined with the limited
availability of credit in the U.S. financial markets.
The number of paid claims during both the third and fourth
quarters of 2008 were lower than the number of paid claims
during the second quarter of 2008, although the inventory of
filed claims has continued to increase. The slowdown in the
second half of 2008 was due to a number of factors, including
lender and GSE foreclosure moratoriums, delays by the servicers
due to a large increase in the number of defaults, our ongoing
effort to identify fraud, misrepresentation or other
underwriting violations in policies which are currently in
default, as well as increased rescission activity.
The table below provides the cumulative paid loss ratios by
certificate year (calculated as direct losses paid divided by
direct premiums received, in each case for a particular policy
year) that have developed through December 31, 2008 and
2007. The data below excludes the effects of reinsurance.
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss Ratios as of
|
|
|
|
December 31,
|
|
Book Year
|
|
2008
|
|
|
2007
|
|
|
1996
|
|
|
14.6
|
%
|
|
|
14.5
|
%
|
1997
|
|
|
10.4
|
|
|
|
10.2
|
|
1998
|
|
|
6.9
|
|
|
|
6.8
|
|
1999
|
|
|
9.9
|
|
|
|
9.9
|
|
2000
|
|
|
35.7
|
|
|
|
35.4
|
|
2001
|
|
|
32.3
|
|
|
|
31.0
|
|
2002
|
|
|
33.2
|
|
|
|
31.9
|
|
2003
|
|
|
20.3
|
|
|
|
16.7
|
|
2004
|
|
|
26.4
|
|
|
|
17.5
|
|
2005
|
|
|
47.3
|
|
|
|
21.6
|
|
2006
|
|
|
45.9
|
|
|
|
11.7
|
|
2007
|
|
|
19.9
|
|
|
|
0.1
|
|
2008
|
|
|
|
|
|
|
|
|
38
During 2008, we experienced large increases in the cumulative
paid loss ratios for the 2005, 2006, and 2007 vintage years and
more gradual increases for the other vintage years. While we
have historically expected higher claim payments in the second
through the fifth years after loan origination, the more recent
vintage years have developed at a much faster rate from a
default and claim perspective than historical trends would
indicate. We do not expect this adverse development to subside
and expect the cumulative paid loss ratios for the 2005, 2006
and 2007 books of business to ultimately be significantly higher
than our previous books of business and possibly greater than
100%.
Net losses and LAE also include the change in reserves for
losses and LAE. The following table provides further information
about our reported loss reserves, excluding the effects of
reinsurance, at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Primary insurance:
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
$
|
691,438
|
|
|
$
|
251,316
|
|
Reserves for defaults incurred but not reported
|
|
|
108,825
|
|
|
|
40,691
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance
|
|
|
800,263
|
|
|
|
292,007
|
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
|
347,546
|
|
|
|
54,876
|
|
Reserves for defaults incurred but not reported
|
|
|
22,494
|
|
|
|
8,340
|
|
|
|
|
|
|
|
|
|
|
Total Modified Pool insurance
|
|
|
370,040
|
|
|
|
63,216
|
|
Reserve for loss adjustment expenses
|
|
|
17,537
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and loss adjustment expenses
|
|
$
|
1,187,840
|
|
|
$
|
359,939
|
|
|
|
|
|
|
|
|
|
|
The above table does not account for reserves ceded to the
lender sponsored captive reinsurers. The amount recoverable
under captive reinsurance contracts, net of liabilities where
the right of offset exists, is shown as an asset on the balance
sheet and amounted to approximately $157 million and
$7 million at December 31, 2008 and 2007, respectively.
The following table shows the net change in reserves for losses
and LAE for 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Increase in reserve for losses and loss adjustment expenses
|
|
$
|
827,901
|
|
|
$
|
275,587
|
|
|
|
200
|
|
Increase in reinsurance recoverable
|
|
|
(149,531
|
)
|
|
|
(7,305
|
)
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in reserve for losses and loss adjustment expenses
|
|
|
678,370
|
|
|
|
268,282
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The large increase in reserves in 2008 primarily reflects the
increase in the number of defaults, a decline in the cure rate
of defaults, as well as the changing composition of our default
inventory, with higher concentrations in distressed market
states and recent policy years. Our reserving model incorporates
managements judgment regarding the impact of the current
housing and economic environment on our estimate of the ultimate
claims we will pay on loans currently in default. To reflect the
significant adverse changes in the economy, including declining
home prices and our reduced ability to mitigate claims, we have
increased the severity factor utilized in the calculation of the
reserve.
We have experienced an increasing number of defaults that
contained underwriting violations in the original application
for insurance. Generally, our master policies provide that we
are not liable to pay a claim for loss when this occurs. We are
currently reviewing the majority of the claims for losses and
defaults that occur soon after loan origination, especially with
respect to the 2006 and 2007 vintage years, to determine whether
the limitations on our
39
liability contained in our master policies are applicable.
Beginning in the third quarter of 2007, we incorporated an
adjustment in the frequency factor utilized in the calculation
of our provision for losses to account for expected rescissions.
The expected rescission factor, for specific sub-sections of our
portfolio, increased in each quarter of 2008. This increase in
the number of policies that have been rescinded, combined with
the large increase in number of policies under review for
possible violations of our master policies, resulted in a
decline in the frequency factor at December 31, 2008 from
that used at December 31, 2007, which mitigated the reserve
increase.
Although defaults increased across the country in general, the
distressed markets have experienced substantially higher growth
rates in defaults. Defaults in the distressed markets increased
254% during 2008 compared to an increase of 84% in states not
identified as distressed markets. Additionally, on average,
defaults in the distressed market states have a higher average
loan balance and average risk in default than the remainder of
our defaults. At December 31, 2008, the distressed markets
had average loan balances of approximately $248,000 compared to
approximately $161,000 for the remainder of the portfolio.
The following table indicates the growth in both the gross risk
in default in these four distressed market states and reserves
attributable to these states at December 31, 2008 and
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
% of Gross Risk In Force:
|
|
|
|
|
|
|
|
|
California
|
|
|
14.6
|
%
|
|
|
15.1
|
%
|
Florida
|
|
|
11.6
|
%
|
|
|
12.1
|
%
|
Arizona
|
|
|
5.2
|
%
|
|
|
5.5
|
%
|
Nevada
|
|
|
3.0
|
%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
34.4
|
%
|
|
|
35.8
|
%
|
% of Gross Risk in Default:
|
|
|
|
|
|
|
|
|
California
|
|
|
25.1
|
%
|
|
|
19.1
|
%
|
Florida
|
|
|
23.1
|
%
|
|
|
20.0
|
%
|
Arizona
|
|
|
7.2
|
%
|
|
|
5.6
|
%
|
Nevada
|
|
|
5.0
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
60.4
|
%
|
|
|
48.6
|
%
|
% of Gross Reserves:
|
|
|
|
|
|
|
|
|
California
|
|
|
24.4
|
%
|
|
|
18.3
|
%
|
Florida
|
|
|
23.5
|
%
|
|
|
20.0
|
%
|
Arizona
|
|
|
7.4
|
%
|
|
|
5.4
|
%
|
Nevada
|
|
|
5.0
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
60.3
|
%
|
|
|
47.6
|
%
|
Certificates originated during 2007 and 2006 comprise 62.7% of
our loans in default, but 73.4% of the risk in default at
December 31, 2008. The difference in percentages of loans
in default and risk in default primarily reflects the higher
loan amounts associated with the 2007 and 2006 policy years.
40
To illustrate the impact of the changes in the frequency and
severity factors utilized in the reserve model, the following
table details the amount of risk in default and the reserve
balance as a percentage of risk in default at December 31,
2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(Dollars in thousands)
|
|
Risk on loans in default
|
|
$
|
2,729,313
|
|
|
$
|
1,000,384
|
|
Gross Case Reserves as a percentage of risk in default(1)
|
|
|
42.0
|
%
|
|
|
36.6
|
%
|
|
|
|
(1) |
|
Reflects gross case reserves, which excludes IBNR and ceded
reserves and the benefit from Modified Pool structures, as a
percent of risk in default for total Primary delinquent loans
and total Modified Pool delinquent loans. |
The following table shows default statistics as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Total business:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
345,055
|
|
|
|
378,907
|
|
With deductibles
|
|
|
52,414
|
|
|
|
59,592
|
|
Without deductibles
|
|
|
292,641
|
|
|
|
319,315
|
|
Number of loans in default
|
|
|
40,286
|
|
|
|
16,821
|
|
With deductibles
|
|
|
9,058
|
|
|
|
4,072
|
|
Without deductibles
|
|
|
31,228
|
|
|
|
12,749
|
|
Percentage of loans in default (default rate)
|
|
|
11.68
|
%
|
|
|
4.44
|
%
|
Percentage of loans in default excluding deductibles
|
|
|
10.67
|
%
|
|
|
3.99
|
%
|
Primary insurance:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
252,368
|
|
|
|
273,798
|
|
Number of loans in default
|
|
|
24,241
|
|
|
|
10,419
|
|
Percentage of loans in default
|
|
|
9.61
|
%
|
|
|
3.81
|
%
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
92,687
|
|
|
|
105,109
|
|
With deductibles
|
|
|
52,393
|
|
|
|
59,569
|
|
Without deductibles
|
|
|
40,294
|
|
|
|
45,540
|
|
Number of loans in default
|
|
|
16,045
|
|
|
|
6,402
|
|
With deductibles
|
|
|
9,058
|
|
|
|
4,072
|
|
Without deductibles
|
|
|
6,987
|
|
|
|
2,330
|
|
Percentage of loans in default
|
|
|
17.31
|
%
|
|
|
6.09
|
%
|
Percentage of loans in default excluding deductibles
|
|
|
17.34
|
%
|
|
|
5.12
|
%
|
The percentage of total loans in default increased to 11.68% as
of December 31, 2008 from 4.44% at December 31, 2007,
an overall increase of 163% during 2008. The number of loans in
default includes all reported delinquencies that are in excess
of two payments in arrears at the reporting date and all
reported delinquencies that were previously in excess of two
payments in arrears and have not been brought current. The
percentage of loans in default, or default rate, has increased
considerably during 2008. The default rate is affected by the
number of policies in default as well as the number of policies
in force. As we are in run-off and are no longer issuing
commitments for mortgage insurance, we expect the number of
policies in force to continue to decrease which will have an
adverse effect on the default rate. We currently expect the
overall default rate as well as the number of loans in default
to increase in 2009, and the increase may be greater than that
experienced in 2008.
41
We do not provide reserves on Modified Pool defaults with
deductibles until the incurred losses for that transaction reach
the deductible threshold. At December 31, 2008, 39% of our
structured bulk transactions with deductibles as part of the
structure, including all such transactions originated in 2006
and 2007, had incurred losses that had exceeded these individual
deductible amounts. On these structured bulk contracts, we
recognized $169.6 million of losses in excess of the
aggregate deductibles. Although a majority of our structured
bulk transactions have not exceeded the individual deductible
amounts, given the large increases in default and paid claim
activity related to the transactions, we have realized the
majority of the benefit from the deductibles and do not expect
any material benefit going forward.
We also do not provide reserves on Modified Pool defaults where
the incurred losses to date for the related structure have
exceeded the stop loss amount. As of December 31, 2008, 5%
of our structured transactions have incurred losses that
exceeded the stop loss amount. This had the effect of limiting
reserves by $37.5 million at December 31, 2008. We
believe that based on the recent development of our modified
pool business, we will continue to provide additional reserves
on structured bulk transactions with deductibles and we will
continue to limit the addition of reserves due to modified pool
contracts reaching stop loss limits.
As part of our overall risk management strategy, we have entered
into excess of loss captive reinsurance agreements with several
of our lender customers. As detailed under
Business Reinsurance in Part I,
Item 1 of this report, we retain the first loss position on
the first aggregate layer of risk and reinsure a second finite
layer with the captive reinsurer. Certain captives have exceeded
the first loss layer in incurred losses, which resulted in the
ceding of reserves and paid losses related to specific book
years. We recorded a net of $157 million of ceded reserve
from these captive arrangements at December 31, 2008 and
ceded $497,000 of paid claims during 2008. If the current
default and paid claim trends continue, we expect to cede
additional reserves and paid losses to the captive reinsurers in
2009.
Expenses
and Taxes
We wrote off the remaining deferred policy acquisition costs
(DAC) asset balance of $34.8 million during the
first quarter of 2008 as estimated gross loss in the remaining
portfolio no longer supported the asset value.
The increase in other operating expenses during 2008 resulted
from significant non-recurring expenses in the first half of
2008, including expenses associated with the attempted capital
raising efforts, severance and other termination costs
associated with the transition to run-off, and expenses
associated with our exit from Canada.
Our effective tax rate decreased to 16.4% for 2008 from 40.7%
for 2007. The effective tax rate for 2008 is lower than the
marginal rate of 35% and decreased substantially from the rate
in 2007 due primarily to the large operating loss reported in
2008 and the inability to recognize future tax benefits in
accordance with U.S. generally accepted accounting
principles.
Federal tax law permits mortgage guaranty insurance companies to
deduct from taxable income, subject to certain limitations, the
amounts added to contingency reserves. As a result of
substantial operating losses for 2007 and 2008, the previously
established contingency reserve was released earlier than the
scheduled ten years in an amount that offset the operating loss
for federal tax reporting purposes. Accordingly, the previously
purchased Tax and Loss Bonds associated with the contingency
reserve release were redeemed earlier than originally scheduled.
As of December 31, 2008, we have redeemed substantially all
of our previously purchased Tax and Loss Bonds. We expect to
continue to incur operating losses for tax purposes and generate
net operating loss carry forwards for federal income tax
reporting purposes for which we will be unable to receive any
immediate benefit in our statement of operations.
Significant
Customers
On July 15, 2008, we ceased issuing commitments for
insurance written and are operating our business in run-off.
Going forward, our production will consist of certificates
issued from commitments for mortgage insurance that were entered
into prior to July 15, 2008. As such, we do not have any
significant customers on whom we rely for new business.
42
Financial
Position
Total assets were $1.1 billion at both December 31,
2008 and December 31, 2007. For the year ended
December 31, 2008, total assets reflect the liquidation of
certain assets in connection with the repayment of the
$80.0 million credit facility and the write-off of the
remaining $34.8 million of DAC as well as an increase of
$145.0 million of ceded reinsurance recoverable, primarily
related to loss reserves ceded to captive reinsurers. Total
liabilities increased substantially to $1.3 billion at
December 31, 2008 from $634.0 million at
December 31, 2007 primarily reflecting the
$827.9 million increase in loss and LAE reserves. This
increase was partially offset by the repayment of the
$80.0 million credit facility in the first quarter of 2008
and a decline in deferred income taxes of $123.3 million
related to the reversal of previously established deferred taxes.
This section identifies several items on our balance sheet that
are important in the overall understanding of our financial
position. These items include DAC as well as prepaid federal
income tax and related deferred income taxes. The majority of
our assets are included in our investment portfolio. A separate
Investment Portfolio section follows the Financial Position
section and reviews our investment portfolio, key portfolio
management strategies, and methodologies by which we manage
credit risk within the investment portfolio.
Deferred
Policy Acquisition Costs
Prior to the write-off of the DAC asset at March 31, 2008,
we capitalized costs to acquire new business as DAC and
recognized these as expenses against future gross profits. At
March 31, 2008, we determined that the net present value of
the estimated future cash flows on the remaining book of
business exceeded the recorded reserves (net of the unamortized
DAC) which required the establishment of a premium deficiency
reserve. The actual mechanics of recording the premium
deficiency reserve require that we first reduce the DAC balance
to zero before recording any additional premium deficiency
reserve. Therefore, we wrote down the DAC asset by
$34.8 million in the first quarter of 2008. We have not
capitalized any costs to acquire new business subsequent to the
first quarter of 2008, but included such costs in the line item
Other operating expenses on our statement of
operations. We will not be capitalizing any costs to acquire new
business going forward.
Prepaid
Federal Income Taxes and Deferred Income Taxes
During the period that the Company was reporting positive
results of operations, we purchased Tax and Loss Bonds to take
advantage of a special contingency reserve deduction that
mortgage guaranty companies are allowed for tax purposes. We
recorded these bonds on our balance sheet as prepaid federal
income taxes. Purchases of Tax and Loss Bonds are essentially a
prepayment of federal income taxes that are scheduled to become
payable in ten years, when the contingency reserve is scheduled
to be released, and the Tax and Loss Bonds are scheduled to
mature. The scheduled proceeds from the maturity of the Tax and
Loss Bonds were anticipated to be utilized to fund the income
tax payments.
Deferred income taxes are provided for the differences in
reporting taxable income in the financial statements and on the
tax return. The largest cumulative difference has historically
been the special contingency reserve deduction for mortgage
insurers mentioned above. During 2008, deferred income taxes
declined by $120.5 million, primarily the result of the
reversal of the contingency reserve. The remainder of the
deferred tax liability has primarily arisen from book and tax
reporting differences related to DAC and unrealized investment
gains (losses).
In years when the taxable income of a mortgage insurer results
in a loss before the application of the special contingency
reserve, the prior established contingency reserve can be
reversed earlier than originally scheduled (effectively
recognizing as taxable income the prior contingency reserve that
had been deferred) to offset the current year loss. When the
special contingency reserve for tax purposes is reversed to
offset a current year operating loss, the Tax and Loss Bonds can
be redeemed earlier than the originally scheduled ten years.
During 2008, we reversed $335.0 million of contingency
reserve and redeemed all of the remaining $116.0 million of
Tax and Loss Bonds. During the second half of 2007, we reversed
$113 million of contingency reserve for tax purposes
earlier than originally scheduled and redeemed
$50.9 million of Tax and Loss Bonds related to that
reversal.
43
Investment
Portfolio
Portfolio
Description
Our goal for managing our investment portfolio is to optimize
investment returns, provide liquidity when necessary, preserve
capital and adhere to regulatory requirements. We have
established a formal investment policy that describes our
overall quality and diversification objectives and limits.
Historically, the majority of our investment portfolio had been
comprised of tax-preferred state and municipal fixed income
securities. Given the operating losses reported since the third
quarter of 2007, we currently do not anticipate the realization
of tax benefits normally associated with state and municipal
securities. As a result, we made the decision in the second
quarter of 2008 to restructure the investment portfolio into
taxable publicly-traded securities, primarily corporate debt
obligations, asset-backed securities, and mortgage-backed
securities. Furthermore, as we anticipate negative cash flow
from operations in 2009 due to the expected increase in claims
paid, we expect the proceeds from the maturity and sale of
securities will be required to fund the shortfall. In connection
with the restructuring of our investment portfolio, we shortened
the portfolio duration to better match the maturities with our
anticipated cash needs. At December 31, 2008, we had
$159 million of municipal securities remaining in our
portfolio. In the current market there are significant risks
involved in attempting to liquidate the remaining tax-preferred
portfolio. These risks include execution risk in the selling and
buying of securities, additional credit risk moving from
primarily insured, highly rated municipal bonds to lower rated
corporate bonds, and uncertainty surrounding mortgage-backed and
asset-backed securities.
Our investment policy and strategies are subject to further
change depending upon regulatory, economic and market conditions
as well as our existing financial condition and operating
requirements, including our tax position. We classify our entire
investment portfolio as available for sale. This classification
allows us the flexibility to dispose of securities in order to
meet our investment objectives and operating requirements. All
investments are carried on our balance sheet at fair value.
The following table shows the growth and transition of our
investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations
|
|
$
|
20,168
|
|
|
|
2.3
|
%
|
|
$
|
11,762
|
|
|
|
1.5
|
%
|
State and municipal bonds
|
|
|
159,394
|
|
|
|
17.8
|
%
|
|
|
673,264
|
|
|
|
85.8
|
%
|
Corporate bonds
|
|
|
547,945
|
|
|
|
61.2
|
%
|
|
|
40,605
|
|
|
|
5.2
|
%
|
Mortgage-backed bonds
|
|
|
126,679
|
|
|
|
14.1
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Total fixed maturities
|
|
|
854,186
|
|
|
|
95.4
|
%
|
|
|
725,631
|
|
|
|
92.5
|
%
|
Equity securities
|
|
|
583
|
|
|
|
0.1
|
%
|
|
|
2,162
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
854,769
|
|
|
|
95.5
|
%
|
|
|
727,793
|
|
|
|
92.8
|
%
|
Short-term investments
|
|
|
40,653
|
|
|
|
4.5
|
%
|
|
|
56,746
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
895,422
|
|
|
|
100.0
|
%
|
|
$
|
784,539
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the results of our investment
portfolio for the last two years:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Average investments at cost or amortized cost
|
|
$
|
828,142
|
|
|
$
|
682,006
|
|
Pre-tax net investment income
|
|
$
|
39,580
|
|
|
$
|
32,936
|
|
Book yield
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
Pre-tax realized investment (losses) gains
|
|
$
|
(26,559
|
)
|
|
$
|
(3,049
|
)
|
44
The book yield is comparable for 2008 and 2007 as the taxable
securities purchased during 2008 generally have a lower duration
but a similar yield as the longer duration municipals that
comprised the majority of the portfolio at December 31,
2007. The largest portion of the realized investment losses in
2008 are from write downs due to other-than-temporary
impairments as described in Realized Gains (Losses) and
Impairments below.
Unrealized
Gains and Losses
The following table summarizes by category our unrealized gains
and losses in our securities portfolio at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government obligations
|
|
$
|
19,665
|
|
|
$
|
503
|
|
|
$
|
|
|
|
$
|
20,168
|
|
State and municipal bonds
|
|
|
156,675
|
|
|
|
2,719
|
|
|
|
|
|
|
|
159,394
|
|
Corporate bonds
|
|
|
545,230
|
|
|
|
2,715
|
|
|
|
|
|
|
|
547,945
|
|
Mortgage-backed bonds
|
|
|
123,394
|
|
|
|
3,285
|
|
|
|
|
|
|
|
126,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed maturities
|
|
|
844,964
|
|
|
|
9,222
|
|
|
|
|
|
|
|
854,186
|
|
Equity securities
|
|
|
566
|
|
|
|
17
|
|
|
|
|
|
|
|
583
|
|
Short term investments
|
|
|
40,565
|
|
|
|
88
|
|
|
|
|
|
|
|
40,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
886,095
|
|
|
$
|
9,327
|
|
|
$
|
|
|
|
$
|
895,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Given our recurring losses from operations and the significant
doubt regarding our ability to continue as a going concern, we
may no longer have the ability to hold impaired assets for a
sufficient time to recover their value. As a result, we made the
decision to recognize an impairment loss on all securities whose
amortized cost is greater than the market value and thus have no
unrealized losses at December 31, 2008.
These unrealized gains do not necessarily represent future gains
that we will realize. Changing conditions related to specific
securities, overall market interest rates, or credit spreads, as
well as our decisions concerning the timing of a sale, may
impact values we ultimately realize. Taxable securities
typically exhibit greater volatility in value than tax-preferred
securities and thus we expect greater volatility in unrealized
gains and realized losses going forward. Volatility may increase
in periods of uncertain market or economic conditions.
45
Credit
Risk
Credit risk is inherent in an investment portfolio. One way we
attempt to limit the inherent credit risk in our portfolio is to
maintain investments with high ratings. The following table
shows our investment portfolio by credit ratings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency bonds
|
|
$
|
20,168
|
|
|
|
2.4
|
%
|
|
$
|
11,762
|
|
|
|
1.6
|
%
|
AAA
|
|
|
236,975
|
|
|
|
27.7
|
|
|
|
518,769
|
|
|
|
71.5
|
|
AA
|
|
|
183,916
|
|
|
|
21.5
|
|
|
|
150,820
|
|
|
|
20.8
|
|
A
|
|
|
381,936
|
|
|
|
44.7
|
|
|
|
25,774
|
|
|
|
3.6
|
|
BBB
|
|
|
25,203
|
|
|
|
3.0
|
|
|
|
8,738
|
|
|
|
1.2
|
|
BB
|
|
|
1,239
|
|
|
|
0.1
|
|
|
|
1,072
|
|
|
|
0.1
|
|
B
|
|
|
619
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
CCC
|
|
|
1,523
|
|
|
|
0.2
|
|
|
|
5,591
|
|
|
|
0.8
|
|
CC and lower
|
|
|
48
|
|
|
|
0.0
|
|
|
|
2
|
|
|
|
0.0
|
|
Not rated
|
|
|
2,559
|
|
|
|
0.3
|
|
|
|
3,103
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
854,186
|
|
|
|
100.0
|
%
|
|
$
|
725,631
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
|
|
|
|
0.0
|
%
|
|
$
|
745
|
|
|
|
34.5
|
%
|
A
|
|
|
429
|
|
|
|
73.6
|
|
|
|
883
|
|
|
|
40.8
|
|
BBB
|
|
|
133
|
|
|
|
22.8
|
|
|
|
534
|
|
|
|
24.7
|
|
C
|
|
|
21
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
583
|
|
|
|
100.0
|
%
|
|
$
|
2,162
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the credit quality of the portfolio is primarily
due to the restructuring of the portfolio out of tax-preferred
securities, which have historically carried credit ratings of
AAA as a result of credit enhancements provided by
financial guaranty insurers, and into taxable securities. The
credit rating of a bond will carry the higher of a financial
guarantors credit rating or the credit rating on the
bonds underlying credit qualities if such a credit rating
exists. Taxable securities generally do not have such credit
enhancements and the credit rating reflects the securities
underlying credit qualities.
46
We evaluate the credit risk of a security by analyzing the
underlying credit qualities of the security. The following table
indicates the credit quality of our fixed maturity portfolio
with and without the benefit of the credit enhancements as
provided by financial guaranty insurers at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality
|
|
|
|
|
|
|
With Benefit
|
|
|
|
|
|
|
of Credit
|
|
|
Credit Quality Without Benefit
|
|
|
|
Enhancements
|
|
|
of Credit Enhancements
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
U.S. treasury and agency bonds
|
|
$
|
20,168
|
|
|
|
2.4
|
%
|
|
$
|
20,168
|
|
|
|
2.4
|
%
|
AAA
|
|
|
211,944
|
|
|
|
24.8
|
|
|
|
208,926
|
|
|
|
24.5
|
|
AA
|
|
|
127,238
|
|
|
|
14.9
|
|
|
|
102,353
|
|
|
|
12.0
|
|
A
|
|
|
441,621
|
|
|
|
51.7
|
|
|
|
472,102
|
|
|
|
55.3
|
|
BBB
|
|
|
47,167
|
|
|
|
5.5
|
|
|
|
29,486
|
|
|
|
3.5
|
|
B
|
|
|
619
|
|
|
|
0.1
|
|
|
|
2,050
|
|
|
|
0.2
|
|
CCC
|
|
|
2,822
|
|
|
|
0.3
|
|
|
|
2,067
|
|
|
|
0.2
|
|
CC and below
|
|
|
48
|
|
|
|
0.0
|
|
|
|
48
|
|
|
|
0.0
|
|
Not rated
|
|
|
2,559
|
|
|
|
0.3
|
|
|
|
16,986
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
854,186
|
|
|
|
100.0
|
%
|
|
$
|
854,186
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we did not invest directly in any
financial guaranty insurers, but we were indirectly exposed to
the risk of financial guaranty insurer default through the
credit enhancements provided on the majority of our state and
municipal fixed maturity bond portfolio.
