e10vk
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, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-22342
Triad Guaranty Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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56-1838519
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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101 South Stratford Road,
Winston-Salem, North Carolina
(Address of principal
executive offices)
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27104
(Zip Code)
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Registrants telephone number, including area code:
(336) 723-1282
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.01 per share
(Title of class)
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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 þ
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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: $7,402,662 as of
June 30, 2009, 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 5, 2010, was
15,258,128.
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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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Triad Guaranty Inc.
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Part III
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Proxy Statement for 2010 Annual Meeting of Stockholders
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PART I
Overview
of Triad
Triad Guaranty Inc. (TGI) is a holding company
which, through its wholly-owned subsidiary, Triad Guaranty
Insurance Corporation (TGIC), historically has
provided mortgage insurance coverage in the United States.
Mortgage insurance 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, mortgage insurance reduces,
and in some instances eliminates, any loss to the insured
lender. Mortgage insurance 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
government-sponsored entities or GSEs. Investors and
lenders also purchase mortgage insurance to obtain additional
default protection or capital relief on loans with equity of
greater than 20%.
TGIC 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, 2009, CHL owns 16.9% of the outstanding common
stock of TGI. TGI was incorporated in 1993 in the state of
Delaware for the purpose of holding all of the outstanding stock
of TGIC and to undertake the initial public offering of its
common stock, which was completed in November 1993.
Unless the context requires otherwise, references to
Triad in this annual report on
Form 10-K
refer to the operations of TGIC and its wholly-owned subsidiary,
Triad Guaranty Assurance Corporation (TGAC).
References to we, us, our,
and the Company refer collectively to the operations
of TGI and Triad.
TGIC is an Illinois-domiciled insurance company and TGAC is an
Illinois-domiciled reinsurance company. The Illinois Department
of Insurance (the Insurance Department) is the
primary regulator of both TGIC and TGAC. The Illinois Insurance
Code grants broad powers to the Insurance Department and its
director (collectively, the Department) to enforce
rules or exercise discretion over almost all significant aspects
of our insurance business.
Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and is operating its
business in run-off under two Corrective Orders issued by the
Department, as discussed further in this Item 1. The first
Corrective Order was issued in August 2008. The second
Corrective Order was issued in March 2009 and subsequently
amended in May 2009. As used in this report, the term
run-off means writing no new mortgage insurance
policies, but continuing to service 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; reviewing policies for the existence of
misrepresentation, fraud or non-compliance with stated programs;
and settling all legitimate filed claims per the provisions of
the policies and the two Corrective Orders issued by the
Department. The term settled, as used in this report
in the context of the payment of a claim, refers to the
satisfaction of Triads obligations following the
submission of valid claims by our policyholders. Prior to
June 1, 2009, valid claims were settled solely by a cash
payment. Since June 1, 2009, valid claims have been settled
by a combination of 60% in cash and 40% in the form of a
deferred payment obligation (DPO), as discussed
further in this Item 1. The Corrective Orders, among other
things, allow management to continue to operate Triad under the
close supervision of the Department, include restrictions on the
distribution of dividends or interest on notes payable to TGI by
Triad, and include requirements on the payment structure of
claims. Failure to comply with the provisions of the Corrective
Orders could result in the imposition of fines or penalties or
subject Triad to further legal proceedings, including
receivership proceedings for the conservation, rehabilitation or
liquidation of Triad.
On December 1, 2009, we sold our information technology and
operating platform to Essent Guaranty, Inc.
(Essent), a new mortgage insurer. Under the terms of
the purchase agreement, Essent acquired all of our proprietary
mortgage insurance software and substantially all of the
supporting hardware, as well as certain other assets, in
exchange for up to $30 million in cash and the assumption
by Essent of certain contractual obligations.
1
Approximately $15 million of the consideration is fixed and
up to an additional $15 million is contingent on Essent
writing a certain minimum amount of insurance in the five-year
period following closing. During the 2009 fourth quarter, we
received the initial $10 million installment of the
purchase price. Essent has established its operations and
technology center in Winston-Salem, North Carolina and a number
of our former information technology and operations employees
have joined Essent as contemplated by the agreement. At the
closing of the transaction with Essent, we also entered into a
services agreement, pursuant to which Essent is providing
ongoing information systems maintenance and services, customer
service and policy administration support to Triad. Triad may,
at any time during the period beginning two years and ending
seven years after the closing of the transaction with Essent,
obtain a copy of the program object code, source code and
documentation relating to the proprietary mortgage insurance
software developed by Triad and sold in the transaction, solely
for its own internal business purposes. Should Triad exercise
this option, the services agreement would terminate and any
remaining contingent amounts owed under the purchase agreement
would no longer be payable to Triad. See Item 1A,
Risk Factors for more information on the risks
associated with this transaction.
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.
Item 1A of this annual report on
Form 10-K
discusses the risk factors that could affect our revenue,
expenses and financial condition. These risk factors may also
cause our actual results to differ materially from the results
contemplated by any forward-looking statements we may make.
Investors should consider these risk factors carefully in
reading this annual report.
Our office is 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 our property and equipment, consisting primarily
of computer equipment and software (other than those assets sold
to Essent as noted above) are the extent of our long-lived
assets. Our telephone number is
(336) 723-1282.
Accounting
Principles
In reading this annual report, it is important to understand the
difference between accounting principles generally accepted in
the United States of America (GAAP) and statutory
accounting principles applicable to insurance companies
(SAP) and how we use these accounting principles. As
an insurance company, Triad is required to file financial
statements prepared in accordance with SAP with the insurance
departments of the states in which it conducts business.
Furthermore, the financial statements for Triad that are
provided to the Department and that form the basis for our
corrective plan required by the Corrective Orders were prepared
in accordance with SAP as set forth in the Illinois Insurance
Code or prescribed by the Department.
In our SEC filings, however, we are required to prepare our
financial statements in accordance with GAAP. The financial
statements presented in this annual report on
Form 10-K
are thus presented on a GAAP-basis, rather than a SAP-basis.
At December 31, 2009, we reported a deficit in assets under
GAAP of $706.4 million. A deficit in assets occurs when
recorded liabilities exceed recorded assets in financial
statements prepared under GAAP. Triad, however, reported
policyholders surplus under SAP of $122.8 million. A
policyholders surplus occurs when recorded assets exceed
recorded liabilities in financial statements prepared under SAP.
The primary differences between these results using GAAP and SAP
were the methodology utilized for the establishment of reserves
and the reporting requirements relating to the DPO stipulated in
the second Corrective Order. Triad did not report a deficiency
in policyholders surplus, which occurs when recorded
liabilities exceed recorded assets in financial statements
prepared under SAP, because of the reporting requirements
relating to the DPO under SAP. The second Corrective Order was
designed in part to help Triad maintain its policyholders
surplus. While a deficit in assets under GAAP is not necessarily
a measure of insolvency, a deficiency in policyholders
surplus under SAP could be deemed such a measure. We believe
that if Triad were to report an
other-than-temporary
deficiency in policyholders surplus under SAP, Illinois
law may require the Department to seek receivership of Triad,
which could lead TGI to institute a proceeding seeking relief
from creditors under U.S. bankruptcy laws.
2
Corrective
Orders
Triad has entered into two Corrective Orders with the
Department. The first Corrective Order was entered into on
August 5, 2008 and remains in effect. This 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, that Corrective Order:
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Required Triad to submit a corrective plan to the Department;
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Prohibits all stockholder dividends from Triad to TGI without
the prior approval of the Department;
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Prohibits interest and principal payments on Triads
surplus note to TGI without the prior approval of the Department;
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Restricts Triad 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 Department;
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Requires Triad to obtain prior written approval from the
Department before entering into certain transactions with
unaffiliated parties;
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Requires Triad to meet with the Department in person or via
teleconference as necessary; and
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Requires Triad to furnish to the Department 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 Department as required
under the initial Corrective Order. The corrective plan
included, among other items, a five-year statutory financial
projection for Triad and a detailed description of our planned
course of action to address our financial condition. The
financial projections that form the basis of our corrective plan
were prepared in accordance with SAP as set forth in the
Illinois Insurance Code. We received approval of the corrective
plan from the Department in October 2008.
Following the approval of the initial corrective plan, in the
first quarter of 2009 we revised the assumptions initially
utilized as a result of continued deteriorating economic
conditions impacting our financial condition, results of
operations and future prospects. The revised assumptions
produced a range of potential ultimate outcomes for our run-off,
but included projections showing that absent additional action
by the Department or favorable changes in our business, we would
have reported a deficiency in policyholders surplus as
calculated in accordance with SAP as early as March 31,
2009. If this statutory insolvency had occurred, the Department
likely would have instituted a receivership proceeding against
Triad, which in turn would likely have led to the institution of
bankruptcy proceedings by TGI. In an effort to protect existing
policyholders, the Department issued the second Corrective Order
effective on March 31, 2009, as amended on May 26,
2009. The second Corrective Order stipulates or prescribes:
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Effective June 1, 2009, all valid claims under Triads
mortgage guaranty insurance policies are settled 60% in cash and
40% by recording a DPO;
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At March 31, 2009, Triad was required to adjust surplus and
reserves reflecting the impact of the second Corrective Order on
future settled claims;
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The DPO requires that we accrue a carrying charge based on the
investment yield earned by Triads investment portfolio;
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Triad will establish an escrow account at least equal to the DPO
balance and any associated carrying charges;
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Triad will require that any risk or obligation of any captive
reinsurer must be paid in full, and will deposit any excess
reinsurance recovery above the 60% cash payment into an escrow
account;
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Payment of the DPO and the carrying charge is subject to
Triads future financial performance and requires the
approval of the Department;
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Procedures to account for the impact of the second Corrective
Order in the financial statements prepared in accordance with
SAP;
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Upon payment of a claim under these provisions, Triad is deemed
to have fully satisfied its obligations under the respective
insurance policy;
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Other restrictions and requirements affecting the payment and
transferability of the DPOs and associated carrying
charge; and
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Certain reporting requirements.
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The DPO recording requirements of the second Corrective Order
became effective on June 1, 2009. At December 31,
2009, the recorded DPO, including a carrying charge of
$2.1 million, amounted to $168.4 million. The
recording of a DPO does not impact reported settled losses as we
continue to report the entire amount of a claim in our statement
of operations. The accounting for the DPO on a SAP basis is
similar to a surplus note which is reported as a component of
statutory surplus; accordingly, any repayment of the DPO or the
associated carrying charge requires approval of the Department.
However, in our financial statements prepared in accordance with
GAAP included in this report, the DPO is reported as a liability.
Failure to comply with the provisions of the Corrective Orders
or any other violation of the Illinois Insurance Code may result
in the imposition of fines or penalties or subject Triad to
further legal proceedings, including the institution by the
Department of receivership proceedings for the conservation,
rehabilitation or liquidation of Triad. See Item 1A,
Risk Factors for more information.
Going
Concern
Prior to the issuance of the second Corrective Order, our
recurring losses from operations and resulting decline in
policyholders surplus as calculated in accordance with SAP
increased the likelihood that Triad would be placed into
receivership and raised substantial doubt about our ability to
continue as a going concern. The positive impact on surplus
resulting from the second Corrective Order has resulted in Triad
reporting a policyholders surplus in its SAP financial
statements of $122.8 million at December 31, 2009, as
opposed to a deficiency in policyholders surplus of
$597.8 million on the same date had the second Corrective
Order not been implemented. While implementation of the second
Corrective Order has deferred the institution of an involuntary
receivership proceeding, no assurance can be given that the
Department will not seek receivership of Triad in the future.
The Department may seek receivership of Triad based on its
determination that Triad will ultimately become insolvent or for
other reasons stated above. If the Department were to seek
receivership of Triad, TGI could be compelled to institute a
proceeding seeking relief from creditors under
U.S. bankruptcy laws. Our consolidated financial statements
that are presented in this report do not include any adjustments
that reflect the financial risks of Triad 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
implementation of the revised corrective plan. See Item 1A,
Risk Factors for more information about our
financial solvency and going concern risks and uncertainties.
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 Department
in the implementation and the oversight of the Corrective Orders.
Overview
of Market Conditions
The conditions of the real estate, mortgage and financial
markets remain depressed. While recent economic data seems to
indicate increasing stability in the residential real estate
market, the supply of unsold real estate and foreclosed
properties, the general lack of credit availability and a
significant decline in property values continue to be obstacles
to any significant rebound in the real estate market.
Furthermore, the employment situation is at recessionary levels
with the national unemployment rate near 10%.
Financial institutions continue to face capital constraints due
to the decline in the value of assets, including residential
mortgage related assets. Financial institutions in general have
responded to these capital constraints by reducing the
availability of credit and tightening lending requirements,
which in turn have impacted the ability of borrowers to
refinance loans. In addition, tight credit markets also limit
the flexibility of borrowers when dealing with a loan in
default, and may lead to a greater number of foreclosures.
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According to the most recent S&P/Case-Shiller Home Price
Indices, based on data through December 2009, property values
have declined 30.0% and 29.4% in the 10-City Composite and
20-City Composite indices, respectively, from the second quarter
2006 housing peak. The decline in property values has
particularly affected homeowners who originated mortgage debt
during 2006 and 2007 with high
loan-to-value
ratios and who now owe more on their mortgage than the property
is worth. Furthermore, insurance policies on mortgages in
California, Florida, Arizona, and Nevada (collectively, the
distressed markets) comprise 32% of our risk in
force and these states have experienced the greatest declines in
property values.
The mortgage industry has also seen an increase in so-called
strategic defaults in which borrowers who possess
the apparent ability to make loan payments nevertheless elect to
default on a mortgage, ostensibly because the loan balance
exceeds the current value of the underlying property. Strategic
defaults have been advocated in media reports despite the
negative impact on a borrowers future credit and their
acceptance represents a cultural change in the United States.
Although this information is difficult to track, we believe the
occurrence of strategic defaults increased significantly during
2009 and this trend may continue into 2010.
The national unemployment rate is currently near 10% and many
economic forecasts do not project significant improvement in the
employment situation until 2011. Furthermore, it has been noted
by many economists that the actual employment picture may be
much worse because the unemployment rate only captures those who
are actively looking for employment, and does not account for
those who have ceased looking for employment as well as workers
who are under-employed. A prolonged period of high unemployment
will continue to adversely impact our business.
Government
Initiatives
Since the latter part of 2008, several programs have been
initiated by the federal government and implemented through the
GSEs and lenders that are, in general, designed to prevent
foreclosures and provide relief to homeowners and to the
financial markets. These programs involve both modifications to
the original terms of existing mortgages and complete
refinancings. These programs are designed to provide a means for
borrowers to qualify for lower payments by modifying the
interest rate or extending the term of the mortgage. Several of
these programs have subsequently been expanded or extended and
may continue to change as the federal government continues to
seek ways to help prevent foreclosures.
In December 2008, the federal government instituted a program to
purchase mortgage-backed securities that were guaranteed by
Fannie Mae, Freddie Mac, or the Government National Mortgage
Association. The purpose of the program is to support the
housing market and foster improved conditions in the financial
markets by reducing the cost and increasing the availability of
credit for the purchase of homes. We believe this program is
largely responsible for the relatively low mortgage rates that
were available in 2009 and are currently available. The federal
government has indicated that it intends to gradually exit the
purchase program in 2010. If the government were to
significantly reduce its level of participation or cease the
program entirely, we believe mortgage rates would increase,
which would exacerbate our loss mitigation opportunities.
In February 2009, the federal government unveiled The Homeowner
Affordability and Stability Plan (HASP). HASP
includes the Home Affordable Modification Program
(HAMP). HAMP 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. For
more information on our participation in HAMP, see
Defaults and Claims in this Item 1.
We are actively working with both servicers and the GSEs in the
implementation of these programs and other such programs
designed to address various problems in the mortgage and housing
market. However, to date these programs have had limited
success. To a large degree, the benefit we receive from these
programs is dependent on the efforts of servicers and the GSEs.
If a loan is modified or refinanced as part of one of these
programs, we intend to maintain insurance on the loan and are
subject to the same ongoing risks as we were prior to the
adoption of the programs if the policy were to re-default.
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As of the date of this annual report on
Form 10-K,
we are unable to predict the impact that these government
initiatives will have on our future results of operations and
prospects. This uncertainty regarding the impact of these
programs is amplified by the complexity of the programs, our
reliance on loan servicers to implement the programs, the
conservatorship of the GSEs, and conditions within the housing
market and the economy, among other factors.
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, each of which are described below. These
products comprised all of our insurance in force as of
December 31, 2009 and 2008. 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
were 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 receive only the ongoing
premiums of the remaining insurance in force, which we refer to
as renewal premiums, net of any premium ceded to captive
reinsurers and refunds resulting from policy cancellations or
rescission of coverage.
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 was
first insured. Primary insurance was written on both flow and
structured bulk transactions. Flow transactions consisted of
loans originated by lenders that were submitted to us on a
loan-by-loan
basis, whereas structured bulk transactions consisted of loans
originated on a group of loans that met our loan quality and
pricing criteria. 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, subject to the DPO, in full satisfaction of our
obligation. Due to the requirement under the second Corrective
Order that we pay only 60% of each settled claim in cash, paying
the entire claim amount and taking title to the property is no
longer a viable option.
Primary insurance comprised approximately 71% and 69% of our
total direct insurance in force at December 31, 2009 and
2008, respectively. The limited amount of new insurance written
by Triad in 2008 and 2009 was all Primary insurance.
Modified
Pool Insurance
Modified Pool insurance, which we have not written since the
second quarter of 2007, was written only on structured bulk
transactions. 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%.
Modified Pool transactions included an aggregate stop-loss limit
applied to the entire group of insured loans. Additionally, some
of the Modified Pool 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 29% and
31% of our total direct insurance in force at December 31,
2009 and 2008, respectively.
Sales
We ceased issuing commitments for mortgage insurance on
July 15, 2008 and are operating our business in run-off. As
a result, we terminated our entire sales force in 2008 and are
not actively selling either Primary or Modified Pool mortgage
insurance products to any customer. All of our production since
July 15, 2008 consisted of
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certificates issued from commitments that were entered into
prior to that date. We do not expect any material production
going forward.
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. A policy
is also cancelled upon the settlement of a claim and the full
satisfaction of our obligations under the respective insurance
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.
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 mortgage insurance on most loans made on or after
July 29, 1999, when the outstanding loan amount is 78% or
less of the propertys original purchase price and certain
other conditions are satisfied. A borrower may request that a
loan servicer cancel borrower-paid mortgage insurance on a
mortgage loan when the loan balance is less than 80% of the
propertys current value, but loan servicers are generally
restricted in their ability to grant those requests by secondary
market requirements and by certain other regulatory restrictions.
Mortgage insurance coverage can also be cancelled when an
insured loan is refinanced. Because we are a company operating
in run-off, a refinancing will generally have the impact of
reducing insurance in force and future premiums as we cannot
replace the cancelled insurance with new mortgage insurance
coverage. One exception to this is that under HAMP and HASP, the
mortgage insurance will remain with Triad after a qualified loan
is refinanced. Any refinancing 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, loans from economically distressed areas,
and/or loans
from areas experiencing unfavorable house price depreciation
would increase. Furthermore, any decline in insurance in force
would adversely affect the amount of future premium we would
receive as well as our loss ratio and capital position.
Certain of our Modified Pool contracts contain provisions that
terminate coverage of all loans covered by the contract when
cumulative settled losses reach the specific stop loss limit for
that contract. At December 31, 2009, 19% of our Modified
Pool insurance in force was subject to be cancelled if the
settled losses reach the stop loss limit. No future premium is
received following the termination of a Modified Pool contract.
The insurance in force under the remaining 81% of our Modified
Pool contracts does not terminate when settled losses reach the
specific stop loss limit.
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 19% and 13% for
2009 and 2008, respectively, and was as high as 49% during 2003.
The increase in the cancellation rate in 2009 was due to the
significant increase in paid claims, rescissions, and the
termination of several Modified Pool Contracts after reaching
the stop loss limits.
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, reserves and losses are ceded under
reinsurance agreements to captive reinsurance affiliates of
certain customers. Reinsurance contracts do not relieve us from
our obligations to policyholders. Failure of the reinsurer to
honor its obligation in excess of the minimum capital level
required by the reinsurance agreement could result in losses to
Triad; consequently, allowances are established for amounts
deemed uncollectible from the captive reinsurance company.
7
Prior to run-off, we offered captive reinsurance structures
designed to allow lenders to share in the risks of mortgage
insurance. Under the typical captive reinsurance program, a
captive 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, we retain the first loss position on the first
aggregate layer of risk and reinsure a second defined aggregate
layer with the reinsurer. We generally retain the remaining risk
above the layer reinsured. Of the reinsurance agreements in
place at December 31, 2009, the first layer we retained
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 our captive reinsurance
agreements to establish trust accounts to partially support the
reinsurers obligations under the reinsurance agreements.
The captive reinsurer is the grantor of the trust and we are 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 capital levels allow. If certain capitalization
requirements of the 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.
At December 31, 2009, we had approximately
$257 million in captive reinsurance trust balances with
$229 million of reserves ceded to those captives. At
December 31, 2009, total ceded reserves and unpaid ceded
losses exceeded the trust balances for the majority of our
captive reinsurance agreements. In those cases, we limit the net
reserve credit that we recognize in the financial statements to
the trust balances because we have limited contractual rights to
require additional capital contributions. At December 31,
2009, approximately $131 million of reserves exceeded the
available trust balance for which no benefit was recognized in
our financial statements. As we are limited in our ability to
recognize benefits from ceded losses to a captive reinsurer by
the reinsurers trust balance, we expect only a minimal
benefit in future periods from these arrangements.
During 2009, we terminated three captive reinsurance
arrangements and received approximately $18.9 million of
trust assets. We also commuted one captive reinsurance
arrangement where the majority of the trust assets were remitted
to the reinsurer. The terminations and commutation resulted in
an increase in cash and invested assets and a corresponding
decrease in reinsurance recoverable. The terminations and
commutation had no material impact on our results of operations
or financial condition.
Additionally, in March 2010 we entered into a commutation
agreement with our largest captive reinsurance partner. Under
terms of the commutation agreement, we will assume all liability
for the existing and future claims covered by the reinsurance
and trust agreement in exchange for the entire trust balance of
approximately $142.0 million. We do not expect the
transaction will have any impact on the statement of operations
for the first quarter of 2010. We are currently in discussion
with other captive reinsurers regarding the termination or
commutation of their treaties.
At December 31, 2009 and 2008, respectively, approximately
53% and 58% 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 TGIC that was formed to retain the premiums and related risk
on deeper coverage business. As of December 31, 2009 and
2008, TGAC assumed approximately $154 million and
$189 million in risk from TGIC, respectively.
8
Contract
Underwriting
Prior to entering into run-off, we provided fee-based contract
underwriting services to certain, approved mortgage originators.
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 these contract underwriting services through our own
employees, as well as independent contractors. These services
were provided for loans that required mortgage insurance, as
well as loans that did not require mortgage insurance. If it was
determined that we failed to properly underwrite a loan subject
to the lenders underwriting guidelines, we could be
required to provide monetary or other remedies to the lender
customer. While we ceased providing contract underwriting
services in 2008, we generally retain potential liability for
our previous underwriting activities for seven years from the
date the services were provided. Historically, expenses for
contract underwriting remedies were immaterial to our results of
operations in part due to the favorable conditions in the
residential real estate market. During 2009 and 2008, however,
net expenses for contract underwriting remedies grew to
approximately $4.6 million and $1.3 million,
respectively, and we have established a reserve for contract
underwriting remedies of $3.0 million as of
December 31, 2009.
Defaults
and Claims
Defaults
The claim process on mortgage insurance begins with the
lenders notification to the insurer of a default on an
insured 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. In addition, the
mortgage insurance industry has little historical experience in
projecting defaults in a market environment characterized by
widespread declining house prices. We believe such price
declines have precipitated a large number of strategic defaults.
We believe these strategic defaults are more prevalent in
mortgages that were originated during 2006 and 2007 during the
peak of the housing boom, with little or no down payment, as
well as those mortgages in the distressed states.
Borrowers may cure defaults by making all delinquent loan
payments or by selling the property and satisfying all amounts
due under the mortgage. Borrowers may also participate in loan
modification programs such as HAMP. Under HAMP, eligible
borrowers may have the terms of their mortgage modified and
enter a trial modification period which lasts three months. If a
borrower meets the eligibility requirements and makes all
mortgage payments during the trial period, the loan would be
reported to us as cured. These programs were in place for most
of 2009, although activity was slow to develop. At
December 31, 2009, we had been notified that approximately
8,000 of the loans that we insure were in some stage of
participation in HAMP, although very few have successfully
completed the trial modification period. We do not receive
information on all of the loans participating in these programs
or the current status of the participating loans on a timely
basis and, therefore, we do not have the necessary information
to determine the number of our policies in force that are
participating in modification programs. This limits our ability
to evaluate the ultimate success rate of HAMP and other such
programs and, as a result, the potential impact on our results
of operations and financial condition.