At December 31, 2008, our state and municipal bond
portfolio amounted to $159.4 million, with approximately
$131.9 million containing credit enhancements from
financial guaranty insurers. The following table indicates the
approximate exposure to and percentage of our credit enhanced
state and municipal bond portfolio by financial guaranty insurer:
|
|
|
|
|
|
|
|
|
|
|
Credit Enhanced State and
|
|
|
|
Municipal Portfolio
|
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Financial Guarantors
|
|
|
|
|
|
|
|
|
MBIA
|
|
$
|
63,099
|
|
|
|
47.8
|
%
|
AMBAC
|
|
|
34,858
|
|
|
|
26.4
|
|
FSA
|
|
|
21,474
|
|
|
|
16.3
|
|
Others (five companies)
|
|
|
12,491
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,922
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
For the quarter ended December 31, 2008, we made the
decision to recognize an impairment loss on all securities whose
amortized cost was greater than the market value. This decision
was made as a result of our recurring losses from operations and
the significant doubt regarding our ability to continue as a
going concern as opposed to resulting from an analysis of any
specific security. Going forward, we will recognize an
impairment loss for all securities whose amortized cost is
greater than the reported market value.
Prior to this decision, we regularly reviewed our entire
investment portfolio to identify securities that may have
suffered impairments in value that will not be recovered, termed
potentially distressed securities. In identifying
these securities, we paid special attention to the length of
time a securitys fair value was below its amortized cost
and the degree to which the fair value was below amortized cost,
as well as other factors. When we concluded that a decline was
other-than-temporary, the security was written down to fair
value through a charge to realized investment gains and losses.
If a decision was made to sell a security or type of security,
we recognized an impairment loss on those securities whose book
value was greater than the market value at the time the decision
was
47
made. In the second quarter of 2008, we made the decision to
liquidate the tax-preferred bond portfolio and recognized
subsequent impairment losses of approximately $7.5 million
during 2008 specifically on that portfolio.
Realized
Losses and Impairments
Realized gains (losses) include both write-downs of securities
with other-than-temporary impairments and gains (losses) from
the sales of securities. Net realized losses for 2008 totaled
$26.6 million. The net realized loss was primarily composed
of: (1) an impairment loss of $36.8 million on bonds
offset by $8.5 million gain on the sale of bonds;
(2) an impairment loss of $1.7 million on preferred
stock; and (3) a gain of $3.4 million on foreign
currency.
Liquidity
and Capital Resources
The accompanying consolidated financial statements have been
prepared in accordance with GAAP and assume that we will
continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities and commitments in
the normal course of business. However, our ability to continue
as a going concern will be dependent on the successful
development, approval, and implementation of a revised
corrective plan as previously discussed. If we are unable to
develop, gain approval from the Division of, or implement a
revised corrective plan, the Division could place TGIC into
receivership proceedings for conservatorship, rehabilitation, or
liquidation. Each of these outcomes effectively removes all of
the assets and future cash flows of TGIC from the ownership of
the parent company and its stockholders and allocates it to
TGICs policyholders. As TGIC is the Companys primary
source of cash flow, if TGIC were placed in receivership
proceedings by the Division, we could be forced to seek
protection from creditors under Chapter 11 of the United
States Bankruptcy Code and little or no funds would ever be
available for distribution to our stockholders. The report of
our independent registered public accounting firm with respect
to our December 31, 2008 financial statements indicates
that there is substantial doubt about our ability to continue as
a going concern.
Generally, our sources of operating funds consist of premiums
written and investment income. Operating cash flow has
historically been applied to the payment of claims, interest,
expenses and prepaid federal income taxes in the form of Tax and
Loss Bond purchases. However, beginning in the second half of
2007, the early redemption of Tax and Loss Bonds due to our
operating losses has provided a source of funds. See
Prepaid Federal Income Taxes and Deferred Income
Taxes for additional information concerning the Tax and
Loss Bonds. We redeemed $116.0 million and
$50.9 million of Tax and Loss Bonds in 2008 and 2007,
respectively, related to operating losses. As of
December 31, 2008, our remaining holdings of Tax and Loss
Bonds are insignificant.
We generated positive cash flow from operating activities of
$147.1 million during 2008 compared to $191.1 million
in 2007. The positive cash flow from operations in 2008 included
the redemption of Tax and Loss Bonds of $116.0 million.
Going forward, Tax and Loss Bonds are not expected to be a
source of operating cash flow.
In 2008, we experienced a significant operating loss, primarily
due to an increase in net loss and LAE reserves of
$678.4 million, which did not impact our operating cash
flow. Generally, there is about a 12 to 18 month delay from
when reserves are initially established on a default to when a
claim is ultimately paid. During 2008, direct paid losses
amounted to $237.6 million compared to $100.6 million
in 2007. While the level of paid claims increased substantially
in 2008 from the levels experienced in 2007, the amount was less
than anticipated. We believe the lower than anticipated amount
of paid claims was due to a number of factors that have delayed
claim payments, including GSE and state foreclosure moratoriums,
delays by the servicers due to a large increase in the number of
policies in default, a continued effort on our part in
investigating policies for underwriting violations, and an
increase in rescission activity.
Net cash received from premiums amounted to $274.7 million
in 2008 compared to $281.3 million in 2007. The decrease is
due to the overall decline in insurance in force as well as an
increase in premium refunds due to rescission activity. Although
persistency has remained high, the rate of decline in total
insurance in force has accelerated in the last two quarters of
2008 following our decision to stop writing new business and
enter into voluntary run off. Additionally, we anticipate more
refunds of premiums in 2009 based on the number of policies
currently under review. Based upon the two items enumerated
above, we believe the decline in premiums will continue in 2009.
48
During 2009 and continuing into 2010, we expect to report
negative cash flow from operations as we anticipate the payment
of claims and expenses will be greater than net premium and
investment income received. We anticipate that the cash
necessary to meet the negative operating cash flow in 2009 and
2010 will be funded by the scheduled maturities of invested
assets and, if needed, sales of other assets in our investment
portfolio. Items that could have an impact on cash flow in 2009
and 2010 include the outcome of the arbitration of the
$95 million Excess-of-Loss reinsurance treaty and the
reimbursement of claims paid by the captive reinsurers.
As described under Investment Portfolio, we are in
the process of repositioning our investment portfolio to convert
from a primarily tax-preferred portfolio to a taxable portfolio.
Furthermore, maturities within our fixed income investment
portfolio are being structured to have such funds available to
meet operating cash needs or provide options to reinvest those
funds. See Investment Portfolio for more information
concerning the repositioning. Our business does not routinely
require significant amounts of capital expenditures. Although
some capital expenditures are required to keep systems operating
effectively and efficiently during run-off, we anticipate that
future capital expenditures will be less than in previous years.
At December 31, 2008, the Company reported a deficit in
assets of $136.7 million compared to stockholders
equity of $498.9 million at December 31, 2007. A
deficit in assets occurs when recorded liabilities exceed
recorded assets. The deficit in assets is the result of six
straight quarters of losses totaling $737.9 million. The
largest portion of our losses is the result of an increase in
loss and loss adjustment expense reserves of $1.1 billion
since June 30, 2007, the last quarter for which we reported
a profit. In addition, we have paid in excess of
$300 million of claims during these last six quarters, an
amount greater than the total claims paid during the first
18 years of the Companys existence. At
December 31, 2008, we had approximately $935 million
of cash and invested assets, approximately $234 million
more than at June 30, 2007. We reported $147.1 million
of cash flow from operations for 2008, with $116.0 million
derived from the redemption of Tax and Loss Bonds that are not
expected to be an ongoing source of cash. We expect to continue
to report a deficit in assets in future periods. While we do not
expect the deficit in assets to have a direct impact on our
operations, it could adversely impact our continued listing on
The NASDAQ Stock Market. While we reported a deficit in assets
at December 31, 2008 for GAAP purposes, we are still
reporting positive policyholders surplus as calculated
under statutory accounting principles.
On June 28, 2007, the Company entered into a three-year,
$80.0 million unsecured revolving credit facility with
three domestic banks to provide short-term liquidity for
insurance operations and general corporate purposes. On
August 22, 2007, we drew down $80 million under the
credit facility and it remained outstanding until the entire
balance was repaid on March 31, 2008. The entire
$80 million credit facility was terminated on the same day.
We do not have any credit facility in place at December 31,
2008, nor do we anticipate that it would be feasible to obtain
one given our current financial condition and the state of the
current credit markets.
The insurance laws of the State of Illinois impose certain
restrictions on dividends that an insurance subsidiary can pay
its parent company. As discussed previously, the Corrective
Order prohibits the payment of dividends by our insurance
subsidiary to the parent corporation without prior approval from
the Division.
Included in policyholders surplus of the primary insurance
subsidiary, Triad, is a surplus note of
$25 million payable to the registrant, its parent. The
accrual of and payment of the interest on the surplus note must
be approved by the Division, which has broad discretion to
approve or disapprove any such payment. In June 2008, we
requested permission to accrue and pay the interest on the
$25 million surplus note from the Division. Our request was
formally denied. The Corrective Order from the Division
prohibits Triad from paying interest on the surplus note to its
parent company without prior approval from the Division. We do
not expect Triad will be able to pay any principal or interest
on this note for the foreseeable future.
The parent company has limited sources of cash flow. The
$35 million outstanding long-term debt is the obligation of
the parent company and not of Triad. Debt service amounts to
$2.8 million per year and is paid by the parent company.
The primary source of funds for the parent company debt service
has historically been the interest paid on the $25 million
surplus note by Triad, which has provided $2.2 million on
an annual basis. We do not expect this source of cash to be
available for the foreseeable future. At December 31, 2008,
the parent company had cash and invested assets of approximately
$10.7 million. While we currently believe that the cash
resources on hand at the parent company will be sufficient to
cover the required debt service for 2009 on the $35 million
long-term debt, we cannot provide any assurance that this or any
future debt service payments will be made and the ultimate
ability
49
of the parent company to repay the entire $35 million is
subject to substantial risks and cannot be assured unless a
source of funds is secured. The ability of the parent company to
pay the debt service with funds obtained from Triad, whether in
the form of dividends, payments on the surplus note or
otherwise, will require the approval of the Division, and it is
unlikely that such approval will be sought or obtained in the
foreseeable future.
Triad has historically reimbursed the parent company for a
majority of its operating cash expenses under a management
agreement. As part of the Corrective Order, we are required to
submit to the Division a request for reimbursement of these
expenses on a quarterly basis. These parent company cash
expenses range from approximately $250,000 to $600,000 per
quarter depending on certain activities and include legal,
director, accounting, and consulting fees. There can be no
assurance these quarterly expenditures will not increase in the
future. If the Division prohibits or limits the reimbursement by
Triad of the parent companys operating expenses, the cash
resources of the parent company will be adversely affected.
In 2007, the Company established a Canadian subsidiary for the
purpose of exploring the opportunity to provide mortgage
insurance in Canada. During the first quarter of 2008, in
response to the continued stress in the U.S. mortgage
markets, the Company discontinued the effort in Canada and
repatriated most of the funds back to the U.S. parent
company. The Canadian subsidiary was liquidated during the
fourth quarter of 2008 and all funds have now been returned to
the parent company. Of the approximately $45.0 million of
cash originally invested, we received approximately
$44.1 million back from Canada, which included a net
realized gain from foreign currency translation of
$3.4 million.
Triad cedes business to captive reinsurance affiliates of
certain mortgage lenders, primarily under excess of loss
reinsurance agreements. Generally, reinsurance recoverables on
loss reserves and unearned premiums ceded to these captives are
backed by trust accounts where Triad is the sole beneficiary.
When ceded loss reserves exceed the trust balances, we address
the counter-party credit risk of the reinsurance recoverable on
a
case-by-case
basis and provide for a provision for uncollectible accounts
where appropriate. At December 31, 2008, total trust
balances were approximately $258.0 million compared to
$201.5 million at December 31, 2007.
Triad ceased accepting commitments to write new mortgage
commitments on July 15, 2008 and is operating in run-off.
The risk-to-capital ratio, which is utilized as a measure by
many states and regulators of an insurers capital adequacy
and ability to underwrite new business, is no longer relevant
for this purpose to Triad. Generally, states limit a mortgage
insurers statutory risk-to-capital ratio to 25-to-1. At
December 31, 2008, Triads statutory
risk-to-capital
ratio substantially exceeded that level.
Statutory capital, for the purpose of computing the net risk in
force to statutory capital ratio, includes both
policyholders surplus and the contingency reserve. The
following table provides information regarding our statutory
capital position at December 31, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Statutory policyholders surplus
|
|
$
|
88.0
|
|
|
$
|
197.7
|
|
Statutory contingency reserve
|
|
|
|
|
|
|
387.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88.0
|
|
|
$
|
585.1
|
|
|
|
|
|
|
|
|
|
|
For statutory reporting purposes, during 2008 we adopted the
reserve requirements as outlined in the Illinois Insurance Code
that requires loss reserves be established for all loans that
are four or more payments in arrears or in foreclosure. The
utilization of these standards results in a smaller reserve
recorded for statutory purposes than the reserve recorded in the
Companys GAAP financial statements, which provide reserves
on all loans that are three or more months in default. The
difference in the two methodologies is approximately
$192 million as of December 31, 2008. This accounting
change was deemed to be a change in statutory accounting method
adopted on a prospective basis, and, accordingly, we recorded a
cumulative effect to surplus as of the beginning of 2008 of
approximately $107 million. As a result, beginning with the
quarter ended September 30, 2008, the net loss and loss
adjustment expense reserve reported in Triads statutory
financial statements has been and will continue to be different
than that reported in our GAAP financial statements.
50
During the second quarter of 2008, we recorded the full impact
of the Excess of Loss reinsurance treaty for statutory reporting
purposes. We recorded reinsurance recoverables, accrued premiums
and expenses in accordance with the terms of the contract, which
had the effect of increasing policyholders surplus in
Triads statutory financial statements at June 30,
2008 by approximately $78 million. In accordance with
statutory accounting treatment for reinsurance in dispute and
past due billed reinsurance recoverable amounts, we recorded an
allowance for uncollectible reinsurance of approximately
$25 million in the fourth quarter of 2008. At
December 31, 2008, we recognized approximately
$53 million from the excess of loss reinsurance treaty in
policyholders surplus for statutory reporting purposes
that had not been recognized in the GAAP financial statements.
Historically, one of the primary differences between statutory
policyholders surplus and equity computed under GAAP is
the statutory contingency reserve. Generally, mortgage insurance
companies are required to add to the statutory contingency
reserve through a charge to surplus an amount equal to 50% of
calendar year earned premiums and retain the contingency reserve
in the statutory statements for a period of ten years. The
contingency reserve can be released earlier than the scheduled
ten years if the loss ratio exceeds 35%. Triads loss ratio
substantially exceeded 35% in 2008 and 2007. Accordingly, we
released approximately $235.0 million of contingency
reserve in 2008 and $275.0 million in 2007. Going forward,
any contingency reserve established as earned premiums will be
recognized and immediately released as long as the loss ratio
continues to exceed 35%.
In connection with the decision to transition our business into
run-off, we notified the rating agencies that we were
terminating all agreements with them regarding the issuance of
ratings on the Company. As a result, the rating agencies have
since withdrawn their ratings for the Company and for our
subsidiaries, including Triad. All three rating agencies
currently have a negative outlook on the U.S. private
mortgage insurance industry.
Off
Balance Sheet Arrangements and Aggregate Contractual
Obligations
We had no material off-balance sheet arrangements at
December 31, 2008.
We lease office facilities, automobiles, and office equipment
under operating leases with minimum lease commitments that range
from one to five years. We had no capitalized leases or material
purchase commitments at December 31, 2008.
Our long-term debt has a single maturity date of 2028. The
following table represents our aggregate contractual obligations
as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
Long-term debt
|
|
$
|
35,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,000
|
|
Operating leases
|
|
|
6,053
|
|
|
|
1,654
|
|
|
|
4,399
|
|
|
|
|
|
|
|
|
|
Loss reserves
|
|
|
1,187,840
|
|
|
|
407,687
|
|
|
|
780,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,228,893
|
|
|
$
|
409,341
|
|
|
$
|
784,552
|
|
|
$
|
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves represent the estimated costs of settling claims
on loans reported in default, and loans in default that are in
the process of being reported to us, as of the date of our
financial statements. For the purpose of this table, we
estimated that 34% of the existing reserves will result in claim
payments in the next year and the remaining 66% will be paid in
the following two years in equal amounts. The payment period is
based on historical claim payment trends adjusted somewhat for
recent developments affecting the payment of claims. The
establishment of loss reserves is subject to inherent
uncertainty and requires significant judgment by management.
Furthermore, the current operating environment and recent
government initiatives have made it even more difficult to
estimate loss reserves and the payment period.
51
Critical
Accounting Policies and Estimates
Accounting estimates and assumptions discussed in this section
are those that we consider to be the most critical to an
understanding of our financial statements because they
inherently involve significant judgments and uncertainties. In
developing these estimates, we make subjective and complex
judgments that are inherently uncertain and subject to material
change as facts and circumstances develop. Although variability
is inherent in these estimates, we believe the amounts provided
are appropriate based on the facts available upon compilation of
the financial statements. Also, see Note 1 to the
Consolidated Financial Statements, Summary of Significant
Accounting Policies for a complete discussion of our significant
accounting policies.
Reserve
for Losses and Loss Adjustment Expenses
(LAE)
We calculate our best estimate of the reserve for losses to
provide for the estimated costs of settling claims on loans
reported in default, as of the date of our financial statements.
Additionally, we provide a reserve for loans in default that are
in the process of being reported to us (incurred but not
reported) using an estimate based on the percentage of actual
reported defaults. Our reserving process incorporates various
components in a model that gives effect to current economic
conditions and segments defaults by a variety of criteria. The
criteria include, among others, policy year, lender, geography
and the number of months the policy has been in default, as well
as whether the defaults were underwritten as flow business or as
part of a structured bulk transaction. Beginning in 2007, we
incorporated in the calculation of loss reserves the probability
that a policy may be rescinded for underwriting violations.
Frequency and severity are the two most significant assumptions
in the establishment of our loss reserves. Frequency is used to
estimate the ultimate number of paid claims associated with the
current inventory of loans in default. The frequency estimate
assumes that long-term historical experience, taking into
consideration criteria such as those described in the preceding
paragraph, and adjusted for current economic conditions that we
believe will significantly impact the long-term loss
development, provides a reasonable basis for forecasting the
number of claims that will be paid. Our expectations regarding
future rescissions have been incorporated into the frequency
factor. Severity is the estimate of the dollar amount per claim
that will be paid. The severity factors are estimates of the
percentage of the risk in force that will be paid. The severity
factors used are based on an analysis of the severity rates of
recently paid claims, applied to the risk in force of the loans
currently in default. The frequency and severity factors are
updated quarterly. Economic conditions and other data upon which
these factors are based may change more frequently than once a
quarter. Therefore, significant changes in reserve requirements
may become evident three or more months following the underlying
events that would necessitate the change.
The estimation of loss reserves requires assumptions as to
future events, and there are inherent risks and uncertainties
involved in making these assumptions. Economic conditions that
have affected the development of loss reserves in the past may
not necessarily affect development patterns in the future in
either a similar manner or degree. Furthermore, the current
conditions of the economy and the mortgage market are
substantially different than those we have witnessed before and,
as such, we believe our estimates are susceptible to a larger
degree of variation than those established in previous financial
statements. To provide a measure of the sensitivity on pretax
income and
52
loss reserves carried on the balance sheet, we have provided the
following table that quantifies the impact of percentage
increases and decreases in both the average frequency and
severity as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Sensitivity Analysis
|
|
|
|
Effect on Pretax Loss from
|
|
|
|
Changes in Assumptions
|
|
|
|
Decrease in Factors
|
|
|
Increase in Factors
|
|
|
|
Resulting in a
|
|
|
Resulting in an
|
|
|
|
(Decrease) in Pretax
|
|
|
Increase in Pretax
|
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars in thousands)
|
|
|
30% Increase (Decrease) in the Frequency Factors
|
|
|
|
|
|
|
|
|
Utilized in the Loss Reserve Model
|
|
|
(279,923
|
)
|
|
|
278,184
|
|
15% Increase (Decrease) in the Severity Factors
|
|
|
|
|
|
|
|
|
Utilized in the Loss Reserve Model
|
|
|
(159,257
|
)
|
|
|
154,980
|
|
Both a 30% Increase (Decrease) in the Frequency
|
|
|
|
|
|
|
|
|
Factor and a 15% Increase (Decrease) in the Severity
|
|
|
|
|
|
|
|
|
Factor Utilized in the Loss Reserve Model
|
|
|
(397,192
|
)
|
|
|
461,212
|
|
The impact on loss reserves on the balance sheet would be to
decrease reserves for favorable developments and to increase
reserves for unfavorable developments. There would be no impact
on liquidity resulting from the change in reserves. However,
there would be a change in cash or invested assets equal to the
increase or decrease in the ultimate paid claims related to the
change in reserves. We believe that a 30% increase or decrease
in frequency is reasonably likely based on potential changes in
future economic conditions and past experience, although we
believe there is a greater propensity during 2009 for an
increase in the frequency factor given the current conditions of
the housing market. Our loss severity is ultimately limited by
the coverage percentage on individual loans but can increase
from the current level. We believe that a 15% increase or
decrease in severity is reasonably likely based on potential
changes in future economic conditions and past experience,
although we believe there is a greater propensity during 2009
for an increase in the severity factor given the current
conditions of the housing market. Economic conditions that could
give rise to an increase in the frequency rate could be a sudden
increase or a prolonged period of increase in the unemployment
rate or a continued downward trend in home prices while,
conversely, an improved housing market, a sudden drop in
interest rates or a sustained period of economic and job growth
could decrease the frequency rate. Any factor that would affect
our ability to sell a home of a borrower in default prior to
foreclosure would affect our severity. The most prominent of
these would be the value of the underlying home.
Our level of loss reserves as well as our recognition of premium
income are both impacted by the estimate of future rescissions
in the existing default portfolio. In general, a rescission
occurs when an investigation finds that fraud, misrepresentation
or other specified violations occurred in the origination of a
loan. When this occurs, insurance coverage from the date of
issuance is cancelled and all of the previously paid premium is
refunded.
During 2008, we experienced a much higher level of rescission
activity than in previous years. This activity was concentrated
in policies originated in 2006 and 2007. We have also identified
concentrations with specific lenders and by delivery channel.
Beginning in late 2007, we began to incorporate a factor in our
computation of loss reserves to account for expected
rescissions. In estimating this factor, we consider whether the
policy is under review, if the policy has been recommended for
rescission, how many payments the borrower made on the mortgage,
whether the policy was delivered through the flow channel or
bulk channel, as well as who was the originating lender. The
effect of the factor is to reduce the loss reserve by reflecting
the probability that we may rescind coverage on a certificate.
The inclusion of this factor in our calculation of loss reserves
reduced incurred losses by $203.9 million at
December 31, 2008.
We also account for the impact of expected rescissions on our
future premium revenue by establishing an accrual for expected
premium refunds. In establishing this accrual, we consider the
probability a policy will be rescinded, which is consistent with
the factor used in the calculation of loss reserves. The
establishment of this liability reduced premium revenue in 2008
by $17.1 million.
53
A substantial amount of judgment is used in calculating the
impact of rescissions and we have limited historical experience
in calculating this impact. Our recent experience with
rescissions is not necessarily indicative of the future trends.
Furthermore, our ability to rescind a policy may be adversely
impacted by the insured disputing our rights and prevailing in
court or arbitration. Any increase or decrease in rescission
factors would impact our reserves in the period in which they
are adopted.
Because the estimate for loss reserves is sensitive to the
estimates of claims frequency and severity, we perform analyses
to test the reasonableness of the best estimate generated by our
loss reserve process. Our loss reserve estimation process and
our analyses support the reasonableness of the best estimate of
loss reserves recorded in our financial statements. See
Losses and Expenses above for a more detailed
discussion of the reserves for losses and LAE.
Investments
Valuing our investment portfolio involves a variety of
assumptions and estimates, particularly for investments that are
not actively traded. We rely on external pricing sources for
highly liquid, publicly traded securities and use an internal
pricing matrix developed by our outside investment advisors for
privately placed securities. This matrix relies on our judgment
concerning (a) the discount rate we use in calculating
expected future cash flows, (b) credit quality and
(c) expected maturity.
Given our recurring losses from operations and the significant
doubt regarding our ability to continue as a going concern, we
may no longer have the ability to hold impaired assets for a
sufficient time to recover their value. As a result, we
recognized an impairment loss on all securities that were in an
unrealized loss position at December 31, 2008. Previously,
we reviewed our investments quarterly to identify and evaluate
whether any investments had indications of possible impairment
and whether any impairments were other than temporary. Factors
considered in determining whether a loss is other than temporary
include the length of time and extent to which fair value has
been less than the cost basis, the financial condition and
near-term prospects of the issuer, and our intent and ability to
hold the investment for a period of time sufficient to allow for
recovery in market value. For a further discussion of the
valuation of our investment portfolio and the methodology we use
to identify potential impairments, see Investment
Portfolio above.
Premium
Deficiency
A premium deficiency is recognized when the present value of the
embedded estimated future loss from the existing insurance
portfolio is greater than the existing net reserves.
Computations of premium deficiency reserves requires the use of
significant judgments and estimates to determine the present
value of future premiums and present value of expected losses
and expenses on our business. The present value of future
premiums relies on, among other things, assumptions about
persistency and repayment patterns on underlying loans. The
present value of expected losses and expenses depends on
assumptions relating to severity of claims and claim rates on
current defaults, and expected defaults in future periods.
We initially established a premium deficiency reserve at
March 31, 2008 on our entire book of business, which
included a $34.8 million acceleration of DAC amortization
in that period. Due to the significant amount of reserves
recorded during 2008 on the existing reported defaults, we no
longer have a need to record a premium deficiency reserve in
addition to those loss reserves already established. However,
the estimation of the premium deficiency reserve requires
assumptions as to future events, and there are inherent risks
and uncertainties involved in making these assumptions. The
computation is extremely sensitive to future economic
conditions. Economic conditions that have impacted our judgment
and affected our computation of the premium deficiency in the
past may not necessarily affect development patterns in the
future in either a similar manner or degree. There can be no
guarantee that we will not be required to establish a premium
deficiency reserve in the future.
54
Safe
Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other portions of this report
contain forward-looking statements relating to future plans,
expectations and performance, which involve various risks and
uncertainties, including, but not limited to, the following:
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a deeper or more prolonged recession in the United States
coupled with the tightening of the mortgage credit markets could
increase defaults and limit opportunities for borrowers to cure
defaults or for Triad to mitigate losses, which could have an
adverse material impact on our business or results of operations;
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our ability to demonstrate to the satisfaction of the Illinois
Division of Insurance that our revised financial and operating
plan will likely produce a solvent run-off under refined
assumptions, which requires, among other things, that we
maintain an appropriate level of policyholders surplus
under statutory accounting principles;
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the possibility that the Division may take various actions
regarding Triad if it does not approve our revised financial and
operating plan, including placing Triad into receivership
proceedings, which would effectively eliminate all remaining
stockholder value;
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our ability to continue as a going concern;
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the ability of the parent company to pay the debt service with
funds obtained from Triad, whether in the form of dividends,
payments on the surplus note or otherwise, will require the
approval of the Division, and it is unlikely that such approval
will be sought or, if sought, will be obtained in the
foreseeable future;
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whether we ultimately prevail in arbitration with the
Excess-of-Loss reinsurance treaty, which will have an impact on
our financial performance in run-off;
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if house prices continue to fall, additional borrowers may
default and claims could be higher than anticipated;
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if unemployment rates continue to rise, especially in those
areas that have already experienced significant declines in
house prices, defaults and claims could be higher than
anticipated;
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further economic downturns in regions where we have larger
concentrations of risk and in markets already distressed could
have a particularly adverse effect on our financial condition
and loss development;
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the appointment of FHFA as the conservator of both Fannie Mae
and Freddie Mac has resulted in changes in the business
practices of the GSEs;
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the impact of recently adopted programs affecting modifications
and refinancings of mortgages could materially impact our
financial performance in run-off;
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our financial condition and performance in run-off could be
affected by recently adopted legislation, such as EESA and HASP;
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our financial condition and performance in run-off could be
affected by legislation adopted in the future, if any, impacting
the mortgage industry, the GSEs specifically, or the financial
services industry in general;
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if the GSEs or our lender customers choose to cancel the
insurance on policies that we insure, our financial performance
in run-off could be adversely affected;
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a significant decline in interest rates coupled with an increase
in available credit could increase refinancings and decrease the
persistency of renewal premiums and the quality of our insurance
in force;
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if we have failed to properly underwrite mortgage loans under
contract underwriting service agreements, we may be required to
assume the costs of repurchasing those loans or face other
remedies;
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any impediment to our ability to rescind coverage on insurance
policies, which would be detrimental to our success in run-off;
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55
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our ability to lower operating expenses to the most efficient
level while still providing the ability to mitigate losses
effectively during run-off, which will directly impact our
financial performance in run-off; and
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if we are unable to satisfy its continued listing requirements,
we may be delisted from The NASDAQ Stock Market.
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Accordingly, actual results may differ from those set forth in
these forward-looking statements. Attention also is directed to
other risks and uncertainties set forth in documents that we
file from time to time with the SEC.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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The information required by this Item 7A is not required to
be provided by issuers that satisfy the definition of
smaller reporting company under SEC rules.
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Item 8.
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Financial
Statements and Supplementary Data
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The Financial Statements and Supplementary Data are presented in
a separate section of this report and are incorporated herein by
reference.
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A(T).
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Controls
and Procedures
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Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
Triad Guaranty Inc. maintains disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in its periodic reports to the SEC is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to Triad Guaranty
Inc.s management, including its Principal Executive
Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure based upon
the definition of disclosure controls and procedures
set forth in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934. In designing and evaluating
the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily was
required to apply its judgment to the cost-benefit relationship
of possible controls and procedures.
As of December 31, 2008, an evaluation was performed under
the supervision and with the participation of management,
including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures. Based upon that evaluation, management has concluded
that disclosure controls and procedures as of December 31,
2008 were effective in ensuring that material information
required to be disclosed in this
Form 10-K
was recorded, processed, summarized, and reported on a timely
basis.
Changes
in Internal Control over Financial Reporting
There have been no changes in Triad Guaranty Inc.s
internal control over financial reporting during the quarter
ended December 31, 2008 that materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Managements
Annual Report on Internal Control over Financial
Reporting
Management of Triad Guaranty Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities and Exchange Act of 1934. Triad Guaranty
Inc.s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Internal control over financial
56
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Triad Guaranty
Inc.; (2) provide reasonable assurance that the
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States; (3) provide
reasonable assurance that receipts and expenditures of Triad
Guaranty Inc. are being made in accordance with authorization of
management and directors of Triad Guaranty Inc.; and
(4) provide reasonable assurance regarding the prevention
of or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on the
consolidated financial statements. Internal control over
financial reporting includes the controls themselves, monitoring
(including internal auditing practices) and actions taken to
correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Triad Guaranty
Inc.s internal control over financial reporting as of
December 31, 2008. Management based this assessment on
criteria for effective internal control over financial reporting
described in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon this
assessment, management determined that, as of December 31,
2008, Triad Guaranty Inc. maintained effective internal control
over financial reporting.
This annual report does not include an attestation report of
Triad Guaranty Inc.s registered public accounting firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by Triad
Guaranty Inc.s registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission
that permit Triad Guaranty Inc. to provide only
managements report in this annual report.
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Item 9B.
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Other
Information
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On March 10, 2009, the Compensation Committee determined
that William T. Ratliff, III, the Companys Chairman
of the Board, had completed his designated tasks associated with
the transition of Mr. Jones as President and CEO and the
management of certain projects for the Company and reduced
Mr. Ratliffs annual cash compensation from $400,000
to $225,000. Mr. Ratliff will continue to serve as the
Companys Chairman of the Board and will be paid his cash
compensation for his service as Chairman in advance in quarterly
installments and on the same basis as the other directors. In
addition, he was granted a restricted stock award of
8,669 shares of the Companys common stock, which is a
pro-rated amount of the 25,000 shares to be granted to the
Chairman of the Board each year under the Companys
director compensation program. As Chairman of the Board,
Mr. Ratliff is not eligible for payment of Board or
Committee meeting fees or for serving as a chairman of any Board
Committee. On a going forward basis, Mr. Ratliff will be
subject to the Companys director compensation program, as
it may be amended from time to time, as described in
Item 11. Executive Compensation of this annual
report on
Form 10-K.
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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The following persons are the current directors of the Company
and are expected to be nominated to serve as directors at the
Companys 2009 annual meeting of stockholders. If elected,
each would hold office until the next annual meeting of
stockholders and until his successor is duly elected and
qualified or until his earlier removal or resignation:
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Robert T. David
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Age 70
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Director since 1993
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Since 2000, Mr. David has served as President and Chief
Executive Officer of Integrated Photonics, Inc., a manufacturer
of fiber optic components and materials.
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H. Lee Durham, Jr.
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Age 60
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Director since 2006
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57
Mr. Durham served PricewaterhouseCoopers in a number of
senior management positions from 1990 until his retirement in
2002. From 1980 to 1990 he was with Durham, Martin,
Jenkins & Co., a firm he founded and grew until it was
merged into Coopers & Lybrand. Since 2003,
Mr. Durham has served on the board of First Citizens
BancShares, Inc. and currently serves as Chair of its Audit
Committee.
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Deane W. Hall
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Age 59
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Director since 2009
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Mr. Hall retired from JP Morgan Chase in April 2006 after
serving in numerous senior management roles over his
17 years with their mortgage subsidiary, Chase Home
Finance. He was a member of Chase Home Finance Board of
Directors during that period. In addition, Mr. Hall served
on the Board of Directors of Mortgage Electronic Registration
System (MERS) from July 1998 to June 2004. His prior
experience also includes five years with Fannie Mae.
Mr. Hall currently serves as a member of the Board of
Directors of CSI, Inc., a nationwide staffing company.
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William T. Ratliff, III
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Age 55
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Director since 1993
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Mr. Ratliff, III has been the Chairman of the Board of
the Company since 1993 and served as the Companys Chief
Executive Officer and President from July 2008 to October 2008,
and continued to serve as an executive officer of the Company
from October 2008 until March 2009. Mr. Ratliff, III
was Chairman of the Board of Triad from 1989 to 2005 and
President of Collateral Investment Corp. (CIC), an
insurance holding company, from 1990 to 2005.
Mr. Ratliff, III has served as President of Collat,
Inc. since 1995 and as a director since 1987. Collat, Inc. is
the general partner of Collateral Holdings, Ltd., a closely-held
investment partnership. Mr. Ratliff, III has been
Chairman of the Board of Directors of New South Federal Savings
Bank (New South) since 1986 and President and a
director of New South Bancshares, Inc., New Souths parent
company, since 1994.
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David W. Whitehurst
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Age 59
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Director since 1993
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Mr. Whitehurst is the owner of DW Investments, LLC, a real
estate and investment holding company and DW Cleaners LLC d/b/a
Champion Cleaners, a dry cleaning business in Birmingham,
Alabama. He was Executive Vice President and Chief Operating
Officer of CIC from 1995 to 2002. He was a director of New South
from 1989 to 2001. Mr. Whitehurst is a certified public
accountant (retired).
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934
requires the Companys executive officers, directors and
persons who own more than 10% of the Companys common stock
to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. These persons are required
to provide the Company with copies of all Section 16(a)
forms that they file. Based solely on the Companys review
of these forms and written representations from the executive
officers and directors, the Company believes that all
Section 16(a) filing requirements were met during calendar
year 2008.
Code
of Ethics
The Board of Directors has adopted a Code of Ethics for our
principal executive and senior financial officers which is
available at our website at:
http://www.triadguaranty.com.
This Code of Ethics supplements our Code of Conduct applicable
to all employees and directors and is intended to promote honest
and ethical conduct, full and accurate reporting and compliance
with laws as well as other matters.
To the extent permissible under applicable law, the rules of the
SEC or NASDAQ listing standards, we also intend to post on our
website any amendment to the Code of Ethics that requires
disclosure under applicable law, SEC rules or NASDAQ listing
standards. Any waiver of the Code of Ethics for any executive
officer or director must be approved by the Board and will be
disclosed on a
Form 8-K
filed with the SEC, along with the reasons for the waiver.
58
Audit
Committee
The Audit Committee is a separately-designated standing audit
committee established in accordance with
section 3(a)(58)(A) of the Securities Exchange Act of 1934.
The Audit Committee is currently composed of
Messrs. Whitehurst (Chairman), Durham and Hall.
The Board of Directors has determined that each of
Mr. Durham and Mr. Whitehurst is an audit
committee financial expert as defined under the applicable
rules and regulations of the Securities and Exchange Commission.
The Board has also determined that all of the members of the
Audit Committee (i) are independent under
Rule 10A-3(b)(1)
under the Securities Exchange Act of 1934, (ii) have not
participated in the preparation of the financial statements of
the Company or any current subsidiary during the past three
(3) years, and (iii) are able to read and understand
fundamental financial statements, including a balance sheet,
income statement and cash flow statement. In addition, the Board
has determined that Messrs. Whitehurst, Durham, and Hall
are independent under the applicable listing standards of The
NASDAQ Stock Market LLC.
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Item 11.
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Executive
Compensation
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Significant changes were made in our compensation program for
2008 based on the unprecedented changes affecting our Company,
our industry and the entire financial markets resulting from the
mortgage crisis that permeated almost the entire economy. On
July 15, 2008, we ceased accepting commitments for any new
mortgage insurance business and began operating in run-off. On
August 5, 2008, we agreed to a Corrective Order with the
Division which, among other items, includes restrictions on the
distribution of funds by Triad. In July 2008, Mark Tonnesen
resigned as our President and CEO and was replaced on an interim
basis by the existing Chairman of the Board, Will Ratliff. In
October 2008, Ken Jones, our Senior Vice President and Chief
Financial Officer, was appointed to serve as CEO and President.
Mr. Jones retained the responsibilities of CFO and
Mr. Ratliff continues to serve as the Companys
Chairman of the Board.
In early 2008, the Compensation Committee and the Board approved
significant changes to our executive compensation program
applicable to 2008 only. The purpose of these changes was to
retain our executive-level employees, including our named
executive officers, and to motivate them to continue to achieve
our corporate goals and objectives. The Compensation Committee
and the Board determined that these changes were essential in
view of the unprecedented financial and operational challenges
we faced in 2008. In connection with these changes, the
Compensation Committee awarded no salary increases to our named
executive officers, fixing 2008 base salaries at 2007 levels. In
addition, the Compensation Committee decided not to award cash
incentives or grant equity awards for 2007 performance.
The Compensation Committee and the Board also approved the 2008
Executive Retention Program in early 2008. Under this program,
certain members of senior management were eligible to receive
two cash retention awards if their employment continued through
June 30, 2008 and December 31, 2008, or immediately if
terminated by the Company before those dates. Among our named
executive officers, Mr. Tonnesen was granted a $450,000
retention bonus, Mr. Jones was granted a retention bonus of
$200,000, Mr. Van Fleet was granted a retention bonus of
$180,000, Mr. Wall was granted a retention bonus of
$150,000, and Mr. Haferman was granted a retention bonus of
$100,000. Neither Mr. Ratliff nor Mr. McKenzie were
granted a retention bonus in 2008.
In addition, the Compensation Committee and the Board adopted
the 2008 Executive Severance Program (the Severance
Program) in order to address the pending expiration of
employment agreements with certain executive officers and the
absence of any comprehensive severance pay program. Under the
Severance Program, certain executives, including certain named
executive officers, would be entitled to receive monthly cash
payments based on his or her annual base salary and targeted
cash bonus, as well as COBRA benefits and access to outplacement
services. Although the Severance Program was originally
scheduled to expire on December 31, 2008, our Compensation
Committee, with the approval of the Division, has extended the
Severance Program until December 31, 2009.
On November 19, 2008, the Compensation Committee approved
the 2009 Executive Compensation Program (the
Program) following the earlier review and approval
of the Program by the Division. The Program is applicable to
employees who are members of the executive committee, including
Messrs. Jones, Wall, and
59
Haferman. The design of the Program is based on a revised
compensation philosophy that reflects the significant change in
the Companys focus from profit generation to managing a
solvent run-off. The four key principles of the Program are as
follows:
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To retain key executives with the talent and the knowledge of
the Company and industry to drive success;
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To motivate, and provide an incentive for, executives to achieve
financial performance and other quantitative and qualitative
targets associated with satisfaction of all legitimate
policyholder claims and ultimate solvency of the Company;
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To reward exceptional performance; and
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To provide a level of financial security to key executives to
allow them to focus on executing the corrective plan in a
difficult corporate environment.
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The material terms of the components of the Program, which are
generally effective January 1, 2009, are described below.
Base Salary: Salary adjustments have been
implemented effective January 1, 2009 for selected
executives to recognize their technical expertise, leadership
skills, strategic focus and years of experience and to reflect
the anticipated value of their position at the Company in 2009.
Under the Program, the annual base salary of Mr. Jones
remains at $350,000 for 2009, Mr. Walls 2009 annual
base salary has been increased to $196,000, and
Mr. Hafermans 2009 annual base salary remains at
$198,400.
Annual Performance-Based Cash Incentive
Award: The annual performance-based cash
incentive award component of the Program will recognize the
accomplishment of key corporate goals and individual objectives
and, if those targets are not met, the award will reflect the
missed opportunity. The targeted cash amounts were established
by determining the value of the contributions of the
executives position and are a set dollar amount rather
than a percentage of base salary. Targeted amounts will be
provided when the individual and the Company have met the goals
and objectives approved by the Compensation Committee. In most
cases, the amount of the targeted award is weighted 80% on
corporate performance and 20% on the individuals
performance; however, the Committee has the discretion to award
up to 150% of the targeted amount to those executives who
deliver exceptional results against their individual objectives.
The corporate goals were approved by the Committee in January
2009. Each executive has developed his or her individual
objectives and these were approved by the Chief Executive
Officer in January 2009 and later approved by the Committee. The
individual objectives for Mr. Jones were approved directly
by the Committee. In most cases, a minimum bonus opportunity is
available as a retention guarantee for those
executives in key positions for the ongoing operations of the
Company at December 31, 2009. The minimum annual cash
incentive award for Mr. Jones is $100,000 and his targeted
annual cash incentive award is $200,000. The minimum annual cash
incentive award for Mr. Wall is $62,500 and his targeted
annual cash incentive award is $125,000. The minimum annual cash
incentive award for Mr. Haferman is $50,000 and his
targeted annual cash incentive award is $125,000.
Long-Term Retention Opportunity: In addition
to the minimum annual cash incentive award described above, two
other retention components, a long-term cash award and a
long-term equity award, are available under the Program for
senior executives, with a focus on a much longer retention goal.
Long-Term
Cash Award
The long-term cash awards have a four-year cliff vesting, such
that an executive must remain with the Company until
December 31, 2012 to receive the award. If the executive is
involuntarily terminated prior to December 31, 2012 for
reasons other than cause, including position elimination alone
or in conjunction with a change in control, the cash award will
fully vest upon termination. Under the Program,
Messrs. Jones, Wall and Haferman will have an opportunity
to receive a long-term retention bonus of $350,000, $250,000,
and $100,000, respectively.
60
Long-Term
Equity Award
The long-term equity awards are intended to supplement the
long-term cash awards and to provide an additional incentive for
a solvent run-off. Equity awards will be in the form of phantom
stock to give the Board flexibility to provide the final award
in either restricted stock or cash. Equity awards will be issued
with a four-year vesting term, with equal vesting in three
annual installments beginning on January 1, 2011. In
accordance with the Companys current and past practice,
these awards will fully vest upon involuntary termination for
reasons other than for cause.
On November 19, 2008, pursuant to the Companys 2006
Long-Term Stock Incentive Plan and the Program, the Committee
approved an award of 35,000 phantom shares to Mr. Jones,
25,000 phantom shares to Mr. Wall, and 10,000 phantom
shares to Mr. Haferman. Each share of phantom stock is the
economic equivalent of one share of the Companys common
stock. The shares of phantom stock become payable, in cash or
the Companys common stock, at the election of the
Committee upon vesting. The award will vest in equal one-third
amounts on January 1, 2011, January 1, 2012 and
January 1, 2013. The award will fully vest upon involuntary
termination for reasons other than for cause.
Severance: As noted above, the Severance
Program has been extended into 2009 without any changes. For
executives, the Severance Program includes annual base salary
and the annual targeted cash award, and would be provided
monthly based on the executives position at the Company
and seniority. Under the Severance Program, Mr. Jones and
Mr. Wall would be entitled to receive 18 months of
severance pay and Mr. Haferman would be entitled to receive
13 months of severance pay.
61
SUMMARY
COMPENSATION TABLE
The following table sets forth certain summary information
regarding the compensation paid or accrued by us to or for the
account of (i) each person who served as our Chief
Executive Officer during 2008, (ii) our two most highly
compensated executive officers who were serving as such at
December 31, 2008 and (iii) two additional persons who
would have been included in this table if those individuals had
been employed by us at December 31, 2008. There were three
individuals who served as Chief Executive Officer during 2008.
Mr. Jones, who currently serves as our Chief Executive
Officer, also serves as our principal financial officer.
Included in the All Other Compensation column for
the Former Executive Officers are severance payments
that were part of contractual commitments or employment
agreements in place prior to termination of their employment.
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All Other
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Salary
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Bonus
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Stock Awards(1)
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Option Awards (1)
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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Current Named Executive Officers
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Kenneth W. Jones,
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2008
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222,890
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200,000
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(2)
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113,055
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14,969
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6,759
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(10)
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557,673
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President and Chief Executive Officer (October 22, 2008 to
December 31, 2008), Senior Vice President and Chief
Financial Officer (January 1, 2008 to October 22, 2008)
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2007
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192,500
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|
|
|
|
|
71,881
|
|
|
|
12,193
|
|
|
|
10,070
|
|
|
|
286,644
|
|
William T. Ratliff, III,
|
|
|
2008
|
|
|
|
232,178
|
|
|
|
|
|
|
|
123,565
|
(7)
|
|
|
|
|
|
|
84,376
|
(7)
|
|
|
440,119
|
|
President and Chief Executive Officer (July 19, 2008 to
October 22, 2008), Executive Officer (October 22, 2008
to December 31, 2008)
|
|
|
2007
|
|
|
|
|
(8)
|
|
|
|
|
|
|
264,818
|
|
|
|
|
|
|
|
112,500
|
|
|
|
377,318
|
|
Earl F. Wall,
|
|
|
2008
|
|
|
|
175,000
|
|
|
|
150,000
|
(2)
|
|
|
84,297
|
|
|
|
12,474
|
|
|
|
9,993
|
(11)
|
|
|
431,764
|
|
Senior Vice President, Secretary, and General Counsel of the
Company and Triad
|
|
|
2007
|
|
|
|
175,000
|
|
|
|
|
|
|
|
96,875
|
|
|
|
10,166
|
|
|
|
9,316
|
|
|
|
291,357
|
|
Steven J. Haferman,
|
|
|
2008
|
|
|
|
198,400
|
|
|
|
100,000
|
(2)
|
|
|
96,496
|
|
|
|
16,076
|
|
|
|
9,054
|
(12)
|
|
|
420,026
|
|
Senior Vice President, Risk Management and Information Technology
|
|
|
2007
|
|
|
|
198,400
|
|
|
|
|
|
|
|
66,458
|
|
|
|
13,098
|
|
|
|
6,620
|
|
|
|
284,576
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark K. Tonnessen,
|
|
|
2008
|
|
|
|
315,245
|
|
|
|
450,000
|
(2)
|
|
|
797,206
|
(3)
|
|
|
982,040
|
(3)
|
|
|
249,662
|
(4)
|
|
|
2,794,153
|
|
President and Chief Executive Officer
(January 1, 2008 to July 18, 2008)
|
|
|
2007
|
|
|
|
495,000
|
|
|
|
|
|
|
|
642,617
|
|
|
|
1,008,731
|
|
|
|
35,370
|
|
|
|
2,181,718
|
|
Bruce Van Fleet,
|
|
|
2008
|
|
|
|
135,417
|
|
|
|
180,000
|
(2)
|
|
|
165,510
|
(3)
|
|
|
377,986
|
(3)
|
|
|
206,581
|
(5)
|
|
|
1,065,494
|
|
Executive Vice President, Sales and Marketing
(January 1, 2008 to July 15, 2008)
|
|
|
2007
|
|
|
|
192,308
|
|
|
|
|
|
|
|
|
|
|
|
105,945
|
|
|
|
10,623
|
|
|
|
308,876
|
|
Gregory J. McKenzie (9),
|
|
|
2008
|
|
|
|
125,022
|
|
|
|
125,022
|
(13)
|
|
|
235,564
|
|
|
|
179,503
|
(3)
|
|
|
761,925
|
(6)
|
|
|
1,427,036
|
|
President and Chief Executive Officer of Triad Guaranty
Insurance Corporation Canada (January 1, 2008 to
June 30, 2008)
|
|
|
2007
|
|
|
|
226,202
|
|
|
|
123,383
|
|
|
|
|
|
|
|
69,980
|
|
|
|
67,898
|
|
|
|
487,463
|
|
|
|
|
(1) |
|
Reflects the dollar amount of awards recognized for financial
statement reporting purposes for the year ended
December 31, 2008 in accordance with Financial Accounting
Standards Board Statement No. 123(R)
(FAS 123(R)), disregarding the estimate of
forfeitures related to service-based vesting conditions. During
2008, there were no actual forfeitures by any of our named
executive officers. Grants were made in 2008 and prior to 2007,
except for the grant to Mr. McKenzie, which was made
pursuant to the terms of his offer of employment in 2007. Grants
in the form of shares of restricted stock were valued at the
market price of our common stock on the date of grant. Grants in
the form of options were ten (10) year stock options
exercisable at the market price on the date of grant. We
utilized a Black-Scholes pricing model (or in certain cases, a
derivative of such a model) and applied a discount for
non-transferability of options and deferred vesting to determine
the number of at the market options. See
Note 11 of the Notes to Consolidated Financial Statements
in our Annual Report on
Form 10-K
for the year ended December 31, 2008. |
|
(2) |
|
Amount reflects retention bonuses granted under terms of the
2008 Executive Retention Program in recognition of the need to
retain these and other individuals through projected periods of
uncertainty resulting |
62
|
|
|
|
|
from the capital raise process or regulatory actions if the
capital raise was unsuccessful. These amounts were originally to
be paid in July 2008 and January 2009 if the executive officer
was still employed by us; however, the full amounts were paid to
each of Mr. Tonnesen and Mr. Van Fleet in 2008
following their separation from the Company in accordance with
their existing contractual arrangements with the Company. |
|
(3) |
|
The previously unvested portion of the equity awards held by
Messrs. Tonnesen, Van Fleet and McKenzie became fully
vested as of the date of separation from the Company per terms
of each of these individuals separate agreements, except
for 40,500 restricted shares issued to Mr. Tonnesen on
February 27, 2008 that will vest in a lump sum on
August 14, 2010. |
|
(4) |
|
This amount includes a lump sum severance payment of $225,000
paid in August 2008 pursuant to his employment agreement in
connection with Mr. Tonnesens retirement from the
Company, a $8,059 matching contribution under our 401(k) plan, a
car allowance of $8,000 ($1,000 per month for the eight months
that he was employed) and reimbursement of financial planning
services of $7,500, as well as payments for long term disability
insurance and country club dues totaling $1,103. |
|
(5) |
|
This amount includes severance payments of $197,083 paid in
monthly installments from July through December 2008 under terms
of the 2008 Executive Retention Program, a $9,200 matching
401(K) plan contribution, and payments for long term disability
insurance of $298. |
|
(6) |
|
This amount includes a lump sum severance payment of $750,130
paid in July 2008 and $11,795 representing a car allowance and
club dues for January through June 2008, grossed up for Canadian
tax reporting purposes in accordance with
Mr. McKenzies original employment agreement executed
in 2007. |
|
(7) |
|
Mr. Ratliff was compensated as a director prior to his
appointment as interim President and Chief Executive Officer
effective July 18, 2008. Mr. Ratliff relinquished his
role of CEO effective October 22, 2008 but remained as an
executive officer through year end and therefore did not qualify
for additional compensation as a director. The additional
compensation earned by Mr. Ratliff as the Chairman of the
Board of Directors included both cash and equity components.
Effective March 10, 2009, Mr. Ratliff relinquished his
role as an executive officer and subsequently will be
compensated only for his service as a director. |
|
(8) |
|
Mr. Ratliffs compensation for the year ended
December 31, 2007 was limited to compensation for service
as a director. |
|
(9) |
|
Amounts have been converted from Canadian Dollars to U.S.