Defaults that are not cured generally result in the submission
of a claim to us. In very limited instances, we may advance the
borrower the delinquent loan payments in order to cure the
default. In such cases, we generally 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
our default statistics at December 31, 2009 and 2008.
9
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 settled historically ranged
from six to 18 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 loan modification programs and other initiatives;
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delays in submitting and 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 settlement of claims is not evenly spread
throughout the insurance coverage period. Prior to 2007,
relatively few claims were settled during the first year
following loan origination. A period of rising claim settlements
historically followed that initial year of coverage. Thereafter,
the number of claim settlements historically declined at a
gradual rate, although the rate of decline could be affected by
local economic conditions. We have experienced increased early
default and claim activity on loans originated in 2006, 2007 and
2008 that differ significantly from historical levels. We
believe this is primarily the result of: (1) deterioration
in the housing and financial markets evidenced by a decline in
home prices and reduced credit availability; (2) a larger
percentage of loans originated with high LTVs during these
years; and (3) lax underwriting standards by certain
mortgage loan originators. It is difficult to project the future
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. Furthermore,
default and claim activity on loans originated prior to 2006
have adversely deviated from historical patterns as declining
economic conditions, home price declines, and reduced credit
have affected even these more seasoned loans.
Under the terms of our 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) settling 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) settling 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.
During 2009, due to the extent of house price depreciation and
the claim settlement provisions of the second Corrective Order
we did not exercise the option to purchase properties in
settlement of claims and we do not expect this will be a viable
option going forward. At December 31, 2009, we did not hold
any properties as a result of electing to settle the full amount
of the claim compared to five properties with a combined fair
value of approximately $713,000 held at December 31, 2008.
10
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.
Rescission
and Denial Activity
Generally, our master policies provide that we are not liable to
settle 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. Prior to 2007, rescission activity was immaterial
to our results. We believe this was primarily due to a favorable
real estate market that provided significant loss mitigation
opportunities.
Rescission activity began to increase noticeably in 2007. During
2008, we rescinded coverage on policies with a combined risk in
force of $244 million. During 2009, we rescinded coverage
on policies with a combined risk in force of $683 million.
This activity was concentrated primarily in policies originated
during 2006 and 2007. We also experienced a higher rescission
rate with policies originated through the structured bulk
channel.
Our master policy generally allows us to deny coverage on a
filed claim if: (1) the insured property is sold without
our permission prior to the due date of the claim settlement; or
(2) if the claim was not timely filed. In cases where we
deny a claim, we only return the unearned premium. Claim denial
activity also increased in 2009, but not to the same degree as
rescission activity.
If we rescind or deny coverage on an insured loan, the risk of
default reverts to the policyholder, which has the right to
challenge the decision. In 2009, we reversed very few of our
decisions based on policyholder challenges. However, challenges
to our decision to rescind or deny coverage may occur months or
years after such decision was made and policyholders may
challenge a decision multiple times. The increased level of
rescission and denial activity by mortgage insurers has caused
certain lenders and servicers to institute legal action to
challenge the validity of rescissions and claim denials, and we
are currently defending two such proceedings. See Item 3,
Legal Proceedings, for more information.
As a result of the increase in our rescission and denial
activity, we believe we face an increased risk of litigation.
Our liquidity, cash flow and financial performance would be
adversely affected if our ability to rescind coverage or deny
claim liability is materially limited or impaired. See
Item 1A, Risk Factors, for more information.
On September 4, 2009, Triad filed a complaint against
American Home Mortgage (AHM) in the United States
Bankruptcy Court for the District of Delaware seeking rescission
of multiple master mortgage guaranty insurance policies and
declaratory relief. The complaint seeks relief from AHM as well
as all owners of loans insured under the master policies by way
of a defendant class action. See Item 3, Legal
Proceedings, for more information.
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. Currently, our ability
to employ loss mitigation techniques is severely limited. As a
result, we generally settle claims at or even exceeding our risk
in default. We believe the lack of mitigation opportunities is
primarily the result of depressed housing prices.
In addition to loss mitigation techniques that reduce or
eliminate claims, when we settle a claim we also may obtain
deficiency judgments against borrowers in those states that
allow such action so that we can recoup some of our losses. We
have expanded use of this technique due to the current economic
environment when allowed by certain jurisdictions and when
borrowers appear to choose a strategic default. The availability
and limitations on obtaining deficiency judgments vary
state-by-state.
11
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 ultimate 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 segments
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. Additionally, we incorporate 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.
Gross
Risk in Force
We had $13.6 billion of gross risk in force as of
December 31, 2009 compared to $16.9 billion as of
December 31, 2008. 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 table reflects the percentage of gross risk in
force and the default rates on our book of business by location
of property as of December 31, 2009 and December 31,
2008.
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December 31,
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2009
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2008
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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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13.3
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%
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35.7
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%
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14.6
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%
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23.3
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%
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Florida
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11.5
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%
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39.3
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%
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11.6
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%
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25.9
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%
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Texas
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6.8
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%
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9.4
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%
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6.5
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%
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5.3
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%
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Arizona
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4.6
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%
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30.9
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%
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5.2
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%
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17.6
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%
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Illinois
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4.1
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%
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23.1
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%
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3.9
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%
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11.1
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%
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North Carolina
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3.9
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%
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12.3
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%
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3.8
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%
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5.6
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%
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Georgia
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3.7
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%
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17.2
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%
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3.5
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%
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8.5
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%
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New Jersey
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3.4
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%
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23.9
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%
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3.1
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%
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11.7
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%
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Virginia
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3.3
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%
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14.8
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%
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3.3
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%
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9.5
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%
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Colorado
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3.1
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%
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13.8
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%
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3.2
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%
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6.6
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%
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New York
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3.0
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%
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18.0
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%
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2.7
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%
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9.0
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%
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Washington
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2.8
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%
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16.3
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%
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2.8
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%
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6.7
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%
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Nevada
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2.7
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%
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40.0
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%
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3.0
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%
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21.5
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%
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Pennsylvania
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2.6
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%
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12.2
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%
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2.5
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%
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6.7
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%
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Maryland
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2.5
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%
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21.6
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%
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2.4
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%
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11.2
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%
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All Other
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28.5
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%
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14.5
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%
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27.9
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%
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8.0
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%
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Total Company
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100.0
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%
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20.1
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%
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100.0
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%
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11.7
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%
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12
The table above shows that California, Florida, Arizona, and
Nevada contribute 32.1% of our gross risk in force as of
December 31, 2009 compared to 34.4% at December 31,
2008. The decline in the percentage of the total risk in force
in these states is primarily attributable to a higher level of
claim and rescission activity. Our policies in these states
continue to 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.
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 generally grant broad powers to
supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion over almost every
significant aspect of the insurance business. These include the
licensing of companies to transact business and varying degrees
of control over claims handling practices, reinsurance
requirements, premium rates, the forms and policies offered to
customers, financial statements, periodic financial reporting,
permissible investments and adherence to financial standards
relating to statutory surplus, dividends and other criteria of
solvency intended to ensure the satisfaction of obligations to
policyholders.
Because TGI is an insurance holding company and Triad is an
Illinois-domiciled insurance company, the Illinois insurance
laws regulate, among other things, certain transactions in
TGIs common stock and certain transactions between Triad
and TGI 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 TGI
or its subsidiaries unless such person files a statement and
other documents with the Department and obtains the
Departments 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 TGIs voting securities is owned or
controlled, directly or indirectly, by a person, although the
Department 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 TGI 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. Under the first Corrective Order, Triad is
currently prohibited, and expects to be prohibited for the
foreseeable future, from paying any dividends to TGI. Triad also
has a $25 million outstanding surplus note held by TGI.
Under the terms of the first Corrective Order, Triad is
prohibited from paying interest or principal on the surplus note
until otherwise approved by the Department. In 2009, TGI wrote
off the $25 million surplus note and reversed accrued
interest of $4.4 million on its financial statements as an
other-than-temporary
impairment. This
other-than-temporary
impairment did not affect TGIs consolidated results of
operations. See Item 1A, Risk Factors for more
information.
Mortgage insurers are generally 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. The contingency reserves must be maintained for a
period of 10 years except in circumstances where prescribed
levels of losses exceed regulatory thresholds. In addition,
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. The redemption of Tax and Loss Bonds
primarily occurred in 2007 and 2008 and an immaterial amount was
redeemed during 2009. As of December 31, 2009, Triad did
not hold any Tax and Loss Bonds. We expect 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 TGIC under the insurance laws
of the state of Illinois in December 1994, is subject to all
Illinois insurance regulatory requirements applicable to TGIC.
13
Triad Re, a wholly-owned sponsored captive reinsurance company,
was organized as a subsidiary of Triad under the insurance laws
of the state of Vermont in November 1999. During 2009, the only
participating reinsurer in Triad Re commuted its captive
reinsurance agreement. As a result, Triad Re was liquidated in
the fourth quarter of 2009.
TGIC and TGAC are each subject to examination of their affairs
by the insurance departments of every state in which they are
licensed to transact business. The Department periodically
conducts financial condition examinations of insurance companies
domiciled in Illinois and the results of the examinations are
filed with all state insurance departments. The most recent
examination of TGIC and TGAC for the fiscal years 2004 through
2007 was concluded in August 2008, and no adjustments or
material recommendations were needed as a result of this
examination.
Insurance departments of certain states generally prohibit the
writing of new business if an 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. Recently, certain state insurance regulators have
specifically allowed mortgage insurers to reduce the risk
outstanding by the amount of risk in default, for which reserves
have been provided, in their calculation of
risk-to-capital.
The Department has not specifically permitted this practice. The
Department has additional restrictions that limit our ability to
write new business. At December 31, 2009, Triads
risk-to-capital
ratio was 73.5-to-1. We ceased issuing commitments for mortgage
insurance on July 15, 2008.
TGI and Triad are also indirectly impacted by regulations
affecting purchasers of mortgage loans, such as the GSEs, 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. The GSEs were placed into
conservatorship by the FHFA in August 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 the GSEs 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 the GSEs 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 Orders and Recent Government
Initiatives under this Item 1 for additional
information about regulatory restrictions and initiatives.
Available
Information
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 on
Form 10-K.
We have included our web site address as a factual reference and
do not intend it as an active link to our web site. Through our
web site we make available, free of charge, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after this material is electronically filed with or
furnished to the Securities and Exchange Commission (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 February 26, 2010, we employed approximately
108 persons, with 106 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 TGI and Triad and Director of Triad
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52
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Kenneth S. Dwyer
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Vice President and Chief Accounting Officer of TGI and Triad
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Shirley A. Gaddy
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Senior Vice President, Operations of Triad
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57
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Steven J. Haferman
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Senior Vice President, Strategic Initiatives of Triad and
Director of Triad
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48
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Earl F. Wall
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Senior Vice President, Secretary, and General Counsel of TGI and
Triad and Director of Triad
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52
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Kenneth W. Jones has served 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 served as our Vice President and
Chief Accounting Officer since September 2003. Previously,
Mr. Dwyer served as Vice President and Controller of
Jefferson Pilot Financial from 1997 to 2003. Prior
to that, he was the Vice President and Controller of
Pan-American
Life Insurance. Before joining
Pan-American
Life, Mr. Dwyer was employed at Deloitte &
Touche, LLP for 20 years.
Shirley A. Gaddy joined us in 1996 and has served as our
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 37 years.
Stephen J. Haferman has served 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.
Earl F. Wall has served as our Senior Vice President
since November 1999, General Counsel since January 1996, and
Secretary since June 1996. Mr. Wall also served as a Vice
President of TGI and 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.
15
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.
We reported a deficit in assets under GAAP at
December 31, 2009 of $706 million. In order to
overcome this deficit in assets, our future net income on the
remaining insurance in force must exceed $706 million
during the run-off period. There is substantial risk that the
future net income during the run-off period will not exceed this
amount, which could result in the institution of receivership
proceedings for Triad and subsequently could lead us to
institute a proceeding seeking relief from creditors under
U.S. bankruptcy laws.
During 2009, our GAAP net loss for the year amounted to
$596 million, which resulted in an accumulated deficit in
assets of $706 million at December 31, 2009. In order
to overcome this deficit in assets, our future revenue in
run-off must exceed future losses and expenses by at least
$706 million. Our total operating revenue, excluding
realized investment gains and losses, declined to
$236 million in 2009 from $297 million in 2008.
Because we no longer write new mortgage insurance, we project
our revenue will continue to decline as our insurance in force
declines. Total losses and expenses also declined in 2009 to
$849 million from $1,025 million in 2008. The
uncertainty concerning future defaults makes it difficult to
accurately predict the amount of our future losses and expenses,
particularly in later years.
One of the most significant components of our net loss has been
the increase in the reserve for losses. We calculate our best
estimate of the reserve for losses to provide for the estimated
ultimate 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 segments defaults by a
variety of criteria. Frequency and severity are the two most
significant assumptions in the establishment of our loss
reserves. During 2009, we refined both the frequency and
severity factors based upon actual settled loss development over
the past year, and our expectation for future development.
Economic conditions in the housing and mortgage industries
continue to be depressed and we do not anticipate a meaningful
recovery in the near-term. As a result of the current economic
conditions, our loss mitigation opportunities remain limited.
The actual amount of our claim settlements may be substantially
different from our loss reserve estimates. Our estimates could
be adversely affected by a variety of factors, including, but
not limited to, further declines in home prices, specifically in
certain geographic regions that have experienced only modest
declines to date, continuing increases in the unemployment rate,
and a decrease in the realized rescission rates compared to
those utilized in our reserve methodology. Changes to our
estimates of reserves could result in a significant impact to
our results of operations and our deficit in assets, even in a
stable economic environment.
If we are unable to satisfy TGIs future debt service
obligations, TGI would likely be forced to seek bankruptcy
protection, which would have a material adverse effect on our
financial condition, results of operations, and cash flows, and
would effectively eliminate all remaining stockholder value.
In 1998, TGI completed a $35.0 million private offering of
notes with a single maturity of January 15, 2028. TGI
contributed $25.0 million of the net proceeds from the sale
of the notes to Triad in exchange for a surplus note. The
$35.0 million outstanding long-term debt and
$2.8 million annual debt service are the obligations of TGI
and not Triad. Historically, the primary source of funds for the
TGI debt service has been the $2.2 million of interest paid
annually by Triad to TGI on the $25.0 million surplus note.
The terms of the $25.0 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 the
surplus note. In the second quarter of 2008, the statutory
surplus fell below the balance at origination of the surplus
note and has remained below the balance, effectively prohibiting
the payment of interest. Additionally, the Corrective Orders
prohibit the payment of interest or principal on the surplus
note without the prior approval of the Department. TGI has
limited assets and even more limited sources of revenues. At
this time, we do not expect that TGI will receive any further
interest payments from Triad on the surplus note for the
foreseeable future. In 2009, TGI wrote off the $25 million
surplus note and reversed
16
accrued interest of $4.4 million on its financial
statements as an
other-than-temporary
impairment. This
other-than-temporary
impairment did not affect TGIs consolidated results of
operations. Without the payment of interest from Triad on the
$25.0 million surplus note, TGIs ability to pay its
$2.8 million annual debt service obligation is limited to
its cash and invested assets, which amounted to an aggregate of
approximately $8.7 million as of December 31, 2009.
Unless other sources of funds are obtained by TGI, TGI will
likely default in the payment of interest due under its
$35 million notes within the next three years.
Additionally, Triad has historically reimbursed TGI for
operating expenses incurred on behalf of the operating
subsidiary under terms of a capital management agreement. Terms
of the Corrective Orders require the approval of the Department
for all intercompany transactions. Excluding the annual debt
service obligations of $2.8 million, TGIs cash
expenses for 2009 were approximately $1.9 million and all
requested reimbursements were approved by the Department.
However, if we are unable to obtain the Departments
approval for Triad to reimburse future operating costs of TGI,
then the limited assets of TGI will dissipate at a much greater
pace, which would further jeopardize the ability of TGI to make
the required interest payments on its $35.0 million notes.
If TGI is unable to make the required debt service payments to
the holders of the notes, it may be forced to seek protection
under U.S. bankruptcy laws. A bankruptcy filing by TGI
would have a material adverse effect on our financial condition,
results of operations and cash flows and would likely eliminate
all remaining stockholder value.
Triad is operating under two Corrective Orders issued by the
Department. Failure to comply with the provisions of the
Corrective Orders may result in the imposition of fines or
penalties or subject Triad to further legal proceedings.
Triad has entered into two Corrective Orders with the
Department. The first Corrective Order was entered into on
August 5, 2008 and 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. The
second Corrective Order became effective on March 31, 2009,
as amended on May 26, 2009, and was implemented in
anticipation of Triad reporting a deficiency in
policyholders surplus under SAP at March 31, 2009 and
to prevent the Department from having to seek receivership of
Triad following the reporting of those results.
These Corrective Orders, among other things, include
restrictions on the distribution of dividends or interest on
notes payable to TGI by Triad, allow management to continue to
operate Triad under close supervision, and include restrictions
on the payment of claims. Failure to comply with the provisions
of the Corrective Orders or any other violation of the Illinois
Insurance Code may result in the imposition of fines or
penalties or subject Triad to further legal proceedings,
including receivership proceedings for the conservation,
rehabilitation or liquidation of Triad. If the Department were
to seek receivership of Triad, TGI could be compelled to
institute a proceeding seeking relief from creditors under
U.S. bankruptcy laws which would likely eliminate all
remaining stockholder value.
The adverse conditions in the housing and mortgage markets
and the high level of unemployment continue to have a negative
impact on the development of the loans we insure. Although we
regularly review and consider our methodology for recording our
loss reserve estimates, these estimates are subject to
uncertainties and are based on assumptions that we are required
to make during this time of substantial economic uncertainty. As
a result, settled claims may ultimately be substantially
different than the loss reserves that we have recorded and such
differences may have a material adverse impact on our financial
condition and results of operations.
Cure rates over the last year have decreased dramatically from
the previous historically low levels of 2008. Additionally,
during 2009 default rates increased and home price declines
outside of our traditional distressed markets accelerated. In
response to these developing economic trends, in 2009 we raised
the frequency and severity assumptions utilized in our
methodology for recording loss reserve estimates. Although our
recorded loss reserves at December 31, 2009 reflect our
best estimates as of such date, settled claims could be
substantially different from the loss reserves that have been
recorded and could materially and adversely affect our financial
condition and results of operations.
We calculate our best estimate of the reserve for losses to
provide for the estimated ultimate 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 segments defaults by a variety of criteria. The
criteria include, among others,
17
policy year, lender, geography, the number of months the loan
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 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 inventory of loans in default. 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 amounts or
(2) by disposing of the property securing the mortgage
before foreclosure with no claim ever being filed because the
proceeds of the sale satisfied the mortgage. During 2009, our
cure rate continued its decline as home prices declined or
remained depressed 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
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 2009 was the impact of rescissions.
Generally, a loan that is reported to be in default within the
first 23 months of insurance is classified as an Early
Payment Default (EPD) although we may investigate certain loans
in default for non-compliance with programs, fraud or
misrepresentation without regard to the length of time since the
loan was insured. Terms of our master policies allow us 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 provide a reserve on that
loan. Due to the unusually high levels of rescissions on EPDs
for which we have completed our investigation, our reserving
methodology incorporates an expected rescission percentage on
the EPDs that we are in the process of investigating. 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.
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 a loan
in default compared to the outstanding mortgage loan amount. If
our assumptions regarding anticipated house prices 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.
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 Orders, our recurring losses from operations and
our deficit in assets at December 31, 2009. Our financial
statements included in this annual report do not include any
adjustments relating
18
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 17, 2010 on our consolidated financial
statements for the two years ended December 31, 2009 and
2008 notes that there is substantial doubt about our ability to
continue as a going concern.
During the fourth quarter of 2009, we sold our information
technology and operating platform to Essent Guaranty, Inc.
(Essent), a new mortgage insurer, for up to
$30 million in cash and the assumption by Essent of certain
contractual obligations. Furthermore, a number of our former
information technology and operations employees have joined
Essent. Under a services agreement, Essent is to provide us with
ongoing information technology services, customer service and
policy administration support. This transaction provides for
potential additional risk including: (1) the future
collection of both the fixed and contingent payments; and
(2) the outsourcing of services vital to an efficient
run-off.
Under the terms of the agreement, Essent acquired all of our
proprietary mortgage insurance software and substantially all of
the supporting hardware, as well as certain other assets, in
exchange for up to $30 million in cash and the assumption
by Essent of certain contractual obligations. Approximately
$15 million of the consideration is fixed and up to an
additional $15 million is contingent on Essent writing a
certain minimum amount of insurance in the five-year period
following closing. If Essent is unable to write this minimum
amount, we would not receive the additional $15 million of
the contingent purchase price which could impact our future cash
flows.
As part of our agreement with Essent, substantially all of our
former information technology, customer service, and policy
administration support employees have joined Essent. Under a
services agreement, these along with other Essent employees will
provide ongoing information systems maintenance and services,
customer service and policy administration support to Triad
while also providing these services for Essent. These services
are vital to our success in run-off and we no longer have direct
management over these employees. While the services agreement
contains service level requirements and other terms designed to
ensure sufficient performance, the enforcement of such
conditions could prove difficult and costly. Our financial
condition and results of operation could be adversely impacted
if the services provided are insufficient or not provided in a
timely manner.
Our financial condition at December 31, 2009 has
benefited substantially from significant rescission activity and
denial of claims. If we do not continue to realize benefits from
rescissions and denials at similar levels, or our ability to
rescind or deny coverage were successfully challenged in
litigation, then our financial condition and results of
operations could be materially and adversely affected.
We have experienced a significant increase in recent years in
rescission activity and, to a lesser extent, claim denials and
expect to rescind additional policies and deny claims in the
future as we continue to investigate early payment defaults and
identify instances of fraud, misrepresentation or other
violations of our master policies. There can be no assurance
that future rescissions and denials, which have positively
impacted the level of our loss reserves at December 31,
2009, will continue to be realized at levels similar to 2009.
Any decision to rescind coverage may be challenged by the
policyholder. Challenges to our decision to rescind or deny
coverage may occur months or years after such decision was made
and policyholders may challenge a decision multiple times. The
increased level of rescission and denial activity by mortgage
insurers has caused certain policyholders and loan servicers to
institute legal actions to challenge the validity of rescissions
and claim denials, and we are currently a defendant in two such
proceedings.
On December 11, 2009, American Home Mortgage Servicing
filed a complaint against Triad for damages, declaratory relief,
and injunction in the United States District Court, Northern
District of Texas. The complaint alleges that Triad denied
payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance
policies prohibit denial of claim without evidence of harm, and
an injunction against future like denials.
On March 5, 2010, Countrywide Home Loans, Inc. filed a
lawsuit in the Los Angeles County Superior Court of the State of
California alleging breach of contract and seeking a declaratory
judgment that bulk rescissions of flow loans is improper and
that Triad is improperly rescinding loans under the terms of its
master policies.
19
We believe it is likely that other lenders and mortgage
servicers will challenge the ability of mortgage insurers to
rescind and deny coverage, including the filing of additional
lawsuits. While we intend to vigorously defend the two lawsuits
described above and believe our rescissions and claim denials
are wholly permissible under the terms of our master policies,
other program documents and applicable law, no assurance can be
given that we will be successful in the defense of these suits.
An adverse court declaratory judgment regarding the
interpretation of a master policy provision or the
impermissibility of basing a rescission or claim denial on
particular originator, lender or servicer conduct could set a
precedent that has the effect of significantly restricting or
limiting our ability to rescind policies and deny coverage of
claims. This could result not only from legal proceedings in
which we are the defendant, but also from suits pending against
other mortgage insurers that are addressing policy provisions or
the permissibility of rescission and denial practices that are
similar to our own. Our liquidity, cash flow and financial
performance would be adversely affected if our ability to
rescind coverage or deny claim liability is materially limited
or impaired in the future as a result of these legal challenges
by policyholders and servicers.
Our operating cash flow consists of net premium received plus
investment income less losses and expenses paid. In 2009, we
experienced a deficit in operating cash flow of
$135 million. We have repositioned our investment portfolio
in an attempt to match anticipated maturities with our expected
cash flow needs. If the proceeds from maturities of securities
coupled with other sources are insufficient to cover operating
cash flow deficits, we could be forced to liquidate securities
which, depending on market conditions, may result in
unanticipated 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, we developed a strategy to liquidate
those securities and convert to higher-yielding taxable bonds.