Dollars using the average monthly exchange rate for 2008 of
0.94356. |
|
(10) |
|
Amount includes a $5,644 matching contribution under our 401(k)
plan, $605 for life insurance, and $510 for long-term disability
insurance. |
|
(11) |
|
Amount includes a $9,000 matching contribution under our 401(k)
plan, $483 for life insurance and $510 for long-term disability
insurance. |
|
(12) |
|
Amount includes a $8,186 matching contribution under our 401(k)
plan, $358 for life insurance and $510 for long-term disability
insurance. |
|
(13) |
|
Mr. McKenzies 2008 bonus was equal to 50% of his 2008
annual base salary per terms of his original offer of employment
executed in January 2007. |
Discussion
Surrounding the Summary Compensation Table
Changes
in the Chief Executive Officer in 2008
The Summary Compensation Table (SCT) discloses
information regarding the three individuals that held the
position of Chief Executive Officer (CEO) during 2008.
Mr. Tonnesen had previously held that position since
joining the Company in 2005. On April 23, we entered into
an amended and restated employment agreement with
Mr. Tonnesen that replaced his original agreement. The
purpose of the new agreement was to secure his continued
employment during the transition period until his planned
retirement on December 31, 2008, unless he retired earlier
with our consent. Effective July 18, 2008,
Mr. Tonnesen resigned his position as CEO and agreed to
retire from the Company on August 15, 2008.
On July 18, 2008, Mr. Ratliff, our existing Chairman
of the Board of Directors, was appointed President and CEO on an
interim basis. Mr. Ratliff received a base salary of
$600,000 on an annualized basis; however, he was not
63
eligible for any bonus, severance pay or other compensation or
to participate in other benefit plans or arrangements offered by
the Company except for the reimbursement of reasonable expenses.
During the period that Mr. Ratliff served as our employee,
he did not receive Board fees. On October 22, 2008, the
Board of Directors appointed Mr. Jones as President and
CEO. After Mr. Ratliff relinquished his position as
President and CEO, he remained an executive officer of the
Company with an annualized salary of $400,000 with the same
limitations on other benefits described above. Effective
March 10, 2009, Mr. Ratliff relinquished his role as
an executive officer but will continue to serve as the
Companys Chairman of the Board and will be compensated as
a director for such service as set forth under Discussion
Surrounding Directors Compensation below. In connection
with his appointment as President and CEO, Mr. Jones
salary was increased to an annualized amount of $350,000 for the
remainder of 2008 and his eligibility to receive a retention
bonus amount of an aggregate of $200,000 remained unchanged.
In connection with his appointment as President and Chief
Executive Officer in October 2008, we entered into a letter
agreement with Mr. Jones dated October 22, 2008 (the
Agreement). Pursuant to the Agreement,
Mr. Jones is entitled to receive an annual base salary of
$350,000 during 2009 and received a pro-rated amount of such
base salary from October 22 to December 31, 2008. The
Agreement did not alter any of the other components of
Mr. Jones 2008 compensation. With respect to calendar
year 2009, the Agreement provides for the opportunity to earn
the targeted cash incentive award, long-term retention cash
incentive award, equity award of phantom shares and severance
payments outlined in the discussion preceding our Summary
Compensation Table.
Current
Named Executive Officers and Changes in Equity
Values
The Summary Compensation Table reflects a significant amount of
expense related to stock and option grants in accordance with
FAS 123(R) which recognizes the amortization of the value
of the equity award recorded at the grant date over the vesting
period. The value at the grant date was calculated as the number
of shares multiplied by the share price as of the date of grant
for restricted stock and the use of the Black-Scholes model to
value options at the grant date. The mortgage industry has
experienced, and it continues to experience, unprecedented
upheaval. This upheaval has caused our financial results and
financial position to decline precipitously over the course of
2007 and 2008. Our management is well aware of the effect that
those results have had on the value of our stockholders
investment in our common stock, having personally experienced
significant erosion in the value of their own equity awards that
we granted to them in recent years. The magnitude of this
decline reflects the extent to which managements interests
are tied to those of our stockholders.
The following table (which is not required by the rules of the
Securities and Exchange Commission) sets forth the value, as of
the date of grant, of the shares of restricted stock, shares of
phantom stock, and stock options (computed using the
Black-Scholes model) granted to each of our current named
executive officers during the period
2006-2008
and the dollar amount and percentage decline in the aggregate
value of such grants between the date of grant and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at Grant Date
|
|
|
Value at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Phantom
|
|
|
Stock
|
|
|
Restricted
|
|
|
Phantom
|
|
|
Stock
|
|
|
Total Decline in
|
|
Current Named
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Options
|
|
|
Stock
|
|
|
Stock
|
|
|
Options
|
|
|
Value
|
|
Executive Officers
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)(%)
|
|
|
Kenneth W. Jones
|
|
|
2008
|
|
|
|
122,600
|
|
|
|
15,750
|
|
|
|
|
|
|
|
7,600
|
|
|
|
13,300
|
|
|
|
|
|
|
|
117,450
|
|
|
|
84.9
|
%
|
|
|
|
2007
|
|
|
|
91,815
|
|
|
|
|
|
|
|
42,100
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
133,111
|
|
|
|
99.4
|
%
|
|
|
|
2006
|
|
|
|
136,175
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
135,225
|
|
|
|
99.3
|
%
|
William T. Ratliff, III
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
112,481
|
|
|
|
|
|
|
|
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
|
111,512
|
|
|
|
99.1
|
%
|
|
|
|
2006
|
|
|
|
283,783
|
|
|
|
|
|
|
|
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
281,443
|
|
|
|
99.2
|
%
|
Earl F. Wall
|
|
|
2008
|
|
|
|
82,755
|
|
|
|
11,250
|
|
|
|
|
|
|
|
5,130
|
|
|
|
9,500
|
|
|
|
|
|
|
|
79,375
|
|
|
|
84.4
|
%
|
|
|
|
2007
|
|
|
|
77,163
|
|
|
|
|
|
|
|
35,084
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
111,570
|
|
|
|
99.4
|
%
|
|
|
|
2006
|
|
|
|
96,264
|
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
95,393
|
|
|
|
99.1
|
%
|
Steven J. Haferman
|
|
|
2008
|
|
|
|
82,755
|
|
|
|
4,500
|
|
|
|
|
|
|
|
5,130
|
|
|
|
3,800
|
|
|
|
|
|
|
|
78,325
|
|
|
|
89.8
|
%
|
|
|
|
2007
|
|
|
|
98,231
|
|
|
|
|
|
|
|
45,219
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
142,589
|
|
|
|
99.4
|
%
|
|
|
|
2006
|
|
|
|
114,387
|
|
|
|
|
|
|
|
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
113,589
|
|
|
|
99.3
|
%
|
64
Former
Executive Officers, Contractual Commitments, and Changes in
Equity Value
After Mr. Tonnesen agreed to an amended and restated
employment agreement in April 2008, he retired effective
August 15, 2008. The amended and restated employment
agreement provided for an annual salary of $495,000 until the
anticipated retirement date, a retention bonus of $450,000,
severance in the amount of $225,000, and a grant of
40,500 shares of restricted stock, among other benefits. On
August 15, 2008, in accordance with the terms of
Mr. Tonnesens amended and restated employment
agreement, all of the unvested equity awards, except for the
40,500 restricted shares issued on February 27, 2008 that
will vest in a lump sum on August 14, 2010, vested and he
was paid the remainder of his retention bonus and severance.
Mr. Tonnesen continues to serve as an independent
consultant to the Company under a contract that extends until
August 2010.
As part of our workforce reduction in connection with our
transition to run-off, the Company notified Messrs. Van
Fleet and McKenzie in June of their impending termination. In
accordance with his 2007 employment agreement as president of
Triad Guaranty Insurance Corporation Canada, Mr. McKenzie
was entitled to receive severance in an amount equal to two
times his base salary and target cash incentive amounting to
U.S. $750,130 and the immediate vesting of all equity
awards if he was terminated within 18 months of service.
This cash severance amount was paid in full to Mr. McKenzie
in July 2008. In accordance with the terms of the Companys
2008 Executive Severance Plan and Executive Retention Plan,
Mr. Van Fleet was entitled to the immediate payment of the
remainder of his unpaid retention bonus, the immediate vesting
of all equity awards and severance payments equal to thirteen
months of his monthly annualized 2008 salary and 2008 target
bonus to be paid over thirteen months following his termination
in July 2008. Additionally, in accordance with various
agreements for each of the individuals regarding their
termination from the Company, the amounts recognized for stock
and option expense in the SCT for Messrs. Tonnesen, Van
Fleet and McKenzie reflected the recognition of any unrecognized
cost as the equity awards became fully vested upon termination.
However, the dramatic decline in the Companys stock price
during 2007 and 2008 has rendered all of the options nearly
worthless. Furthermore, the value at December 31, 2008 of
the restricted stock and phantom stock is also substantially
less than the amounts shown in the SCT and the expenses recorded
in our financial statements. The following table (which is not
required by the rules of the Securities and Exchange Commission)
sets forth the value, as of the date of grant, of the shares of
restricted stock, shares of phantom stock, and stock options
(computed using the Black-Scholes model) granted to each of the
Former Executive Officers identified in our Summary Compensation
Table during the period
2006-2008
and the dollar amount and percentage decline in the aggregate
value of such grants between the date of grant and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at Grant Date
|
|
|
Value at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Phantom
|
|
|
Stock
|
|
|
Restricted
|
|
|
Phantom
|
|
|
Stock
|
|
|
Total Decline in
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Options
|
|
|
Stock
|
|
|
Stock
|
|
|
Options
|
|
|
Value
|
|
Former Executive Officers
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)(%)
|
|
|
Mark K. Tonnesen
|
|
|
2008
|
|
|
|
248,265
|
|
|
|
|
|
|
|
|
|
|
|
15,390
|
|
|
|
|
|
|
|
|
|
|
|
232,875
|
|
|
|
93.8
|
%
|
|
|
|
2007
|
|
|
|
512,787
|
|
|
|
|
|
|
|
545,745
|
|
|
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
1,054,037
|
|
|
|
99.6
|
%
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Van Fleet
|
|
|
2008
|
|
|
|
165,510
|
|
|
|
|
|
|
|
|
|
|
|
10,260
|
|
|
|
|
|
|
|
|
|
|
|
155,250
|
|
|
|
93.8
|
%
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
483,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483,936
|
|
|
|
100.0
|
%
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory J. McKenzie
|
|
|
2008
|
|
|
|
235,564
|
|
|
|
|
|
|
|
|
|
|
|
13,604
|
|
|
|
|
|
|
|
|
|
|
|
221,960
|
|
|
|
94.2
|
%
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
249,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,483
|
|
|
|
100.0
|
%
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
OUTSTANDING
EQUITY AWARDS AT 2008 YEAR END TABLE
The following table sets forth certain information regarding the
outstanding equity awards held by the individuals named in the
Summary Compensation Table at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards(1)
|
|
|
|
Option Awards
|
|
|
|
|
|
Market
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of Stock
|
|
|
Units of
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
That Have Not
|
|
|
Stock That
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Vested(3)
|
|
|
Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable(2)
|
|
|
Price ($)
|
|
|
Date
|
|
|
(#)
|
|
|
Vested ($)
|
|
|
Current Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth W. Jones
|
|
|
1,800
|
|
|
|
900
|
|
|
|
43.35
|
|
|
|
03/08/17
|
|
|
|
57,246
|
|
|
|
21,753
|
|
William T. Ratliff, III
|
|
|
14,825
|
|
|
|
|
|
|
|
23.24
|
|
|
|
01/25/09
|
|
|
|
1,776
|
|
|
|
675
|
|
|
|
|
20,950
|
|
|
|
|
|
|
|
27.95
|
|
|
|
01/18/10
|
|
|
|
|
|
|
|
|
|
|
|
|
13,750
|
|
|
|
|
|
|
|
39.00
|
|
|
|
01/24/11
|
|
|
|
|
|
|
|
|
|
|
|
|
11,760
|
|
|
|
|
|
|
|
33.18
|
|
|
|
02/06/13
|
|
|
|
|
|
|
|
|
|
Steve J. Haferman
|
|
|
1,933
|
|
|
|
967
|
|
|
|
43.35
|
|
|
|
03/08/17
|
|
|
|
25,711
|
|
|
|
9,770
|
|
Earl F. Wall
|
|
|
2,947
|
|
|
|
|
|
|
|
39.49
|
|
|
|
01/25/12
|
|
|
|
40,451
|
|
|
|
15,371
|
|
|
|
|
1,500
|
|
|
|
750
|
|
|
|
43.35
|
|
|
|
03/08/17
|
|
|
|
|
|
|
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark K. Tonnesen
|
|
|
108,225
|
|
|
|
|
|
|
|
41.12
|
|
|
|
09/14/15
|
|
|
|
40,500
|
|
|
|
15,390
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
43.35
|
|
|
|
03/08/17
|
|
|
|
|
|
|
|
|
|
Bruce Van Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory J. McKenzie
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Valued based on the closing price of our common stock on
December 31, 2008, which was $0.38. |
|
(2) |
|
All unvested option awards will vest on December 31, 2009. |
|
(3) |
|
The unvested restricted stock awards will vest as follows:
(i) on January 1, 2009: Mr. Jones,
706 shares, Mr. Ratliff, 1,360 shares,
Mr. Haferman, 755 shares and Mr. Wall,
1,357 shares; (ii) on May 16, 2009:
Mr. Jones, 834 shares and Mr. Haferman,
700 shares; (iii) on May 17, 2009:
Mr. Ratliff, 416 shares; (iv) on January 1,
2010: Mr. Jones, 706 shares, Mr. Haferman,
756 shares and Mr. Wall, 594 shares; (v) on
August 15, 2010: Mr. Tonnesen, 40,500 shares;
(vi) on February 26, 2011: Mr. Jones,
20,000 shares, Mr. Haferman, 13,500 shares and
Mr. Wall, 13,500 shares; (vii) on January 1,
2011: Mr. Jones, 11,550 shares, Mr. Haferman,
3,300 shares and Mr. Wall, 8,250 shares;
(viii) on January 1, 2012: Mr. Jones,
11,550 shares, Mr. Haferman, 3,300 shares and
Mr. Wall, 8,250 shares; and (ix) on
January 1, 2013: Mr. Jones, 11,900 shares,
Mr. Haferman, 3,400 shares and Mr. Wall,
8,500 shares. |
As part of our effort to retain individuals whom we believe are
key to our ability to meet the challenges that we faced in 2008,
the Compensation Committee made equity-based retention awards in
the form of shares of restricted stock to Mr. Tonnesen
(40,500 shares), Mr. Jones (20,000 shares),
Mr. Wall (13,500 shares), Mr. Haferman
(13,500 shares) and Mr. Van Fleet (27,000 shares)
in February 2008. These shares, originally subject to three-year
cliff vesting, were valued at $6.13 per share, based on the
closing price of our stock on February 27, 2008, the date
of grant, and are otherwise subject to the terms of our 2006
Long-Term Stock Incentive Plan. The Compensation Committee also
awarded Mr. McKenzie 35,800 shares of restricted stock
in accordance with the terms of his offer of employment in 2007.
These restricted shares were valued at $6.58 based on the
closing price of our stock on February 19, 2008, the date
of grant, and were originally scheduled to vest equally over
three years. The shares granted to Mr. Tonnesen will vest
two years after his retirement date, or August 14, 2010,
according to the terms of his agreement. The shares granted to
Messrs. Van Fleet and McKenzie all vested immediately upon
their termination from the Company in June 2008 and July 2008,
respectively.
The Company has no defined-benefit plan or executive
post-employment plan for which any retirement benefits would be
paid to executives. The Company has a qualified defined
contribution plan (401(k) plan) under which each employee is
given the opportunity to contribute a percentage of their base
salary. As more fully described in Footnote 10 to our
Consolidated Financial Statements, the Company makes a matching
contribution on behalf of each participating employee equal to
100% of the first 3% of the employees deferred salary,
plus 50% of the employees deferred salary greater than 3%
but not exceeding 5%.
66
Other than the 2009 Executive Retention Program and Severance
Program detailed above, there are no specific contracts,
agreements, plans or arrangements that provides for payment(s)
to a named executive officer at, following, or in connection
with the resignation, retirement or other termination of a named
executive officer, or a change in control or a change in the
named executive officers responsibilities following a
change in control. Upon a change in control or termination by
the Company without cause, any unvested portion of restricted
stock grants, phantom stock grants, and options would vest
immediately. There would be no value to any of the executive
officers to the immediate vesting of the options as the exercise
price of the option awards significantly exceeds the market
value of our common stock as of the date of filing of this
Form 10-K.
2008
DIRECTOR COMPENSATION TABLE
The following table sets forth certain information regarding
amounts paid or accrued by us to or for the account of our
Directors during the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Stock Awards(2)
|
|
|
Total
|
|
Name(1)
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Glenn T. Austin, Jr.(3)
|
|
|
89,915
|
|
|
|
37,384
|
|
|
|
127,299
|
|
Robert T. David
|
|
|
70,790
|
|
|
|
38,190
|
|
|
|
108,980
|
|
H. Lee Durham
|
|
|
110,415
|
|
|
|
34,907
|
|
|
|
145,322
|
|
Richard S. Swanson(4)
|
|
|
69,290
|
|
|
|
37,384
|
|
|
|
106,674
|
|
David W. Whitehurst
|
|
|
108,402
|
(5)
|
|
|
43,281
|
(6)
|
|
|
151,683
|
|
Henry G. Williamson, Jr.(7)
|
|
|
69,665
|
|
|
|
24,249
|
|
|
|
93,914
|
|
|
|
|
(1) |
|
William T. Ratliff, III, our Chairman of the Board, was not
compensated as a director during his service as interim
President and Chief Executive Officer from July 18, 2008
until October 22, 2008. In addition, because
Mr. Ratliff continued to serve as an executive officer
through December 31, 2008 following his relinquishment of
the positions of President and CEO, he did not qualify for
additional compensation as a director for the period from
October 22, 2008 to December 31, 2008. Effective
March 10, 2009, Mr. Ratliff relinquished his role as
an executive officer and subsequently will be compensated only
for his service as a director. Our Summary Compensation Table
includes Mr. Ratliffs compensation for his service as
our Chairman of the Board and as one of our executive officers
during 2008. |
|
(2) |
|
Reflects the dollar amount recognized for financial statement
reporting purposes for the year ended December 31, 2008 in
accordance with FAS 123(R), disregarding the estimate of
forfeitures related to service-based vesting conditions. During
2008, there were no actual forfeitures by any of our directors.
Grants in the form of shares of restricted stock were valued at
the market price of our common stock on the date of grant. See
Note 11 of the Notes to Consolidated Financial Statements
for the year ended December 31, 2008. The full grant date
fair value of awards granted in November 2008 computed in
accordance with FAS 123(R) for Messrs. David, Durham,
and Whitehurst is $6,750. Mr. Ratliff was not awarded any
stock in November 2008 as he was serving as an executive officer
and employee and did not qualify for director compensation at
the time of the grants. At December 31, 2008, the aggregate
number of unvested shares of restricted stock for each director
was as follows: for Messrs. Austin and Swanson,
241 shares, for Messrs. David and Whitehurst,
15,241 shares and for Mr. Durham, 15,189 shares.
At December 31, 2008, the aggregate number of shares of
common stock which could be acquired through the exercise of
stock options was as follows: Mr. David, 6,880 shares
and Mr. Whitehurst, 20,360 shares. |
|
(3) |
|
Mr. Austin did not stand for re-election at our 2008 annual
meeting, and his term as a director thus ended on
September 11, 2008. |
|
(4) |
|
Mr. Swanson resigned from the Board effective
October 7, 2008. |
|
(5) |
|
Includes $9,237 paid for services as a director of Triad
Guaranty Insurance Corporation Canada. |
|
(6) |
|
Includes $5,090 paid for services as a director of Triad
Guaranty Insurance Corporation Canada. |
|
(7) |
|
Mr. Williamson did not stand for re-election at our 2008
annual meeting, and his term as a director thus ended on
September 11, 2008. |
67
Discussion
Surrounding Directors Compensation
Messrs. Austin and Williamson decided not to stand for
re-election to the Board in 2008. On October 7, 2008,
Mr. Swanson resigned as a director based upon additional
responsibilities and time requirements required with his
position with the Federal Home Loan Bank of Des Moines. In
January 2009, Deane W. Hall was elected a director, bringing the
total number of directors to five as of the date of filing of
this annual report on
Form 10-K.
Due to the unprecedented changes taking place in the financial
markets as well as in our own Company during 2008, the date of
our annual stockholders meeting was changed from its normal May
timeframe to September. This delay increased the period that
directors served since the last election from the normal twelve
month period to sixteen months. In an effort to compensate the
directors for this additional period of service, the
Compensation Committee and Board determined to pay an additional
four months of the annual retainer plus amounts for two
additional committees established during 2008 in response to the
many changes that were taking place in the Company. Due to the
significant drop in stock price during the year, the annual
retainer utilized in the additional four month compensation was
structured on an all cash basis rather than the historical 31%
cash and 69% restricted stock component. This amount was paid to
all non-employee directors who served through the September 2008
stockholders meeting and is reflected in the amounts disclosed
in the table above.
In October 2008, the Compensation Committee and the Board
changed the structure of its non-employee director compensation
program in order to reflect both the decline in value of the
trading price of the Companys common stock and the change
in the size of the Board and its committees. General terms of
the revised director compensation program for non-employee
directors, which was effective during the fourth quarter of 2008
and is expected to remain in place during 2009, are as follows:
Each non-employee director is entitled to receive an $85,000
annual cash retainer that is payable in equal quarterly
installments. Each non-employee director shall also receive an
annual grant of 15,000 shares of restricted stock pursuant
to the Companys 2006 Long-Term Stock Incentive Plan and
the related restricted stock agreement. The restricted stock
vests 100% on the first anniversary of the grant date.
Additionally, those directors that are chosen to serve as
committee chairs are entitled to receive cash compensation paid
in equal quarterly installments of $15,000 for the Audit
Committee, $12,500 for the Compensation Committee and $7,500 for
the Corporate Governance and Nominating Committee. In addition,
a single director will be designated as the Lead Independent
Director for which he will receive cash compensation of $7,500
paid in equal quarterly installments. For 2009, the Lead
Independent Director is Mr. Durham.
The meeting fee structure was also revised to reflect the
reduced number of committees and the increased time commitment
expected of the directors, as detailed below.
|
|
|
|
|
In-person Board meetings: After attending five in-person Board
meetings in any given year, each non-employee director is
entitled to receive $5,000 for each additional in-person Board
meeting attended for the remainder of that year.
|
|
|
|
Telephonic Board meetings: After attending eight telephonic
Board meetings in any given year, each non-employee director is
entitled to receive for the remainder of that year:
(i) $1,250 for each telephonic meeting attended that is
less than or equal to one hour, and (ii) $2,500 for each
telephonic meeting attended that exceeds one hour.
|
|
|
|
Telephonic Audit Committee meetings: Each non-employee member of
the Audit Committee is entitled to receive per year:
(i) $1,250 for each telephonic meeting attended that is
less than or equal to one hour, and (ii) $2,500 for each
telephonic meeting attended that exceeds one hour.
|
|
|
|
Telephonic Committee meetings other than Audit Committee: Each
non-employee member of other committees is entitled to receive
per year: (i) $750 for each telephonic meeting attended
that is less than or equal to one hour, and (ii) $1,500 for
each telephonic meeting attended that exceeds one hour.
|
At the time of the adoption of the revised directors
compensation program in October 2008, the Chairman of the
Boards compensation was intentionally not addressed
because he was serving as an executive officer of the Company,
even though he no longer served as our President and CEO. During
the time that our Chairman served as an executive officer and
employee of the Company, he received no additional Board
compensation.
68
On March 10, 2009, the Compensation Committee determined
that our Chairman of the Board had completed his designated
tasks associated with the transition of Mr. Jones as
President and CEO and the management of certain projects for the
Company. Accordingly, effective March 10, 2009,
Mr. Ratliff ceased being an employee and Executive Officer
at the Company and his annual cash compensation was reduced from
$400,000 to $225,000, effective immediately. In connection with
this determination, the Compensation Committee revised our
director compensation program as set forth below with respect to
the Companys Chairman of the Board:
|
|
|
|
|
Retainer: The Chairman of the Board is entitled to receive a
$225,000 annual cash retainer that is payable in equal quarterly
installments. The Chairman shall also receive an annual grant of
25,000 shares of restricted stock pursuant to the Plan and
the related restricted stock agreement. The restricted stock
vests 100% on the first anniversary of the grant date.
|
|
|
|
Meetings: The Chairman will not be compensated for attending
Board meetings, Committee meetings or telephonic meetings.
|
Prior to the adoption of our revised director compensation
program in October 2008, for 2008 our non-employee directors
were each entitled to receive an annual retainer of $95,000,
$30,000 of which would be paid in cash in four quarterly
installments and $65,000 of which would be paid in restricted
stock following the annual meeting of stockholders. Our
non-executive Chairman of the Board was entitled to receive an
annual retainer of $225,000, $112,500 of which would be paid in
cash in four quarterly installments and $112,500 of which would
be paid in restricted stock following the annual meeting of
stockholders. In its discretion and based upon an evaluation
conducted by the Corporate Governance and Nominating Committee,
the Compensation Committee also could recommend a discretionary
payment for services above and beyond those traditionally
performed by a non-executive Chairman of the Board. Since 2007,
grants of restricted stock to our non-employee directors vest
100% on the first anniversary of the grant date, a practice that
was continued when the Board revised our director compensation
program in October 2008.
Prior to October 2008, our Audit Committee members were entitled
to receive $2,500 per meeting, up to an annual maximum of
$20,000. Other committee members were entitled to receive $1,500
per meeting, up to an annual maximum of $6,000. In its
discretion, the Compensation Committee had the authority to
award fees in excess of these amounts based upon additional
services that are required by the applicable committee. Prior to
October 2008, the Audit Committee chairperson was entitled to
receive a retainer of $15,000 per year, while all other
chairpersons of committees were entitled to receive a retainer
of $7,500 per year. The Boards lead independent director
was entitled to receive an annual retainer of $7,500 per year.
As noted above, our October 2008 revised director compensation
program significantly changes the mix of cash and stock that
constitutes our non-employee directors annual retainer.
Under the new program, the split is approximately 92% cash and
8% common stock, while under the old program the split was
approximately 31% cash and 69% common stock. Our Board also
increased the fees paid to the chairs of each committee and
established an entirely new fee structure for in-person and
telephonic meeting attendance under the October 2008 revised
director compensation program.