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 expected 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 prior to maturity, which may result in
unanticipated realized investment losses.
Consistent with industry practice, we provide reserves only
for loans in default rather than on our estimate of the ultimate
loss for all insured loans. 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. We
generally do not establish reserves until we are notified that a
borrower has failed to make at least two payments when due.
During 2009, the loans in default reported to us for which we
provide gross reserves grew by 17,489 (43% increase) to 57,775
at December 31, 2009. GAAP precludes us from establishing
loss reserves for future claims on insured loans that are not
currently in default. As a result, our financial statements do
not reflect our expected loss from policies not in default. 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.
Since 2007, the United States housing market has experienced
a significant amount of home price depreciation which has had a
direct negative impact on our results of operations and
financial condition. During 2009, home prices continued to
decline in the first half of the year, and while the decline
moderated in the second half of the year, home prices generally
remained depressed in most markets. If home prices continue to
decline on a more significant or expanded geographic basis than
what we have experienced to date, we may incur a higher level of
losses from paid claims and also be required to increase our
loss reserves on those defaults reported to us at
December 31, 2009.
Previously, a primary component of our loss mitigation efforts
included selling a property prior to foreclosure as well as
purchasing the property in lieu of paying the coverage
percentage specified in the insurance policy. The decline in
home prices has negatively affected both of these mitigation
options as the fair value of many of the borrowers homes
is actually less than the outstanding mortgage. If home values
fail to appreciate or decline on a more significant and expanded
geographic basis, the frequency of loans going into default and
eventually resulting in a paid claim could increase and our
ability to mitigate our losses on mortgages may be further
reduced, which could have a material adverse effect on our
business, financial condition and operating results.
20
Because a significant portion of our business is sensitive to
interest rates, a large increase in rates would cause higher
monthly mortgage payments for certain borrowers that could
potentially lead to a greater number of defaults, which would
adversely impact our business.
At December 31, 2009, approximately 27.5% of our Primary
gross risk in force and approximately 67.8% 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
before being subjected to interest rate adjustments. As a
result, some ARMs that we insure have not yet been subject to an
interest rate adjustment. In periods of rising interest rates, a
borrowers monthly payment with an ARM will most likely
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, 2009, approximately 11.0% of our Primary
gross risk in force and 14.1% 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, and this 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 balances on
mortgage 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, 2009, our risk in force for California,
Florida, Arizona and Nevada, which we classify as
distressed markets, represented approximately 32% of
our gross risk in force on a per policy basis. These distressed
markets have experienced some of the most rapid home price
depreciation since 2007 coupled with some of the highest
foreclosure rates when compared to the rest of the country.
Moreover, they represented 53% of our risk in default and 55% of
our gross loss reserves. The default rate at December 31,
2009 in these distressed markets was 36.7% compared to 14.9% for
the remainder of our portfolio excluding these distressed
markets. If the housing markets remain at these depressed levels
or drop further due to anticipated additional foreclosures for
an extended period of time, we could experience even greater
additional adverse effects on our operating results and
financial condition due to the large concentration of our
business in these distressed markets.
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 and following periods of declining home prices.
At December 31, 2009, approximately 17.3% of our mortgage
insurance in force consisted of insurance on mortgage loans with
LTVs at origination greater than 95%. During and following
periods of rapidly declining home prices such as occurred in
2007 and 2008, these loans have a greater propensity to default
due to the decline in borrowers equity. Loans with greater
than 95% LTV at origination have experienced a significantly
greater default rate than lower LTVs as of December 31,
2009. 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
21
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 rate of default and paid
claims on high LTV loans, our results of operations could be
adversely affected.
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 declining
home prices and high levels of unemployment, 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 may increase as our policies continue to
age.
Historically, we expected the majority of claims on insured
loans in our 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. Previously,
almost all of our loss experience would be complete after the
fifth year as rising home prices over a five year period
generally provided the borrower with enough equity to avoid
foreclosure. However, with the unprecedented decline in home
prices over the past three years, many borrowers now find
themselves with no remaining equity, even with a significant
down payment at origination. During 2009, we had an increase in
the default rates for the 2003 through 2005 vintage years, which
are books of business where previously we were expecting
declines in the default rates. We believe our loss experience
may increase as our policies age as a result of the significant
decline in house prices over the last three years. 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.
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, we
agreed to indemnify the participating lender against losses
incurred in the event that we failed to properly underwrite a
loan in accordance with the lenders underwriting
guidelines, 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.
If our lender partners for which we have entered into captive
reinsurance arrangements cannot or choose not to fulfill their
financial obligations, our benefits under the captive
reinsurance treaties will be limited to the trust balances
maintained within the reinsurance structures, which could have
an adverse impact on our future results of operations.
An integral component of the reinsurance treaties includes trust
accounts, which are established to support a portion of the
reinsurers obligations. 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, terms of our captive risk-sharing
arrangements generally do not require additional capital
contributions by the lender. Most lenders have not contributed
any
22
additional capital that would allow these captive reinsurance
structures to remain viable. As a result, at December 31,
2009, approximately $131 million of additional reserves
could have been ceded to lender captives if they had contributed
more capital. We expect these captive structures will be of
limited benefit going forward and, as a result, could have
adverse financial results on our operations.
Loan servicers have 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 resulting in a paid claim
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 is 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 increasing 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 Corrective Orders from
the Department and the outlook for the legacy mortgage insurance
industry remains uncertain. Maintaining experienced staff is
critical to achieving a successful run-off.
We undertook 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. In order to retain our key personnel, we have
established a severance plan and a retention plan, both of which
currently expire in 2012. The very nature of run-off, as well as
the ongoing negative news related to the mortgage markets, has
introduced a heightened level of stress and uncertainty among
our remaining employees. If we fail to adopt or gain approval
from the Department to replace severance or retention plans, we
may be unable to keep key personnel. The loss of any key
personnel could limit our ability to properly execute an
efficient and effective run-off.
Loan modification and other similar programs may not provide
material benefits to us.
The U.S. Treasury as well as several lenders have adopted
programs to modify loans to make them more affordable to
borrowers with the goal of reducing the number of foreclosures.
At December 31, 2009, we had been notified of modifications
involving loans with risk in force of approximately
$263 million.
One such program is the HAMP, which was announced by the US
Treasury in early 2009. Some of HAMPs eligibility criteria
require current information about borrowers, such as their
current income and non-mortgage debt payments. Because the GSEs
and servicers do not share such information with us, we cannot
adequately determine with any degree of certainty the number of
loans in our delinquent inventory that are eligible to
participate in HAMP. Further, it takes several months from the
time a borrower has made all of the payments during HAMPs
three month trial modification period for the loan
to be reported to us as a cured delinquency. We have been
notified that approximately 8,000 of the loans that we insure
were in some stage of participation in HAMP, although very few
have successfully completed the trial modification period. We
rely on information concerning HAMP provided to us by the GSEs
and servicers. We do not receive all of the information from
such sources that is required to determine with certainty the
number of loans that are participating in, or have successfully
completed, HAMP.
Even if a loan is modified, the effect on us of loan
modifications depends on how many modified loans subsequently
re-default, which in turn can be affected by changes in house
prices. Re-defaults can result in losses for us that could be
greater than we would have paid had the loan not been modified.
Currently, we cannot predict with a high degree of confidence
what the ultimate re-default rate will be, and, therefore, we
cannot ascertain with confidence whether these programs will
provide material benefits to us. In addition, because we do not
know all of the parameters used to determine which loans are
eligible for modification programs, our estimates of the number
of
23
loans qualifying for modification programs are inherently
uncertain. If legislation is enacted to permit a mortgage
balance to be reduced in bankruptcy, we would still be
responsible to pay the original balance if the borrower
re-defaulted on that mortgage after its balance had been
reduced. Various government entities and private parties have
enacted foreclosure moratoriums. A moratorium does not affect
the accrual of interest and other expenses on a loan. Unless a
loan is modified during a moratorium to cure the default, at the
expiration of the moratorium additional interest and expenses
would be due which could result in our losses on loans subject
to the moratorium being higher than if there had been no
moratorium.
We delisted our common stock from The NASDAQ Global Select
Market (NASDAQ) on December 28, 2009 and our
common stock is currently traded on the OTC Bulletin Board
(OTCBB) and the Pink
Sheets®
Electronic OTC Market (Pink Sheets). Our move from
NASDAQ to the OTCBB and Pink Sheets could result in reduced
liquidity for our stockholders or otherwise make it more
difficult for them to execute transactions in our common
stock.
NASDAQ is a stock exchange that has specific quantitative and
qualitative listing and maintenance standards. Companies listed
on NASDAQ have reporting obligations and maintain an ongoing
regulatory relationship with NASDAQ. The OTCBB and the Pink
Sheets facilitate quotation of securities not listed on an
exchange and have very few quantitative or qualitative listing
or maintenance standards, although companies traded on the OTCBB
must remain current in their filings with the SEC.
Since December 28, 2009, the average daily trading volume
of our common stock has decreased by approximately 77% compared
to the
year-to-date
period ended December 24, 2009. Furthermore, our common
stock has experienced large relative price swings on minimal
volume since delisting. We believe the liquidity of our common
stock has been adversely affected as a result of the delisting
from NASDAQ and it has become more difficult for investors to
trade our common stock. If the small trading volumes on the
OTCBB and Pink Sheets persist or decline even further, our
stockholders could face periods of reduced liquidity for our
common stock.
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Item 1B.
|
Unresolved
Staff Comments
|
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 68,932 square feet under a lease that will
expire in 2012. All staff functions are located within this
office complex. We currently sublease space on two floors of
this facility to Essent, totaling approximately
20,937 square feet under a sublease that will expire in
2012. We believe this property is suitable and adequate for its
present circumstances.
On December 1, 2009, we completed the sale of our
information technology and operating platform, including
substantially all of our computer hardware to Essent. We also
entered into a service agreement on December 1, 2009 with
Essent to provide systems maintenance and development services,
including disaster recovery services and certain other
technology services.
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Item 3.
|
Legal
Proceedings
|
The Company is involved in litigation and other legal
proceedings in the ordinary course of business as well as the
matters identified below.
On September 4, 2009, Triad filed a complaint against AHM
in the United States Bankruptcy Court for the District of
Delaware seeking rescission of multiple master mortgage guaranty
insurance policies (master policies) and declaratory
relief. The complaint seeks relief from AHM as well as all
owners of loans insured under the master policies by way of a
defendant class action. Triad alleged that AHM failed to follow
the delegated insurance underwriting guidelines approved by
Triad, that this failure breached the master policies as well as
the implied covenants of good faith and fair dealing, and that
these breaches were so substantial and fundamental that the
intent of the master policies could not be fulfilled and Triad
should be excused from its obligations under the master
policies. The total amount of risk originated under the AHM
master policies, accounting for any applicable stop loss
24
limits associated with modified pool contracts, was
$1.6 billion, of which $1.1 billion remains in force
at December 31, 2009. Triad continues to accept premiums
and process claims under the master policies but, as a result of
this action, Triad ceased remitting claim payments to companies
servicing loans originated by AHM. Both premiums and claim
payments subsequent to the filing of the complaint have been
segregated pending resolution of this action. Triad has not
recognized any benefit in its financial statements pending the
outcome of the litigation.
On November 4, 2009, AHM filed an action in the Bankruptcy
Court seeking to recover $7.6 million of alleged
preferential payments made to Triad. AHM alleges that such
payments constitute a preference and are subject to recovery by
the bankrupt estate. The time period in which to respond to this
request has been tolled pending settlement discussions in the
above-referenced AHM matter. In the event a settlement is not
successfully concluded, Triad intends to vigorously defend this
matter.
On December 11, 2009, American Home Mortgage Servicing
filed a complaint against Triad for damages, declaratory relief,
and injunction in the United States District Court, Northern
District of Texas. The complaint alleges that Triad denied
payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance
policies prohibit denial of claim without evidence of harm, and
an injunction against future like denials. Triad intends to
vigorously defend this matter.
On February 6, 2009, 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 April 1, 2008
and the complaint alleges violations of federal securities laws
by the Company and two of its present or former officers. The
court has appointed lead counsel for the plaintiff and an
amended complaint was filed on June 22, 2009. We filed our
motion to dismiss the amended complaint on August 21, 2009
and the plaintiff filed its opposition to the motion to dismiss
on October 20, 2009. Our reply was filed on
November 19, 2009 and we are awaiting the Courts
decision on our motion to dismiss.
On March 5, 2010, Countrywide Home Loans, Inc. filed a
lawsuit in the Los Angeles County Superior Court of the State of
California alleging breach of contract and seeking a declaratory
judgment that bulk rescissions of flow loans is improper and
that Triad is improperly rescinding loans under the terms of its
master policies. Triad intends to vigorously defend this matter.
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Item 4.
|
(Removed
and Reserved).
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25
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
information
The Companys common stock traded on The NASDAQ Global
Select
Market®
(NASDAQ) until December 28, 2009, at which time
the Companys delisting from NASDAQ became effective. The
Companys decision to delist its common stock from NASDAQ
was primarily due to the Companys belief that it would not
be able to maintain (or regain) compliance with certain required
NASDAQ listing rules. 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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
0.85
|
|
|
$
|
0.12
|
|
|
$
|
10.19
|
|
|
$
|
4.10
|
|
Second Quarter
|
|
$
|
1.40
|
|
|
$
|
0.16
|
|
|
$
|
5.43
|
|
|
$
|
0.73
|
|
Third Quarter
|
|
$
|
1.82
|
|
|
$
|
0.58
|
|
|
$
|
4.49
|
|
|
$
|
0.35
|
|
Fourth Quarter
|
|
$
|
1.36
|
|
|
$
|
0.25
|
|
|
$
|
2.00
|
|
|
$
|
0.28
|
|
Effective December 28, 2009, the Companys common
stock began trading on the OTC
Bulletin Board®
and the Pink
Sheets®
Electronic OTC Markets under the symbol TGIC. At
December 31, 2009, 15,258,128 shares were issued and
outstanding.
Holders
As of March 1, 2010, the number of stockholders of record
of the Companys common stock was approximately 301. In
addition, there were approximately 3,490 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 TGI. Under
the Corrective Orders, Triad is prohibited from paying dividends
to TGI without the prior approval of the Department. 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 Department. 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, we have no intention 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
|
|
Item 6.
|
Selected
Financial Data
|
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.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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 depressed
market conditions in residential housing markets coupled with
elevated unemployment rates have subjected our business,
financial condition and results of operations to substantial
risks, many of which are summarized under Item 1A.
Risk Factors, above, which should be read in
conjunction with the following discussion.
Certain of the statements contained in this annual report on
Form 10-K
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 and
typically are identified by use of terms such as
may, will, should,
could, expect, plan,
anticipate, believe,
estimate, predict,
potential, continue and similar words,
although some forward-looking statements are expressed
differently. 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: the possibility that the Illinois Department
of Insurance may take various actions regarding Triad if it does
not operate its business in accordance with its revised
financial and operating plan and the Corrective Orders,
including seeking receivership proceedings; our ability to
operate our business in run-off and maintain a solvent run-off;
our ability to continue as a going concern; 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; the
possibility that there will not be adequate interest in the
Companys common stock to ensure efficient pricing; and the
relevant factors described in Item 1A, Risk
Factors and in the Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995 section
below, as well as in other reports and statements that we file
with the Securities and Exchange Commission. Forward-looking
statements are based upon our current expectations and beliefs
concerning future events and we undertake no obligation to
update or revise any forward-looking statements to reflect the
impact of circumstances or events that arise after the date the
forward-looking statements are made, except as required by the
federal securities laws.
Overview
Triad Guaranty Inc. (TGI) is a holding company that
historically provided private mortgage insurance coverage in the
United States through its wholly-owned subsidiary, Triad
Guaranty Insurance Corporation (TGIC). Unless the
context requires otherwise, references to Triad in
this annual report on
Form 10-K
refer to the operations of TGIC and its wholly-owned subsidiary,
Triad Guaranty Assurance Corporation (TGAC).
References to we, us, our,
and the Company refer collectively to the operations
of TGI and Triad. TGIC is an Illinois-domiciled insurance
company and TGAC is an Illinois-domiciled reinsurance company.
The Illinois Department of Insurance (the Insurance
Department) is the primary regulator of both TGIC and
TGAC. The Illinois Insurance Code grants broad powers to the
Insurance Department and its director (collectively, the
Department) to enforce rules or exercise discretion
over almost all significant aspects of our insurance business.
Triad ceased issuing new commitments for mortgage guaranty
insurance coverage on July 15, 2008 and is operating its
remaining 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; reviewing policies for the existence of
misrepresentation, fraud or non-compliance with stated programs;
and
27
settling all legitimate filed claims per the provisions of the
two Corrective Orders issued by the Department. The first
Corrective Order was issued in August 2008. The second
Corrective Order was issued in March 2009 and subsequently
amended in May 2009. These Corrective Orders, among other
things, include restrictions on the distribution of dividends or
interest on notes payable to TGI by Triad, allow management to
continue to operate Triad under close supervision, and include
restrictions on the payment of claims. Failure to comply with
the provisions of the Corrective Orders may result in the
imposition of fines or penalties or subject Triad to further
legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of 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. Insurance provided on these individual
transactions was provided through the structured bulk channel.
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 events occurs: the policy is cancelled at the
insureds request; coverage is cancelled due to
pre-determined aggregate stop loss limits being met for certain
Modified Pool transactions; we terminate the policy for
non-payment of premium; the policy defaults and we satisfy our
obligations under the insurance contact; or we rescind or deny
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 or anticipated to
be rescinded due to violations of certain provisions of a master
policy;
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investment income; and
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proceeds from the sale of assets other than the sale of
securities.
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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.
In run-off, our expenses consist primarily of:
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settled claims net of any losses ceded to captive reinsurers;
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changes in reserves for estimated future claim payments on loans
that are currently in default net of any reserves ceded to
captive reinsurers;
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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.
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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 settled;
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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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28
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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.
|
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 and our overall premium base declines over time.
Generally, the longer a policy remains on our books, or
persists, the greater the amount of premium revenue
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.
Corrective
Orders
Triad has entered into two Corrective Orders with the
Department. The first Corrective Order was entered into on
August 5, 2008 and remains in effect. This 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, that Corrective Order:
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Required Triad to submit a corrective plan to the Department;
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Prohibits all stockholder dividends from Triad to TGI without
the prior approval of the Department;
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Prohibits interest and principal payments on Triads
surplus note to TGI without the prior approval of the Department;
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Restricts Triad 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 Department;
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Requires Triad to obtain prior written approval from the
Department before entering into certain transactions with
unaffiliated parties;
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Requires Triad to meet with the Department in person or via
teleconference as necessary; and
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Requires Triad to furnish to the Department 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 Department as required
under the initial Corrective Order. The corrective plan
included, among other items, a five-year statutory financial
projection for Triad and a detailed description of our planned
course of action to address our financial condition. The
financial projections that form the basis of our corrective plan
were prepared in accordance with Statutory Accounting Principles
(SAP) set forth in the Illinois Insurance Code. We
received approval of the corrective plan from the Department in
October 2008.
Following the approval of the initial corrective plan, in the
first quarter of 2009 we revised the assumptions initially
utilized as a result of continued deteriorating economic
conditions impacting our financial condition, results of
operations and future prospects. The revised assumptions
produced a range of potential ultimate outcomes for our run-off,
but included projections showing that absent additional action
by the Department or favorable changes in our business, we would
have reported a deficiency in policyholders surplus as
calculated in accordance with SAP as early as March 31,
2009. If this statutory insolvency had occurred, the Department
likely would have instituted a receivership proceeding against
Triad, which in turn would likely have led to the institution of
bankruptcy proceedings by TGI. In an effort to protect existing
policyholders, the Department issued the second Corrective Order
effective on March 31, 2009, as amended on May 26,
2009. The second Corrective Order stipulates or prescribes:
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Effective June 1, 2009, all valid claims under Triads
mortgage guaranty insurance policies are settled 60% in cash and
40% by recording a DPO;
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29
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At March 31, 2009, Triad was required to adjust surplus and
reserves reflecting the impact of the second Corrective Order on
future settled claims;
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The DPO requires that we accrue a carrying charge based on the
investment yield earned by Triads investment portfolio;
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Triad will establish an escrow account at least equal to the DPO
balance and any associated carrying charges;
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Triad will require that any risk or obligation of any captive
reinsurer must be paid in full, and will deposit any excess
reinsurance recovery above the 60% cash payment into an escrow
account;
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Payment of the DPO and the carrying charge is subject to
Triads future financial performance and requires the
approval of the Department;
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Procedures to account for the impact of the second Corrective
Order in the financial statements prepared in accordance with
SAP;
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Upon payment of a claim under these provisions, Triad is deemed
to have fully satisfied its obligations under the respective
insurance policy;
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Other restrictions and requirements affecting the payment and
transferability of the DPOs and associated carrying
charge; and
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Certain reporting requirements.
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The DPO recording requirements of the second Corrective Order
became effective on June 1, 2009. At December 31,
2009, the recorded DPO, including a carrying charge of
$2.1 million, amounted to $168.4 million. The
recording of a DPO does not impact reported settled losses as we
continue to report the entire amount of a claim in our statement
of operations. The accounting for the DPO on a SAP basis is
similar to a surplus note which is reported as a component of
statutory surplus; accordingly, any repayment of the DPO or the
associated carrying charge requires approval of the Department.
However, in our financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP) included in this report, the DPO is
reported as a liability.
Failure to comply with the provisions of the Corrective Orders
or any other violation of the Illinois Insurance Code may result
in the imposition of fines or penalties or subject Triad to
further legal proceedings, including the institution by the
Department of receivership proceedings for the conservation,
rehabilitation or liquidation of Triad. 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 Department
in the implementation of the Corrective Orders.
Recent
Events Affecting our Business
Our operating results and financial condition continue to be
negatively impacted by the adverse conditions present in the
housing and mortgage markets, including, but not limited to,
declines in home prices and a restrictive credit environment,
combined with high levels of unemployment and the recessionary
economic environment in general. We believe these conditions
will persist for an extended period of time and will continue to
have an adverse impact on our financial results.
Prior to the second Corrective Order, our recurring losses from
operations and resulting decline in policyholders surplus
as calculated in accordance with SAP increased the likelihood
that Triad would be placed into receivership and raised
substantial doubt about our ability to continue as a going
concern. The positive impact on surplus resulting from the
second Corrective Order has resulted in Triad reporting a
policyholders surplus in its SAP financial statements of
$122.8 million at December 31, 2009, as opposed to a
deficiency in policyholders surplus of $597.8 million
on the same date had the second Corrective Order not been
implemented. While implementation of the second Corrective Order
has deferred the institution of an involuntary receivership
proceeding, no assurance can be given that the Department will
not seek receivership of Triad in the future
30
and there continues to be substantial doubt about our ability to
continue as a going concern. The Department may seek
receivership of Triad based on its determination that Triad will
ultimately become insolvent or for other reasons stated above.
If the Department were to seek receivership of Triad, TGI could
be compelled to institute a proceeding seeking relief from
creditors under U.S. bankruptcy laws. Our consolidated
financial statements that are presented in this report do not
include any adjustments that reflect the financial risks of
Triad 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 implementation of the revised
corrective plan. See Item 1A, Risk Factors for
more information about our financial solvency and going concern
risks and uncertainties.
On September 4, 2009, we filed a complaint against American
Home Mortgage (AHM) in the United States Bankruptcy
Court for the District of Delaware seeking rescission of
multiple master mortgage guaranty insurance policies
(master policies) and declaratory relief. The
complaint seeks relief from AHM as well as all owners of loans
insured under the master policies by way of a defendant class
action. We alleged that AHM failed to follow the delegated
insurance underwriting guidelines approved by Triad, that this
failure breached the master policies as well as the implied
covenants of good faith and fair dealing, and that these
breaches were so substantial and fundamental that the intent of
the master policies could not be fulfilled and Triad should be
excused from its obligations under the master policies. The
total amount of risk originated under the AHM master policies,
accounting for any applicable stop loss limits associated with
modified pool contracts, was $1.6 billion, of which
$1.1 billion remains in force at December 31, 2009. We
continue to accept premiums and process claims under the master
policies but, as a result of this action, we ceased remitting
claim payments to companies servicing loans originated by AHM.
Both premiums and claim payments subsequent to the filing of the
complaint have been segregated pending resolution of this
action. We have not recognized any benefit in our financial
statements pending the outcome of the litigation. See
Item 3, Legal Proceedings for more information.
On December 1, 2009, we sold our information technology and
operating platform to Essent Guaranty, Inc.
(Essent), a new mortgage insurer. Under the terms of
the agreement, Essent acquired all of our proprietary mortgage
insurance software and substantially all of the supporting
hardware, as well as certain other assets, in exchange for up to
$30 million in cash and assumption by Essent of certain
contractual obligations. Approximately $15 million of the
consideration is fixed and up to an additional $15 million
is contingent on Essent writing a certain minimum amount of
insurance in the five-year period following closing. On
December 1, 2009, we received the initial $10 million
installment of the purchase price. Essent has established its
operations and technology center in Winston-Salem, North
Carolina and a number of our former information technology and
operations employees have joined Essent as contemplated by the
agreement. At the closing of the transaction with Essent, we
also entered into a services agreement, pursuant to which Essent
is providing ongoing information systems maintenance and
services, customer service and policy administration support to
Triad. Triad may, at any time during the period beginning two
years and ending seven years after the closing of the
transaction with Essent, obtain a copy of the program object
code, source code and documentation relating to the proprietary
mortgage insurance software developed by Triad and sold in the
transaction, solely for its own internal business purposes.
Should Triad exercise this option, the services agreement would
terminate and any remaining contingent amounts owed under the
purchase agreement would no longer be payable to Triad. See
Item 1A, Risk Factors for more information on
the risks associated with this transaction.
At December 31, 2009, we reported a deficit in assets under
GAAP of $706.4 million compared to a deficit in assets of
$136.7 million at December 31, 2008. A deficit in
assets occurs when recorded liabilities exceed recorded assets
in financial statements prepared under GAAP and is not
necessarily a measure of insolvency. The growth in the deficit
in assets is the result of the substantial increase in loss
reserves and settled claims over the past two years, reflecting
the continued decline in housing and mortgage loan conditions.
We will have to earn in excess of $706.4 million on a GAAP
basis during the remaining run-off period and continue to meet
our debt obligations in order to become financially solvent and
continue as a going concern. We expect to continue to report a
deficit in assets for the foreseeable future. See Item 1A,
Risk Factors for more information about our
financial solvency and going concern risks and uncertainties.
We have identified a substantial number of underwriting or
program violations and borrowers misrepresentations in the
defaults reported to us. As a result, we have subsequently
rescinded or cancelled coverage on these
31
policies at a rate substantially greater than we have
historically experienced. While we expect to continue to settle
all legitimate claims, we expect the elevated level of
rescission activity will continue in 2010 based on the number of
policies under review and the number of occurrences of master
policy violations identified during 2009. The impact of
rescissions on reserves provided and accruals for anticipated
premium refunds has been significant. See Update on
Critical Accounting Policies and Estimates in this report
for additional discussion on rescissions.
There have been numerous news reports on the elevated level of
rescission and denial activity by the private mortgage insurance
industry and the effect on lenders and legal action has been
initiated against certain mortgage insurers. On
December 11, 2009, American Home Mortgage Servicing filed a
complaint against Triad for damages, declaratory relief, and
injunction in the United States District Court, Northern
District of Texas. The complaint alleges that Triad denied
payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance
policies prohibit denial of claim without evidence of harm, and
an injunction against future like denials. See Item 3,
Legal Proceedings, for more information.
As a result of the increase in our rescission and denial
activity, we believe we face an increased risk of litigation.
Any impediment to our ability to rescind coverage for
underwriting violations would be detrimental to our success in
run-off. See Item 1A, Risk Factors, for more
information.
In December 2009, we delisted our common stock from The NASDAQ
Stock Market. We decided to delist our common stock because of
our belief that we would be unable to regain compliance prior to
the expiration of the grace period with at least one of the two
NASDAQ continued listing requirements that we were out of
compliance with at the time and our inability to transfer our
listing to another NASDAQ tier. As a result of the delisting, we
are currently quoted on the
over-the-counter
market on the OTC
Bulletin Board®
and the Pink
Sheets®
under the symbol TGIC. We believe there may be
certain risks in investing in
over-the-counter
stocks that are not present in stocks listed on a stock exchange
such as NASDAQ. See Item 1A, Risk Factors, for
more information.
Since the latter part of 2008, several programs have been
initiated by the federal government and implemented through the
government sponsored entities (GSEs) and lenders
that are, in general, designed to prevent foreclosures and
provide relief to homeowners and to the financial markets. These
programs involve both modifications to the original terms of
existing mortgages and complete refinancings. These programs are
designed to provide a means for borrowers to qualify for lower
payments by modifying the interest rate or extending the term of
the mortgage. Several of these programs have subsequently been
expanded or extended and may continue to change as the Federal
government continues to seek ways to help prevent foreclosures.
While we are actively working with both servicers and the GSEs
in the implementation of these programs, they are in the early
stages of development and the results to date have not been
meaningful to our operations. To a large degree, the benefit we
receive from these programs is dependent on the efforts of
servicers and the GSEs. If a loan is modified or refinanced as
part of one of these programs, we intend to maintain insurance
on the loan and are subject to the same ongoing risk if the
policy were to re-default. We have seen only a marginal positive
impact from these programs through December 31, 2009. The
ultimate impact of these government programs on our future
results of operations and prospects are unknown at this time.
This uncertainty around the impact of these programs is
amplified by the complexity of the programs, our reliance on
loan servicers to implement the programs, and conditions within
the housing market and the economy, among other factors. See
Item 1A, Risk Factors for more information.
Consolidated
Results of Operations
Following is selected financial information for the last two
years:
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Year Ended
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|
|
|
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|
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December 31,
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|
|
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|
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2009
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|
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2008
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|
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% Change
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|
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|
(Dollars in thousands, except per share data)
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|
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Earned premiums
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|
$
|
179,658
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|
|
$
|
257,423
|
|
|
|
(30
|
)
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Net losses and loss adjustment expenses
|
|
|
807,627
|
|
|
|
923,301
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|
|
|
(13
|
)
|
Net loss
|
|
|
(595,632
|
)
|
|
|
(631,127
|
)
|
|
|
(6
|
)
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Diluted loss per share
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|
$
|
(39.70
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)
|
|
$
|
(42.27
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)
|
|
|
(6
|
)
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32
The primary driver for the 2009 net loss continues to be
the high level of net losses and loss adjustment expenses
(LAE) combined with a large drop in earned premiums.
The level of net losses and LAE was primarily impacted by the
continued depressed economic conditions, particularly those
related to unemployment as well as the housing and mortgage
markets.
Net losses and LAE are comprised of settled claims and LAE as
well as the increase in the loss and LAE reserves net of any
reinsurance recoverables. Net losses and LAE were
$807.6 million for the twelve months ended
December 31, 2009 and were composed of net settled claims
and LAE of $535.1 million and an increase in net loss and
LAE reserves of $272.5 million. Net settled losses and LAE
increased by $277.3 million or 108% during the year ended
December 31, 2009 compared to the respective period of 2008
as the number of settled claims and average settled loss
continued to increase. This increase was mitigated somewhat by
increased rescission activity. The growth in net loss and LAE
reserves during 2009 primarily reflects a 43% and 33% increase
in the number of reported loans in default and risk in default,
respectively, although this was offset somewhat by an increase
in the rescission factor used in the estimate of loss reserves
as well as an increased benefit realized from modified pool stop
loss limits.
Earned premiums decreased in 2009 compared to 2008 primarily due
to paid refunds and expected refunds of premium from rescission
activity as well as the decline in insurance in force. Paid
refunds and the increase in the accrual for expected refunds of
premium totaled $76.5 million during 2009 compared to
$27.4 million during 2008.
Certain segments of our insured portfolio continue to perform
more adversely when compared to the rest of the portfolio. These
segments include:
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Loans on properties in California, Florida, Arizona, and Nevada
(collectively referred to as distressed
markets) At December 31, 2009, the
default rate for the distressed markets was 36.8% compared to
14.9% for the remaining portfolio and the risk in default in the
distressed markets comprised 52.5% of the gross risk in default
while only comprising 32.2% of total risk in force. We believe
the adverse performance of the distressed markets was, in part,
due to non-sustainable levels of house price appreciation in the
years prior to 2007 and the subsequent unprecedented
depreciation in house prices that has continued. In general, the
non-distressed markets have not experienced the significant
collapse in house prices that have occurred in the distressed
markets. During 2009, however, risk in default in the
non-distressed markets grew 59.6% compared to a growth rate of
16.0% in the distressed markets. We believe the growing
deterioration in the non-distressed markets is a result of high
unemployment, although the general depressed conditions in house
prices and credit markets have also had an adverse impact.
Defaults in the distressed markets also comprised a large
percentage of paid claims and rescinded policies which mitigated
the growth rate in risk in default in these markets.
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|
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Policies originated in 2006 and 2007 At
December 31, 2009, the default rate for these policy years
was 27.1% and 26.6%, respectively, compared to 14.4% for the
other policy years combined. Defaults in these policy years
comprised 70.2% of our gross risk in default while only
comprising 55.7% of our total risk in force. All policy years,
however, experienced a large increase in default rates in 2009.
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We describe our results of operations in greater detail in the
discussion that follows. The information is presented in four
categories: Production; Insurance and Risk in Force; Revenues;
and Losses and Expenses.
Production
On July 15, 2008, we ceased issuing commitments for
mortgage insurance. Our future production, if any, will consist
of certificates issued from commitments for mortgage insurance
that were entered into prior to July 15, 2008 and will be
immaterial to our results of operations. In 2009, we wrote
$42.9 million of new insurance compared to
$3.5 billion in 2008. All production in 2009 and 2008 was
from our Primary flow channel.
33
Insurance
and Risk in Force
The following table provides detail on our direct insurance in
force at December 31, 2009 and 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Primary insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow primary insurance
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|
$
|
32,856
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|
|
$
|
39,370
|
|
|
|
(17
|
)
|
Structured bulk insurance
|
|
|
3,064
|
|
|
|
3,902
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance
|
|
|
35,920
|
|
|
|
43,272
|
|
|
|
(17
|
)
|
Modified Pool insurance
|
|
|
14,584
|
|
|
|
19,312
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
$
|
50,504
|
|
|
$
|
62,584
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historically, cancellation of insurance coverage has been
primarily due to refinance or sales activity and has an inverse
correlation to the movement in mortgage rates. Although mortgage
rates remain at historically low levels, refinance activity has
been minimal for the past two years. We believe this is
primarily due to the general inability of borrowers to refinance
or sell their homes as a result of stricter underwriting
guidelines by lenders as well as the decline in home prices
since 2007.
The decline in insurance in force in 2009 and 2008 reflects the
lack of writing new business as well as the cancellation of
insurance coverage resulting from claim settlement and
rescission activity. Furthermore, during the fourth quarter of
2009, insurance coverage was terminated on four Modified Pool
transactions when pre-determined aggregate stop loss limits in
the contracts were met. A small portion of our Modified Pool
contracts contain provisions that terminate coverage and the
contract when cumulative settled losses reach the stop loss
limit. No future premium is received following the termination
of one of these Modified Pool contracts. We expect that several
other Modified Pool transactions will also reach their
respective stop loss limits during 2010 and terminate, which
would result in an estimated decline in premiums of
approximately $3.8 million from what was earned in 2009.
The majority of our Modified Pool contracts do not terminate
when settled losses reach the stop loss limit.
This decline in insurance in force was moderated by very strong
persistency over recent periods. Primary insurance persistency
was 82.9% at December 31, 2009 compared to 86.6% at
December 31, 2008. Modified pool insurance persistency was
75.5% at December 31, 2009 compared to 88.3% at
December 31, 2008 and was impacted by the cancellation of
the Modified Pool transactions. While interest rates available
currently in the marketplace are lower than those on our
existing portfolio, we do not believe that factor will have a
significant impact on persistency in the immediate future as
many borrowers are unable to meet more stringent underwriting
guidelines regarding equity or
debt-to-income
levels to facilitate a refinancing or sell an existing property.
Given the lack of production during 2009 and the high level of
persistency, the composition of our risk in force has remained
relatively consistent with that of a year ago. Additionally,
while our exposure to the distressed markets expressed as a
percentage of our total risk in force remained relatively
constant during 2009, the contribution to losses from the
distressed markets has been disproportionally higher.
Our portfolio contains significant exposure to Alt-A loans,
loans with the potential for negative amortization (pay
option ARM), as well as interest only loans. An inherent
risk in both a pay option ARM loan and an interest only loan is
the impact of 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 a pay option ARM
loan is that the payment being made may be less than the amount
of interest accruing, creating negative amortization on the
outstanding principal of the loan. We define Alt-A loans as
loans that have been underwritten with reduced or no
documentation verifying the borrowers income, assets, or
employment and where the borrower has a FICO score greater than
619. We have found a substantial amount of misrepresentation and
fraud on the Alt-A loans in our portfolio. Due in part to recent
conditions in the housing markets, the Alt-A loans, pay option
ARM loans, and interest only loans have, as a group, performed
significantly worse than the remaining prime fixed rate loans
through December 31, 2009.
34
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 with declining or depressed home
prices. 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 significant 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 the LTV 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. The premium rates charged for business originated in
2005, 2006 and 2007, and specifically for high risk products
including pay options ARMs and Alt-A loans, may not generate
ongoing premium revenue sufficient to cover future losses.
The following table shows direct risk in force as of
December 31, 2009 and December 31, 2008 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 large number of policies that have been cancelled
from prior origination years. 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 and claim rates than preceding
vintage years. For additional information regarding these
vintage years, see Losses and Expenses, below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
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)
|
|
|
2004 and before
|
|
$
|
2,018.3
|
|
|
|
21.4
|
%
|
|
$
|
712.8
|
|
|
|
16.9
|
%
|
|
$
|
2,435.7
|
|
|
|
21.6
|
%
|
|
$
|
801.1
|
|
|
|
14.2
|
%
|
2005
|
|
|
1,207.3
|
|
|
|
12.9
|
|
|
|
1,494.6
|
|
|
|
35.5
|
|
|
|
1,405.6
|
|
|
|
12.5
|
|
|
|
1,899.0
|
|
|
|
33.8
|
|
2006
|
|
|
1,907.2
|
|
|
|
20.4
|
|
|
|
1,336.7
|
|
|
|
31.8
|
|
|
|
2,386.0
|
|
|
|
21.2
|
|
|
|
2,111.6
|
|
|
|
37.7
|
|
2007
|
|
|
3,649.2
|
|
|
|
39.0
|
|
|
|
664.8
|
|
|
|
15.8
|
|
|
|
4,376.5
|
|
|
|
38.9
|
|
|
|
802.6
|
|
|
|
14.3
|
|
2008
|
|
|
586.8
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
654.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,368.7
|
|
|
|
100.0
|
%
|
|
$
|
4,208.8
|
|
|
|
100.0
|
%
|
|
$
|
11,258.5
|
|
|
|
100.0
|
%
|
|
$
|
5,614.3
|
|
|
|
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 53% of our Primary flow insurance in force was
subject to captive reinsurance arrangements at December 31,
2009 compared to 55% at December 31, 2008. 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 and we are the beneficiary. At
December 31, 2009, we had approximately $257 million
in captive reinsurance trust balances with $229 million of
reserves ceded to those captives. The majority of the captive
reinsurance arrangements have trust balances below the reserves
ceded under the contracts. In those cases, the net reserve
credit that we recognize in our financial statements is limited
to the trust balances because we have no contractual right to
require additional capital contributions. As a result, we expect
limited benefit in future periods from these arrangements.
During 2009, we terminated three captive reinsurance
arrangements and received approximately $18.9 million of
trust assets. We also commuted one captive reinsurance
arrangement and the majority of the trust assets were remitted
to the reinsurer. The terminations and commutation resulted in
an increase in cash and invested assets and a corresponding
decrease in reinsurance recoverable. The terminations and
commutation had no material impact on our results of operations
or financial condition.
Additionally, in March 2010 we entered into a commutation
agreement with our largest captive reinsurance partner. Under
terms of the commutation agreement, we will assume all liability
for the existing and future claims covered by the reinsurance
and trust agreement in exchange for the entire trust balance of
approximately $142.0 million. We do not expect the
transaction will have any impact on the statement of operations
for the
35
first quarter of 2010. We are currently in discussion with other
captive reinsurers regarding the termination or commutation of
their treaties.
Revenues
A summary of the individual components of our revenue for the
past two years follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Direct premium written before the impact of refunds
|
|
$
|
293,485
|
|
|
$
|
343,668
|
|
|
|
(15
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash refunds primarily related to rescissions
|
|
|
(46,070
|
)
|
|
|
(11,436
|
)
|
|
|
303
|
|
Change in refund accruals primarily related to rescissions
|
|
|
(30,403
|
)
|
|
|
(15,922
|
)
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct premium written
|
|
|
217,012
|
|
|
|
316,310
|
|
|
|
|
|
Ceded premium written
|
|
|
(40,872
|
)
|
|
|
(60,777
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium written
|
|
|
176,140
|
|
|
|
255,533
|
|
|
|
(31
|
)
|
Change in unearned premiums
|
|
|
3,518
|
|
|
|
1,890
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
179,658
|
|
|
$
|
257,423
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
44,133
|
|
|
$
|
39,580
|
|
|
|
12
|
|
Net realized investment (losses) gains
|
|
$
|
1,354
|
|
|
$
|
(26,559
|
)
|
|
|
(105
|
)
|
Other income
|
|
$
|
12,666
|
|
|
$
|
8
|
|
|
|
158,225
|
|
Total revenues
|
|
$
|
237,811
|
|
|
$
|
270,452
|
|
|
|
(12
|
)
|
The decrease in direct premium written in 2009 is the result of
the impact of premium refunds from rescissions and a 19.3%
decline in insurance in force over the one-year prior period.
Rescission activity increased substantially during 2009 compared
to 2008. When we rescind coverage on a policy, the entire
previously paid premium is refunded. Cash premium refunded
during 2009, primarily due to rescission activity, was 15.7% of
direct premium written before the impact of refunds compared to
3.3% for 2008. We also establish an accrual for expected premium
refunds on policies that are currently under investigation for
rescission. During 2009, the rescission factors used in our
reserve methodology were incrementally increased, which also
caused corresponding increases in the accrual for anticipated
premium refunds. The increases in rescission factors were based
upon actual substantially increased rescission activity than
what we had previously utilized in our reserve methodology. At
December 31, 2009 we accrued $47.5 million of premium
refunds on our balance sheet compared to $17.1 million at
December 31, 2008.
Ceded premium written is comprised primarily of premiums written
under excess of loss reinsurance treaties with captives. Ceded
premium during 2009 decreased over 2008 due to: (1) a
decrease in insurance in force subject to captive reinsurance as
a result of policy cancellations and the termination or
commutation of certain reinsurance arrangements; and
(2) the establishment of an accrual to account for the
rescission of coverage on policies subject to captive
reinsurance and the expected refunds of premiums previously
ceded. The premium cede rate decreased slightly to 18.8% for
2009 compared to 19.2% for 2008.
Other income in 2009 primarily represents the gain recognized on
the sale of the rights to the mortgage insurance operating
system and certain hardware to Essent. The gain recognized
reflects the guaranteed sales price; future contingent
consideration was not considered in calculating the gain.
Net investment income grew by 11.5% during 2009 compared to
2008, primarily due to the accretion of discount of previously
impaired securities. Average invested assets at cost or
amortized cost decreased by less than 1% in 2009 as a result of
negative operating cash flow and the write down of
other-than-temporarily
impaired securities. When a performing asset is impaired and the
resulting book value is below the par value, Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 320,
Investments Debt and Equity Securities
(ASC 320), provides that the investment income
in subsequent periods will be
36
increased by the accretion of the revised discount amount of the
impairment over the remaining expected life of the security. For
a further discussion, see Investment Portfolio.
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,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settled claims
|
|
$
|
515,413
|
|
|
$
|
237,080
|
|
|
|
117
|
|
Net change in loss reserves
|
|
|
272,553
|
|
|
|
665,549
|
|
|
|
(59
|
)
|
Loss adjustment expenses
|
|
|
19,661
|
|
|
|
20,672
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
807,627
|
|
|
$
|
923,301
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs
|
|
$
|
|
|
|
$
|
39,416
|
|
|
|
(100
|
)
|
Other operating expenses (net of acquisition costs deferred)
|
|
$
|
35,911
|
|
|
$
|
58,709
|
|
|
|
(39
|
)
|
Loss ratio
|
|
|
449.5
|
%
|
|
|
358.7
|
%
|
|
|
25
|
|
Expense ratio
|
|
|
20.4
|
%
|
|
|
24.8
|
%
|
|
|
(18
|
)
|
Combined ratio
|
|
|
469.9
|
%
|
|
|
383.5
|
%
|
|
|
23
|
|
Net losses and LAE are comprised of settled claims and LAE as
well as the increase in the loss and LAE reserve during the
period.
The following table provides details on the amount of settled
claims and the number of settled claims of both Primary and
Modified Pool insurance for the years ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net settled claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
$
|
360,613
|
|
|
$
|
190,836
|
|
|
|
89
|
|
Modified Pool insurance
|
|
|
214,837
|
|
|
|
46,742
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct settled claims
|
|
|
575,450
|
|
|
|
237,578
|
|
|
|
142
|
|
Ceded Paid Losses
|
|
|
(60,037
|
)
|
|
|
(498
|
)
|
|
|
11,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net settled claims
|
|
$
|
515,413
|
|
|
$
|
237,080
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of claims settled:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary insurance
|
|
|
6,117
|
|
|
|
3,662
|
|
|
|
67
|
|
Modified Pool insurance
|
|
|
3,175
|
|
|
|
758
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,292
|
|
|
|
4,420
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of claims settled during 2009 increased over 2008
primarily as a result of the aging of the default inventory.
Another contributing factor to the increase in settled claims
was the end of certain lender and GSE foreclosure moratoriums
that had previously delayed the completion of the foreclosure
process, which is generally necessary before a claim can be
filed. Average severity, which is calculated by dividing total
direct settled claims by the number of claims settled, increased
to $61,900 in 2009 from $53,800 in 2008 reflecting a larger
percentage of our paid claims from the more recent vintage
years, specifically the 2006 and 2007 vintage years, and the
distressed markets, both of which reflect larger loan balances
(see tables below for more detail).
37
The following table shows the average loan size and average risk
per policy by vintage year. Policies originated during 2006 and
2007 comprised approximately 67.3% of our 2009 settled claims
compared to 38.4% in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
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
|
|
|
2004 and Prior
|
|
$
|
115,009
|
|
|
$
|
29,588
|
|
|
$
|
137,459
|
|
|
$
|
40,939
|
|
|
$
|
117,899
|
|
|
$
|
29,994
|
|
|
$
|
140,513
|
|
|
$
|
41,805
|
|
2005
|
|
|
154,263
|
|
|
|
40,777
|
|
|
|
172,011
|
|
|
|
55,570
|
|
|
|
156,011
|
|
|
|
40,983
|
|
|
|
177,143
|
|
|
|
57,679
|
|
2006
|
|
|
200,178
|
|
|
|
51,909
|
|
|
|
263,390
|
|
|
|
66,617
|
|
|
|
207,918
|
|
|
|
53,710
|
|
|
|
263,356
|
|
|
|
69,310
|
|
2007
|
|
|
202,948
|
|
|
|
54,421
|
|
|
|
268,527
|
|
|
|
78,303
|
|
|
|
207,159
|
|
|
|
55,755
|
|
|
|
272,745
|
|
|
|
79,194
|
|
2008
|
|
|
202,737
|
|
|
|
46,761
|
|
|
|
|
|
|
|
|
|
|
|
204,341
|
|
|
|
46,952
|
|
|
|
|
|
|
|
|
|
Overall Average
|
|
$
|
167,720
|
|
|
$
|
43,745
|
|
|
$
|
200,165
|
|
|
$
|
57,765
|
|
|
$
|
171,463
|
|
|
$
|
44,612
|
|
|
$
|
208,361
|
|
|
$
|
60,572
|
|
The following table shows the average loan size and average risk
per policy for the distressed markets compared to the remainder
of the portfolio. Policies from the distressed markets comprised
54.5% of our 2009 settled claims compared to 31.1% in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
Primary
|
|
|
Modified Pool
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Loan Size
|
|
|
Insured Risk
|
|
|
Distressed States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
321,759
|
|
|
$
|
79,797
|
|
|
$
|
328,631
|
|
|
$
|
87,058
|
|
|
$
|
338,511
|
|
|
$
|
84,726
|
|
|
$
|
332,252
|
|
|
$
|
88,693
|
|
Florida
|
|
|
196,021
|
|
|
|
51,909
|
|
|
|
203,540
|
|
|
|
55,475
|
|
|
|
202,670
|
|
|
|
53,737
|
|
|
|
211,933
|
|
|
|
58,047
|
|
Arizona
|
|
|
191,560
|
|
|
|
49,974
|
|
|
|
197,569
|
|
|
|
60,096
|
|
|
|
199,468
|
|
|
|
52,504
|
|
|
|
204,922
|
|
|
|
63,292
|
|
Nevada
|
|
|
219,335
|
|
|
|
58,382
|
|
|
|
219,730
|
|
|
|
68,718
|
|
|
|
243,600
|
|
|
|
65,888
|
|
|
|
227,631
|
|
|
|
72,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average distressed states
|
|
$
|
229,695
|
|
|
$
|
59,308
|
|
|
$
|
253,891
|
|
|
$
|
69,887
|
|
|
$
|
242,075
|
|
|
$
|
62,856
|
|
|
$
|
260,512
|
|
|
$
|
72,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-distressed states
|
|
$
|
153,181
|
|
|
$
|
40,095
|
|
|
$
|
166,741
|
|
|
$
|
50,223
|
|
|
$
|
154,678
|
|
|
$
|
40,275
|
|
|
$
|
172,285
|
|
|
$
|
52,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Average
|
|
$
|
167,720
|
|
|
$
|
43,745
|
|
|
$
|
200,165
|
|
|
$
|
57,765
|
|
|
$
|
171,463
|
|
|
$
|
44,612
|
|
|
$
|
208,361
|
|
|
$
|
60,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average severity in 2009 continued to be influenced by our
reduced ability to mitigate claims. The decline in home prices
since 2007 across almost all markets, with significant declines
in the distressed markets, combined with reduced mortgage credit
availability have continued to negatively impact our ability to
mitigate losses through the sale of properties. Policies
originated in 2006 and 2007 have been particularly impacted by
the decline in home prices as these borrowers have had less time
to build up equity before the decline in prices. 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. A greater concentration of settled claims in distressed
markets or more recent policy years will exacerbate this effect.