69
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
The following table contains information regarding securities
authorized for issuance under our equity compensation plans as
of December 31, 2008:
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of Securities
|
|
|
|
Securities to be
|
|
|
Average Exercise
|
|
|
Remaining Available for
|
|
|
|
Issued upon
|
|
|
Price of
|
|
|
Future Issuance Under
|
|
|
|
Exercise of
|
|
|
Outstanding
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Options,
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Warrants and
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
330,721
|
|
|
$
|
43.35
|
|
|
|
611,512
|
(2)
|
Equity compensation plans not approved by security holders(3)
|
|
|
61,190
|
|
|
$
|
37.95
|
|
|
|
|
(4)
|
Total
|
|
|
391,911
|
|
|
$
|
38.80
|
|
|
|
611,512
|
|
|
|
|
(1) |
|
This information relates to our 2006 Long-Term Stock Incentive
Plan, which was approved by our stockholders in May 2006. |
|
(2) |
|
In addition to being available for future issuance upon exercise
of stock options, shares that remain available for future grant
may be issued pursuant to restricted stock awards under our 2006
Long-Term Stock Incentive Plan. |
|
(3) |
|
This information relates to our 1993 Long-Term Stock Incentive
Plan. |
|
(4) |
|
All shares that were available for issuance under our 1993
Long-Term Stock Incentive Plan at the time the 2006 Long-Term
Incentive Plan was adopted were carried forward to the 2006 plan
and became available for issuance under that plan. See
Note 12 to the Companys Consolidated Financial
Statements. |
PRINCIPAL
HOLDERS OF COMMON STOCK
The following table shows, with respect to each person who is
known to be the beneficial owner of more than 5% of our common
stock: (i) the total number of shares of common stock
beneficially owned as March 3 ,2009; and (ii) the
percentage of the common stock so owned as of that date:
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
|
Percent of
|
|
Name and Address of Beneficial Owner
|
|
Beneficial Ownership(1)
|
|
|
Common Stock
|
|
|
Collateral Holdings, Ltd. and affiliates(2)(3)
|
|
|
2,572,550
|
|
|
|
16.9
|
%
|
FMR LLC and affiliates (4 )
|
|
|
1,438,451
|
|
|
|
9.5
|
%
|
Third Avenue Management LLC(5)
|
|
|
1,300,000
|
|
|
|
8.5
|
%
|
The following table shows, with respect to each of our directors
and the executive officers named in the Summary Compensation
Table and all directors and executive officers as a group,
sixteen (16) in number: (i) the total number of shares
of common stock beneficially owned as of March 3, 2009; and
(ii) the percentage of the
70
common stock so owned as of that date. Unless otherwise
indicated, the address for each of our directors and executive
officers is
c/o Triad
Guaranty Inc., 101 South Stratford Road, Winston-Salem, North
Carolina 27104:
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
|
Percent of
|
|
Name of Beneficial Owner
|
|
Beneficial Ownership(1)
|
|
|
Common Stock
|
|
|
Glenn T. Austin, Jr.
|
|
|
4,336
|
|
|
|
|
*
|
Robert T. David
|
|
|
39,556
|
(7)
|
|
|
|
*
|
H. Lee Durham, Jr.
|
|
|
17,419
|
|
|
|
|
*
|
Steven J. Haferman
|
|
|
19,799
|
|
|
|
|
*
|
Kenneth W. Jones
|
|
|
28,918
|
(7)
|
|
|
|
*
|
Gregory J. McKenzie
|
|
|
38,300
|
|
|
|
|
*
|
William T. Ratliff, III(6)
|
|
|
3,237,547
|
(7)(8)
|
|
|
21.3
|
%
|
Richard S. Swanson
|
|
|
4,476
|
|
|
|
|
*
|
Mark K. Tonnes en
|
|
|
244,654
|
(7)
|
|
|
1.6
|
%
|
Bruce Van Fleet
|
|
|
27,000
|
|
|
|
|
*
|
Earl F. Wall
|
|
|
108,221
|
|
|
|
|
*
|
David W. Whitehurst
|
|
|
55,177
|
(7)
|
|
|
|
*
|
Henry G. Williamson, Jr.
|
|
|
1,474
|
|
|
|
|
*
|
All directors and executive officers as a group (16 persons)
|
|
|
3,882,584
|
(7)
|
|
|
25.5
|
%
|
|
|
|
* |
|
Less than one percent (1%). |
|
(1) |
|
Calculated pursuant to
Rule 13d-3(d)
under the Securities Exchange Act of 1934. Unless otherwise
stated below, each such person has sole voting and investment
power with respect to all such shares. In accordance with
Rule 13d-3(d),
shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within sixty
(60) days of March 3, 2009 are deemed outstanding for
the purpose of calculating the number and percentage owned by
such person, but are not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. |
|
(2) |
|
Collat, Inc. is the general partner of Collateral Holdings, Ltd.
and as such may be deemed to be the beneficial owner of the
shares of common stock owned by Collateral Holdings, Ltd.
Mr. William T. Ratliff, III is the president and a
director of Collat, Inc. and beneficially owns 50.2% of the
outstanding voting capital stock of Collat, Inc. Accordingly,
Mr. Ratliff, III may be deemed to be the beneficial
owner of the shares of common stock owned by Collateral
Holdings, Ltd. The business address of
Mr. Ratliff, III, Collateral Holdings, Ltd. and
Collat, Inc. is 1900 Crestwood Boulevard, Birmingham, Alabama
35210. Mr. Ratliff, III. is the son of
Mr. William T. Ratliff, Jr. |
|
(3) |
|
Number of shares reported on Schedule 13G jointly filed by
Collateral Holdings, Ltd., Collat, Inc., Mr. Ratliff, Jr.
and Mr. Ratliff, III with the Securities and Exchange
Commission on February 13, 2009, reporting shared power of
Collateral Holdings, Ltd. to vote or direct the vote of and
dispose or direct the disposition of 2,572,550 shares;
shared power of Collat, Inc. to vote or direct the vote of and
dispose or direct the disposition of 2,572,550 shares; sole
power of Mr. Ratliff, Jr. to vote or direct the vote of and
dispose or direct the disposition of 571,037 shares and
shared power of Mr. Ratliff, Jr. to vote or direct the vote
of and dispose or direct the disposition of
2,572,550 shares; and sole power of
Mr. Ratliff, III to vote or direct the vote of and
dispose or direct the disposition of 282,457 shares and
shared power of Mr. Ratliff, III to vote or direct the
vote of and dispose or direct the disposition of
2,819,068 shares. The aggregate amount of shares
beneficially owned by Mr. Ratliff, III includes
2,572,550 shares held of record by Collateral Holdings,
Ltd., 2,617 shares of record held by his wife,
7,077 shares held of record in trusts for his minor
children, 61,285 shares which he could acquire through the
exercise of stock options, 74,555 shares through
RaS I, Ltd, a family limited partnership and
246,518 shares as one of five trustees for a
Grandchildrens Trust. |
|
(4) |
|
Number of shares reported on Schedule 13G/A filed jointly
by FMR LLC and Edward C. Johnson 3d with the Securities and
Exchange Commission on February 14, 2009. According to the
Schedule 13G/A filed by FMR LLC, Fidelity
Management & Research Company, a wholly-owned
subsidiary of FMR LLC and an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, is the
beneficial owner of the |
71
|
|
|
|
|
common stock as a result of acting as investment adviser to
various investment companies registered under Section 8 of
the Investment Company Act of 1940 (the funds). One
of the funds, Fidelity Low Priced Stock Fund, owns all of the
shares reported by FMR LLC on its Schedule 13G/A. Edward C.
Johnson 3d, Chairman of FMR LLC, and FMR LLC, through its
control of Fidelity, and the funds each has sole power to
dispose of the reported common stock. However, neither FMR LLC
nor Mr. Johnson has the sole power to vote or direct the
voting of the common stock owned directly by the funds. Such
voting rights reside with the board of trustees of each fund.
The business address of FMR LLC, Mr. Johnson, Fidelity
Management & Research Company and the funds is 82
Devonshire Street, Boston, Massachusetts 02109. |
|
(5) |
|
Number of shares reported on Schedule 13G filed by Third
Avenue Management LLC (TAM) with the Securities and
Exchange Commission on February 13, 2009. TAM has sole
voting and dispositive power with respect to these shares.
According to its Schedule 13G, Third Avenue Real Estate
Opportunities Fund, L.P., a private fund for which TAM acts as
investment advisor, has the right to receive dividends from, and
the proceeds from the sale of, the common stock reported by TAM.
The business address of Third Avenue Management LLC is 622 Third
Avenue, 32nd Floor, New York, NY 10017. |
|
(6) |
|
Mr. Ratliff, III is president and a director of
Collat, Inc., the general partner of Collateral Holdings, Ltd.,
and beneficially owns 50.2% of the outstanding voting capital
stock of Collat, Inc. Accordingly, Mr. Ratliff, III
may be deemed to be the beneficial owner of the shares of common
stock owned by Collateral Holdings, Ltd. The business address of
Mr. Ratliff, III is 1900 Crestwood Boulevard,
Birmingham, Alabama
35210-2034.
Mr. Ratliff, III is the son of Mr. Ratliff, Jr.
No other director or executive officer of the Company
beneficially owns any partnership interests in Collateral
Holdings, Ltd. |
|
(7) |
|
Includes shares of common stock which could be acquired through
the exercise of stock options as follows: Mr. David,
4,080 shares; Mr. Jones, 1,800 shares;
Mr. Ratliff, III, 46,460 shares;
Mr. Tonnesen, 143,225 shares; Mr. Whitehurst,
20,360 shares; all directors and executive officers as a
group, 233,879 shares. |
|
(8) |
|
Includes 2,617 shares owned by
Mr. Ratliff, IIIs wife; 12,390 shares held
of record in trusts for his minor children; 74,555 shares
held through RaS I, Ltd., a family limited partnership; and
246,518 shares held by Mr. Ratliff, III as one of
five trustees for the Grandchildrens Trust U/A,
December 4, 1990. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Other than with respect to the conflicts of interest policies
contained in our Code of Ethics and Code of Conduct, which
require that all of our directors, officers and employees
disclose their personal or business interests in any transaction
in which we may engage and recuse themselves from any discussion
or decision affecting their personal or business interests, we
do not maintain a formal written related person transaction
policy. In addition to communicating with us as required by our
Code of Ethics and Code of Conduct, however, each of our
executive officers and directors or their immediate family
members (each, a related person), completes an
annual questionnaire that elicits information about ongoing and
potential transactions, arrangements or relationships, other
than certain specified employment and compensatory matters
(each, a transaction), in which we and any related
person are participants (a related person
transaction) in order to determine whether (i) such
related persons have or may have a direct or indirect material
interest in the transaction, (ii) the amount involved
exceeds $120,000 (which for 2007 and 2008 was less than 1% of
the average of the Companys total assets at year end for
the last two completed fiscal years), and (iii) any such
transaction is or would be in the best interest of us and our
stockholders. The appropriate committee of the Board, depending
on the nature of the transaction, reviews and approves or
ratifies all related person transactions, which are publicly
disclosed if and as required by SEC rules. There were no related
person transactions during 2008 and 2007 that were required to
be disclosed pursuant to our policies or SEC rules. The
appropriate committee of the Board is required to consider all
available relevant facts and circumstances in its review of an
ongoing or potential related person transaction, including the
benefits to us, the impact on a directors independence in
the event the related person is a director (or a family member
or entity affiliated with a director), the availability of other
sources for comparable products or services, the proposed terms
and the terms available to or from parties that are not related
persons. Any director who is a related person with respect to a
transaction under review may not participate in the
deliberations or vote with respect to approval or ratification
of the related person transaction. The Company paid companies
affiliated with our Chairman for expenses incurred on behalf of
Triad. The total expense incurred for such items was $34,500 and
$69,300 in 2008 and 2007, respectively.
72
The Board does not believe that a specific written related
person transaction policy is necessary because the Board
historically has not, and does not expect to, approve related
person transactions that require disclosure under SEC rules
other than in rare circumstances. Each related person
transaction is considered on a stand-alone basis based on facts
and circumstances at the time of consideration. In addition to
the conflicts of interest procedures set forth in our Code of
Conduct and Code of Ethics and the information elicited through
our annual questionnaire, the appropriate committees
procedures with respect to review and approval of related person
transactions are dictated by principles of Delaware corporate
law as in effect at the time and the discharge of our
directors fiduciary duties to us and our stockholders.
The business and affairs of the Company are managed under the
direction of the Board of Directors. The Board of Directors has
determined that each of Messrs. David, Durham, Hall and
Whitehurst is an independent director, as that term
is defined under the applicable listing standards of The NASDAQ
Stock Market LLC.
The Board performed a review to determine the independence of
its members and made a subjective determination as to each of
these independent directors that no transactions, relationships
or arrangements exist that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying
out the responsibilities of a director of Triad Guaranty Inc. In
making these determinations, the Board reviewed the information
provided by the directors and the Company with regard to each
directors business and personal activities as they may
relate to the Company and its management.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Audit
Fees
The aggregate fees, including expenses reimbursed, billed by
Ernst & Young LLP (E&Y) for
professional services rendered for the audit of our consolidated
financial statements, the reviews of our quarterly financial
statements and the audits of our individual operating
subsidiaries, including our Canadian subsidiary in 2007, that
are required for regulatory purposes were $558,000 for calendar
year 2008 and $709,177 for calendar year 2007. Aggregate fees in
2007 included fees for services rendered for an integrated audit
and for an audit of internal control over financial reporting.
Audit-Related
Fees
The aggregate fees, including expenses reimbursed, billed by
E&Y for services related to the audit and review of our
financial statements were $22,000 for calendar year 2008 and
$50,545 in calendar year 2007. These services included an
actuarial certification for our Vermont captive reinsurance
subsidiary and an audit of our 401(k) plan for each of 2008 and
2007.
Tax
Fees
We did not engage E&Y for tax services in calendar years
2008 and 2007.
All Other
Fees
The aggregate fees, including expenses reimbursed, billed by
E&Y for services rendered to us, other than the services
described above, were $1,950 in calendar year 2008 and $1,500 in
calendar year 2007. These fees were for a subscription to
E&Ys online accounting and reporting database.
The Audit Committee pre-approves all auditing services and
permitted non-audit services, including the fees and terms
thereof, to be performed for us by its independent auditor,
subject to the de minimus exceptions for non-audit services
as provided for in the Sarbanes-Oxley Act and the rules and
regulations of the Securities and Exchange Commission. The Audit
Committee may form and delegate authority to subcommittees,
consisting of one or more members, to grant pre-approvals of
permitted non-audit services, provided that decisions of such
subcommittees to grant pre-approvals are presented to the full
Audit Committee at its next scheduled meeting. In calendar year
2008, all non-audit services were approved by the Audit
Committee.
73
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) (1) and (2) Financial Statements and
Financial Statement Schedules The response to this
portion of Item 15 is submitted as a separate section of
this report and is incorporated herein by reference.
(a) (3) Listing of Exhibits The response
to this portion of Item 15 is submitted as the
Exhibit Index of this report and is
incorporated herein by reference.
(b) Exhibits Please see Exhibit Index.
(c) Financial Statement Schedules The response
to this portion of Item 15 is submitted as a separate section of
this report and is incorporated herein by reference.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Triad Guaranty Inc.
Kenneth W. Jones
President and Chief Executive Officer
March 16, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the
16th day
of March, 2009, by the following persons on behalf of the
registrant and in the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ William
T. Ratliff, III
William
T. Ratliff, III
|
|
Chairman of the Board
|
|
|
|
/s/ Kenneth
W. Jones
Kenneth
W. Jones
|
|
President and Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
|
|
|
|
/s/ Kenneth
S. Dwyer
Kenneth
S. Dwyer
|
|
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ Robert
T. David
Robert
T. David
|
|
Director
|
|
|
|
/s/ H.
Lee Durham, Jr.
H.
Lee Durham, Jr.
|
|
Director
|
|
|
|
/s/ Deane
W. Hall
Deane
W. Hall
|
|
Director
|
|
|
|
/s/ David
W. Whitehurst
David
W. Whitehurst
|
|
Director
|
75
ANNUAL
REPORT ON
FORM 10-K
ITEM 8,
ITEM 15(a)(1) and (2), (3), (b), and (c)
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEX TO
EXHIBITS
CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL
STATEMENT SCHEDULES
CERTAIN
EXHIBITS
YEAR
ENDED DECEMBER 31, 2008
TRIAD
GUARANTY INC.
WINSTON-SALEM,
NORTH CAROLINA
76
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 15(a)
(1) and (2))
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
78
|
|
|
|
|
79
|
|
|
|
|
80
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
83
|
|
Financial Statement Schedules
|
|
|
|
|
Schedules at and for each of the two years in the period ended
December 31, 2008
|
|
|
|
|
|
|
|
107
|
|
|
|
|
108
|
|
|
|
|
114
|
|
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements
and notes thereto.
77
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Triad Guaranty
Inc.
We have audited the accompanying consolidated balance sheets of
Triad Guaranty Inc. as of December 31, 2008 and 2007, and
the related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2008. Our audits
also included the financial statement schedules listed in the
Index at item 15(a). These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Triad Guaranty Inc. at December 31,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended
December 31, 2008 in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
The accompanying financial statements have been prepared
assuming that Triad Guaranty Inc. will continue as a going
concern. As more fully described in Note 2 to the
consolidated financial statements, the Company is operating the
business in run-off under a Corrective Order with the Illinois
Division of Insurance and has reported a net loss for the year
ended December 31, 2008 and has a Stockholders
deficiency in assets at December 31, 2008. These conditions
raise substantial doubt about Triad Guaranty Inc.s ability
to continue as a going concern. Managements plans in
regard to these matters are also described in Note 2. The
2008 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 13, 2009
78
TRIAD
GUARANTY INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Invested assets:
|
|
|
|
|
|
|
|
|
Securities available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost: $844,964 and $710,924)
|
|
$
|
854,186
|
|
|
$
|
725,631
|
|
Equity securities (cost: $566 and $2,520)
|
|
|
583
|
|
|
|
2,162
|
|
Short-term investments
|
|
|
40,653
|
|
|
|
56,746
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
895,422
|
|
|
|
784,539
|
|
Cash and cash equivalents
|
|
|
39,940
|
|
|
|
124,811
|
|
Real estate acquired in claim settlement
|
|
|
713
|
|
|
|
10,860
|
|
Accrued investment income
|
|
|
10,515
|
|
|
|
10,246
|
|
Deferred policy acquisition costs
|
|
|
|
|
|
|
36,243
|
|
Prepaid federal income taxes
|
|
|
15
|
|
|
|
116,008
|
|
Property and equipment, at cost less accumulated depreciation
(2008 $25,294; 2007 $23,458)
|
|
|
7,747
|
|
|
|
11,421
|
|
Reinsurance recoverable, net
|
|
|
150,848
|
|
|
|
5,815
|
|
Other assets
|
|
|
25,334
|
|
|
|
32,910
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,130,534
|
|
|
$
|
1,132,853
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
1,187,840
|
|
|
$
|
359,939
|
|
Unearned premiums
|
|
|
15,863
|
|
|
|
17,793
|
|
Amounts payable to reinsurers
|
|
|
719
|
|
|
|
6,525
|
|
Deferred income taxes
|
|
|
|
|
|
|
123,297
|
|
Revolving line of credit
|
|
|
|
|
|
|
80,000
|
|
Long-term debt
|
|
|
34,529
|
|
|
|
34,519
|
|
Accrued interest on debt
|
|
|
1,275
|
|
|
|
1,355
|
|
Accrued expenses and other liabilities
|
|
|
26,974
|
|
|
|
10,574
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,267,200
|
|
|
|
634,002
|
|
Commitments and contingencies Notes 6 and 16
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share
authorized 1,000,000 shares; no shares issued
and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share authorized
32,000,000 shares; issued and outstanding
15,161,259 shares at December 31, 2008 and
14,920,243 shares at December 31, 2007
|
|
|
151
|
|
|
|
149
|
|
Additional paid-in capital
|
|
|
112,629
|
|
|
|
109,679
|
|
Accumulated other comprehensive income, net of income tax
liability of $3,265 and $6,475 at December 31, 2008 and
2007, respectively
|
|
|
6,063
|
|
|
|
13,405
|
|
Retained earnings (accumulated deficit)
|
|
|
(255,509
|
)
|
|
|
375,618
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(136,666
|
)
|
|
|
498,851
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
1,130,534
|
|
|
$
|
1,132,853
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
79
TRIAD
GUARANTY INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
316,310
|
|
|
$
|
339,007
|
|
Ceded
|
|
|
(60,777
|
)
|
|
|
(55,784
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
255,533
|
|
|
|
283,223
|
|
Change in unearned premiums
|
|
|
1,890
|
|
|
|
(4,323
|
)
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
257,423
|
|
|
|
278,900
|
|
Net investment income
|
|
|
39,580
|
|
|
|
32,936
|
|
Net realized investment losses
|
|
|
(26,559
|
)
|
|
|
(3,049
|
)
|
Other income
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,452
|
|
|
|
308,795
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
923,301
|
|
|
|
372,939
|
|
Interest expense on debt
|
|
|
3,557
|
|
|
|
4,375
|
|
Policy acquisition costs
|
|
|
39,416
|
|
|
|
18,497
|
|
Other operating expenses (net of acquisition costs deferred)
|
|
|
58,709
|
|
|
|
43,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024,983
|
|
|
|
439,439
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
|
(754,531
|
)
|
|
|
(130,644
|
)
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,012
|
)
|
|
|
(5
|
)
|
Deferred
|
|
|
(121,392
|
)
|
|
|
(53,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,404
|
)
|
|
|
(53,186
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(631,127
|
)
|
|
$
|
(77,458
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common and common equivalent share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(42.27
|
)
|
|
$
|
(5.22
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(42.27
|
)
|
|
$
|
(5.22
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per common and common
equivalent share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,929,692
|
|
|
|
14,829,205
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,929,692
|
|
|
|
14,829,205
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
80
TRIAD
GUARANTY INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS (DEFICIT)
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
149
|
|
|
$
|
104,981
|
|
|
$
|
12,018
|
|
|
$
|
453,076
|
|
|
$
|
570,224
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,458
|
)
|
|
|
(77,458
|
)
|
Other comprehensive
income-net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
(2,691
|
)
|
|
|
|
|
|
|
(2,691
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
4,078
|
|
|
|
|
|
|
|
4,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,071
|
)
|
Share-based compensation
|
|
|
|
|
|
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
3,918
|
|
Tax effect of exercise of non-qualified stock options and
vesting of restricted stock
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
Issuance of common stock under stock incentive plan
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
149
|
|
|
|
109,679
|
|
|
|
13,405
|
|
|
|
375,618
|
|
|
|
498,851
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(631,127
|
)
|
|
|
(631,127
|
)
|
Other comprehensive
income-net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
(3,264
|
)
|
|
|
|
|
|
|
(3,264
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(4,078
|
)
|
|
|
|
|
|
|
(4,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(638,469
|
)
|
Share-based compensation
|
|
|
|
|
|
|
4,257
|
|
|
|
|
|
|
|
|
|
|
|
4,257
|
|
Tax effect of exercise of non-qualified stock options and
vesting of restricted stock
|
|
|
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,305
|
)
|
Net issuance of restricted stock under stock incentive plan
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
151
|
|
|
$
|
112,629
|
|
|
$
|
6,063
|
|
|
$
|
(255,509
|
)
|
|
$
|
(136,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
81
TRIAD
GUARANTY INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(631,127
|
)
|
|
$
|
(77,458
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and unearned premium reserves
|
|
|
825,971
|
|
|
|
280,187
|
|
Accrued expenses and other liabilities
|
|
|
16,395
|
|
|
|
889
|
|
Income taxes recoverable
|
|
|
(1,234
|
)
|
|
|
|
|
Reinsurance, net
|
|
|
(150,839
|
)
|
|
|
(4,360
|
)
|
Accrued investment income
|
|
|
(286
|
)
|
|
|
(2,192
|
)
|
Policy acquisition costs deferred
|
|
|
(3,173
|
)
|
|
|
(19,597
|
)
|
Policy acquisition costs
|
|
|
39,416
|
|
|
|
18,497
|
|
Net realized investment losses
|
|
|
26,559
|
|
|
|
3,049
|
|
Provision for depreciation
|
|
|
4,951
|
|
|
|
2,309
|
|
Accretion of discount on investments
|
|
|
2,737
|
|
|
|
680
|
|
Deferred income taxes
|
|
|
(121,392
|
)
|
|
|
(53,181
|
)
|
Prepaid federal income taxes
|
|
|
115,993
|
|
|
|
50,900
|
|
Real estate acquired in claim settlement, net of write-downs
|
|
|
10,147
|
|
|
|
(690
|
)
|
Accrued interest on debt
|
|
|
(80
|
)
|
|
|
80
|
|
Other assets
|
|
|
8,878
|
|
|
|
(11,992
|
)
|
Other operating activities
|
|
|
4,222
|
|
|
|
3,955
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
147,138
|
|
|
|
191,076
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases fixed maturities
|
|
|
(839,372
|
)
|
|
|
(298,992
|
)
|
Sales fixed maturities
|
|
|
633,928
|
|
|
|
155,295
|
|
Maturities fixed maturities
|
|
|
40,473
|
|
|
|
1,715
|
|
Purchases equities
|
|
|
|
|
|
|
(55
|
)
|
Sales equities
|
|
|
287
|
|
|
|
8,338
|
|
Net change in short-term investments
|
|
|
14,074
|
|
|
|
(51,445
|
)
|
Purchases of property and equipment
|
|
|
(1,296
|
)
|
|
|
(6,052
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(151,906
|
)
|
|
|
(191,196
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Funding (repayment) of revolving credit facility
|
|
|
(80,000
|
)
|
|
|
80,000
|
|
Excess tax benefits from share-based compensation
|
|
|
15
|
|
|
|
175
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(79,985
|
)
|
|
|
80,791
|
|
Foreign currency translation adjustment on cash and cash
equivalents
|
|
|
(118
|
)
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(84,871
|
)
|
|
|
86,202
|
|
Cash and cash equivalents at beginning of year
|
|
|
124,811
|
|
|
|
38,609
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
39,940
|
|
|
$
|
124,811
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information
|
|
|
|
|
|
|
|
|
Cash (received) paid during the period for:
|
|
|
|
|
|
|
|
|
Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
|
|
$
|
(122,111
|
)
|
|
$
|
(45,614
|
)
|
Interest
|
|
$
|
3,631
|
|
|
$
|
4,286
|
|
See accompanying notes.
82
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
Nature
of Business
Triad Guaranty Inc. is a holding company which, through its
wholly-owned subsidiary, Triad Guaranty Insurance Corporation
(Triad), historically has provided mortgage
insurance coverage in the United States. Mortgage insurance
allows buyers to achieve homeownership with a reduced down
payment, facilitates the sale of mortgage loans in the secondary
market and protects lenders from credit default-related
expenses. Triad ceased issuing new commitments for mortgage
guaranty insurance coverage on July 15, 2008 and is
operating the business in run-off under a Corrective Order with
the Illinois Department of Financial and Professional
Regulation, Division of Insurance (the Division).