We expect that, in general, the number and amount of settled
claims will increase in 2010. Longer-term future claim
settlement activity, however, remains uncertain due to
rescission activity as well as government and other efforts to
stem the level of foreclosures. During 2009, we rescinded
coverage on loans with $683 million of risk in default
compared to $244 million of risk in default during 2008. We
believe the majority of the rescinded risk in default would have
ultimately proceeded to foreclosure and resulted in settled
claims. At December 31, 2009, approximately 30% of the
policies in our default inventory were under review for fraud or
misrepresentation and we currently expect a significant
percentage of these to be rescinded. The degree to which
policies are rescinded could have a substantial impact on
settled claim activity and our results of operations in 2010.
Several programs initiated by the federal government are, in
general, designed to prevent foreclosures and provide relief to
homeowners and to the financial markets. One such program is the
HAMP, which provides incentives to borrowers, servicers, and
lenders to modify loans with the modifications jointly paid for
by lenders and the U.S. government. This program was in
place for most of 2009, although activity was slow to develop.
At December 31, 2009, we had been notified that
approximately 8,000 of the loans that we insure were in some
stage of participation in HAMP, although very few have
successfully completed the trial modification period. We rely on
information concerning HAMP provided to us by the GSEs and
servicers. We do not believe that we receive timely
38
information on all of the loans participating in these programs
nor the current status of the participating loans and we do not
have the necessary information to determine the number of our
policies in force that would be eligible for such modification
programs. This affects our ability to evaluate the ultimate
success rate of HAMP and other such programs and, therefore, the
impact on our results of operations and financial condition. If
HAMP and/or
similar programs prove to be effective in preventing ultimate
foreclosure, future settled claim activity could be reduced.
The table below provides a trend analysis of the gross
cumulative incurred loss incidence rate by book year (calculated
as cumulative gross losses settled plus loss reserves, excluding
the impact of modified pool and captive structures, divided by
policy risk originated, in each case for a particular book year)
as it has developed for each three-month period beginning
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
Book Year
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2000 & Prior
|
|
|
1.02
|
%
|
|
|
1.01
|
%
|
|
|
1.00
|
%
|
|
|
0.99
|
%
|
|
|
0.99
|
%
|
|
|
0.98
|
%
|
2001
|
|
|
1.50
|
%
|
|
|
1.46
|
%
|
|
|
1.44
|
%
|
|
|
1.42
|
%
|
|
|
1.42
|
%
|
|
|
1.38
|
%
|
2002
|
|
|
2.13
|
%
|
|
|
2.08
|
%
|
|
|
2.01
|
%
|
|
|
1.94
|
%
|
|
|
1.92
|
%
|
|
|
1.87
|
%
|
2003
|
|
|
2.17
|
%
|
|
|
2.04
|
%
|
|
|
1.86
|
%
|
|
|
1.70
|
%
|
|
|
1.66
|
%
|
|
|
1.59
|
%
|
2004
|
|
|
4.37
|
%
|
|
|
3.97
|
%
|
|
|
3.50
|
%
|
|
|
2.86
|
%
|
|
|
2.52
|
%
|
|
|
2.21
|
%
|
2005
|
|
|
10.93
|
%
|
|
|
10.51
|
%
|
|
|
8.85
|
%
|
|
|
6.71
|
%
|
|
|
5.30
|
%
|
|
|
4.45
|
%
|
2006
|
|
|
15.10
|
%
|
|
|
16.41
|
%
|
|
|
15.19
|
%
|
|
|
10.46
|
%
|
|
|
9.39
|
%
|
|
|
7.83
|
%
|
2007
|
|
|
14.82
|
%
|
|
|
13.42
|
%
|
|
|
12.05
|
%
|
|
|
7.72
|
%
|
|
|
6.46
|
%
|
|
|
5.66
|
%
|
2008
|
|
|
4.29
|
%
|
|
|
3.66
|
%
|
|
|
2.83
|
%
|
|
|
1.83
|
%
|
|
|
1.30
|
%
|
|
|
0.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Cummulative Total:
|
|
|
7.25
|
%
|
|
|
7.10
|
%
|
|
|
6.39
|
%
|
|
|
4.63
|
%
|
|
|
4.03
|
%
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to 2007, the policies that we insured historically
defaulted for a variety of reasons, but primarily due to loss of
employment, divorce, or illness of a mortgage holder.
Historically, we expected the gross cumulative incurred loss
incidence rate for a specific book year to also increase over
time as the incidence of default is relatively low in the first
few years of development, typically reaches its peak in the
second through the fifth year after loan origination, and will
moderately increase over time as a small number of policies
continue to default.
However, in addition to the above factors, the incidence of
default in the current environment has been and continues to be
adversely impacted by the significant decline in home prices
throughout the United States. The more recent book years
particularly have been impacted and, as the above table
indicates, the 2005, 2006 and 2007 book years are exhibiting
significantly adverse performance compared to the more developed
earlier book years. We do not expect this adverse performance to
subside and expect the gross cumulative incurred loss incidence
rate of these book years to ultimately be significantly higher
than our previous books of business.
Approximately 14.6% of our insurance in force at
December 31, 2009 is comprised of pay-option ARM loans, the
majority of which were originated in 2005, 2006 and 2007. The
performance of these loans has been, in general, worse than that
of our other insured loans. As described above, the structure of
a pay-option ARM loan poses certain inherent risks, including
the potential for payment shock and negative amortization.
Historically, the performance of pay-option ARM loans has
benefitted from, and the risk has been mitigated by, home price
appreciation and the ability to refinance before amortizing
payments are required. We do not believe these historical
mitigating factors are present to any meaningful degree in the
current environment.
We are not provided with information on whether a borrower is
required to make amortizing payments but we are provided
information on the accumulation of negative amortization. The
majority of our pay-option ARM loan portfolio has accumulated
negative amortization and we believe the majority of this
portfolio is approaching the milestone where amortizing payments
will be required. As a result, our pay-option ARM loans may face
a significant payment shock in the current and future periods
which increases our risk of loss.
39
Net losses and LAE also include the change in reserves for
losses and LAE. The following table shows the change in reserves
for losses and LAE for 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Increase in reserve for losses and LAE on a gross basis before
the benefit of captives and Modified Pool structures
|
|
$
|
698,468
|
|
|
$
|
875,959
|
|
|
|
(20
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded reserves to captive reinsurers
|
|
|
72,370
|
|
|
|
149,531
|
|
|
|
(52
|
)
|
Impact of Modified Pool structures
|
|
|
349,265
|
|
|
|
48,059
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in reserve for losses and loss adjustment expenses
|
|
$
|
276,833
|
|
|
$
|
678,369
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve for losses and LAE on a gross basis, before the
benefit of captives and Modified Pool structures, increased by
53.9%, or $698.5 million, during 2009. This increase was
primarily due to a 43.4% increase in the number of policies in
default as well as an increase in the severity factor utilized
in our reserve estimation. The increase in reserve for losses
and LAE on a gross basis was also impacted by an increase in the
overall frequency factor used in estimating reserves as cures of
loans in default continued to drop dramatically. However, the
overall frequency factor increase was mitigated somewhat by an
increase in the rescission factor component reflecting an
increase in the number of policies currently in default that we
expect to rescind. The rescission factor incorporated in the
loss reserve calculation mitigated the increase in gross
reserves and LAE by 30.1% at December 31, 2009 compared to
18.9% at December 31, 2008.
The increase in net loss and LAE reserves was mitigated
substantially by stop loss levels in Modified Pool transactions
and, to a lesser degree, by captive reinsurance structures. We
do not provide reserves on Modified Pool defaults where the
cumulative incurred losses to date for the related transaction
have exceeded the stop loss limit. The benefit received from
Modified Pool stop loss levels accounted for 56.1% of the change
in gross reserves and LAE in 2009 compared to 4.4% in 2008. The
table below reports on the performance and remaining risk
exposure of vintage year modified pool transactions. A
significant portion of the Modified Pool transactions from the
2005, 2006 and 2007 policy years have reached the
transactions stop loss limit on an incurred basis given
the adverse development of this business. As a result,
additional new defaults on this Modified Pool business will have
a limited net impact on future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross Risk
|
|
|
Total
|
|
|
Remaining
|
|
|
Gross Risk
|
|
|
Total
|
|
|
Remaining
|
|
Vintage Year
|
|
in Force
|
|
|
Stop Loss
|
|
|
Stop Loss
|
|
|
in Force
|
|
|
Stop Loss
|
|
|
Stop Loss
|
|
|
|
(Dollars in millions)
|
|
|
2003 and Prior
|
|
$
|
224.5
|
|
|
$
|
176.4
|
|
|
$
|
157.6
|
|
|
$
|
253.9
|
|
|
$
|
181.7
|
|
|
$
|
170.7
|
|
2004
|
|
|
504.4
|
|
|
|
164.8
|
|
|
|
96.5
|
|
|
|
566.0
|
|
|
|
164.9
|
|
|
|
138.5
|
|
2005
|
|
|
1,461.8
|
|
|
|
260.4
|
|
|
|
11.5
|
|
|
|
1,863.1
|
|
|
|
261.0
|
|
|
|
132.9
|
|
2006
|
|
|
1,423.5
|
|
|
|
366.6
|
|
|
|
38.9
|
|
|
|
2,229.2
|
|
|
|
389.8
|
|
|
|
139.0
|
|
2007
|
|
|
717.0
|
|
|
|
109.0
|
|
|
|
5.9
|
|
|
|
869.1
|
|
|
|
117.6
|
|
|
|
39.3
|
|
Ceded reserves to captive reinsurers served to reduce the change
in gross reserves and LAE by $76.3 million during 2009
compared to $149.7 million during 2008. At
December 31, 2009, the majority of our captive reinsurance
arrangements had total ceded reserves, combined with any unpaid
ceded claims, that exceeded the respective trust balance. In
those cases, the net reserve credit that we recognize in our
financial statements is limited to the trust balance. Given this
limitation, we do not expect any material benefit from these
arrangements in future periods.
40
The following table provides further information about our loss
reserves, absent the impact of reserves ceded to the lender
sponsored captive reinsurers, carried on our balance sheet at
December 31, 2009, and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Primary insurance:
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
$
|
1,088,776
|
|
|
$
|
728,981
|
|
Reserves for defaults incurred but not reported
|
|
|
44,454
|
|
|
|
65,671
|
|
|
|
|
|
|
|
|
|
|
Total Primary insurance
|
|
|
1,133,230
|
|
|
|
794,652
|
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
Reserves for reported defaults
|
|
|
340,504
|
|
|
|
344,112
|
|
Reserves for defaults incurred but not reported
|
|
|
41,492
|
|
|
|
31,539
|
|
|
|
|
|
|
|
|
|
|
Total Modified Pool insurance
|
|
|
381,996
|
|
|
|
375,651
|
|
Reserve for loss adjustment expenses
|
|
|
21,817
|
|
|
|
17,537
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and loss adjustment expenses
|
|
$
|
1,537,043
|
|
|
$
|
1,187,840
|
|
|
|
|
|
|
|
|
|
|
The following table shows that the percentage of gross risk in
force, gross risk in default, and gross reserves in the four
distressed market states at December 31, 2009 has decreased
since December 31, 2008. However, the distressed market
states continue to comprise the majority of gross risk in
default and gross reserves at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
% of Gross Risk In Force:
|
|
|
|
|
|
|
|
|
California
|
|
|
13.3
|
%
|
|
|
14.6
|
%
|
Florida
|
|
|
11.5
|
%
|
|
|
11.6
|
%
|
Arizona
|
|
|
4.6
|
%
|
|
|
5.2
|
%
|
Nevada
|
|
|
2.7
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
32.1
|
%
|
|
|
34.4
|
%
|
% of Gross Risk in Default:
|
|
|
|
|
|
|
|
|
California
|
|
|
21.1
|
%
|
|
|
25.1
|
%
|
Florida
|
|
|
20.2
|
%
|
|
|
23.1
|
%
|
Arizona
|
|
|
6.5
|
%
|
|
|
7.2
|
%
|
Nevada
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
52.6
|
%
|
|
|
60.4
|
%
|
% of Gross Reserves:
|
|
|
|
|
|
|
|
|
California
|
|
|
20.8
|
%
|
|
|
24.4
|
%
|
Florida
|
|
|
21.6
|
%
|
|
|
23.5
|
%
|
Arizona
|
|
|
7.2
|
%
|
|
|
7.4
|
%
|
Nevada
|
|
|
5.3
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
Total Distressed Market States
|
|
|
54.9
|
%
|
|
|
60.3
|
%
|
While defaults from the distressed markets continue to comprise
the majority of risk in default, risk in default from policies
in the non-distressed markets increased by 59.6% during 2009
compared to an increase of 16.0% in the distressed markets. We
believe the growing deterioration in the non-distressed markets
is primarily a result of high unemployment and the slower, more
gradual decline in home prices. Defaults in the distressed
markets also comprised a large percentage of settled claims and
rescinded policies, which mitigated the slowing growth rate in
risk in default in these markets.
41
Certificates originated during 2007 and 2006 comprise 61.4% of
the number of loans in default, but 70.2% of the risk in default
at December 31, 2009. Both measures are down slightly from
2008 year-end levels due primarily to a large amount of
claim activity attributable to the 2006 policy year and
rescission activity attributable to both the 2006 and 2007
policy years. The difference in percentages of loans in default
and risk in default primarily reflects the higher loan amounts
associated with these policy years.
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,
2009 and December 31, 2008. The table also provides the
impact of the rescission factor, which is a component of the
frequency factor utilized in the reserve model, on gross case
reserves at the respective periods.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Gross risk on loans in default
|
|
$
|
3,638
|
|
|
$
|
2,729
|
|
Risk expected to be rescinded on loans in default
|
|
|
(725
|
)
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
Risk in default net of expected rescissions
|
|
$
|
2,913
|
|
|
$
|
2,324
|
|
|
|
|
|
|
|
|
|
|
Gross case reserve
|
|
$
|
2,427
|
|
|
$
|
1,385
|
|
Gross case reserves on loans expected to be rescinded
|
|
|
(540
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
Gross case reserves net of expected rescissions
|
|
$
|
1,887
|
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
Gross case reserves net of expected rescissions as a percentage
of gross risk in default(1)
|
|
|
51.9
|
%
|
|
|
42.0
|
%
|
Gross case reserves net of expected rescissions as a percentage
of gross risk in default, net of expected rescissions
|
|
|
64.6
|
%
|
|
|
49.3
|
%
|
Percentage decrease in gross case reserves from rescission factor
|
|
|
22.2
|
%
|
|
|
17.3
|
%
|
|
|
|
(1) |
|
Reflects gross case reserves, which excludes IBNR, ceded
reserves and the benefit from Modified Pool structures, as a
percentage of risk in default for total delinquent loans. |
The following table shows default statistics as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Total business:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
287,026
|
|
|
|
345,055
|
|
Number of loans in default
|
|
|
57,775
|
|
|
|
40,286
|
|
Percentage of loans in default (default rate)
|
|
|
20.13
|
%
|
|
|
11.68
|
%
|
Primary insurance:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
214,164
|
|
|
|
252,368
|
|
Number of loans in default
|
|
|
38,023
|
|
|
|
24,241
|
|
Percentage of loans in default
|
|
|
17.75
|
%
|
|
|
9.61
|
%
|
Modified Pool insurance:
|
|
|
|
|
|
|
|
|
Number of insured loans in force
|
|
|
72,862
|
|
|
|
92,687
|
|
Number of loans in default
|
|
|
19,752
|
|
|
|
16,045
|
|
Percentage of loans in default
|
|
|
27.11
|
%
|
|
|
17.31
|
%
|
The percentage of total loans in default, or default rate,
increased to 20.1% as of December 31, 2009 from 11.7% at
December 31, 2008, an overall increase of 71.8% during
2009. 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 default rate is affected by the number
of policies in default as well as the number of policies in
force. Because we are
42
no longer issuing commitments for mortgage insurance, we expect
the number of policies in force to continue to decrease, which
can lead to an increase in our default rate.
Expenses
and Taxes
Other operating expenses decreased 38.8% during 2009 compared to
2008, which is primarily attributable to exit costs incurred
during the first half of 2008 in connection with the transition
of our business to run-off.
At the end of the first quarter of 2008, we established a
premium deficiency reserve because the present value of our
estimated future settled losses and expenses, net of the present
value of our estimated future renewal premiums, exceeded our
existing net reserves. Subsequent to the first quarter of 2008,
the quarterly review of our outstanding book of business has not
resulted in the need to establish any further premium
deficiency. This is primarily due to the large increases in our
recorded loss reserves.
At the end of the first quarter of 2008, we wrote off the
remaining deferred policy acquisition costs (DAC)
asset balance of $34.8 million because the estimated gross
loss in the remaining portfolio no longer supported the asset
value. Subsequently, we have not capitalized any cost to acquire
new business.
Interest expense increased by $2.5 million or 69.6% in 2009
compared to 2008. Interest expense in 2009 included the accrual
of $2.1 million related to the DPO liability and
$1.2 million related to an accrual for interest on an IRS
assessment. We have paid the tax portion of the IRS assessment
in order to stop the accrual of interest and have appealed the
IRS assessment.
The income tax benefit recognized in 2009 of $16.1 million
primarily represents the reduction of the valuation allowance
applied to the deferred tax assets as a result of the growth in
unrealized gains. In the fourth quarter of 2009, changes in the
tax law allowed net operating losses to be carried back five
years as opposed to two years, thereby allowing the recoupment
of additional taxes. Going forward, 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 effectively be unable to receive any
immediate benefit in our Statements of Operations.
Our effective tax rate was 2.7% for 2009 compared to 16.4% for
2008. The effective tax rate for 2009 reflects our inability to
recognize tax benefits, except for the change in unrealized
investment gains as noted above, as we provide a valuation
allowance on almost the entire deferred tax asset generated from
the net operating loss carry forwards.
Financial
Position
Total assets were $1.1 billion at both December 31,
2009 and December 31, 2008. Total cash and invested assets
declined to $833.3 million at December 31, 2009 from
$935.4 million as a result of negative operating cash flow
during 2009. Other assets increased by $96.3 million
primarily due to an $82.7 million increase in reinsurance
recoverable under captive reinsurance agreements.
Total liabilities increased substantially to $1.8 billion
at December 31, 2009 from $1.3 billion at
December 31, 2008. The increase in total liabilities was
primarily due to the $349.2 million increase in loss and
LAE reserves and the establishment of the DPO which totaled
$168.4 million, including a carrying charge of
$2.1 million, at December 31, 2009.
Investment
Portfolio
The majority of our assets are included in our investment
portfolio. 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. We
classify our entire investment portfolio as available for sale.
All investments are carried on our balance sheet at fair value.
Historically, the majority of our investment portfolio was
comprised of tax-preferred state and municipal fixed income
securities. Because we did not expect to realize the tax
benefits normally associated with holding tax-preferred state
and municipal fixed income securities, we restructured our
investment portfolio beginning in 2008
43
by moving into taxable publicly-traded securities, primarily
corporate debt obligations, asset-backed securities, and
mortgage-backed securities. Because we anticipate negative cash
flow from operations in 2010 due to the expected increase in
claims paid, we expect the proceeds from the maturity and sale
of securities during 2010 will be used 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. We have completed
the majority of the restructuring and at December 31, 2009,
we had $95.7 million of tax-preferred state and municipal
fixed income securities remaining in our portfolio. Risks are
involved in attempting to restructure our remaining
tax-preferred portfolio, including execution risk in the selling
and buying of securities, additional credit risk in moving from
primarily insured, highly rated municipal bonds to lower rated
corporate bonds, and uncertainty surrounding mortgage-backed and
asset-backed securities.
The following table shows the makeup of our investment portfolio
and the transition since one year ago:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government and agencies
|
|
$
|
25,260
|
|
|
|
3.1
|
%
|
|
$
|
7,996
|
|
|
|
0.9
|
%
|
Foreign government and corporate debt
|
|
|
10,302
|
|
|
|
1.3
|
%
|
|
|
17,312
|
|
|
|
1.9
|
%
|
Corporate debt
|
|
|
500,999
|
|
|
|
61.7
|
%
|
|
|
477,056
|
|
|
|
53.3
|
%
|
Residential mortgage-backed
|
|
|
107,406
|
|
|
|
13.2
|
%
|
|
|
126,679
|
|
|
|
14.1
|
%
|
Asset-backed
|
|
|
39,392
|
|
|
|
4.9
|
%
|
|
|
65,749
|
|
|
|
7.3
|
%
|
State and municipal bonds
|
|
|
101,471
|
|
|
|
12.5
|
%
|
|
|
159,394
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
784,830
|
|
|
|
96.7
|
%
|
|
|
854,186
|
|
|
|
95.4
|
%
|
Equity securities
|
|
|
|
|
|
|
0.0
|
%
|
|
|
583
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
784,830
|
|
|
|
96.7
|
%
|
|
|
854,769
|
|
|
|
95.5
|
%
|
Short-term investments
|
|
|
26,651
|
|
|
|
3.3
|
%
|
|
|
40,653
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
811,481
|
|
|
|
100.0
|
%
|
|
$
|
895,422
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in the amount of the investment portfolio is
primarily due to the use of the proceeds from maturities and the
sale of securities to fund the negative cash flow from
operations in 2009. We expect to continue to have negative cash
flow from operations for the immediate future, which will
further reduce the level of our investment portfolio. Terms of
the second Corrective Order require that Triad establish a
separate custody account with investments at least equal to the
unpaid DPOs. At December 31, 2009, approximately 21% of our
invested assets were supporting the DPOs and related accrued
interest.
The following table shows the operating results of our
investment portfolio for the last two years:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Average investments at cost or amortized cost
|
|
$
|
825,447
|
|
|
$
|
828,142
|
|
Pre-tax net investment income
|
|
$
|
44,133
|
|
|
$
|
39,580
|
|
Book yield
|
|
|
5.5
|
%
|
|
|
4.6
|
%
|
Pre-tax realized investment (losses) gains
|
|
$
|
1,354
|
|
|
$
|
(26,559
|
)
|
The increase in the book yield in 2009 was primarily
attributable to impairment losses recognized in previous
periods, with a subsequent accretion of discount to maturity in
2009. The pre-tax realized investment gains in 2009 were
primarily attributable to the sale of previously-impaired
securities, offset in part by further write downs of
other-than-temporary
impaired securities. The 2009 realized investment gains reflect
improved market conditions after the first quarter of 2009. The
realized investment losses in 2008 were primarily attributable
to write downs due to
other-than-temporary
impairments.