The term run-off, as used in these financial
statements, refers to Triad no longer writing new mortgage
insurance policies but continuing to service the existing
policies. Servicing existing policies includes: receiving
premiums on policies that remain in force; cancelling coverage
at the insureds request; terminating policies for
non-payment of premium; working with borrowers in default to
remedy the default
and/or
mitigate the Companys loss; and settling all legitimate
filed claims per the Companys contractual obligations. The
Corrective Order, among other items, allows management to
continue to operate Triad under close supervision and includes
restrictions on the distribution of dividends or interest on
notes payable to its parent by Triad. Triad Guaranty Inc. and
its subsidiaries are collectively referred to as the
Company.
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with United States generally accepted
accounting principles (GAAP), which vary in some respects from
statutory accounting practices which are prescribed or permitted
by the various state insurance departments in the United States.
Consolidation
The consolidated financial statements include the amounts of
Triad Guaranty Inc. and its wholly owned subsidiary, Triad,
including Triads wholly-owned subsidiaries, Triad Guaranty
Assurance Corporation (TGAC) and Triad Re Insurance
Corporation (Triad Re). Triad Guaranty Insurance
Corporation Canada was a wholly-owned subsidiary of Triad
Guaranty Inc. at December 31, 2007, that was incorporated
in 2007 and liquidated during the fourth quarter of 2008. All
significant intercompany accounts and transactions have been
eliminated.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Investments
All fixed maturity and equity securities are classified as
available-for-sale and are carried at fair value.
Unrealized gains and losses on available-for-sale securities,
net of tax, are reported as a separate component of accumulated
other comprehensive income. Fair value generally represents
quoted market value prices for securities traded in the public
market or prices analytically determined using bid or closing
prices for securities not traded in the public marketplace.
Realized investment gains or losses are determined on a specific
identification basis. At December 31, 2008, the Company
recognized an impairment loss on all securities that were in an
unrealized loss position.. This decision was made as a result of
the significant doubt regarding our ability to continue as a
going concern, thus affecting our ability to hold such
securities until recovery. Previously, the Company evaluated its
investments regularly to determine whether there were declines
in values that were other-than-temporary. When the
83
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company determined that a security had experienced an
other-than-temporary impairment, the impairment loss was
recognized in the period as a realized investment loss.
Short-term investments are defined as short-term, highly liquid
investments, both readily convertible to known amounts of cash
and having maturities of twelve months or less upon acquisition
by the Company and are not used to fund operational cash flows
of the Company.
Fair
Value Measurements
The Company utilizes the provisions of Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements, (SFAS 157) in its
estimation and disclosures about fair value. SFAS 157
defines fair value, establishes a framework for measuring fair
value under GAAP, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements.
The Company adopted SFAS 157 effective for its fiscal year
beginning January 1, 2008.
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation methods used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under SFAS 157 are as
follows:
|
|
|
|
Level 1:
|
Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
Level 2:
|
Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the
full term of the asset or liability.
|
|
|
Level 3:
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(i.e., supported with little or no market activity).
|
An assets or a liabilitys level within the fair
value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
Cash
and Cash Equivalents
The Company considers cash equivalents to be short-term, highly
liquid investments with original maturities of three months or
less that are used to fund operational cash flow needs.
Real
Estate Acquired in Claim Settlement
Real estate is sometimes acquired in the settlement of claims as
part of the Companys effort to mitigate losses. The real
estate is carried at the lower of cost or fair value at the
balance sheet date. Gains or losses from the holding or
disposition of real estate acquired in claim settlement are
recorded in net losses and LAE. At December 31, 2008 and
2007, the Company held 5 and 57 properties, respectively, that
it acquired in settlement of claims.
Premium
Deficiency Reserve and Deferred Policy Acquisition
Costs
Prior to the transition into run-off, the costs of acquiring new
business, principally sales compensation and certain policy
underwriting and issue costs, that are primarily related to the
production of new business, were capitalized as deferred policy
acquisition costs. Amortization of such policy acquisition costs
was charged to expense in proportion to premiums recognized over
the estimated policy life.
The Company historically prepared an analysis to determine if
the deferred policy acquisition costs on our balance sheet were
recoverable against the future profits of the existing book of
business. In the first quarter of 2008, the Company determined
that a premium deficiency existed in its book of business, and
thus the entire unamortized
84
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance of deferred policy acquisition costs of
$39.4 million was written off as non-recoverable.
Subsequently, there has been no capitalization of acquisition
costs because the Company has been in run-off since
July 15, 2008.
Property
and Equipment
Property and equipment is recorded at cost and is depreciated
principally on a straight-line basis over the estimated useful
lives, generally three to five years, of the depreciable assets.
Property and equipment primarily consists of computer hardware,
software, furniture, and equipment. In connection with the
transition to run-off, certain hardware and software costs
related to sales, underwriting, and other non-continuing
functions were written off in 2008.
Loss
and Loss Adjustment Expense Reserves
Reserves are provided for the estimated costs of settling claims
on loans reported in default and loans in default that are in
the process of being reported to the Company. Consistent with
industry accounting practices, the Company does not establish
loss reserves for future claims on insured loans that are not
currently in default. Amounts for salvage recoverable, albeit
very small, are considered in the determination of the reserve
estimates. Loss reserves are established by management using a
process that incorporates various components in a model that
gives effect to current economic conditions and segments
defaults by a variety of criteria. The criteria include, among
others, policy year, lender, geography and the number of months
the policy has been in default, as well as whether the defaulted
loan was underwritten through our flow distribution channel or
as part of a structured bulk transaction. The Company
incorporated in the calculation of loss reserves the probability
that a policy may be rescinded for underwriting violations.
Frequency and severity are the two most significant assumptions
in the establishment of the Companys loss reserves.
Frequency is used to estimate the ultimate number of paid claims
associated with the current defaulted loans. The frequency
estimate assumes that long-term historical experience, taking
into consideration criteria such as those described in the
preceding paragraph, and adjusted for current economic
conditions that the Company believes will significantly impact
the long-term loss development, provides a reasonable basis for
forecasting the number of claims that will be paid. An important
determinant of the frequency factor is the Companys
estimate of the number and amount of reported defaults that we
anticipate will be rescinded due to fraud or misrepresentation
at the loan origination. Severity is the estimate of the dollar
amount per claim that will be paid. The severity factors are
estimates of the percent of the risk in force that will be paid.
The severity factors used are based on an analysis of the
severity rates of recently paid claims, applied to the risk in
force of the loans currently in default. The frequency and
severity factors are updated quarterly.
The estimation of loss reserves requires assumptions as to
future events, and there are inherent risks and uncertainties
involved in making these assumptions. Economic conditions that
have affected the development of loss reserves in the past may
not necessarily affect development patterns in the future in
either a similar manner or degree. As adjustments to these
liabilities become necessary, such adjustments are reflected in
current operations.
Reinsurance
Certain premiums and losses are assumed from and ceded to other
insurance companies under various reinsurance agreements.
Reinsurance premiums, loss reimbursement, and reserves related
to reinsurance business are accounted for on a basis consistent
with that used in accounting for the original policies issued
and the terms of the reinsurance contracts. The Company may
receive a ceding commission in connection with ceded
reinsurance. If so, the ceding commission is earned on a monthly
pro rata basis in the same manner as the premium and is recorded
as a reduction of other operating expenses.
85
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and deferred tax liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Federal tax law permits mortgage guaranty insurance companies to
deduct from taxable income, subject to certain limitations, the
amounts added to contingency loss reserves. Generally, the
amounts so deducted must be included in taxable income in the
tenth subsequent year. This deduction is allowed only to the
extent that non-interest bearing United States Mortgage Guaranty
Tax and Loss Bonds are purchased and held in an amount equal to
the tax benefit attributable to such deduction. The Company
accounts for these purchases as a prepayment of federal income
taxes. As a result of operating losses in 2007 and 2008, the
previously established contingency reserve has been completely
released earlier than the originally scheduled ten years.
Accordingly, the previously purchased Tax and Loss Bonds
associated with the contingency reserve release were redeemed
early.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48),
clarifies the accounting and disclosure for uncertainty in tax
positions. Currently, the Companys 2007, 2006 and 2005
federal returns are under examination and all years prior to
2004 are closed. In connection with the current examination, the
IRS has assessed an additional $5.5 million of Alternative
Minimum Tax (AMT). This amount has been recorded as
a current tax accrual for 2008. Due to the significant tax loss
generated in 2008, the Company will be able to utilize AMT carry
back to tax years 2007 and 2006 to recover 90% of the original
AMT due for those tax years and record a current tax recoverable
of $3.0 million. The remaining balance will be credit
carryforward.
The Company incurred a significant amount of tax losses in 2008
and has had recurring losses for at least one year earlier.
After a minimum carry back to the 2006 tax year, the Company had
a net operating loss carry forward at December 31, 2008 of
$106.8 million. Due to the uncertainty surrounding the
ability of the Company to generate taxable income in the future
to offset the current tax loss carry forward, the Company
established a full valuation allowance.
The Companys policy for recording interest and penalties,
if any, associated with audits is to record such items as a
component of income before taxes. Penalties would be recorded in
other operating expenses and interest paid or
received would be recorded as interest expense or interest
income, respectively, in the statement of income.
Income
Recognition
The Company writes policies that are guaranteed renewable
contracts at the policyholders option on single premium,
annual premium, and monthly premium bases. The Company does not
have the option to re-underwrite these contracts. Premiums
written on a monthly basis are earned in the month coverage is
provided. Premiums written on annual policies are earned on a
monthly pro rata basis. Single premium policies covering more
than one year are amortized over the estimated policy life in
accordance with the expiration of risk.
Cancellation of a policy generally results in the unearned
portion of the premium paid being refunded to the policyholder.
However, many of the annual paying policies are paid by the
lender and are non-refundable. The cancellation of one of these
policies would impact earned premium through the release of the
unearned premium reserve at the time of the cancellation. The
amounts earned through the cancellation of annual paying
policies are not significant to earned premium. Through the
claim and default investigation process, the Company has
rescinded coverage on an increasing number of insurance polices
due to fraud or misrepresentation by the borrower or program
violations by the lender at origination. Historically, in the
rare circumstances when a policy was rescinded,
86
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the entire premium paid to date was refunded to the policyholder
and a charge to premium income was made in the period when the
rescission was made. In recognition of the increasing amount of
rescissions, the Company records an accrual to recognize the
anticipated premium refunds due to future rescissions embedded
in the existing default portfolio.
Significant
Customers
Since the Company has been in run-off since July 15, 2008,
the Company is not issuing commitments for any new insurance and
therefore does not have customers in the traditional sense, only
renewal premiums on existing policies. However, during 2007 when
the Company was writing new business, three customers
individually accounted for greater than 10% of total revenues.
These three customers accounted for approximately 22%, 13% and
10%, respectively, of the Companys total 2007 revenue.
Share-Based
Compensation
The Company utilizes the provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)) in the accounting for
share-based compensation to employees and
non-employee directors. SFAS 123(R) requires companies to
recognize in the statement of operations the grant-date fair
value of stock options and other equity-based compensation. See
Note 12 for further information related to share-based
compensation expense.
Foreign
Currency Translation
Assets related to our Canadian subsidiary denominated in
non-U.S. dollar
currencies are translated into U.S. dollar equivalents
using exchange rates at December 31. Revenues and expenses
are translated at weighted-average exchange rates for the period
in which they occurred. Gains and losses on currency
re-measurement represent the revaluation of assets and
liabilities denominated in non-functional currency to the
functional currency, the U.S. dollar, and are recorded in
net realized investment gains (losses).
|
|
(Loss)
|
Earnings
Per Share (EPS)
|
Basic and diluted EPS are based on the weighted-average daily
number of shares outstanding. For the year ended
December 31, 2008 and 2007, the basic and diluted EPS
denominators are the same weighted-average daily number of
shares outstanding. In computing diluted EPS, only potential
common shares that are dilutive those that reduce
EPS or increase loss per share are included.
Exercise of options and unvested restricted stock are not
assumed if the result would be antidilutive, such as when a loss
from operations is reported.
Comprehensive
(Loss) Income
Comprehensive (loss) income consists of net (loss) income and
other comprehensive (loss) income. For the Company, other
comprehensive (loss) income is composed of unrealized gains or
losses on available-for-sale securities, net of income tax, and
the unrealized gains or losses on the change in foreign currency
translation, net of
87
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income taxes. The components of comprehensive (loss) income are
displayed in the following table, along with the related tax
effects:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Unrealized losses arising during the period, before taxes
|
|
$
|
(31,580
|
)
|
|
$
|
(7,189
|
)
|
Income tax benefit
|
|
|
11,053
|
|
|
|
2,516
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses arising during the period, net of taxes
|
|
|
(20,527
|
)
|
|
|
(4,673
|
)
|
Less reclassification adjustment:
|
|
|
|
|
|
|
|
|
Loss realized in operations
|
|
|
(26,559
|
)
|
|
|
(3,049
|
)
|
Income tax benefit
|
|
|
9,296
|
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses realized in operations
|
|
|
(17,263
|
)
|
|
|
(1,982
|
)
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on investments
|
|
|
(3,264
|
)
|
|
|
(2,691
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, before taxes
|
|
|
(5,531
|
)
|
|
|
5,531
|
|
Income tax benefit (expense)
|
|
|
1,453
|
|
|
|
(1,453
|
)(1)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, after taxes
|
|
|
(4,078
|
)
|
|
|
4,078
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
$
|
(7,342
|
)
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Tax effect calculated from unrealized gain on subsidiary of
$4,151. |
Recent
Accounting Pronouncements
In January 2009, the FASB issued FSP
EITF 99-20-1,
Amendments to the Impairment Guidance in EITF Issue
No. 99-20
(EITF 99-20-1),
which eliminates the requirement in EITF
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets
(EITF 99-20)
for holders of beneficial interests to estimate cash flow using
current information and events that a market participant would
use in determining the current fair value and
other-than-temporary impairment of the beneficial interest.
FSP 99-20-1
removes the reference to a market participant and requires that
an other-than-temporary impairment be recognized in earnings
when it is probable that there has been an adverse change in the
holders estimated cash flows from the cash flows
previously projected, which is consistent with the impairment
model used in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
FSP 99-20-1
is effective for interim and annual reporting periods ending
after December 15, 2008, and must be applied prospectively
at the balance sheet date of the reporting period for which the
assessment of cash flows is made. We adopted the guidance in
FSP 99-20-1
as of December 31, 2008. The adoption did not have a
material impact on our consolidated financial condition or
results of operations.
In February 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-2
delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).
Accordingly, we did not apply the provisions of SFAS 157 to
nonfinancial assets and nonfinancial liabilities within the
scope of
FSP 157-2.
Examples of items to which the deferral is applicable include,
but are not limited to:
|
|
|
|
|
Nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination or other new
basis event, but not measured at fair value in subsequent
periods;
|
|
|
|
Reporting units measured at fair value in the goodwill
impairment test under SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS 142), and
indefinite-lived intangible assets measured at fair value for
impairment assessment under SFAS 142;
|
88
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Nonfinancial long-lived assets measured at fair value for an
impairment assessment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets;
|
|
|
|
Asset retirement obligations initially measured at fair value
under SFAS No. 143, Accounting for Asset Retirement
Obligations; and
|
|
|
|
Nonfinancial liabilities for exit or disposal activities
initially measured at fair value under SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities.
|
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active. During times when there is little market activity
for a financial asset, the objective of fair value measurement
remains the same, that is, the price that would be received by
the holder of the financial asset in an orderly transaction
(exit price) that is not a forced liquidation or distressed sale
at the measurement date. Determining fair value of a financial
asset during a period of market inactivity may require the use
of significant judgment and evaluation of the facts and
circumstances to determine if transactions for financial assets
are forced liquidation or distressed sales. An entitys own
assumptions regarding future cash flows and risk-adjusted
discount rates for financial assets are acceptable when relevant
observable inputs are not available. In addition,
FSP 157-3
provides an illustrative example of key considerations when
determining fair value of a financial asset when the market for
the asset is not active.
FSP 157-3
was effective on October 10, 2008, including all prior
periods for which financial statements have not been issued. Any
changes in valuation techniques resulting from the adoption of
FSP 157-3
will be accounted for as a change in accounting estimated in
accordance with SFAS No. 154, Accounting Changes
and Error Corrections. We adopted the guidance in
FSP 157-3
in our financial statements for the reporting period ended
September 30, 2008. The adoption did not have a material
impact on our consolidated financial condition or results of
operations.
In April 2008, the FASB issued FSP
FAS No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3),
which applies to recognized intangible assets accounted for
under the guidance in SFAS 142. When developing renewal or
extension assumptions in determining the useful life of
recognized intangible assets,
FSP 142-3
requires an entity to consider its own historical experience in
renewing or extending similar arrangements. Absent the
historical experience, an entity should use the assumptions a
market participant would make when renewing and extending the
intangible asset consistent with the highest and best use of the
asset by market participants. In addition,
FSP 142-3
requires financial statement disclosure regarding the extent to
which expected future cash flows associated with the asset are
affected by an entitys intent
and/or
ability to renew or extend an arrangement.
FSP 142-3
is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2008, with early
adoption prohibited.
FSP 142-3
should be applied prospectively to determine the useful life of
a recognized intangible asset acquired after the effective date.
In addition,
FSP 142-3
requires prospective application of the disclosure requirements
to all intangible assets recognized as of, and subsequent to,
the effective date. The Company adopted
FSP 142-3
on January 1, 2009, and does not expect the adoption will
have a material impact on its consolidated financial condition
and results of operations.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of non-governmental entities that are presented in conformity
with GAAP. SFAS 162 is effective 60 days following the
SECs approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company does not anticipate that
SFAS 162 will have a material impact on the Companys
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin (ARB) No. 51
(SFAS 160), which aims to improve the
relevance, comparability and transparency of the financial
information that a reporting entity provides
89
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in its consolidated financial statements by establishing
accounting and reporting standards surrounding noncontrolling
interests, or minority interests, which are the portions of
equity in a subsidiary not attributable, directly or indirectly,
to a parent. The ownership interests in subsidiaries held by
parties other than the parent shall be clearly identified,
labeled and presented in the consolidated statement of financial
position within equity, but separate from the parents
equity. The amount of consolidated net income attributable to
the parent and to the noncontrolling interest must be clearly
identified and presented on the face of the Consolidated
Statements of Income. Changes in a parents ownership
interest while the parent retains its controlling financial
interest in its subsidiary must be accounted for consistently as
equity transactions. A parents ownership interest in a
subsidiary changes if the parent purchases additional ownership
interests in its subsidiary, sells some of its ownership
interests in its subsidiary, the subsidiary reacquires some of
its ownership interests or the subsidiary issues additional
ownership interests. When a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former
subsidiary must be initially measured at fair value. The gain or
loss on the deconsolidation of the subsidiary is measured using
the fair value of any noncontrolling equity investment rather
than the carrying amount of that retained investment. Entities
must provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
Company adopted SFAS 160 effective January 1, 2009,
and does not expect the adoption will have a material impact on
its consolidated financial condition and results of operations.
In December 2007, the FASB issued SFAS 141(R), Business
Combinations a replacement of FASB Statement
No. 141 (SFAS 141(R)), which
significantly changes the principles and requirements for how
the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. This statement is effective
prospectively, except for certain retrospective adjustments to
deferred tax balances, for fiscal years beginning after
December 15, 2008. This statement will be effective for the
Company beginning January 1, 2009. The Company does not
anticipate that SFAS 141(R) will have a material impact on
the Companys financial position or results of operations.
The Company has prepared its financial statements on a going
concern basis, which contemplates the realization of assets and
the satisfaction of liabilities and commitments in the normal
course of business. However, there is substantial doubt as to
the Companys ability to continue as a going concern. This
uncertainty is based on the ability of Triad to comply with the
run-off provisions of the Corrective Order, the Companys
recurring losses from operations and a deficit in assets at
December 31, 2008. The financial statements do not include
any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts of
liabilities that might be necessary should the Company be unable
to continue in existence.
The Company incurred significant operating losses in 2007 and in
2008 and has a deficit in assets at December 31, 2008 of
$136.7 million. The losses are the result of increased
defaults and foreclosures arising from steeply declining home
prices as the full impact of the recession is now being felt on
the mortgages that we insure. Additionally, Triad, the main
operating insurance subsidiary, is operating under a Corrective
Order with the Division, pursuant to which it can no longer
issue commitments for new insurance and has placed its existing
insurance business in run-off. Terms of the Corrective Order
required Triad to submit a corrective plan which included a
five-year projection of operations and financial condition that
indicated a solvent run-off. Subsequent to the approval of the
corrective plan, economic conditions deteriorated as house
prices continued their decline, unemployment rates increased,
the mortgage markets deteriorated and the government formally
concluded that the United States is in a deep recession. TGAC is
also operating under a similar Corrective Order.
90
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Since the approval of our initial corrective plan, we have
revised the assumptions we initially utilized as a result of
continued deteriorating economic conditions impacting our
financial condition, results of operations and future prospects.
Our new assumptions produce a range of potential ultimate
outcomes for our run-off and project that absent additional
action by the Division or favorable changes in our business, we
will report a deficiency in policyholders surplus as
calculated under SAP as early as March 31, 2009 and
continuing through 2011. Triad follows certain statutory
accounting practices that differ from U.S. GAAP related to
reserves and reinsurance recoveries and without which there
would have been a deficit for statutory reporting purposes as of
December 31, 2008. Management is currently working with the
Division to structure a revised corrective plan in a manner that
is expected to provide for a solvent run-off. If the revised
corrective plan is unsuccessful, the Division may be forced to
place Triad into receivership which would effectively compel the
parent, Triad Guaranty Inc. to declare bankruptcy. The ability
to successfully develop, gain approval of and implement the
revised corrective plan by management is unknown at this time.
The cost or amortized cost, gross unrealized gains and losses,
and the fair value of investments at December 31, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
19,665
|
|
|
$
|
503
|
|
|
$
|
|
|
|
$
|
20,168
|
|
State and municipal
|
|
|
156,675
|
|
|
|
2,719
|
|
|
|
|
|
|
|
159,394
|
|
Corporate
|
|
|
545,230
|
|
|
|
2,715
|
|
|
|
|
|
|
|
547,945
|
|
Mortgage backed
|
|
|
123,394
|
|
|
|
3,285
|
|
|
|
|
|
|
|
126,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
844,964
|
|
|
|
9,222
|
|
|
|
|
|
|
|
854,186
|
|
Equity securities
|
|
|
566
|
|
|
|
17
|
|
|
|
|
|
|
|
583
|
|
Short-term investments
|
|
|
40,565
|
|
|
|
88
|
|
|
|
|
|
|
|
40,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
886,095
|
|
|
$
|
9,327
|
|
|
$
|
|
|
|
$
|
895,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
11,644
|
|
|
$
|
144
|
|
|
$
|
(25
|
)
|
|
$
|
11,763
|
|
State and municipal
|
|
|
659,178
|
|
|
|
15,552
|
|
|
|
(1,467
|
)
|
|
|
673,263
|
|
Corporate
|
|
|
40,102
|
|
|
|
672
|
|
|
|
(169
|
)
|
|
|
40,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
710,924
|
|
|
|
16,368
|
|
|
|
(1,661
|
)
|
|
|
725,631
|
|
Equity securities
|
|
|
2,520
|
|
|
|
|
|
|
|
(358
|
)
|
|
|
2,162
|
|
Short-term investments
|
|
|
56,746
|
|
|
|
|
|
|
|
|
|
|
|
56,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
770,190
|
|
|
$
|
16,368
|
|
|
$
|
(2,019
|
)
|
|
$
|
784,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company had no securities with
gross unrealized losses and 82 securities with gross unrealized
losses at December 31, 2007. The following table shows the
gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
391
|
|
|
$
|
(4
|
)
|
|
$
|
2,729
|
|
|
$
|
(21
|
)
|
|
$
|
3,120
|
|
|
$
|
(25
|
)
|
State and municipal
|
|
|
84,437
|
|
|
|
(1,243
|
)
|
|
|
23,586
|
|
|
|
(224
|
)
|
|
|
108,023
|
|
|
|
(1,467
|
)
|
Corporate
|
|
|
20,670
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
20,670
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
105,498
|
|
|
|
(1,416
|
)
|
|
|
26,315
|
|
|
|
(245
|
)
|
|
|
131,813
|
|
|
|
(1,661
|
)
|
Equity securities
|
|
|
2,162
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
2,162
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
107,660
|
|
|
$
|
(1,774
|
)
|
|
$
|
26,315
|
|
|
$
|
(245
|
)
|
|
$
|
133,975
|
|
|
$
|
(2,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Given our recurring losses from operations and the significant
doubt regarding our ability to continue as a going concern, we
may no longer have the ability to hold impaired assets for a
sufficient time to recover their value. As a result, the Company
recognized an impairment loss on all securities that were in an
unrealized loss position at December 31, 2008. Previously,
the Company reviewed its investments quarterly to identify and
evaluate whether any investments had indications of possible
impairment and whether any impairments were other than
temporary. Factors considered in determining whether a loss is
other than temporary include the length of time and extent to
which fair value has been less than the cost basis, the
financial condition and near-term prospects of the issuer, and
the Companys intent and ability to hold the investment for
a period of time sufficient to allow for recovery in market
value. During 2008 and 2007, the Company wrote down securities
including other investments by $38.5 million and
$5.3 million, respectively, to reflect other-than-temporary
declines in fair value.
92
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and estimated fair value of investments in
fixed maturity securities, at December 31, 2008, are
summarized by stated maturity as follows:
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
141,482
|
|
|
$
|
141,754
|
|
After one year through five years
|
|
|
513,189
|
|
|
|
517,099
|
|
After five years through ten years
|
|
|
126,436
|
|
|
|
130,133
|
|
After ten years
|
|
|
63,857
|
|
|
|
65,200
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
844,964
|
|
|
$
|
854,186
|
|
|
|
|
|
|
|
|
|
|
The details of net realized investment gains (losses) including
other-than-temporary impairments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
10,262
|
|
|
$
|
912
|
|
Gross realized losses
|
|
|
(38,570
|
)
|
|
|
(281
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
44
|
|
|
|
1,328
|
|
Gross realized losses
|
|
|
(1,705
|
)
|
|
|
(56
|
)
|
Foreign currency gross realized gains
|
|
|
3,404
|
|
|
|
50
|
|
Other investment gains (losses)
|
|
|
6
|
|
|
|
(5,002
|
)
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
$
|
(26,559
|
)
|
|
$
|
(3,049
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on fixed maturity securities
increased (decreased) by $(5.4 million) and
$(2.9 million) in 2008 and 2007, respectively; the
corresponding amounts for equity securities were $375,000 and
$(1.2 million); and the corresponding amounts for
short-term securities were $88,000 and $0.