44
Unrealized
Gains and Losses
The following table summarizes by category our unrealized gains
and losses in our securities portfolio at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government and agencies
|
|
$
|
24,957
|
|
|
$
|
303
|
|
|
$
|
|
|
|
$
|
25,260
|
|
Foreign government and corporate debt
|
|
|
9,991
|
|
|
|
311
|
|
|
|
|
|
|
|
10,302
|
|
Corporate debt
|
|
|
468,998
|
|
|
|
32,001
|
|
|
|
|
|
|
|
500,999
|
|
Residential mortgage-backed
|
|
|
102,392
|
|
|
|
5,014
|
|
|
|
|
|
|
|
107,406
|
|
Asset-backed
|
|
|
36,844
|
|
|
|
2,548
|
|
|
|
|
|
|
|
39,392
|
|
State and municipal bonds
|
|
|
94,967
|
|
|
|
6,504
|
|
|
|
|
|
|
|
101,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed maturities
|
|
|
738,149
|
|
|
|
46,681
|
|
|
|
|
|
|
|
784,830
|
|
Short term investments
|
|
|
26,650
|
|
|
|
1
|
|
|
|
|
|
|
|
26,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
764,799
|
|
|
$
|
46,682
|
|
|
$
|
|
|
|
$
|
811,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Given our recurring losses from operations, strict regulatory
oversight of our operations, and the significant doubt regarding
our ability to continue as a going concern, we no longer have
the ability to hold impaired assets for a sufficient time to
recover their value. As a result, we 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, 2009.
The unrealized gains are partly due to the recovery in value of
previously impaired fixed income securities. 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; accordingly,
we expect greater volatility in unrealized gains and realized
losses in future periods. Volatility also 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 relatively high ratings. The following
table shows our investment portfolio by credit ratings for the
last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency bonds
|
|
$
|
25,260
|
|
|
|
3.2
|
%
|
|
$
|
20,168
|
|
|
|
2.4
|
%
|
AAA
|
|
|
169,326
|
|
|
|
21.6
|
|
|
|
236,975
|
|
|
|
27.7
|
|
AA
|
|
|
160,399
|
|
|
|
20.4
|
|
|
|
183,916
|
|
|
|
21.5
|
|
A
|
|
|
391,141
|
|
|
|
49.8
|
|
|
|
381,936
|
|
|
|
44.7
|
|
BBB
|
|
|
24,014
|
|
|
|
3.1
|
|
|
|
25,203
|
|
|
|
3.0
|
|
BB
|
|
|
1,817
|
|
|
|
0.2
|
|
|
|
1,239
|
|
|
|
0.1
|
|
B
|
|
|
|
|
|
|
|
|
|
|
619
|
|
|
|
0.1
|
|
CCC
|
|
|
|
|
|
|
|
|
|
|
1,523
|
|
|
|
0.2
|
|
CC and lower
|
|
|
239
|
|
|
|
0.0
|
|
|
|
48
|
|
|
|
0.0
|
|
Not rated
|
|
|
12,634
|
|
|
|
1.6
|
|
|
|
2,559
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
784,830
|
|
|
|
100.0
|
%
|
|
$
|
854,186
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$
|
|
|
|
|
|
%
|
|
$
|
429
|
|
|
|
73.6
|
%
|
BBB
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
22.8
|
|
C
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
|
|
|
|
|
%
|
|
$
|
583
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate the credit risk of a security by analyzing the
underlying credit qualities of the security. We also seek value
in enhancements provided by financial guaranty insurers to our
tax-preferred state and municipal fixed income securities which
may benefit the credit rating. However, given the decline in our
holdings of tax-preferred securities, the value of enhancements
provided by financial guaranty insurers compared to the total
portfolio has reduced considerably. Taxable securities generally
do not have such credit enhancements and the credit rating
reflects only the securities underlying credit qualities.
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 our ability to comply
with terms of the Corrective Orders. If we are unable to comply
with the terms of the Corrective Orders, the Department may
institute legal proceedings to place Triad in receivership. If
Triad were placed into receivership, all of the assets and
future cash flows of Triad would be allocated to Triads
policyholders to pay insurance claims and the administrative
expenses of the receivership, and none of such assets or cash
flows would be available to TGI and its stockholders. As Triad
is the Companys primary source of current and potential
future cash flow, if Triad were placed in receivership
proceedings by the Department, TGI would likely be forced to
institute a proceeding seeking relief from creditors under
U.S. bankruptcy laws and it is likely that 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, 2009 and 2008 financial
statements included a statement that they believe there is
substantial doubt about our ability to continue as a going
concern.
46
Beginning on June 1, 2009 pursuant to the second Corrective
Order, all valid claims under Triads mortgage guaranty
insurance policies have been settled 60% in cash and 40% by the
recording of a DPO. Effective July 1, 2009, the DPO accrues
a carrying charge based on the investment yield earned by
Triads investment portfolio and payment of both the DPO
and the carrying charge is subject to Triads future
financial performance and requires the approval of the
Department. On June 1, 2009, following the implementation
of the second Corrective Order, Triad settled claims of
$415.8 million through the payment of $249.5 million
in cash and the recording of a DPO of $166.3 million. At
December 31, 2009, the total amount of DPOs was
$166.3 million, and accrued carry charges were
$2.1 million. The DPOs are supported by a segregated
custodial account containing primarily corporate securities
which are included in our total invested assets. The specific
terms of the Corrective Order requiring the recording of a DPO
has and will continue to positively impact our operating cash
flows. However, because we remain obligated to pay the DPOs and
will accrue a carrying charge on the DPOs based on the
investment yield earned by Triads investment portfolio, we
do not expect any ultimate financial benefit to us from
recording a DPO.
On December 1, 2009, we sold our information technology and
operating platform to Essent, a new mortgage insurer. Under the
terms of the purchase agreement, Essent acquired all of our
proprietary mortgage insurance software and substantially all of
the supporting hardware, as well as certain other assets, in
exchange for up to $30 million in cash and the assumption
by Essent of certain contractual obligations. Approximately
$15 million of the consideration is fixed and up to an
additional $15 million is contingent on Essent writing a
certain minimum amount of insurance in the five-year period
following closing. During the 2009 fourth quarter, we received
the initial $10 million installment of the purchase price.
Essent has established its operations and technology center in
Winston-Salem, North Carolina and a number of our former
information technology and operations employees have joined
Essent as contemplated by the agreement. At the closing of the
transaction with Essent, we also entered into a services
agreement, pursuant to which Essent is providing ongoing
information systems maintenance and services, customer service
and policy administration support to Triad. Until December 2010,
we pay a pre-determined amount for each month of service; after
December 2010 the fees will be based on the number of policies
in force. During the initial five-year term of the services
agreement, the fees we pay to Essent will be at least $150,000
per month.
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
ten-year non-interest bearing United States Mortgage Guaranty
Tax and Loss Bond (Tax and Loss Bond) purchases.
During the period that we were reporting positive results of
operations and prior to our decision to enter into voluntary
run-off, we purchased Tax and Loss Bonds to take advantage of a
special contingency reserve deduction available to mortgage
guaranty companies under the U.S. tax code. We recorded the
Tax and Loss 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 respective 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 when they became due. However, beginning
in 2007 and continuing into 2008, we made the decision to redeem
our Tax and Loss Bonds earlier than scheduled due to our
operating losses generated in those years, which has provided a
source of operating funds. During 2008, we redeemed essentially
all of our remaining Tax and Loss Bonds, which amounted to
approximately $116.0 million.
During 2009, we had a deficit in operating cash flow of
$134.9 million compared to positive operating cash flow of
$147.1 million in 2008, which was aided significantly by
the redemption of the Tax and Loss Bonds. The decline in
operating cash flow in 2009 would have been $303.3 million
had the second Corrective Order not stipulated the payment in
cash of 60% of each settled claim and the establishment of a DPO
for the remainder of each claim. The decline in operating cash
flow in 2009 compared to 2008 reflects the lack of any material
redemption of Tax and Loss Bonds, a substantial increase in
settled claims, and a decline in net premiums received. The
operating cash flow shortfall in 2009 was funded through sales
and maturities of short-term investments and other longer term
investment securities. See Investment Portfolio for
more information.
Net cash received from premiums was $207.6 million during
2009 compared to $274.7 million in 2008. This decrease is
due to the overall decline in insurance in force as well as
premium refunds related to rescission activity. Premium refunds
were $46.1 million in 2009 compared to $10.3 million
in 2008. We anticipate more refunds of
47
premiums related to rescission activity in 2010 and have
established a $47.5 million premium refund liability at
December 31, 2009 to account for anticipated rescission
activity.
Net cash paid for claims and LAE, after accounting for the
impact of the DPO, increased to $373.2 million during 2009
from $241.9 million during 2008. Net cash paid for claims
and LAE in 2009 benefited from $51.2 million of reimbursed
paid claims primarily from captive reinsurers. Cash outflows on
settled claims in 2009 were reduced by $166.3 million, the
amount of the DPO. While the DPO requirement will mitigate the
actual cash paid on claims in any period in the short run, we
expect that the amount of settled claims and the related cash
paid will continue to increase in subsequent quarters, and the
increase may be substantial.
We expect negative cash flow from operations to continue in 2010
because we expect claims and expenses will exceed our net
premium and investment income. We anticipate that the cash
necessary to meet the negative operating cash flow will be
funded by the scheduled maturities of invested assets and, if
needed, sales of other assets in our investment portfolio.
At December 31, 2009, the Company reported a deficit in
assets of $706.4 million compared to a deficit in assets of
$136.7 million at December 31, 2008. A deficit in
assets occurs when recorded liabilities exceed recorded assets
and the primary factor contributing to the deficit has been our
historical net losses from operations. We expect to continue to
report a deficit in assets for the foreseeable future.
Insurance
Company Specific
The insurance laws of the State of Illinois impose certain
restrictions on dividends that an insurance subsidiary, such as
Triad, can pay its parent company. As discussed above, the
Corrective Orders prohibit the payment of dividends by Triad to
TGI without prior approval from the Department, which is highly
unlikely for the foreseeable future.
Included in policyholders surplus of the primary insurance
subsidiary, TGIC, is a surplus note of $25 million payable
to TGI. The Corrective Orders prohibit the accrual of and
payment of the interest on the surplus note without prior
approval by the Department, which has broad discretion to
approve or disapprove any such payment. We do not expect that
TGIC will be able to pay any principal or interest on this note
for the foreseeable future. In 2009, TGI wrote off the
$25 million surplus note and reversed accrued interest of
$4.4 million on its financial statements as an
other-than-temporary
impairment. This
other-than-temporary
impairment did not affect TGIs consolidated results of
operations.
Triads ability to incur any material operating and capital
expenditures, as well as its ability to enter into any new
contracts with unaffiliated parties, also requires the
Departments approval (except for certain operating
expenditures that have been preapproved by the Department).
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 we terminate or commute a captive reinsurance agreement,
all reinsurance coverage terminates, Triad ceases to cede
premium to the reinsurer, and the supporting trust agreement is
terminated and the assets are distributed per terms of the
agreement resulting in an increase in cash and invested assets
and a corresponding decrease in reinsurance recoverable. During
2009, we terminated three captive reinsurance treaties and
received approximately $18.9 million of trust assets. We
also commuted one captive reinsurance treaty where the majority
of the trust assets were remitted to the reinsurer.
Additionally, in March 2010 we entered into a commutation
agreement with our largest captive reinsurance partner. Under
terms of the commutation agreement, we will assume all liability
for the existing and future claims covered by the reinsurance
and trust agreement in exchange for the entire trust balance of
approximately $142.0 million. We do not expect the
transaction will have any impact on the statement of operations
for the first quarter of 2010. We are currently in discussion
with other captive reinsurers regarding the termination or
commutation of their treaties.
At December 31, 2009, we had approximately
$257 million in captive reinsurance trust balances. We
received approximately $41.0 million in reimbursed settled
losses from captive reinsurance during 2009, which includes the
assets received from the termination of the captive agreements,
and expect further reimbursement in 2010. Due to
48
the adverse performance of the reinsured policies and the
general under-capitalization of the trusts supporting our
captive reinsurance agreements, we expect the majority of the
trust assets to eventually be delivered to Triad by means of
reimbursed settled losses or through the termination of the
agreements.
Triad ceased writing new mortgage commitments on July 15,
2008 and is operating its business 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 Triad because
we are operating in run-off.
Statutory capital, for the purpose of computing the net risk in
force to statutory capital ratio historically included both
policyholders surplus and the special contingency reserve.
However, due to the ongoing operating losses, all of the
contingency reserve has been released and therefore statutory
capital consists solely of policyholders surplus.
Statutory surplus at December 31, 2009 amounted to
$122.8 million compared to $88.0 million one year
earlier. The increase in statutory policyholders surplus
at December 31, 2009 compared to December 31, 2008 was
primarily the result of the recording of the DPO under the
second Corrective Order. As a result of the implementation of
the DPO requirement, Triad reported policyholders surplus
in its SAP financial statements of $122.8 million at
December 31, 2009, as compared to a deficiency in
policyholders surplus of $597.8 million had the DPO
requirement not been implemented.
Holding
Company Specific
TGI has very limited sources of cash flow. TGIs
$35 million outstanding long-term debt is the obligation of
TGI and not of Triad. Debt service amounts to $2.8 million
per year and is paid by TGI. The primary source of funds for TGI
debt service has historically been the interest paid by Triad to
TGI on the $25 million surplus note, 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. In
2009, TGI wrote off the $25 million surplus note and
reversed accrued interest of $4.4 million on its financial
statements as an
other-than-temporary
impairment. This
other-than-temporary
impairment did not affect TGIs consolidated results of
operations. Excluding the surplus note receivable from Triad,
total cash and invested assets at TGI totaled $8.7 million
at December 31, 2009. While we currently believe that the
cash resources on hand at TGI will be sufficient to cover the
required debt service for 2010 and 2011 on the $35 million
long-term debt, we cannot provide any assurance that these or
any future debt service payments will be made and the ultimate
ability of TGI 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 TGI 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 Department, and it is unlikely that
such approval will be sought or obtained in the foreseeable
future.
We may from time to time seek to retire or purchase our
outstanding debt through cash purchases or exchanges for equity
securities, in open market purchases, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if
any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors and the
amounts involved may be material.
As part of the sale of the information technology and operating
platform to Essent, TGI also sold the software related to the
establishment of Canadian operations and received approximately
$0.4 million and accrued an additional $0.2 million
for software owned exclusively by TGI. Additionally, under the
terms of the agreement, TGI may receive an additional
$0.6 million in contingent payments through 2014.
Triad has historically reimbursed TGI for a majority of its
operating cash expenses under a management agreement. Pursuant
to the Corrective Orders, we are required to submit to the
Department a request for reimbursement of these expenses on a
quarterly basis. During 2009, TGI cash expenses were
approximately $1.9 million and all requested
reimbursements, which include the majority of these expenses,
were approved. TGIs 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 Department prohibits or limits
the reimbursement by Triad of TGIs operating expenses, the
cash resources of TGI will be adversely affected.
49
Off
Balance Sheet Arrangements and Aggregate Contractual
Obligations
We had no material off-balance sheet arrangements at
December 31, 2009.
We lease office facilities and office equipment at our
Winston-Salem location under operating leases with minimum lease
commitments that are set to expire in 2012. Terms of the Essent
agreement provided for the
sub-lease of
certain office space from Triad (representing approximately 40%
of the space for which Triad is committed to) at the same rates
for which Triad is paying. We had no capitalized leases or
material purchase commitments at December 31, 2009. Our
long-term debt has a single maturity date of 2028.
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 based upon the amount of risk in default on
each particular loan. 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 and the impact of the
change may not be perceived immediately. 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.
50
During 2009, we raised the severity factor for all loan
categories above 100% (we can pay greater than 100% of the
covered risk due to interest and certain foreclosure costs that
we are required to pay under terms of our policies). To provide
a measure of the sensitivity on pretax income and loss reserves
carried on the balance sheet, we have provided the following
table that quantifies the impact of reasonable percentage
increases and decreases in the average frequency and severity
factors as of December 31, 2009:
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|
Effect on Pretax Loss from
|
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|
Changes in Assumptions
|
|
|
|
Decrease in Factors
|
|
|
Increase in Factors
|
|
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|
Resulting in a
|
|
|
Resulting in an
|
|
|
|
(Decrease) in Pretax
|
|
|
Increase in Pretax
|
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars in thousands)
|
|
|
20% Increase (Decrease) in the Frequency Factors Utilized in the
Loss Reserve Model
|
|
$
|
(337,969
|
)
|
|
$
|
273,938
|
|
5% Increase (Decrease) in the Severity Factors Utilized in the
Loss Reserve Model
|
|
$
|
(91,709
|
)
|
|
$
|
86,335
|
|
Both a 20% Increase (Decrease) in the Frequency Factor and a 5%
Increase (Decrease) in the Severity Factor Utilized in the Loss
Reserve Model
|
|
$
|
(418,255
|
)
|
|
$
|
346,328
|
|
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 an ultimate change in cash or invested assets
equal to the increase or decrease in the actual claims
ultimately paid related to the change in reserves. We believe
that a 20% increase or decrease in frequency is reasonably
possible based on potential ongoing changes in the housing
markets, unemployment rates, rescission activity, and cultural
changes regarding the choice of defaulting on a mortgage even
when the borrower has the ability to pay. We believe there is a
much greater propensity during 2010 for an increase in the
frequency factor given the current conditions. Our loss severity
is ultimately limited by the coverage percentage on individual
loans but can increase from the current elevated levels. We
believe that a 5% increase or decrease in severity is reasonably
possible based on potential changes in future economic
conditions and past experience. Economic conditions that could
give rise to an increase in the frequency rate could be a sudden
increase or a prolonged period of elevated unemployment rates,
further deterioration in home prices especially in geographical
areas that had previously been immune to such downward trends,
or increased cultural or social acceptance of strategic
defaults. Conversely, an improved housing market or a sustained
period of economic and job growth could potentially 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. Government and private industry
programs designed to stem the level of foreclosure could also
impact frequency and severity and the impact of these programs
would most likely have a positive effect on our severity and
frequency factors.
We have noted that our loss reserves as well as our reported
premium income have both been reduced based on the estimate of
future rescissions in the existing default portfolio. In
general, a rescission occurs when we determine that fraud,
misrepresentation or other specified violations occurred in the
origination of a loan. When these violations are identified,
insurance coverage from the date of issuance is cancelled and
the entire previously paid premium is refunded.
During 2009, we experienced a much higher level of rescission
activity than in previous years. This activity has been
concentrated in policies originated in 2006 and 2007. We have
also identified concentrations with specific lenders and by
delivery channel. We incorporate a factor in our computation of
loss reserves to account for expected rescissions, based upon
the status of our investigation of defaults in progress and our
actual experience. The effect of the factor is to reduce the
loss reserve by reflecting the probability that we may rescind
coverage on a certificate. The rescission factor is a
significant component of the frequency factor utilized in the
calculation of our loss reserves and resulted in a reduction to
our gross reserves of approximately $540 million at
December 31, 2009 compared to $239 million at
December 31, 2008.
51
We also account for the impact of expected rescissions on
revenue by establishing an accrual for expected premium refunds.
In establishing this accrual, we consider the probability that a
policy will be rescinded, which is consistent with the factor
used in the calculation of loss reserves. In estimating the
impact of expected rescissions on loss reserves and premium
income, we rely on recent historical experience but also use a
substantial amount of judgment.
While rescission activity has been significantly elevated in
2009 from our historical experience, our recent level of
rescission activity is not necessarily indicative of future
trends. Furthermore, our ability to rescind a policy may be
adversely impacted by legal challenges from policyholders of our
right to rescind policies. The increased level of rescission and
claims denial activity by mortgage insurers has caused certain
policyholders and loan servicers to institute legal actions to
challenge the validity of rescissions and claim denials, and we
are currently a defendant in two such proceedings. See
Item 3, Legal Proceedings, for further
information. We believe it is likely that other lenders and
mortgage servicers will challenge the ability of mortgage
insurers to rescind and deny coverage, including filing of
additional lawsuits. An adverse court decision against us or
another mortgage insurer could set a precedent that has the
effect of significantly restricting or limiting our ability to
rescind policies or deny coverage of claims and require a
corresponding decrease in our rescission factor.
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
less frequently traded and 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 since December 31, 2008 and
continuing through 2009.
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 continued decline in home prices and increased
unemployment levels could increase defaults and limit
opportunities for borrowers to cure defaults or for us to
mitigate losses, which could have an adverse material impact on
our business or results of operations;
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the possibility that the Department may take various actions
regarding Triad if it does not operate its business in
accordance with its revised financial and operating plan and the
Corrective Orders, including instituting receivership
proceedings, which would likely eliminate all remaining
stockholder value;
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our ability to operate our business in and maintain a solvent
run-off;
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|
our ability to continue as a going concern;
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the ability of TGI to pay its 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
Department, and it is unlikely that such approval will be sought
or, if sought, will be obtained in the foreseeable future;
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|
if Triad is not permitted or is otherwise unable to provide
funds to TGI, the available resources of TGI will be
insufficient to satisfy future debt service obligations on its
$35 million outstanding long-term debt;
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|
our ability to rescind coverage or deny claims could be
restricted or limited by legal challenges from policyholders and
loan servicers;
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52
|
|
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|
our loss reserve estimates are subject to uncertainties and are
based on assumptions that are currently volatile in the housing
and mortgage industries and, therefore, settled claims may be
substantially different from our loss reserves;
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we may not continue to realize benefits from rescissions at the
levels that we have recently experienced;
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|
if house prices continue to fall, particularly in non-distressed
markets, or remain depressed, additional borrowers may default
and claims could be higher than anticipated;
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|
if unemployment rates continue to rise or remain at high levels,
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 impact of programs and legislation 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 legislation adopted in the future 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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the possibility that there will not be adequate interest in our
common stock to ensure efficient pricing on the over the counter
markets; and
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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.
|
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.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The Financial Statements and Supplementary Data are presented in
a separate section of this report and are incorporated herein by
reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
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 our management, including our Principal
Executive Officer and Principal Financial Officer, as
appropriate, to allow
53
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, 2009, 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 our disclosure controls and procedures. Based upon
that evaluation, management has concluded that disclosure
controls and procedures as of December 31, 2009 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
On December 1, 2009, we sold our information technology and
operating platform to Essent, a new mortgage insurer. Essent has
established its operations and technology center in
Winston-Salem, North Carolina and a number of our former
information technology and operations employees have joined
Essent as contemplated by the agreement. Under a services
agreement, Essent is providing ongoing information systems
maintenance and services, customer service and policy
administration support to Triad. The outsourcing of these
functions constituted a change in our internal control over
financial reporting during the quarter ended December 31,
2009. The same controls that were in place before the
outsourcing to Essent remain in place. Testing and validation of
these controls were performed through and subsequent to year-end
and we found that they remained intact and were operating
effectively. Therefore, management has concluded that these
changes during the fourth quarter of 2009 did not materially
affect, or are reasonably likely to materially affect, our
internal control over financial reporting.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management 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 Exchange Act of 1934. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States. Internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (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 our
receipts and expenditures are being made in accordance with
authorization of our management and directors; 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 our internal control
over financial reporting as of December 31, 2009.
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, 2009, we maintained
effective internal control over financial reporting.
54
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange
Commission that permits us to provide only managements
report in this annual report.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Certain information called for by this Item is included in our
Proxy Statement for the 2010 Annual Meeting of Stockholders
under the headings Election of Directors,
Executive Officers, Section 16(a)
Beneficial Ownership Reporting Compliance and
Corporate Governance, and is hereby incorporated by
reference.
For information regarding our executive officers, reference is
made to the section entitled Executive Officers in
Part I, Item 1 of this Report.
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 applicable listing standards, we also intend to post on
our website any waiver of or amendment to the Code of Ethics
that requires disclosure under applicable law, SEC rules or
applicable listing standards.
|
|
Item 11.
|
Executive
Compensation
|
Information called for by this Item is included in our Proxy
Statement for the 2010 Annual Meeting of Stockholders under the
headings Executive Compensation and Director
Compensation, and is hereby incorporated by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information called for by this Item is included in our Proxy
Statement for the 2010 Annual Meeting of Stockholders under the
headings Securities Authorized for Issuance Under Equity
Compensation Plans and Principal Holders of Common
Stock, and is hereby incorporated by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information called for by this Item is included in our Proxy
Statement for the 2010 Annual Meeting of Stockholders under the
headings Certain Transactions and Corporate
Governance The Board of Directors, and is
hereby incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information called for by this Item is included in our Proxy
Statement for the 2010 Annual Meeting of Stockholders under the
heading Independent Registered Public Accounting Firm Fee
Information, and is hereby incorporated by reference.
55
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.