Major categories of the Companys net investment income are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
37,549
|
|
|
$
|
29,599
|
|
Preferred stocks
|
|
|
127
|
|
|
|
258
|
|
Common stocks
|
|
|
|
|
|
|
57
|
|
Cash, cash equivalents and short-term investments
|
|
|
2,973
|
|
|
|
3,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,649
|
|
|
|
33,845
|
|
Expenses
|
|
|
(1,069
|
)
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
39,580
|
|
|
$
|
32,936
|
|
|
|
|
|
|
|
|
|
|
93
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2008 and 2007, investments with an
amortized cost of $8.9 million and $6.6 million,
respectively, were on deposit with various state insurance
departments to satisfy regulatory requirements.
|
|
4.
|
Deferred
Policy Acquisition Costs (DAC)
|
Prior to the need for the establishment of a premium deficiency
initially recognized at March 31, 2008, Triad capitalized
costs to acquire new business as DAC and recognized these as
expenses against future gross profits. In accordance with
generally accepted accounting principles, an analysis was
prepared to determine if the DAC asset on the balance sheet was
recoverable against the future profits in the existing book of
business. At March 31, 2008, Triad determined that the net
present value of the estimated future cash flows on the
remaining book of business exceeded the recorded reserves (net
of the unamortized DAC) which required the establishment of a
premium deficiency reserve. The actual mechanics of recording
the premium deficiency reserve require that Triad first reduce
the DAC balance to zero before recording any additional premium
deficiency reserve. Therefore, Triad wrote down the DAC asset by
$39.4 million in the first quarter of 2008. Triad has not
capitalized any costs to acquire new business subsequent to the
first quarter of 2008, but included such costs in the line item
Other operating costs on its statement of operations.
An analysis of deferred policy acquisition costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Balance beginning of period
|
|
$
|
36,243
|
|
|
$
|
35,143
|
|
Acquisition costs deferred:
|
|
|
|
|
|
|
|
|
Sales compensation
|
|
|
1,864
|
|
|
|
8,207
|
|
Underwriting and issue expenses
|
|
|
1,309
|
|
|
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,173
|
|
|
|
19,597
|
|
Amortization of acquisition expenses
|
|
|
39,416
|
|
|
|
18,497
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase
|
|
|
(36,243
|
)
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$
|
|
|
|
$
|
36,243
|
|
|
|
|
|
|
|
|
|
|
94
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Reserve
for Losses and LAE
|
Activity for the reserve for losses and LAE for 2008 and 2007 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1,
|
|
$
|
359,939
|
|
|
$
|
84,352
|
|
Less: reinsurance recoverables
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
359,939
|
|
|
|
84,351
|
|
Incurred losses and loss adjustment expenses net of reinsurance
recoveries (principally in respect of default notices received
in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
873,568
|
|
|
|
332,210
|
|
Deficiency on prior years
|
|
|
49,733
|
|
|
|
40,729
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
923,301
|
|
|
|
372,939
|
|
Loss and loss adjustment expense payments net of reinsurance
recoveries (principally in respect of default notices received
in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
38,974
|
|
|
|
22,725
|
|
Prior years
|
|
|
206,455
|
|
|
|
81,934
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense payments
|
|
|
245,429
|
|
|
|
104,659
|
|
|
|
|
|
|
|
|
|
|
Net ending balance at December 31,
|
|
|
1,037,811
|
|
|
|
352,631
|
|
Reinsurance recoverables
|
|
|
150,029
|
|
|
|
7,308
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
1,187,840
|
|
|
$
|
359,939
|
|
|
|
|
|
|
|
|
|
|
The foregoing reconciliation shows deficiencies in the reserve
for losses and LAE at December 31, 2008 and 2007. The
deficiencies recognized in 2008 and 2007 were reflective of
increased frequency and severity factors subsequent to the
previous year end caused by the continuous decline in the
housing markets.
We provided reserves on reported defaults using assumptions that
estimate the projected frequency (percentage of
defaults that will ultimately be paid as claims) and
severity (percentage of our exposure on each
individual default that will ultimately be paid as a claim). Our
estimates utilized in the reserve process for frequency and
severity are impacted by historical trends adjusted for changing
market conditions. Declines in home prices at a faster rate than
anticipated, the impact of a higher unemployment rate than
anticipated or an unanticipated slowdown of the overall economy
can impact the actual frequency and severity realized during the
year compared to those utilized in the reserve assumptions at
the beginning of the year. Changes in the frequency and severity
factors are accounted for as a change in accounting estimate and
are reported as an expense in the year in which external factors
caused the change in our assumptions. Due to the rapid decline
in home prices and changes in the mortgage markets that reduced
borrowers ability to refinance loans, we adjusted our
assumptions regarding both frequency and severity in 2008 and
2007. The adjustments that we made to our frequency factor had
the biggest impact because a larger percentage of loans that
initially defaulted are now expected to result in a paid claim.
Offsetting this increase somewhat was the impact from an
anticipated increase in the number of policies rescinded, which
resulted in a slight reduction in the frequency factor overall.
The lack of mitigation opportunities due to declining house
prices, further reduced by an excess of housing inventory, also
impacted the severity factor.
95
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain office facilities, autos, and
equipment under operating leases. Rental expense for all leases
was $2.8 million for 2008 and $2.4 million for 2007.
Future minimum payments under non-cancellable operating leases
at December 31, 2008, are as follows:
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
2009
|
|
$
|
1,654
|
|
2010
|
|
|
1,551
|
|
2011
|
|
|
1,471
|
|
2012
|
|
|
1,377
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,053
|
|
|
|
|
|
|
The Company leases facilities for its corporate headquarters
under an operating lease that is scheduled to expire in 2012.
The Company has options to renew this lease for up to ten
additional years at the fair market rental rate at the time of
the renewal.
Income tax benefit differed from the amounts computed by
applying the Federal statutory income tax rate to income before
taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Income tax benefit computed at statutory rate
|
|
$
|
(263,015
|
)
|
|
$
|
(45,726
|
)
|
(Decrease) increase in taxes resulting from:
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(7,353
|
)
|
|
|
(9,380
|
)
|
Valuation allowance
|
|
|
145,335
|
|
|
|
|
|
Other
|
|
|
1,629
|
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(123,404
|
)
|
|
$
|
(53,186
|
)
|
|
|
|
|
|
|
|
|
|
96
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2008 and 2007 are presented
below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
3,924
|
|
|
$
|
3,872
|
|
Impairments on securities
|
|
|
11,258
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
92,431
|
|
|
|
6,346
|
|
Net operating loss carryforwards and other credits
|
|
|
39,635
|
|
|
|
|
|
Other
|
|
|
2,784
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
150,032
|
|
|
|
12,534
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Contingency loss reserve deduction
|
|
|
|
|
|
|
112,801
|
|
Deferred policy acquisition costs
|
|
|
|
|
|
|
12,685
|
|
Unrealized investment gains
|
|
|
3,265
|
|
|
|
6,475
|
|
Other
|
|
|
1,432
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
4,697
|
|
|
|
135,831
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) before valuation allowance
|
|
|
145,335
|
|
|
|
(123,297
|
)
|
Valuation allowance
|
|
|
(145,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
(123,297
|
)
|
|
|
|
|
|
|
|
|
|
If the Company determines that any of its deferred tax assets
will not result in future tax benefits, a valuation allowance
must be established for the portion of these assets that are not
expected to be realized. At December 31, 2008, the Company
established a valuation allowance of approximately
$145.3 million against a $150.0 million deferred tax
asset. Based upon a review of the Companys anticipated
future taxable income, and also including all other available
evidence, both positive and negative, the Company concluded that
it is more likely than not that the net deferred tax asset will
not be realized.
As of December 31, 2008, the Company had a net operating
loss (NOL) carryforward on a regular tax basis of
approximately $106.8 million and an alternative minimum tax
credit carryforward (AMT) of $2.4 million. The
NOL carryforward expires, if unused, in 2028. The amount and
timing of realizing the benefit of NOL carryforwards depends on
future taxable income and limitations imposed by tax laws. The
benefit of the NOL carryforward has not been recognized in the
consolidated financial statements.
Effective January 1, 2007, the Company adopted FASB issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). The Interpretation
seeks to reduce the significant diversity in practices
associated with recognition and measurement in the accounting
for income taxes. The interpretation applies to all tax
positions accounted for in accordance with
SFAS No. 109, Accounting for Income Taxes.
The Company did not record a cumulative effect adjustment
related to the adoption of FIN 48. The Company had no
unrecognized tax
97
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
benefits as of December 31, 2007. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2007
|
|
$
|
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
5,500
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
5,500
|
|
|
|
|
|
|
None of the $5.5 million of unrecognized tax benefits would
affect the effective tax rate as of December 31, 2008.
During the year ended December 31, 2008, the Company did
not recognize any interest or penalties. It is expected that the
matter related to the Companys unrecognized tax benefit
will be effectively settled during 2009.
The Internal Revenue Service (IRS) is currently
conducting an examination of the Companys 2007, 2006 and
2005 federal returns. In connection with the current
examination, the IRS has assessed an additional
$5.5 million of AMT. This amount has been recorded as a
current tax accrual for 2008. Due to the significant tax loss
generated in 2008, the Company will be able to utilize AMT carry
back to tax years 2007 and 2006 to recover 90% of the original
AMT due for those tax years and record a current tax recoverable
of $3.0 million. The remaining balance will be credit
carryforward.
|
|
8.
|
Insurance
in Force, Dividend Restriction, and Statutory Results
|
At December 31, 2008, approximately 59% of Triads
direct risk in force was concentrated in 10 states, with
approximately 15% in California, 12% in Florida, 6% in Texas, 5%
in Arizona, 4% each in Illinois, North Carolina and Georgia, and
3% each in Virginia, Colorado, and New Jersey. California,
Florida and Arizona, which collectively represent 31% of direct
risk in force, have been especially hard hit with home price
depreciation at a rate greater than the rest of the country.
Nevada, which represented 3% of direct risk in force at
December 31, 2008, has also seen significant home price
depreciation. We have experienced substantial increases in the
default rate in these four states during 2008 and we believe
this is primarily the result of home price depreciation. A
prolonged economic downturn with continued house price
depreciation in areas where we have large concentrations would
result in higher incurred losses.
Insurance regulations generally 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,
which is defined as the statutory surplus plus the statutory
contingency reserve. The Corrective Order that we are currently
operating under prohibits the writing of new insurance by Triad.
The amount of net risk for insurance in force at
December 31, 2008 and 2007 as presented below was computed
by applying the various percentage settlement options to the
insurance in force
98
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts, adjusted by risk ceded under reinsurance agreements,
any applicable aggregate stop-loss limits and deductibles.
Triads ratio is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net risk
|
|
$
|
11,019,036
|
|
|
$
|
11,967,179
|
|
Statutory surplus
|
|
$
|
88,027
|
|
|
$
|
197,713
|
|
Statutory contingency reserve
|
|
|
|
|
|
|
387,365
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,027
|
|
|
$
|
585,078
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio
|
|
|
125.2 to 1
|
|
|
|
20.5 to 1
|
|
|
|
|
|
|
|
|
|
|
On August 5, 2008, Triad and TGAC (collectively,
TGIC) entered into an Agreed Corrective Order with
the Division. The Corrective Order was implemented as a result
of the Companys decision to cease writing new mortgage
guaranty insurance and to commence a run-off of its existing
insurance in force as of July 15, 2008. Among other things,
the Corrective Order:
|
|
|
|
|
Required TGIC to submit a corrective plan to the Division;
|
|
|
|
Prohibited all stockholder dividends from TGIC to its parent
company without the prior approval of the Division;
|
|
|
|
Prohibited interest and principal payments on TGICs
surplus note to its parent company without the prior approval of
the Division;
|
|
|
|
Restricted TGIC from making any payments or entering into any
transaction that involves the transfer of assets to, or
liabilities from, any affiliated parties without the prior
approval of the Division;
|
|
|
|
Required TGIC to obtain prior written approval from the Division
before entering into certain transactions with unaffiliated
parties;
|
|
|
|
Required TGIC to meet with the Division in person or via
teleconference as necessary; and
|
|
|
|
Required TGIC to furnish to the Division certain reports,
agreements, actuarial opinions and information on an ongoing
basis at specified times.
|
The Company submitted a corrective plan to the Division as
required under the Corrective Order. The corrective plan it
submitted included, among other items, a five-year statutory
financial projection for TGIC and a detailed description of its
planned course of action to address its current financial
condition. The financial statements that form the basis of its
corrective plan were prepared in accordance with Statutory
Accounting Principles (SAP) set forth in the
Illinois Insurance Code. SAP differs from GAAP, which are
followed to prepare the financial statements presented in this
annual report on
Form 10-K.
The Company received approval of the corrective plan from the
Division in October 2008.
Since the approval of the Companys initial corrective
plan, the Company has revised the assumptions it initially
utilized in its run-off financial forecast model as a result of
a number of factors, including continued deteriorating economic
conditions impacting its financial condition, results of
operations and future prospects. The Companys new
assumptions produce a range of potential ultimate outcomes for
its run-off, but include projections showing that on a likely
case basis and absent additional action by the Division or
favorable changes in its business, the Company will report a
deficiency in policyholders surplus as calculated in
accordance with SAP as early as March 31, 2009 and
continuing at least through 2011. Although the Company currently
projects that this statutory insolvency will be temporary and
its run-off will ultimately be successful, the Company believes
such insolvency would likely lead to the institution by the
Division of receivership proceedings against TGIC if not
corrected. The Company is currently working with the Division to
structure a revised corrective plan to address this issue,
although
99
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
no assurance can be given that it will be successful in these
efforts. If the Company is unable to gain approval from the
Division for a revised corrective plan that addresses this
issue, the Division could place TGIC into receivership
proceedings, which could force the Company to seek protection
from creditors through a voluntary bankruptcy proceeding and the
Company would likely be unable to continue as a going concern.
Failure to comply with the provisions of the Corrective Order or
any other violation of the Illinois Insurance Code may result in
the imposition of fines or penalties or subject TGIC to further
legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of TGIC.
The Companys recurring losses from operations and
resulting decline in policyholders surplus as calculated
in accordance with SAP increases the likelihood that TGIC will
be placed into conservatorship or liquidated and raises
substantial doubt about the Companys ability to continue
as a going concern. The Companys consolidated financial
statements that are presented in this annual report on
Form 10-K
do not include any adjustments that reflect the financial risks
of TGIC entering receivership proceedings and assume that it
will continue as a going concern. The Company expects losses
from operations to continue and its ability to continue as a
going concern is dependent on the successful development,
approval, and implementation of a revised corrective plan.
|
|
9.
|
Related
Party Transactions
|
The Company pays companies affiliated through common ownership
for expenses incurred on behalf of Triad. The total expense
incurred for such items was $34,500 and $69,300 in 2008 and
2007, respectively.
|
|
10.
|
Employee
Benefit Plan
|
Most of the Companys employees are eligible to participate
in its 401(k) Profit Sharing Plan. Under the plan, employees are
automatically enrolled to contribute 4% of their salary unless
they elect to not participate or to participate at a different
contribution level. Employees may contribute up to 25% of their
annual compensation, up to a maximum of $15,500, as determined
by the Internal Revenue Service, for 2008. The Company makes a
matching contribution on behalf of each participating employee
equal to 100% of the first 3% of the employees deferred
salary, plus 50% of the employees deferred salary greater
than 3% but not exceeding 5%. The Companys expense
associated with the plan totaled $556,000 and $688,000 for the
years ended December 31, 2008 and 2007, respectively.
Certain premiums and losses are assumed from and ceded to other
insurance companies under various reinsurance agreements. Almost
all of the reinsurance is on an excess of loss basis and
includes lender-sponsored captives and an independent
reinsurance company. The ceding agreements principally provide
Triad with a risk management tool designed to spread certain
layers of risk to others and achieve a more favorable geographic
dispersion of risk.
100
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effects of reinsurance for the years ended December 31,
2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
318,199
|
|
|
$
|
334,406
|
|
Assumed
|
|
|
1
|
|
|
|
1
|
|
Ceded
|
|
|
(60,777
|
)
|
|
|
(55,507
|
)
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
257,423
|
|
|
$
|
278,900
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,073,328
|
|
|
$
|
380,244
|
|
Assumed
|
|
|
1
|
|
|
|
(1
|
)
|
Ceded
|
|
|
(150,028
|
)
|
|
|
(7,304
|
)
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
923,301
|
|
|
$
|
372,939
|
|
|
|
|
|
|
|
|
|
|
The Company cedes business to captive reinsurance subsidiaries
or affiliates of certain mortgage lenders (captives)
primarily under excess of loss reinsurance agreements.
Reinsurance recoverables on loss reserves and unearned premiums
ceded to these captives are backed by trust funds controlled by
Triad.
In addition to the lender sponsored captives, Triad maintains a
$95 million Excess-of-Loss reinsurance treaty that provides
a benefit when Triads risk-to-capital ratio exceeds
25-to-1 and the combined ratio exceeds 100% (the
attachment point). Once the attachment point has
been reached, following a one-time deductible of
$25 million, the carrier is responsible for the
reimbursement of all paid losses in each quarter that the
attachment point is breached up to the one-time $95 million
policy limit. The coverage period is for 10 years.
Additionally, terms of the treaty require Triad to continue the
payment of premiums to the reinsurer amounting to approximately
$2 million per year for the entire ten year period. The
reinsurance treaty attached at the end of the first quarter of
2008, however the reinsurance carrier subsequently provided
notice of termination of the agreement. The matter is currently
in arbitration and we expect a decision in the second quarter of
2009.
Reinsurance contracts do not relieve Triad from its obligations
to policyholders. Failure of the reinsurer to honor its
obligation could result in losses to Triad; consequently,
allowances are established for amounts deemed uncollectible.
Triad evaluates the financial condition of its reinsurers and
monitors credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers to
minimize its exposure to significant losses from reinsurer
insolvency.
|
|
12.
|
Long-Term
Stock Incentive Plan
|
In May 2006, the Companys stockholders approved the 2006
Long-Term Stock Incentive Plan (the Plan). Under the
Plan, certain directors, officers, and key employees are
eligible to receive various share-based compensation awards.
Stock options, restricted stock, phantom stock rights and other
equity awards may be awarded under the Plan for a fixed number
of shares with a requirement for stock options granted to have
an exercise price equal to or greater than the fair value of the
shares at the date of grant. Generally, most awards vest over
three years. Options granted under the Plan expire no later than
ten years following the date of grant. As of December 31,
2008, 1,244,779 shares were reserved and
852,868 shares were available for issuance under the Plan.
Gross compensation expense of approximately $4.3 million
along with the related tax benefit of approximately
$1.5 million was recognized in the financial statements for
the year ended December 31, 2008, as compared to gross
compensation expense of approximately $3.9 million and the
related tax benefit of approximately $1.4 million for the
year ended
101
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007. For the years ended December 31,
2008 and 2007, approximately $78,000 and $709,000, respectively,
of share-based compensation was capitalized as part of deferred
acquisition costs.
A summary of option activity under the Plan for the year ended
December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Term
|
|
|
|
(Dollars in thousands)
|
|
|
Outstanding, January 1, 2008
|
|
|
645,197
|
|
|
$
|
39.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
253,286
|
|
|
|
40.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
391,911
|
|
|
|
38.80
|
|
|
$
|
|
|
|
|
4.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2008
|
|
|
383,267
|
|
|
|
38.69
|
|
|
$
|
|
|
|
|
4.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock options is estimated on the date of
grant using a Black-Scholes pricing model. The weighted-average
assumptions used for options granted during the years ended
December 31, 2008 and 2007 are noted in the following
table. Since there were no options granted in 2008, the weighted
average assumptions are not applicable for 2008. The expected
volatilities are based on volatility of the Companys stock
over the most recent historical period corresponding to the
expected term of the options. The Company also uses historical
data to estimate option exercise and employee terminations
within the model. Separate groups of employees with similar
historical exercise and termination histories are considered
separately for valuation purposes. The risk-free rates for the
periods corresponding to the expected terms of the options are
based on U.S. Treasury rates in effect on the dates of
grant.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected volatility
|
|
|
n/a
|
|
|
|
31.7
|
%
|
Expected dividend yield
|
|
|
n/a
|
|
|
|
0.0
|
%
|
Expected term
|
|
|
n/a
|
|
|
|
5.0 years
|
|
Risk-free rate
|
|
|
n/a
|
|
|
|
4.5
|
%
|
No options were granted or exercised in 2008. The
weighted-average grant-date fair value of options granted during
the year ended December 31, 2007 was $15.74. The total
intrinsic value of options exercised during the year ended
December 31, 2007 was approximately $0.5 million.
A summary of nonvested restricted stock and phantom stock rights
activity under the Plan for the year ended December 31,
2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant-Date Fair Value
|
|
|
Nonvested, January 1, 2008
|
|
|
99,278
|
|
|
$
|
44.19
|
|
Granted
|
|
|
342,470
|
|
|
|
3.80
|
|
Vested
|
|
|
203,727
|
|
|
|
18.81
|
|
Cancelled
|
|
|
1,713
|
|
|
|
43.95
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2008
|
|
|
236,308
|
|
|
|
7.54
|
|
|
|
|
|
|
|
|
|
|
102
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of restricted stock and phantom stock rights are
determined based on the closing price of the Companys
shares on the grant date. The weighted-average grant-date fair
value of restricted stock and phantom stock rights granted
during the years ended December 31, 2008 and 2007 was $3.80
and $43.72, respectively.
As of December 31, 2008, there was $865,000 of unrecognized
compensation expense related to nonvested stock options,
restricted stock, and phantom stock rights granted under the
Plan. That expense is expected to be recognized over a
weighted-average period of 1.4 years. The total fair value
of stock options, restricted stock and phantom stock rights
vested during the years ended December 31, 2008 and 2007
was $4.3 million and $4.4 million, respectively.
The Company issues new shares upon exercise of stock options and
phantom stock rights.
|
|
13.
|
Fair
Value Measurement
|
Effective January 1, 2008, the Company adopted
SFAS 157, Fair Value Measurements, which establishes
a framework for measuring fair value under GAAP, clarifies the
definition of fair value within that framework, and expands
disclosures about the use of the fair value measurements. In
accordance with SFAS 157, the Company adopted the fair
value measurement on a prospective basis and accordingly has
provided the required disclosures only for the most recent
interim reporting date. The Company did not have any assets or
liabilities measured at fair value on a non-recurring basis as
of December 31, 2008. The following table summarizes the
assets measured at fair value on a recurring basis by the
FAS 157 fair value hierarchy levels described in
Note 1 and the source of the inputs in the determination of
fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
854,186
|
|
|
$
|
|
|
|
$
|
851,651
|
|
|
$
|
2,535
|
|
Equity securities
|
|
|
583
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
Real estate acquired in claim settlement
|
|
|
713
|
|
|
|
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
855,482
|
|
|
$
|
583
|
|
|
$
|
852,364
|
|
|
$
|
2,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant unobservable inputs (Level 3) were used in
determining the fair value on certain bonds in the fixed
maturities portfolio during this period. The following table
provides a reconciliation of the beginning and ending balances
of these Level 3 bonds and the related gains and losses
related to these assets during 2008.
Fair
Value Measurement Using Significant
Unobservable Inputs (Level 3)
Certain Bonds in Fixed Maturities AFS Portfolio
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
Beginning balance
|
|
$
|
7,402
|
|
Total gains and losses (realized and unrealized):
|
|
|
|
|
Included in operations
|
|
|
(270
|
)
|
Included in other comprehensive income
|
|
|
(819
|
)
|
Purchases, issuances and settlements
|
|
|
(3,983
|
)
|
Transfers in and/or out of Level 3
|
|
|
205
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,535
|
|
|
|
|
|
|
The amount of total gains and losses for the period included in
operations attributable to the change in unrealized gains or
losses relating to assets still held at the reporting date
|
|
$
|
(1,815
|
)
|
|
|
|
|
|
Gains and losses (realized and unrealized) included in
operations or other comprehensive losses for the year ended
December 31, 2008 are reported as net realized investment
losses as a loss of $270,273 and an unrealized loss through
other comprehensive loss of $1,544,687.
In 1998, the Company completed a $35.0 million private
offering of notes due January 15, 2028. Proceeds from the
offering, net of debt issue costs, totaled $34.5 million.
The notes, which represent unsecured obligations of the Company,
bear interest at a rate of 7.9% per annum and are non-callable.
|
|
15.
|
Fair
Value of Financial Instruments
|
The carrying values and fair values of financial instruments as
of December 31, 2008 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale
|
|
$
|
854,186
|
|
|
$
|
854,186
|
|
|
$
|
725,631
|
|
|
$
|
725,631
|
|
Equity securities available-for-sale
|
|
|
583
|
|
|
|
583
|
|
|
|
2,162
|
|
|
|
2,162
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
34,529
|
|
|
|
10,124
|
|
|
|
34,519
|
|
|
|
21,945
|
|
Credit facility
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
80,000
|
|
The fair values of cash, cash equivalents and short-term
investments approximate their carrying values due to their
short-term maturity or availability.
104
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of fixed maturity securities and equity
securities have been determined using quoted market prices for
securities traded in the public market or prices using bid or
closing prices for securities not traded in the public
marketplace.
Other investments represent investments in equity securities for
which there is no readily determinable market value. The fair
values of other investments approximate their cost.
The fair value of the Companys long-term debt is estimated
using discounted cash flow analysis based on the Companys
current incremental borrowing rates for similar types of
borrowing arrangements.
On June 18, 2008, the Board of Directors of the Company
approved transitioning the business of its primary insurance
operating subsidiary, Triad Guaranty Insurance Corporation
(Triad), into run-off. As part of the run-off, which
was initiated on July 15, 2008, Triad implemented a
reduction in workforce by terminating approximately
100 employees based primarily in the sales, marketing,
technology and underwriting functions. The remaining workforce
of approximately 150 employees is expected to remain
primarily to facilitate payment of legitimate claims and service
the remaining insurance portfolio during the run-off period. The
Company currently expects that the run-off period will continue
for approximately seven to twelve years.