56
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 19, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the
19th day
of March, 2010, 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
|
57
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, 2009
TRIAD
GUARANTY INC.
WINSTON-SALEM,
NORTH CAROLINA
58
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 15(a)
(1) and (2))
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
Financial Statement Schedules
|
|
|
|
|
Schedules at and for each of the two years in the period ended
December 31, 2009
|
|
|
|
|
|
|
|
89
|
|
|
|
|
90
|
|
|
|
|
98
|
|
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.
59
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, 2009 and 2008, and
the related consolidated statements of operations, changes in
stockholders (deficit) equity, and cash flows for each of
the two years in the period ended December 31, 2009. 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 purpose of expressing an opinion on 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,
2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended
December 31, 2009 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 Corrective Orders with the Illinois
Department of Insurance and has reported a net loss for the year
ended December 31, 2009 and has a Stockholders
deficiency in assets at December 31, 2009. 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
2009 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
Atlanta, Georgia
March 19, 2010
60
TRIAD
GUARANTY INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Invested assets:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
at fair value:
|
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost: $738,149 and $844,964)
|
|
$
|
784,830
|
|
|
$
|
854,186
|
|
Equity securities (cost: $0 and $566)
|
|
|
|
|
|
|
583
|
|
Short-term investments
|
|
|
26,651
|
|
|
|
40,653
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
811,481
|
|
|
|
895,422
|
|
Cash and cash equivalents
|
|
|
21,839
|
|
|
|
39,940
|
|
Real estate acquired in claim settlement
|
|
|
|
|
|
|
713
|
|
Accrued investment income
|
|
|
9,048
|
|
|
|
10,515
|
|
Property and equipment, at cost less accumulated depreciation
($18,191 and $25,294)
|
|
|
3,515
|
|
|
|
7,747
|
|
Reinsurance recoverable, net
|
|
|
233,499
|
|
|
|
150,848
|
|
Other assets
|
|
|
45,444
|
|
|
|
25,349
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,124,826
|
|
|
$
|
1,130,534
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
1,537,043
|
|
|
$
|
1,187,840
|
|
Unearned premiums
|
|
|
12,153
|
|
|
|
15,863
|
|
Amounts payable to reinsurers
|
|
|
7
|
|
|
|
719
|
|
Long-term debt
|
|
|
34,540
|
|
|
|
34,529
|
|
Deferred payment obligation
|
|
|
168,386
|
|
|
|
|
|
Accrued interest
|
|
|
2,476
|
|
|
|
1,275
|
|
Accrued expenses and other liabilities
|
|
|
76,579
|
|
|
|
26,974
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,831,184
|
|
|
|
1,267,200
|
|
Commitments and contingencies Note 5
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
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 15,258,128 and
15,161,259 shares
|
|
|
153
|
|
|
|
151
|
|
Additional paid-in capital
|
|
|
113,848
|
|
|
|
112,629
|
|
Accumulated other comprehensive income, net of income tax
liability of $18,575 and $3,265
|
|
|
30,782
|
|
|
|
6,063
|
|
Accumulated deficit
|
|
|
(851,141
|
)
|
|
|
(255,509
|
)
|
|
|
|
|
|
|
|
|
|
Deficit in assets
|
|
|
(706,358
|
)
|
|
|
(136,666
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,124,826
|
|
|
$
|
1,130,534
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
TRIAD
GUARANTY INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
217,012
|
|
|
$
|
316,310
|
|
Ceded
|
|
|
(40,872
|
)
|
|
|
(60,777
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
176,140
|
|
|
|
255,533
|
|
Change in unearned premiums
|
|
|
3,518
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
179,658
|
|
|
|
257,423
|
|
Net investment income
|
|
|
44,133
|
|
|
|
39,580
|
|
Net realized investment gains (losses)
|
|
|
1,354
|
|
|
|
(26,559
|
)
|
Other income
|
|
|
12,666
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,811
|
|
|
|
270,452
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
807,627
|
|
|
|
923,301
|
|
Interest expense
|
|
|
6,034
|
|
|
|
3,557
|
|
Policy acquisition costs
|
|
|
|
|
|
|
39,416
|
|
Other operating expenses
|
|
|
35,911
|
|
|
|
58,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849,572
|
|
|
|
1,024,983
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
|
(611,761
|
)
|
|
|
(754,531
|
)
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,818
|
)
|
|
|
(2,012
|
)
|
Deferred
|
|
|
(13,311
|
)
|
|
|
(121,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,129
|
)
|
|
|
(123,404
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(595,632
|
)
|
|
$
|
(631,127
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common and common equivalent share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(39.70
|
)
|
|
$
|
(42.27
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per common and common
equivalent share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
15,002,275
|
|
|
|
14,929,692
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
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, 2008
|
|
|
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
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(595,632
|
)
|
|
|
(595,632
|
)
|
Other comprehensive
income-net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on investments
|
|
|
|
|
|
|
|
|
|
|
24,719
|
|
|
|
|
|
|
|
24,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(570,913
|
)
|
Share-based compensation
|
|
|
|
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
|
|
1,221
|
|
Net issuance of restricted stock under stock incentive plan
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
153
|
|
|
$
|
113,848
|
|
|
$
|
30,782
|
|
|
$
|
(851,141
|
)
|
|
$
|
(706,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
63
TRIAD
GUARANTY INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(595,632
|
)
|
|
$
|
(631,127
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and unearned premium reserves
|
|
|
345,493
|
|
|
|
825,971
|
|
Accrued expenses and other liabilities
|
|
|
49,605
|
|
|
|
16,395
|
|
Deferred payment obligation
|
|
|
168,386
|
|
|
|
|
|
Income taxes recoverable
|
|
|
(10,473
|
)
|
|
|
(1,234
|
)
|
Reinsurance, net
|
|
|
(83,363
|
)
|
|
|
(150,839
|
)
|
Accrued investment income
|
|
|
1,467
|
|
|
|
(286
|
)
|
Policy acquisition costs deferred
|
|
|
|
|
|
|
(3,173
|
)
|
Policy acquisition costs
|
|
|
|
|
|
|
39,416
|
|
Net realized investment (gains) losses
|
|
|
(1,354
|
)
|
|
|
26,559
|
|
Provision for depreciation
|
|
|
2,402
|
|
|
|
4,951
|
|
Accretion of discount on investments
|
|
|
(1,812
|
)
|
|
|
2,737
|
|
Deferred income taxes
|
|
|
(13,311
|
)
|
|
|
(121,392
|
)
|
Prepaid federal income taxes
|
|
|
15
|
|
|
|
115,993
|
|
Real estate acquired in claim settlement, net of write-downs
|
|
|
713
|
|
|
|
10,147
|
|
Accrued interest
|
|
|
1,201
|
|
|
|
(80
|
)
|
Other assets
|
|
|
392
|
|
|
|
8,878
|
|
Other operating activities
|
|
|
1,361
|
|
|
|
4,222
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(134,910
|
)
|
|
|
147,138
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases fixed maturities
|
|
|
(182,251
|
)
|
|
|
(839,372
|
)
|
Sales fixed maturities
|
|
|
215,645
|
|
|
|
633,928
|
|
Maturities fixed maturities
|
|
|
67,781
|
|
|
|
40,473
|
|
Sales equities
|
|
|
762
|
|
|
|
287
|
|
Purchases of other investments
|
|
|
(873
|
)
|
|
|
|
|
Net change in short-term investments
|
|
|
13,915
|
|
|
|
14,074
|
|
Disposal (purchases) of property and equipment
|
|
|
1,830
|
|
|
|
(1,296
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
116,809
|
|
|
|
(151,906
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Repayment of revolving credit facility
|
|
|
|
|
|
|
(80,000
|
)
|
Excess tax benefits from share-based compensation
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(79,985
|
)
|
Foreign currency translation adjustment on cash and cash
equivalents
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(18,101
|
)
|
|
|
(84,871
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
39,940
|
|
|
|
124,811
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
21,839
|
|
|
$
|
39,940
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Income taxes and United States Mortgage Guaranty Tax and Loss
Bonds
|
|
$
|
7,721
|
|
|
$
|
(122,111
|
)
|
Interest
|
|
$
|
2,766
|
|
|
$
|
3,631
|
|
See accompanying notes.
64
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Business
Triad Guaranty Inc. (TGI) is a holding company
which, through its wholly-owned subsidiary, Triad Guaranty
Insurance Corporation (TGIC), historically has
provided mortgage insurance coverage in the United States.
Unless the context requires otherwise, references to
Triad in this annual report on
Form 10-K
refer to the operations of TGIC and its wholly-owned subsidiary,
Triad Guaranty Assurance Corporation (TGAC).
References to the Company refer collectively to the
operations of TGI and Triad. 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 its business in run-off
under two Corrective Orders issued by the Illinois Department of
Insurance (the Department). The first Corrective
Order was issued in August 2008. The second Corrective Order was
issued in March 2009 and subsequently amended in May 2009. As
used in these financial statements, the term run-off
means writing no new mortgage insurance policies, but continuing
to service 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; reviewing policies for the existence of
misrepresentation, fraud or non-compliance with stated programs;
and settling all legitimate filed claims per the provisions of
the two Corrective Orders issued by the Department. The term
settled, as used in these financial statements in
the context of the payment of a claim, refers to the
satisfaction of Triads obligations following the
submission of valid claims by our policyholders. Prior to
June 1, 2009, valid claims were settled solely by a cash
payment. Effective on and after June 1, 2009, valid claims
are settled by a combination of 60% in cash and 40% in the form
of a deferred payment obligation (DPO), as discussed
further in this Note 1. The Corrective Orders, among other
things, allow management to continue to operate Triad under the
close supervision of the Department, include restrictions on the
distribution of dividends or interest on notes payable to TGI by
Triad, and include restrictions on the payment of claims.
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.
Accounting
Standards Codification
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (SFAS 168).
SFAS 168 establishes the FASB Accounting Standards
Codification (the Codification or
Accounting Standards Codification
(ASC)), which was officially launched on
July 1, 2009, and became the primary source of
authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (the SEC) under
the authority of Federal securities laws are also sources of
authoritative GAAP for SEC registrants. The subsequent issuances
of new standards will be in the form of Accounting Standards
Updates (ASUs) that will be included in the
Codification. SFAS 168 is included in ASC
105-10,
Generally Accepted Accounting Principles (ASC
105-10),
and is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The Company
adopted the Codification for the interim period ended
September 30, 2009. As the Codification is neither expected
nor intended to change GAAP, the adoption of SFAS 168 did
not have any effect on the Companys accounting policies
nor did it have a material impact on the Companys
financial position and results of operations.
65
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidation
The consolidated financial statements include the amounts of
Triad Guaranty Inc. and its wholly owned subsidiary, TGIC,
including TGICs wholly-owned subsidiary, TGAC. Triad Re
Insurance Corporation (Triad Re) was a wholly-owned
subsidiary of Triad as of December 31, 2008 and was
liquidated during the fourth quarter of 2009. 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 on
available-for-sale
securities, net of tax, are reported as a separate component of
accumulated other comprehensive income. Effective on and
subsequent to December 31, 2008, the Company has recognized
an impairment loss on all securities for which the fair value
was less than the amortized cost at the balance sheet date
because the Company is no longer in a position to retain a
security until it recovers value due to the ongoing losses and
the regulatory oversight. 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. Prior to December 31, 2008, the
Company evaluated its investments regularly to determine whether
there were declines in values that were
other-than-temporary.
When the 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.
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.
Other
Income
Other income in 2009 primarily represents the gain recognized on
the sale of the rights to the mortgage insurance operating
system and certain hardware to Essent Guaranty, Inc.
(Essent). The gain recognized reflects the
guaranteed sales price; future contingent consideration was not
considered in calculating the gain.
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. The Company did not hold any
properties at December 31, 2009, and held only five
properties at December 31, 2008 that were subsequently
disposed of in 2009.
66
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Premium
Deficiency Reserve and Deferred Policy Acquisition
Costs
Prior to 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 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.
Property
and Equipment
We periodically review the carrying value of our long-lived
assets, including property and equipment, for impairment
whenever events or circumstances indicate that the carrying
amount of such assets may not be fully recoverable. For
long-lived assets to be held and used, impairments are
recognized when the carrying amount of a long-lived asset is not
recoverable and exceeds its fair value. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. An impairment loss is
measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value.
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. Certain assets relating to
the mortgage insurance operating platform along with computer
hardware to support it were sold in the fourth quarter of 2009.
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. 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, combined
loan-to-value,
number of payments missed, and default status (bankruptcy,
foreclosure, claim expected, etc.). The Company also
incorporates 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, misrepresentation, or
program violations 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
67
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 (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 ongoing operating losses, 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 in 2008.
The Company uses the provisions of ASC 740, Income Taxes
(ASC 740) to account for and report tax
positions taken or expected to be taken in its tax return that
directly or indirectly affects amounts reported in its financial
statements, including the accounting and disclosure for
uncertainty in tax positions. During 2009, the Internal Revenue
Service (IRS) completed an examination of the
Companys 2007, 2006 and 2005 federal returns. In
connection with the examination, the IRS has assessed a total of
$7.7 million of alternative minimum tax (the
AMT). The Company disagrees with the agents
findings and the matter is currently under appeal. The Company
recorded this assessment as a current tax accrual of
$5.5 million in 2008 and as an additional $2.2 million
in 2009. The Company also deposited $7.7 million with the
U.S. Treasury to stop the accrual of interest until the
matter can be heard by the Appellate Division. The Worker,
Homeownership and Business Assistance Act of 2009, which was
passed by Congress in November 2009, among other things, extends
the period for which net operating losses (NOL) can
be carried back to recover previous taxes paid from two years to
five years. Due to the significant tax loss generated in 2008
and 2009, the Company expects to be able to recover all of the
AMT assessed for the years under examination and also expects to
recover approximately $4.0 million of regular tax paid from
tax years 2005 and 2006. The Company recognized a current tax
benefit of $2.8 million in 2009 related to these items.
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 those assets that are not
expected to be realized. At December 31, 2009, the Company
established a valuation allowance of approximately
$349.7 million against a $367.0 million deferred tax
asset. Based upon a review of the Companys anticipated
future taxable income, including all other
68
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
available evidence, both positive and negative, the Company
concluded that it is more likely than not that the
$349.7 million of the gross deferred tax assets will not be
realized.
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 operations.
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, 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.
Share-Based
Compensation
The Company utilizes the provisions of ASC 715,
Compensation Retirement Benefits (ASC
715) in the accounting for share-based
compensation to employees and non-employee directors. ASC 715
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.
(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, 2009 and 2008, 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
Income (Loss)
Comprehensive income (loss) consists of net income (loss) and
other comprehensive income (loss). For the Company, other
comprehensive income (loss) is composed of unrealized gains or
losses on
available-for-sale
securities, net of income tax, and the unrealized gains or
losses on the change in foreign currency translation in
69
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008, net of income taxes. The components of comprehensive
income (loss) are displayed in the following table, along with
the related tax effects:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Unrealized gain (losses) arising during the period, before taxes
|
|
$
|
39,384
|
|
|
$
|
(31,580
|
)
|
Income tax (expense) benefit
|
|
|
(13,784
|
)
|
|
|
11,053
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period, net of taxes
|
|
|
25,600
|
|
|
|
(20,527
|
)
|
Less reclassification adjustment:
|
|
|
|
|
|
|
|
|
Gain (Loss) realized in operations
|
|
|
1,354
|
|
|
|
(26,559
|
)
|
Income tax (expense) benefit
|
|
|
(473
|
)
|
|
|
9,296
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses realized in operations
|
|
|
881
|
|
|
|
(17,263
|
)
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on investments
|
|
|
24,719
|
|
|
|
(3,264
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, before taxes
|
|
|
|
|
|
|
(5,531
|
)
|
Income tax benefit
|
|
|
|
|
|
|
1,453
|
(1)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, after taxes
|
|
|
|
|
|
|
(4,078
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
24,719
|
|
|
$
|
(7,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Tax effect calculated from unrealized gain on subsidiary of
$4,151. |
Recent
Accounting Pronouncements
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements
(ASU
2010-06).
ASU 2010-06
requires new disclosures and clarifies existing disclosure
requirements about fair value measurement as set forth in
Codification Subtopic
820-10. ASU
2010-06
amends Codification Subtopic
820-10 to
now require that (1) a reporting entity must disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers; (2) in the
reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present
separately information about purchases, sales, issuances, and
settlements and (3) a reporting entity should provide
disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair
value measurements. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. The Company plans to include the disclosures
required by ASU
2010-06 in
the notes to its consolidated financial statements effective
January 1, 2010, except for the disclosures related to
Level 3 fair value measurements, which it plans to include
in the notes to its consolidated financial statements effective
January 1, 2011.
In December 2009, the FASB issued ASU
2009-17,
Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities (ASU
2009-17).
ASU 2009-17
codifies SFAS 167, Amendments to FASB Interpretation
No. 46(R), and amends the consolidation guidance
related to a variable interest entity (VIE).
Primarily, the current quantitative analysis used under ASC 810,
Consolidations, will be eliminated and replaced with a
qualitative approach that is focused on identifying the variable
interest that has the power to direct the activities that most
significantly impact the performance of the VIE and absorb
losses or receive returns that could potentially be significant
to the VIE. In addition, this new accounting standard will
require an ongoing reassessment of the primary beneficiary of
the VIE, rather than reassessing the primary beneficiary only
70
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon the occurrence of certain pre-defined events. ASU
2009-17 will
be effective as of the beginning of the annual reporting period
that begins after November 15, 2009, and requires the
reconsideration of all VIEs for consolidation in which an entity
has a variable interest upon the effective date of these
amendments. The Company plans to adopt the provisions of ASU
2009-17
effective January 1, 2010, and does not expect the adoption
will have a material impact on its consolidated financial
condition and results of operations.
In December 2009, the FASB issued ASU
2009-16,
Transfers and Servicing (Topic 860) Accounting
for Transfers of Financial Assets (ASU
2009-16).
ASU 2009-16
formally codifies SFAS 166, Accounting for Transfers of
Financial Assets. ASU
2009-16
eliminates the concept of a qualifying special-purpose entity
(SPE) and removes the scope exception for a
qualifying SPE from ASC 810, Consolidations. As a result,
previously unconsolidated qualifying SPEs must be re-evaluated
for consolidation by the sponsor or transferor. In addition,
this accounting update amends the accounting guidance related to
transfers of financial assets in order to address practice
issues that have been highlighted by the events of the recent
economic decline. ASU
2009-16 is
effective as of the beginning of the annual reporting period
that begins after November 15, 2009. The recognition and
measurement provisions will be applied to transfers that occur
on or after the effective date and all qualifying SPEs that
exist on and after the effective date must be evaluated for
consolidation. The Company plans to adopt the provisions of ASU
2009-16
effective January 1, 2010, and does not expect the adoption
will have a material impact on its consolidated financial
condition and results of operations.
In August 2009, the FASB issued ASU
No. 2009-05,
Fair Value Measurement and Disclosures: Measuring Liabilities
at Fair Value (ASU
2009-05),
which provides clarification on measuring liabilities at fair
value when a quoted price in an active market is not available.
ASU 2009-05
is effective for the reporting period ending December 31,
2009. The adoption of ASU
2009-05 did
not have a material impact on the Companys financial
position and results of operations.
Effective June 30, 2009, the Company adopted ASC
855-10,
Subsequent Events (ASC
855-10).
ASC 855-10
is based upon the same principles that exist within the auditing
standards and thus formally establishes accounting standards for
disclosing those events occurring after the balance sheet date
but before the financial statements are issued or available to
be issued. The statement requires public entities to evaluate
subsequent events through the date that the financial statements
are issued, while all other entities should evaluate subsequent
events through the date that the financial statements are
available to be issued. ASC
855-10
categorizes subsequent events into recognized subsequent events
(or historically Type I events) and nonrecognized subsequent
events (or historically Type II events). The statement also
enhances disclosure requirements for subsequent events. ASC
855-10 was
effective upon issuance. The adoption of ASC
855-10 did
not have a material impact on the Companys financial
position and results of operations.
Effective June 30, 2009, the Company adopted new guidance
included under ASC 820, Fair Value Measurements and
Disclosures (ASC 820). This new guidance under
ASC 820 requires disclosures of the fair value of financial
instruments for interim reporting periods of publicly traded
companies in addition to the annual disclosure required at
year-end. The provisions of the new standard were effective for
the interim periods ending after June 15, 2009. The Company
has presented the necessary disclosures herein in Note 7,
Fair Value Measurement.
Effective June 30, 2009, the Company adopted ASC 320,
Investments Debt and Equity Securities
(ASC 320-10).
Under ASC 320, an
other-than-temporary
impairment is recognized when an entity has the intent to sell a
debt security or when it is more likely than not that an entity
will be required to sell the debt security before its
anticipated recovery in value. The new guidance does not amend
existing recognition and measurement guidance related to
other-than-temporary
impairments of equity securities and is effective for interim
and annual reporting periods ending after June 15, 2009.
The adoption of ASC 320 did not have a material impact on the
Companys financial position and results of operations.
Effective June 30, 2009, the Company adopted new guidance
under ASC 820, which provides guidance related to:
(1) estimating fair value when the volume and level of
activity for an asset or liability have significantly
71
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
decreased in relation to normal market activity for the asset or
liability, and (2) circumstances that may indicate that a
transaction is not orderly (e.g., a forced liquidation or
distressed sale). This new guidance was effective prospectively
for interim and annual reporting periods ending after
June 15, 2009. The adoption of the new guidance under ASC
820 did not have a material impact on the Companys
financial position and results of operations.
On January 1, 2009, the Company adopted ASC
805-10,
Business Combinations (ASC
805-10),
which is intended to improve reporting by creating greater
consistency in the accounting and financial reporting of
business combinations, resulting in more complete, comparable
and relevant information for investors and other users of
financial statements. To achieve this goal, the new standard
requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired
and liabilities assumed; and expands the disclosure requirements
for material business combinations. The adoption of ASC
805-10 did
not have a material impact on the Companys financial
position and results of operations.
On January 1, 2009, the Company adopted ASC 810,
Consolidations (ASC 810). ASC
810-10-65,
Transition and Open Effective Date Information, is intended to
improve the relevance, comparability, and transparency of
financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in
subsidiaries in the same way as equity in the consolidated
financial statements. Moreover, ASC 810 eliminates the diversity
that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring that they be
treated as equity transactions. The presentation and disclosure
requirements of ASC 810 were applied retrospectively. The
adoption of ASC 810 did not have a material impact on the
Companys financial position and results of operations.
The Company prepares its financial statements presented in this
annual report on
Form 10-K
in conformity with accounting principles generally accepted in
the United States of America (GAAP). The financial
statements for Triad that are provided to the Department and
that form the basis for our corrective plan required by the
Corrective Orders were prepared in accordance with Statutory
Accounting Principles (SAP) as set forth in the
Illinois Insurance Code or prescribed by the Department. The
primary differences between GAAP and SAP for Triad at
December 31, 2009 were the methodology utilized for the
establishment of reserves and the reporting requirements
relating to the DPO stipulated in the second Corrective Order. A
deficit in assets occurs when recorded liabilities exceed
recorded assets in financial statements prepared under GAAP. A
deficiency in policyholders surplus occurs when recorded
liabilities exceed recorded assets in financial statements
prepared under SAP. A deficit in assets is not necessarily a
measure of insolvency. However, the Company believes that if
Triad were to report an
other-than-temporary
deficiency in policyholders surplus under SAP, Illinois
law may require the Department to seek receivership of Triad,
which could lead TGI to institute a proceeding seeking relief
from creditors under U.S. bankruptcy laws. The second
Corrective Order attempts to mitigate the possibility of a
deficiency in policyholders surplus by providing for the
settlement of claims 60% in cash and 40% in the form of a DPO,
which is accounted for as a component of policyholders
surplus under SAP.
The Company has prepared its financial statements on a going
concern basis under GAAP, 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, among other things, the
possible inability of Triad to comply with the provisions of the
Corrective Orders, the Companys recurring losses from
operations and the Company reporting an increasing deficit in
assets as of the end of the last two years. The Companys
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.
72
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company incurred significant operating losses in 2009 and
2008 which resulted in a deficit in assets of
$706.4 million at December 31, 2009. The ongoing
operating losses and the deficit in assets is primarily the
result of increased defaults and higher reserves relating to the
mortgages that the Company has insured. Contributing to the
defaults and claims have been declines in U.S home prices,
particularly in certain distressed markets, tightened credit
markets, rising unemployment, and the overall effects of the
economic recession in the United States. Additionally, the
Company is unable to offset these operating losses with revenue
from new, potentially more profitable, business as Triad is
operating in run-off under the two Corrective Orders issued by
the Department and can no longer issue commitments for new
insurance.