As a result of the Boards decision to transition Triad
into run-off, the Company recorded an estimated non-recurring
pre-tax charge of approximately $8.3 million in other
operating costs on the Statement of Operations. These charges
included approximately $7.1 million in severance and
related personnel costs, approximately $1.0 million related
primarily to the abandonment of a portion of Triads main
office lease that is expected to continue through 2012, and
approximately $0.2 million related to the termination of
certain other leases, including those related to underwriting
offices, equipment and automobiles. Included in the severance
and related personnel costs are approximately $0.8 million
of non-cash charges representing the vesting of equity awards
that vest upon employee termination. At December 31, 2008,
there remained approximately $2.0 million of accrued
severance and related personnel costs and $817,000 of lease
abandonment costs. There have been no significant changes to the
original estimates since the initial establishment of the exit
cost accruals.
The Company is involved in litigation in the ordinary course of
business as well as the case named below. No pending litigation
is expected to have a material adverse effect on the financial
position of the Company.
On February 6, 2008, James L. Phillips served a complaint
against Triad Guaranty Inc., Mark K. Tonnesen and Kenneth W.
Jones in the United States District Court, Middle District of
North Carolina. The plaintiff purports to represent a class of
persons who purchased or otherwise acquired the common stock of
the Company between October 26, 2006 and November 10,
2008 and the complaint alleges violations of federal securities
laws by the Company and two of its present or former officers.
An extension to answer the complaint has been granted. We intend
to contest the lawsuit vigorously.
Triad maintains a $95 million Excess-of-Loss reinsurance
treaty that provides a benefit when Triads risk-to-capital
ratio exceeds 25-to-1 and the combined ratio exceeds 100% (the
attachment point). Once the attachment point has
been reached, following a one-time deductible of
$25 million, the carrier is responsible for the
reimbursement of all paid losses in each quarter that the
attachment point is breached up to the one-time $95 million
policy limit. The coverage period is for 10 years.
Additionally, terms of the treaty require Triad to continue the
payment of premiums to the reinsurer amounting to approximately
$2 million per year for the entire ten year period. The
reinsurance treaty attached at the end of the first quarter of
2008; however, in April 2008, the reinsurance carrier provided a
purported notice of termination of the agreement. By letter
dated May 5, 2008, Triad notified the reinsurer that we
considered the treaty to still be in effect and that we demanded
arbitration seeking a ruling that the reinsurance remained in
effect and requested that the reinsurer comply with terms of the
treaty. The arbitration took
105
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
place in front of a three-person panel in December 2008 and
January 2009, with post-hearing briefs and oral arguments in
February 2009. We expect a decision to be rendered by the
arbitration panel in the second quarter of 2009.
In January 2009, Triad established and funded a trust that would
hold assets as security for the performance by Triad of its
obligations under the Severance Pay Plan. The Severance Pay Plan
was established to provide benefits to eligible employees whose
employment with Triad is involuntarily terminated because of job
elimination, reduction in force,
and/or
restructuring. Both the trust and the severance plan are
scheduled to expire on December 31, 2009; however, both of
these can be extended through action of the Board of Directors.
The purpose of the trust is to protect severance payments from
creditors in the event Triad is placed in receivership.
Additionally, Triad established and funded a trust that would
hold assets as security for the performance by Triad of its
obligations under the 2009 Retention Bonus Plan. The Retention
Bonus Plan was established to provide benefits to eligible
employees who remain employed with Triad through
December 31, 2012. If these eligible employees are
involuntarily terminated without cause before December 31,
2012, the retention bonus is due upon termination. In January
2009, Triad transferred securities with a market value of
approximately $9.7 million from its investment portfolio to
fund these trusts. Investment income from these securities will
continue to accrue to Triad. Severance benefits, if any, will
accrue at such time as a decision is made and notification is
given to employees, while the expense of the long-term retention
bonus will accrue over the retention period.
In February 2009, the Company was notified by one of the captive
reinsurance companies of its intent to terminate the reinsurance
agreement between it and Triad as well as the trust agreement
supporting the reinsurance agreement. As a result of the
termination, all coverage will cease and the trust balances of
approximately $8.1 million supporting the reinsurance
agreement will revert to Triad. Reinsurance recoverables
amounting to the trust balance will be reduced and, as a result,
the transaction will have no impact on operations.
106
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
RELATED PARTIES
TRIAD GUARANTY INC.
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
Cost or
|
|
|
|
|
|
Which Shown
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
in Balance
|
|
|
|
Cost
|
|
|
Value
|
|
|
Sheet
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturity securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
19,665
|
|
|
$
|
20,168
|
|
|
$
|
20,168
|
|
State and municipal bonds
|
|
|
156,675
|
|
|
|
159,394
|
|
|
|
159,394
|
|
Corporate bonds
|
|
|
545,230
|
|
|
|
547,945
|
|
|
|
547,945
|
|
Mortgage backed
|
|
|
123,394
|
|
|
|
126,679
|
|
|
|
126,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
844,964
|
|
|
|
854,186
|
|
|
|
854,186
|
|
Equity securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
566
|
|
|
|
583
|
|
|
|
583
|
|
Short-term investments
|
|
|
40,565
|
|
|
|
40,653
|
|
|
|
40,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments other than investments in related parties
|
|
$
|
886,095
|
|
|
$
|
895,422
|
|
|
$
|
895,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Fixed maturities, available-for-sale
|
|
$
|
5,045
|
|
|
$
|
42,438
|
|
Equity securities, available-for-sale
|
|
|
|
|
|
|
216
|
|
Notes receivable from subsidiary
|
|
|
25,000
|
|
|
|
25,000
|
|
Investment in subsidiaries equity
|
|
|
|
|
|
|
544,184
|
|
Short-term investments
|
|
|
1,752
|
|
|
|
3,969
|
|
Cash
|
|
|
3,963
|
|
|
|
1,999
|
|
Accrued investment income
|
|
|
2,244
|
|
|
|
1,513
|
|
Income taxes recoverable
|
|
|
53
|
|
|
|
129
|
|
Other assets
|
|
|
1
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
38,058
|
|
|
$
|
619,815
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
|
|
|
$
|
80,000
|
|
Long-term debt
|
|
|
34,529
|
|
|
|
34,520
|
|
Accrued interest
|
|
|
1,275
|
|
|
|
1,355
|
|
Deferred income taxes
|
|
|
|
|
|
|
4,113
|
|
Investment in subsidiaries deficit
|
|
|
138,918
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
2
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
174,724
|
|
|
|
120,962
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
151
|
|
|
|
149
|
|
Additional paid-in capital
|
|
|
112,629
|
|
|
|
109,679
|
|
Accumulated other comprehensive income
|
|
|
6,063
|
|
|
|
13,407
|
|
Retained earnings (accumulated deficit)
|
|
|
(255,509
|
)
|
|
|
375,618
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(136,666
|
)
|
|
|
498,853
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
38,058
|
|
|
$
|
619,815
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
108
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Dividends from subsidiary (Triad)
|
|
$
|
|
|
|
$
|
30,000
|
|
Interest income
|
|
|
3,040
|
|
|
|
4,779
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,040
|
|
|
|
34,779
|
|
Realized investment gains (losses)
|
|
|
3,188
|
|
|
|
(4,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
6,228
|
|
|
|
30,548
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,558
|
|
|
|
4,376
|
|
Operating expenses
|
|
|
4,527
|
|
|
|
4,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,085
|
|
|
|
8,654
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and equity (deficit)
in undistributed income (loss) of subsidiaries
|
|
|
(1,857
|
)
|
|
|
21,894
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
Current
|
|
|
831
|
|
|
|
|
|
Deferred
|
|
|
3,837
|
|
|
|
(2,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,668
|
|
|
|
(2,296
|
)
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed loss of subsidiaries
|
|
|
2,811
|
|
|
|
24,190
|
|
Equity in undistributed loss of subsidiaries
|
|
|
(633,938
|
)
|
|
|
(101,648
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(631,127
|
)
|
|
$
|
(77,458
|
)
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
109
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(631,127
|
)
|
|
$
|
(77,458
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed loss of subsidiaries
|
|
|
633,938
|
|
|
|
101,648
|
|
Accrued investment income
|
|
|
(731
|
)
|
|
|
|
|
Other assets
|
|
|
366
|
|
|
|
(367
|
)
|
Deferred income taxes
|
|
|
(3,837
|
)
|
|
|
(2,296
|
)
|
Income taxes recoverable
|
|
|
76
|
|
|
|
(92
|
)
|
Accretion of discount on investments
|
|
|
39
|
|
|
|
(16
|
)
|
Amortization of deferred compensation
|
|
|
4,257
|
|
|
|
3,918
|
|
Amortization of debt issue costs
|
|
|
9
|
|
|
|
10
|
|
Accrued interest
|
|
|
(80
|
)
|
|
|
80
|
|
Realized investment (gains) losses on securities
|
|
|
(3,188
|
)
|
|
|
4,231
|
|
Other liabilities
|
|
|
(972
|
)
|
|
|
950
|
|
Other operating activities
|
|
|
(37
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,287
|
)
|
|
|
30,625
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(5,131
|
)
|
|
|
(87,786
|
)
|
Sales and maturities
|
|
|
41,855
|
|
|
|
75,290
|
|
Cash contributed to subsidiaries:
|
|
|
|
|
|
|
|
|
Triad
|
|
|
|
|
|
|
(50,000
|
)
|
TGICC
|
|
|
|
|
|
|
(45,045
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
Sales
|
|
|
44,295
|
|
|
|
|
|
Change in short-term investments
|
|
|
2,217
|
|
|
|
(3,756
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
83,236
|
|
|
|
(111,297
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
(80,000
|
)
|
|
|
80,000
|
|
Excess tax benefits related to share based payments
|
|
|
15
|
|
|
|
175
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(79,985
|
)
|
|
|
80,791
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
1,964
|
|
|
|
119
|
|
Cash at beginning of year
|
|
|
1,999
|
|
|
|
1,880
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
3,963
|
|
|
$
|
1,999
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
110
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRIAD GUARANTY INC.
(Parent Company)
SUPPLEMENTARY NOTES
|
|
1.
|
Basis of
Presentation and Significant Accounting Policies
|
In the parent company financial statements, the Companys
investment in its subsidiaries is stated at cost plus equity in
undistributed losses of the subsidiaries. Dividends received
from the subsidiaries are shown as investment income. The
Companys share of net income of its subsidiaries is
included in income using the equity method. The accompanying
Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes
to Consolidated Financial Statements included as part of this
Form 10-K.
Triad Guaranty Inc. (the Company) is a holding
company which, through one of its wholly-owned subsidiaries,
Triad Guaranty Insurance Corporation (Triad), has
provided private mortgage insurance coverage in the United
States to mortgage lenders to protect the lender against loss
from defaults on mortgage loans. Triad ceased issuing new
commitments for mortgage guaranty insurance coverage on
July 15, 2008 and is operating the business in run-off
under a Corrective Order with the Division. The term
run-off, as used in these financial statements,
refers to Triad no longer writing new mortgage insurance
policies, but continuing to service the existing policies.
Servicing existing policies includes: receiving premiums on
policies that remain in force; cancelling coverage at the
insureds request; terminating policies for non-payment of
premium; working with borrowers in default to remedy the default
and/or
mitigate the Companys loss; and settling all legitimate
filed claims per the Companys contractual obligations. The
Corrective Order, among other items, allows management to
continue to operate Triad under close supervision and includes
restrictions on the distribution of dividends or interest on
notes payable to its parent by Triad. In 2009, Triad Guaranty
Insurance Corporation Canada repatriated $44 million of the
original $45 million capital contribution, which included a
realized gain of $3 million on foreign currency exchange.
The Company has prepared its financial statements on a going
concern basis, which contemplates the realization of assets and
the satisfaction of liabilities and commitments in the normal
course of business. However, there is substantial doubt as to
the Companys ability to continue as a going concern. This
uncertainty is based on the ability of Triad to comply with the
run-off provisions of the Corrective Order, the Companys
recurring losses from operations and a deficit in assets at
December 31, 2008. The financial statements do not include
any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts of
liabilities that might be necessary should the Company be unable
to continue in existence.
The parent company incurred significant operating losses in 2007
and in 2008 and had a deficit in assets at December 31,
2008 of $136.7 million. The losses are the result of
increased defaults and foreclosures arising from steeply
declining home prices as the increasing impact of the
U.S. recession further impacted the mortgages insured by
the Company. Additionally, Triad, the main operating insurance
subsidiary, is operating under a Corrective Order with the
Division, pursuant to which it can no longer issue commitments
for new insurance and has placed its existing insurance business
in run-off. Terms of the Corrective Order required Triad to
submit a corrective plan which included a five-year projection
of operations and financial condition that indicated a solvent
run-off. Subsequent to the approval of the corrective plan,
economic conditions deteriorated as house prices continued their
decline, unemployment rates increased, the mortgage markets
deteriorated and the U.S. government formally concluded
that the United States is in a deep recession. Triad Guaranty
Assurance Corporation is also operating under a similar
Corrective Order.
Since the approval of the Companys initial corrective
plan, the Company revised the assumptions it initially utilized
as a result of continued deteriorating economic conditions
impacting its financial condition, results of operations and
future prospects. The Companys new assumptions produce a
range of potential ultimate outcomes for its run-off and project
that absent additional action by the Division or favorable
changes in its business, the Company will report a deficiency in
policyholders surplus as calculated under SAP as early as
March 31, 2009 and
111
continuing through 2011. Triad follows certain statutory
accounting practices that differ from U.S. GAAP related to
reserves and reinsurance recoveries and without which there
would have been a deficiency in policyholders surplus for
statutory reporting purposes as of December 31, 2008.
Management is currently working with the Division to structure a
revised corrective plan in a manner that is expected to provide
for a solvent run-off. If the revised corrective plan is
unsuccessful, the Division may be forced to place Triad into
receivership, which would effectively compel the parent, Triad
Guaranty Inc. to declare bankruptcy. The ability to successfully
develop, gain approval of and implement the revised corrective
plan by management is unknown at this time.
The cost or amortized cost and the fair value of investments,
other than the investment in the subsidiaries held by the parent
company, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
At December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
5,040
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
5,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,040
|
|
|
|
5
|
|
|
|
|
|
|
|
5,045
|
|
|
|
|
|
Short-term investments
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,792
|
|
|
|
5
|
|
|
|
|
|
|
|
6,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
At December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
27,925
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,925
|
|
Municipal
|
|
|
14,106
|
|
|
|
575
|
|
|
|
(168
|
)
|
|
|
14,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,031
|
|
|
|
575
|
|
|
|
(168
|
)
|
|
|
42,438
|
|
Equity securities
|
|
|
250
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
216
|
|
Short-term investments
|
|
|
3,969
|
|
|
|
|
|
|
|
|
|
|
|
3,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
46,250
|
|
|
|
575
|
|
|
|
(202
|
)
|
|
|
46,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major categories of the parent companys investment income
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
485
|
|
|
$
|
1,779
|
|
Equity securities
|
|
|
|
|
|
|
18
|
|
Dividends received from subsidiary (Triad)
|
|
|
|
|
|
|
30,000
|
|
Cash and short-term investments
|
|
|
371
|
|
|
|
790
|
|
Note receivable from subsidiary
|
|
|
2,225
|
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,081
|
|
|
|
34,812
|
|
Expenses
|
|
|
41
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,040
|
|
|
|
34,779
|
|
|
|
|
|
|
|
|
|
|
112
In 1998, the Company completed a $35.0 million private
offering of notes due January 15, 2028. Proceeds from the
offering, net of debt issue costs, totaled $34.5 million.
The notes, which represent unsecured obligations of the Company,
bear interest at a rate of 7.9% per annum and are non-callable.
113
EXHIBIT INDEX
Form 10-K
for Fiscal Year Ended December 31, 2008
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1
|
|
Certificate of Incorporation of the Registrant, as amended
May 23, 1997; previously filed as Exhibit 3.1 to the
Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 1997, filed
August 12, 1997, and herein incorporated by reference.
|
|
3
|
.2
|
|
Certificate of Amendment of Certificate of Incorporation of the
Registrant, effective as of May 20, 1998; previously filed
as Exhibit 3.2 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed
April 1, 2008, and herein incorporated by reference.
|
|
3
|
.3
|
|
Bylaws of the Registrant, as amended on March 21, 2003;
previously filed as Exhibit 3.2 to the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2002, filed
March 27, 2003, and herein incorporated by reference.
|
|
3
|
.4
|
|
Amendment to Bylaws of the Registrant, effective
November 20, 2008; previously filed as Exhibit 3.2 to
the Registrants Current Report on
Form 8-K,
filed November 25, 2008, and herein incorporated by
reference.
|
|
4
|
.1
|
|
Form of common stock certificate; previously filed as
Exhibit 4 to the Registrants Registration Statement
on
Form S-1,
filed October 22, 1993, and herein incorporated by
reference.
|
|
4
|
.2
|
|
Indenture, dated as of January 15, 1998, between the
Registrant and Bankers Trust Company; previously filed as
Exhibit 4.2 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 1997, filed
March 26, 1998, and herein incorporated by reference.
|
|
10
|
.6
|
|
Registration Agreement among the Registrant, Collateral
Investment Corp. and Collateral Mortgage, Ltd.; previously filed
as Exhibit 10.6 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, filed
March 28, 1994, and herein incorporated by reference.
|
|
10
|
.16
|
|
Economic Value Added Incentive Bonus Program (Senior
Management); previously filed as Exhibit 10.16 to the
Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 1996, filed
March 27, 1997, and herein incorporated by reference.
|
|
10
|
.21
|
|
Excess of Loss Reinsurance Agreement, effective as of
December 31, 1999, between Triad Guaranty Insurance
Corporation, Capital Mortgage Reinsurance Company and Federal
Insurance Company; previously filed as Exhibit 10.21 to the
Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 1999, filed
March 29, 2000, and herein incorporated by reference.
|
|
10
|
.22
|
|
Excess of Loss Reinsurance Agreement, effective as of
January 1, 2001, between Triad Guaranty Insurance
Corporation and Ace Capital Mortgage Reinsurance Company;
previously filed as Exhibit 10.22 to the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000, filed
March 30, 2001, and herein incorporated by reference.
|
|
10
|
.23
|
|
Employment Agreement, dated May 1, 2002, between the
Registrant and Earl F. Wall; previously filed as
Exhibit 10.23 to the Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2002, filed
August 14, 2002, and herein incorporated by reference.*
|
|
10
|
.26
|
|
Employment Agreement, dated June 14, 2002, between the
Registrant and Kenneth C. Foster; previously filed as
Exhibit 10.26 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2002, filed
March 27, 2003, and herein incorporated by reference.*
|
|
10
|
.27
|
|
Consulting Agreement, dated December 9, 2004, by and
between the Registrant, Triad Guaranty Insurance Corporation,
Triad Guaranty Assurance Company and Collateral Mortgage, Ltd.;
previously filed as Exhibit 10.27 to the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 14, 2005, and herein incorporated by reference.
|
|
10
|
.28
|
|
Agreement for Administrative Services, effective January 1,
2005, between and among Collateral Mortgage, Ltd., Collat, Inc.,
New South Federal Savings Bank, the Registrant and Triad
Guaranty Insurance Corporation; previously filed as
Exhibit 10.28 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 14, 2005, and herein incorporated by reference.
|
|
10
|
.30
|
|
Exchange Agreement, dated as of May 18, 2005, by and among
the Registrant, Collateral Investment Corp. and the Shareholders
of Collateral Investment Corp. listed on the signature pages
thereto; previously filed as Exhibit 10.30 to the
Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2005, filed
August 8, 2005, and herein incorporated by reference.
|
115
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.32
|
|
Employment Agreement and Related Letter of Agreement, dated
September 9, 2005, between the Registrant and Mark K.
Tonnesen; previously filed as Exhibit 10.32 to the
Registrants Current Report on
Form 8-K,
filed September 16, 2005, and herein incorporated by
reference.*
|
|
10
|
.33
|
|
Employment Agreement, dated January 6, 2006, by and between
Ronnie D. Kessinger and the Registrant; previously filed as
Exhibit 10.33 to the Registrants Current Report on
Form 8-K,
filed January 11, 2006, and herein incorporated by
reference.*
|
|
10
|
.34
|
|
Summary of Director Compensation Plan, effective as of
January 1, 2006; previously filed as Exhibit 10.34 to
the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed
April 1, 2008, and herein incorporated by reference.*
|
|
10
|
.35
|
|
Form of Triad Guaranty Inc. 2006 Long-Term Stock Incentive Plan;
previously filed as Exhibit 10.35 to the Registrants
Current Report on
Form 8-K,
filed May 23, 2006, and herein incorporated by reference.*
|
|
10
|
.36
|
|
Amendment to Employment Agreement, dated July 15, 2006,
between Ronnie D. Kessinger and the Registrant; previously filed
as Exhibit 10.36 to the Registrants Current Report on
Form 8-K,
filed July 17, 2006, and herein incorporated by reference.*
|
|
10
|
.37
|
|
Agreement, dated March 30, 2006, entered into between the
Registrant and Kenneth W. Jones; previously filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K,
filed April 5, 2006, and herein incorporated by reference.*
|
|
10
|
.38
|
|
Resignation and Release Agreement, dated March 20, 2006,
entered into by and between the Registrant and Eric B. Dana;
previously filed as Exhibit 10.2 to the Registrants
Current Report on
Form 8-K,
filed April 5, 2006, and herein incorporated by reference.*
|
|
10
|
.39
|
|
Employment Agreement, dated August 15, 2006, between the
Registrant and Kenneth N. Lard; previously filed as
Exhibit 10.37 to the Registrants Current Report on
Form 8-K,
filed August 21, 2006, and herein incorporated by
reference.*
|
|
10
|
.40
|
|
Amendment to Letter Agreement, dated December 26, 2006,
between Mark K. Tonnesen and the Registrant; previously filed as
Exhibit 10.40 to the Registrants Current Report on
Form 8-K,
filed December 28, 2006, and herein incorporated by
reference.*
|
|
10
|
.41
|
|
Executive/Key Employee Phantom Stock Award Agreement between the
Registrant and Mark K. Tonnesen, dated December 26, 2006;
previously filed as Exhibit 10.41 to the Registrants
Current Report on
Form 8-K,
filed December 28, 2006, and herein incorporated by
reference.*
|
|
10
|
.42
|
|
Second Amendment to Employment Agreement, dated January 18,
2007, between Ronnie D. Kessinger and the Registrant; previously
filed as Exhibit 10.42 to the Registrants Current
Report on
Form 8-K;
filed January 19, 2007, and herein incorporated by
reference.*
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|
10
|
.43
|
|
Form of Executive/Key Employee Restricted Stock Agreement under
Triad Guaranty Inc. 2006 Long-Term Stock Incentive Plan;
previously filed as Exhibit 10.43 to the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
March 16, 2007, and herein incorporated by reference.*
|
|
10
|
.44
|
|
Form of Executive Stock Option Agreement under Triad Guaranty
Inc. 2006 Long-Term Stock Incentive Plan; previously filed as
Exhibit 10.44 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
March 16, 2007, and herein incorporated by reference.*
|
|
10
|
.45
|
|
Form of Outside Director Restricted Stock Agreement under Triad
Guaranty Inc. 2006 Long-Term Stock Incentive Plan; previously
filed as Exhibit 10.45 to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
March 16, 2007, and herein incorporated by reference.*
|
|
10
|
.46
|
|
Form of Outside Director Stock Option Agreement under Triad
Guaranty Inc. 2006 Long-Term Stock Incentive Plan; previously
filed as Exhibit 10.46 to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
March 16, 2007, and herein incorporated by reference.*
|
|
10
|
.47
|
|
Summary of Director Compensation Plan, effective as of
May 17, 2007; previously filed as Exhibit 10.47 to the
Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed
April 1, 2008, and herein incorporated by reference.*
|
|
10
|
.48
|
|
Credit Agreement, dated as of June 28, 2007, among the
Registrant, Bank of America, N.A., and the other lenders party
thereto; previously filed as Exhibit 10.47 to the
Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2007, filed
August 9, 2007, and herein incorporated by reference.
|
116
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.49
|
|
Form of 2008 Executive/Key Employee Restricted Stock Award
Agreement pursuant to the 2006 Long-Term Stock Incentive Plan;
previously filed as Exhibit 10.48 to the Registrants
Current Report on
Form 8-K,
filed March 4, 2008 and herein incorporated by reference.*
|
|
10
|
.50
|
|
Employment Agreement, dated March 28, 2008, between the
Registrant and Kenneth C. Foster; previously filed as
Exhibit 10.50 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007, filed April 1,
2008, and herein incorporated by reference.*
|
|
10
|
.51
|
|
Summary of 2008 Executive Retention Program; previously filed as
Exhibit 10.51 to the Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2008, filed
May 12, 2008, and herein incorporated by reference.*
|
|
10
|
.52
|
|
Summary of 2008 Executive Severance Program; previously filed as
Exhibit 10.52 to the Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2008, filed
May 12, 2008, and herein incorporated by reference.*
|
|
10
|
.53
|
|
Amended and Restated Employment Agreement, dated April 23,
2008, between the Registrant and Mark K. Tonnesen; previously
filed as Exhibit 10.53 to the Registrants Quarterly
Report on
Form 10-Q
for the quarterly period ended March 31, 2008, filed
May 12, 2008, and herein incorporated by reference.*
|
|
10
|
.54
|
|
Letter Agreement, dated July 17, 2008, between the
Registrant and Mark K. Tonnesen; previously filed as
Exhibit 10.54 to the Registrants Current Report on
Form 8-K,
filed July 17, 2008, and herein incorporated by reference.*
|
|
10
|
.55
|
|
Letter Agreement, dated July 17, 2008, between the
Registrant and William T. Ratliff, III; previously filed as
Exhibit 10.55 to the Registrants Current Report on
Form 8-K,
filed July 17, 2008, and herein incorporated by reference.*
|
|
10
|
.56
|
|
Letter Agreement, dated October 22, 2008, between the
Registrant and Kenneth W. Jones; previously filed as
Exhibit 10.56 to the Registrants Current Report on
Form 8-K,
filed October 22, 2008, and herein incorporated by
reference.*
|
|
10
|
.57
|
|
Summary of 2009 Executive Compensation Program; previously filed
as Exhibit 10.57 to the Registrants Current Report on
Form 8-K,
filed November 25, 2008, and herein incorporated by
reference.*
|
|
10
|
.58
|
|
Form of Executive/Key Employee Phantom Stock Award Agreement
under Triad Guaranty Inc. 2006 Long-Term Stock Incentive Plan;
previously filed as Exhibit 10.58 to the Registrants
Current Report on
Form 8-K,
filed January 29, 2009, and herein incorporated by
reference.*
|
|
10
|
.59
|
|
Summary of Board of Directors Compensation Program, effective
October 2008.*
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to
Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.1
|
|
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
|
|
|
|
|
Our SEC file number reference for documents filed with the SEC
pursuant to the Securities Exchange Act of 1934, as amended, is
000-22342.
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
** |
|
The following exhibit shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934,
or otherwise subject to the liability of that Section. In
addition, Exhibit No. 32.1 shall not be deemed
incorporated into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934. |
117