As noted above, effective on and after June 1, 2009, valid
claims are settled by a combination of 60% in cash and 40% in
the form of a deferred payment obligation (DPO).
Absent the accounting treatment required by the recording of the
DPO, Triad would have reported a deficiency in
policyholders surplus of $597.8 million at
December 31, 2009. Payment of the carrying charges and the
DPO will be subject to Triads future financial performance
and will require approval of the Department. Failure to comply
with the provisions of the Corrective Orders could result in the
imposition of fines or penalties or subject Triad to further
legal proceedings, including receivership proceedings for the
conservation, rehabilitation or liquidation of Triad. Any
actions like this would lead TGI to institute a proceeding
seeking relief from creditors under U.S. bankruptcy laws.
The ability to successfully comply with the Corrective Orders
and maintain statutory solvency by management is unknown at this
time and is dependent upon many factors, including improved
macroeconomic conditions in the United States.
The cost or amortized cost, gross unrealized gains and losses,
and the fair value of investments at December 31, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
24,957
|
|
|
$
|
303
|
|
|
$
|
|
|
|
$
|
25,260
|
|
Foreign government and corporate debt
|
|
|
9,991
|
|
|
|
311
|
|
|
|
|
|
|
|
10,302
|
|
Corporate debt
|
|
|
468,998
|
|
|
|
32,001
|
|
|
|
|
|
|
|
500,999
|
|
Residential mortgage-backed
|
|
|
102,392
|
|
|
|
5,014
|
|
|
|
|
|
|
|
107,406
|
|
Asset-backed
|
|
|
36,844
|
|
|
|
2,548
|
|
|
|
|
|
|
|
39,392
|
|
State and municipal bonds
|
|
|
94,967
|
|
|
|
6,504
|
|
|
|
|
|
|
|
101,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
738,149
|
|
|
|
46,681
|
|
|
|
|
|
|
|
784,830
|
|
Short-term investments
|
|
|
26,650
|
|
|
|
1
|
|
|
|
|
|
|
|
26,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
764,799
|
|
|
$
|
46,682
|
|
|
$
|
|
|
|
$
|
811,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government and agencies
|
|
$
|
7,646
|
|
|
$
|
350
|
|
|
$
|
|
|
|
$
|
7,996
|
|
Foreign government and corporate debt
|
|
|
17,010
|
|
|
|
302
|
|
|
|
|
|
|
|
17,312
|
|
Corporate debt
|
|
|
474,572
|
|
|
|
2,484
|
|
|
|
|
|
|
|
477,056
|
|
Residential mortgage-backed
|
|
|
123,394
|
|
|
|
3,285
|
|
|
|
|
|
|
|
126,679
|
|
Asset-backed
|
|
|
65,667
|
|
|
|
82
|
|
|
|
|
|
|
|
65,749
|
|
State and municipal bonds
|
|
|
156,675
|
|
|
|
2,719
|
|
|
|
|
|
|
|
159,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of investments in
fixed maturity securities, at December 31, 2009, are
summarized by stated maturity as follows:
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
|
Value
|
|
|
|
Cost
|
|
|
Fair
|
|
|
|
(Dollars in thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
119,736
|
|
|
$
|
122,790
|
|
After one year through five years
|
|
|
390,428
|
|
|
|
416,759
|
|
After five years through ten years
|
|
|
86,939
|
|
|
|
93,897
|
|
After ten years
|
|
|
141,046
|
|
|
|
151,384
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
738,149
|
|
|
$
|
784,830
|
|
|
|
|
|
|
|
|
|
|
Actual and expected maturity for certain securities may differ
from stated maturity due to call and prepayment provisions.
74
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realized
Gains (Losses) Related to Investments
The details of net realized investment gains (losses) including
other-than-temporary
impairments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
7,087
|
|
|
$
|
10,262
|
|
Gross realized losses
|
|
|
(5,820
|
)
|
|
|
(38,570
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
71
|
|
|
|
44
|
|
Gross realized losses
|
|
|
(111
|
)
|
|
|
(1,705
|
)
|
Foreign currency gross realized gains
|
|
|
85
|
|
|
|
3,404
|
|
Other investment gains
|
|
|
42
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
1,354
|
|
|
$
|
(26,559
|
)
|
|
|
|
|
|
|
|
|
|
Gross realized gains in 2009 were primarily attributable to the
sale of previously-impaired securities. Gross realized losses in
2009 and 2008 were primarily attributable to the write downs of
other-than-temporary
impaired securities.
Major categories of the Companys net investment income are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
44,563
|
|
|
$
|
37,549
|
|
Preferred stocks
|
|
|
14
|
|
|
|
127
|
|
Cash, cash equivalents and short-term investments
|
|
|
659
|
|
|
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,236
|
|
|
|
40,649
|
|
Expenses
|
|
|
(1,103
|
)
|
|
|
(1,069
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
44,133
|
|
|
$
|
39,580
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, investments with an
amortized cost of $8.7 million and $8.9 million,
respectively, were on deposit with various state insurance
departments to satisfy regulatory requirements. At
December 31, 2009, investments with an amortized cost of
$168.4 million were supporting our DPOs as required
pursuant to the second Corrective Order.
|
|
4.
|
Deferred
Policy Acquisition Costs (DAC)
|
Prior to the need for the establishment of a premium deficiency
initially recognized at March 31, 2008, the Company
capitalized costs to acquire new business as DAC and recognized
these as expenses against future gross profits. In accordance
with GAAP, 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, the Company 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.
75
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The actual mechanics of recording the premium deficiency reserve
required that the Company first reduce the DAC balance to zero
before recording any additional premium deficiency reserve.
Therefore, the Company wrote down the DAC asset by
$39.4 million in the first quarter of 2008. The Company has
not capitalized any costs to acquire new business subsequent to
the first quarter of 2008, but has included the limited amount
of such costs in the line item Other operating costs
on its statement of operations.
|
|
5.
|
Reserve
for Losses and LAE
|
Activity for the reserve for losses and LAE for 2009 and 2008 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1,
|
|
$
|
1,187,840
|
|
|
$
|
359,939
|
|
Less: reinsurance recoverables
|
|
|
(156,837
|
)
|
|
|
(7,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031,003
|
|
|
|
352,634
|
|
Incurred losses and loss adjustment expenses net of reinsurance
recoveries (principally in respect of default notices received
in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
719,666
|
|
|
|
873,568
|
|
Deficiency on prior years
|
|
|
87,961
|
|
|
|
49,733
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
807,627
|
|
|
|
923,301
|
|
Loss and loss adjustment expense payments net of reinsurance
recoveries (principally in respect of default notices received
in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
40,085
|
|
|
|
38,974
|
|
Prior years
|
|
|
490,708
|
|
|
|
205,958
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense payments
|
|
|
530,793
|
|
|
|
244,932
|
|
|
|
|
|
|
|
|
|
|
Net ending balance at December 31,
|
|
|
1,307,837
|
|
|
|
1,031,003
|
|
Reinsurance recoverables
|
|
|
229,206
|
|
|
|
156,837
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
1,537,043
|
|
|
$
|
1,187,840
|
|
|
|
|
|
|
|
|
|
|
The foregoing reconciliation shows deficiencies in the reserve
for losses and LAE at December 31, 2009 and 2008. The
deficiencies recognized in 2009 and 2008 were reflective of
increased frequency and severity factors subsequent to the
previous year end caused by the continuous decline in the
housing markets.
The Company 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). The
Companys 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, an unanticipated slowdown of
the overall economy, or social and cultural changes that are
more accepting of mortgage defaults even when the borrower has
the ability to pay 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 assumptions. Due
to the rapid decline in home prices in 2008 and changes in the
mortgage markets that reduced borrowers ability to
refinance loans, the Company adjusted its assumptions regarding
both frequency and severity in 2009 and 2008. The adjustments
that were made to the 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
76
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
mitigation opportunities due to declining house prices, further
reduced by an excess of housing inventory, also impacted the
severity factor.
The Company leases its office facilities and equipment under
operating leases. Net rental expense for all leases was
$0.6 million for 2009 and $2.8 million for 2008. Net
rental expense included an additional $1.0 million in 2008
in connection with the abandoned lease expense associated with
certain exit cost accruals. During 2009, the accrual for
abandoned lease expense was decreased by approximately
$0.4 million as tenants were identified for the abandoned
space earlier than originally anticipated. Net rental expense
for 2009 reflects this adjustment as well as the rents collected
from other tenants. Future minimum payments under
non-cancellable operating leases, excluding amounts from tenants
that sublet from the Company, at December 31, 2009 are as
follows:
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
(Dollars in thousands)
|
|
|
2010
|
|
$
|
1,571
|
|
2011
|
|
|
1,471
|
|
2012
|
|
|
1,377
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,419
|
|
|
|
|
|
|
The Company leases facilities for its corporate headquarters
under an operating lease that is scheduled to expire in 2012.
Approximately 40% of the office lease space has been sublet at
the same rate paid by Triad to a company that acquired the
mortgage insurance operating platform, including computer
software and hardware, and is now providing technology and other
services back to Triad. The Company remains primarily liable for
the full amounts under the existing lease.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income tax benefit computed at statutory rate
|
|
$
|
(214,116
|
)
|
|
$
|
(263,015
|
)
|
(Decrease) increase in taxes resulting from:
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(1,806
|
)
|
|
|
(7,353
|
)
|
Valuation allowance
|
|
|
204,373
|
|
|
|
145,335
|
|
Other
|
|
|
(4,580
|
)
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(16,129
|
)
|
|
$
|
(123,404
|
)
|
|
|
|
|
|
|
|
|
|
77
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, 2009 and 2008 are presented
below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
2,084
|
|
|
$
|
3,924
|
|
Impairments on securities
|
|
|
7,229
|
|
|
|
11,258
|
|
Losses and loss adjustment expenses
|
|
|
248,398
|
|
|
|
92,431
|
|
Net operating loss carryforwards and other credits
|
|
|
104,883
|
|
|
|
39,635
|
|
Other
|
|
|
4,380
|
|
|
|
2,784
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
366,974
|
|
|
|
150,032
|
|
Valuation allowance
|
|
|
(349,708
|
)
|
|
|
(145,335
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
17,266
|
|
|
|
4,697
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Unrealized investment gains
|
|
|
16,576
|
|
|
|
3,265
|
|
Other
|
|
|
690
|
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
17,266
|
|
|
|
4,697
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009, the Company
established a valuation allowance of approximately
$349.7 million against a $367.0 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 $349.7 million of the
gross deferred tax assets will not be realized.
As of December 31, 2009, the Company had a net operating
loss (NOL) carryforward on a regular tax basis of
approximately $300.2 million. Of this amount,
$197.9 million expires, if unused, in 2028 and
$102.3 million expires in 2029. 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.
During 2009, the IRS completed an examination of the
Companys 2007, 2006 and 2005 federal returns. In
connection with the examination, the IRS has assessed a total of
$7.7 million of AMT. The Company disagrees with the
agents findings and the matter is currently under appeal.
The Company recorded this assessment as a current tax accrual of
$5.5 million in 2008 and as an additional $2.2 million
in 2009. The Company also deposited $7.7 million with the
U.S. Treasury to stop the accrual of interest until the
matter can be heard by the Appellate Division. The Worker,
Homeownership and Business Assistance Act of 2009, which was
passed by Congress in November 2009, among other things, extends
the period for which NOLs can be carried back to recover
previous taxes paid from two years to five years. Due to the
significant tax loss generated in 2008 and 2009, the Company
expects to be able to recover all of the AMT assessed for the
years under examination and also expects to recover
approximately $4.0 million of regular tax paid from tax
years 2005 and 2006. The Company recognized a current tax
benefit of $2.8 million for 2009 related to these items.
78
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Insurance
in Force, Dividend Restriction, and Statutory Results
|
At December 31, 2009, approximately 58% of the
Companys direct risk in force was concentrated in
10 states, with approximately 13% in California, 12% in
Florida, 7% 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 30% 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, 2009, has also seen significant home
price depreciation. The Company has experienced substantial
increases in the default rate in these four states during 2009
and believes this is primarily the result of home price
depreciation. A prolonged economic downturn with continued house
price depreciation in areas where the Company has large
concentrations of risk in force 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 Orders under which Triad is
currently operating specifically prohibit the writing of new
insurance by Triad. The
Risk-to-Capital
ratio of Triad is substantially greater than the 25:1 regulatory
guideline.
Triad has entered into two Corrective Orders with the
Department. The first Corrective Order was entered into on
August 5, 2008 and remains in effect. This 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, that Corrective Order:
|
|
|
|
|
Required Triad to submit a corrective plan to the Department;
|
|
|
|
Prohibits all stockholder dividends from Triad to TGI without
the prior approval of the Department;
|
|
|
|
Prohibits interest and principal payments on Triads
surplus note to TGI without the prior approval of the Department;
|
|
|
|
Restricts Triad 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 Department;
|
|
|
|
Requires Triad to obtain prior written approval from the
Department before entering into certain transactions with
unaffiliated parties;
|
|
|
|
Requires Triad to meet with the Department in person or via
teleconference as necessary; and
|
|
|
|
Requires Triad to furnish to the Department certain reports,
agreements, actuarial opinions and information on an ongoing
basis at specified times.
|
The Company submitted a corrective plan to the Department as
required under the initial Corrective Order. The corrective plan
included, among other items, a five-year statutory financial
projection for Triad and a detailed description of the
Companys planned course of action to address its financial
condition. The financial projections that form the basis of the
corrective plan were prepared in accordance with SAP set forth
in the Illinois Insurance Code. The Company received approval of
the corrective plan from the Department in October 2008.
Following the approval of the initial corrective plan, in the
first quarter of 2009 the Company revised the assumptions
initially utilized as a result of continued deteriorating
economic conditions impacting its financial condition, results
of operations and future prospects. The revised assumptions
produced a range of potential ultimate outcomes for the run-off,
but included projections showing that absent additional action
by the Department or favorable changes in the Companys
business, Triad would have reported a deficiency in
policyholders surplus as calculated in accordance with SAP
as early as March 31, 2009. If this statutory insolvency
had occurred, the Department likely would have instituted a
receivership proceeding against Triad, which in turn would
likely have led to the institution of bankruptcy proceedings by
TGI. In an effort to protect existing policyholders, the
79
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Department issued the second Corrective Order effective on
March 31, 2009, as amended on May 26, 2009. The second
Corrective Order stipulates or prescribes:
|
|
|
|
|
Effective June 1, 2009, all valid claims under Triads
mortgage guaranty insurance policies are settled 60% in cash and
40% by recording a DPO;
|
|
|
|
At March 31, 2009, Triad was required to adjust surplus and
reserves reflecting the impact of the second Corrective Order on
future settled claims;
|
|
|
|
The DPO requires that Triad accrue a carrying charge based on
the investment yield earned by Triads investment portfolio;
|
|
|
|
Triad will establish an escrow account at least equal to the DPO
balance and any associated carrying charges;
|
|
|
|
Triad will require that any risk or obligation of any captive
reinsurer must be paid in full, and will deposit any excess
reinsurance recovery above the 60% cash payment into an escrow
account;
|
|
|
|
Payment of the DPO and the carrying charge is subject to
Triads future financial performance and requires the
approval of the Department;
|
|
|
|
Procedures to account for the impact of the second Corrective
Order in the financial statements prepared in accordance with
SAP;
|
|
|
|
Upon payment of a claim under these provisions, Triad is deemed
to have fully satisfied its obligations under the respective
insurance policy;
|
|
|
|
Other restrictions and requirements affecting the payment and
transferability of the DPOs and associated carrying
charge; and
|
|
|
|
Certain reporting requirements.
|
The DPO recording requirements of the second Corrective Order
became effective on June 1, 2009. At December 31,
2009, the recorded DPO, including a carrying charge of
$2.1 million, amounted to $168.4 million. The
recording of a DPO does not impact reported settled losses as
the Company continues to report the entire amount of a claim in
its statement of operations. The accounting for the DPO on a SAP
basis is similar to a surplus note which is reported as a
component of statutory surplus; accordingly, any repayment of
the DPO or the associated carrying charge requires approval of
the Department. However, in the Companys financial
statements prepared in accordance with GAAP included in this
report, the DPO is reported as a liability.
The Companys recurring losses from operations and the
resulting decline in Triads policyholders surplus as
calculated in accordance with SAP increases the likelihood that
Triad 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 Triad 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 implementation of
its revised corrective plan.
|
|
9.
|
Employee
Benefit Plans
|
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 $16,500, with an
additional $5,500 contribution available to those individuals
who will reach the age of 50 during 2009. 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
80
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
than 3% but not exceeding 5%. The Companys expense
associated with the plan totaled approximately $294,000 and
$556,000 for the years ended December 31, 2009 and 2008,
respectively.
Additionally, the Company has established and funded a Severance
Trust that qualifies as an employee benefit plan under ERISA.
The Severance Trust is non-contributory by the employees and its
sole purpose is to provide severance payments to employees in
accordance with the Companys severance plan in case Triad
is placed into bankruptcy or taken over by the Department. At
December 31, 2009, the Company had placed assets with a
fair value of $8.1 million in the trust. No severance
expense is recognized until an employee is notified of a fixed
termination date. During 2009, severance costs amounted to
$2.1 million.
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
the Company with a risk management tool designed to spread
certain layers of risk to others and achieve a more favorable
geographic dispersion of risk.
The effects of reinsurance for the years ended December 31,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Earned premiums:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
220,530
|
|
|
$
|
318,199
|
|
Assumed
|
|
|
|
|
|
|
1
|
|
Ceded
|
|
|
(40,872
|
)
|
|
|
(60,777
|
)
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
179,658
|
|
|
$
|
257,423
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
940,034
|
|
|
$
|
1,073,328
|
|
Assumed
|
|
|
|
|
|
|
1
|
|
Ceded
|
|
|
(132,407
|
)
|
|
|
(150,028
|
)
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
807,627
|
|
|
$
|
923,301
|
|
|
|
|
|
|
|
|
|
|
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
the Company.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of the reinsurer to honor
its obligation could result in losses to the Company;
consequently, allowances are established for amounts deemed
uncollectible. The Company evaluates the financial condition of
its reinsurers and monitors credit risk arising from similar
geographic regions, activities, or economic characteristics of
its reinsurers to minimize its exposure to significant losses
from reinsurer insolvency.
|
|
11.
|
Long-Term
Stock Incentive Plan
|
The Company has a stockholder-approved 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
81
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2009, 1,183,985 shares were
reserved and 824,071 shares were available for issuance
under the Plan. Gross compensation expense of approximately
$1.2 million along with the related tax benefit of
approximately $0.4 million was recognized in the financial
statements for the year ended December 31, 2009, as
compared to gross compensation expense of approximately
$4.3 million and the related tax benefit of approximately
$1.5 million for the year ended December 31, 2008. For
the year ended December 31, 2008, approximately $78,000 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, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Remaining Contractual
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Term
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2009
|
|
|
391,911
|
|
|
$
|
38.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
31,997
|
|
|
|
25.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
359,914
|
|
|
|
39.96
|
|
|
$
|
|
|
|
|
|
|
|
|
3.8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
359,914
|
|
|
|
39.96
|
|
|
$
|
|
|
|
|
|
|
|
|
3.8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock options is estimated on the date of
grant using a Black-Scholes pricing model. The Company did not
grant options in 2009 or 2008, therefore the weighted average
assumptions are not applicable for these years. 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.
A summary of nonvested restricted stock and phantom stock rights
activity under the Plan for the year ended December 31,
2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant-Date Fair Value
|
|
|
Nonvested, January 1, 2009
|
|
|
281,308
|
|
|
$
|
6.40
|
|
Granted
|
|
|
60,794
|
|
|
|
1.16
|
|
Vested
|
|
|
78,609
|
|
|
|
11.20
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2009
|
|
|
263,493
|
|
|
|
3.76
|
|
|
|
|
|
|
|
|
|
|
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, 2009 and 2008 was $1.16
and $3.80, respectively.
As of December 31, 2009, there was $297,503 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 0.9 years. The total fair value
of stock options, restricted stock and
82
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
phantom stock rights vested during the years ended
December 31, 2009 and 2008 was $0.6 and $4.3 million,
respectively.
The Company issues new shares upon exercise of stock options and
paid cash upon the vesting of phantom stock rights in 2009.
|
|
12.
|
Fair
Value Measurement
|
Fair
Value of Financial Instruments
The carrying values and fair values of financial instruments as
of December 31, 2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
available-for-sale
|
|
$
|
784,830
|
|
|
$
|
784,830
|
|
|
$
|
854,186
|
|
|
$
|
854,186
|
|
Equity securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
583
|
|
|
|
583
|
|
Short-term investments
|
|
|
26,651
|
|
|
|
26,651
|
|
|
|
40,653
|
|
|
|
40,653
|
|
Cash and cash equivalents
|
|
|
21,839
|
|
|
|
21,839
|
|
|
|
39,940
|
|
|
|
39,940
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
34,540
|
|
|
|
7,268
|
|
|
|
34,529
|
|
|
|
10,124
|
|
Valuation
Methodologies and Associated Inputs
Investments
Investments that are required to be carried at fair value are
measured based on assumptions used by market participants in
pricing the security. The most appropriate valuation methodology
is selected based on the specific characteristics of the fixed
maturity or equity security, and the Company consistently
applies the valuation methodology to measure the securitys
fair value. Fair value measurement is based on a market
approach, which utilizes prices and other relevant information
generated by market transactions involving identical or
comparable securities. Sources of inputs to the market approach
include third-party pricing services, independent broker
quotations or pricing matrices. Observable and unobservable
inputs are used in the Companys valuation methodologies.
Observable inputs include benchmark yields, reported trades,
broker-dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and reference data. In
addition, market indicators, industry and economic events are
monitored and further market data is acquired if certain
triggers are met. For certain security types, additional inputs
may be used, or some of the inputs described above may not be
applicable. For broker-quoted only securities, quotes from
market makers or broker-dealers are obtained from sources
recognized to be market participants. In order to validate the
pricing information and broker-dealer quotes, the Company relies
on, where possible, procedures that include comparisons with
similar observable positions, comparisons with subsequent sales,
discussions with senior business leaders and brokers and
observations of general market movements for those security
classes. For those securities trading in less liquid or illiquid
markets with limited or no pricing information, unobservable
inputs are used in order to measure the fair value of these
securities. In cases where this information is not available,
such as for privately placed securities, fair value is estimated
using an internal pricing matrix. This matrix relies on judgment
concerning the discount rate used in calculating expected future
cash flows, credit quality, industry sector performance and
expected maturity.
Prices received from third parties are not adjusted; however,
the third parties valuation methodologies and related
inputs are analyzed and additional evaluations are performed to
determine the appropriate level within the fair value hierarchy.
83
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The observable and unobservable inputs to the Companys
valuation methodologies are based on a set of standard inputs
that are generally used to evaluate all of our
available-for-sale
securities. The standard inputs used are benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers and reference data.
Depending on the type of security or the daily market activity,
standard inputs may be prioritized differently or may not be
available for all
available-for-sale
securities on any given day.
Short-term
Investments
Short-term investments are carried at fair value. This category
includes debt instruments with a maturity of greater than three
months but less than one year. These assets are classified as
Level 2.
Cash and
Cash Equivalents
Cash and cash equivalents are carried at amortized cost, which
approximates fair value. This category includes highly liquid
debt instruments purchased with a maturity of three months or
less. Due to the nature of these assets, we believe these assets
should be classified as Level 2.
Long-Term
Debt
The $35 million outstanding long-term debt is the
obligation of TGI and not of Triad. Debt service amounts to
$2.8 million per year and is paid by TGI. The primary
source of funds for the TGI debt service has been the interest
paid by Triad on the $25 million surplus note. Triads
interest payment to TGI has historically provided
$2.2 million of the required $2.8 million on an annual
basis. Effective with the first Corrective Order, Triad is now
prohibited from paying interest and principal on the
$25 million surplus note to TGI. The Company does not
believe the prohibition will be lifted for the foreseeable
future. TGI has continued to make the debt service payments of
$2.8 million per year from its existing sources of funds.
At December 31, 2009, total cash and invested assets at TGI
was approximately $8.7 million. Given the limited sources
of funds available to service the long-term debt and the
continued deterioration in the Companys financial
condition, the fair value of the Companys long-term debt
at December 31, 2009 was calculated using discounted cash
flow methodology giving effect only to the anticipated interest
payments based upon available funds at December 31, 2009.
The fair value of the Companys long-term debt at
December 31, 2008 was calculated utilizing a discounted
present value methodology for the repayment of the principle at
maturity utilizing credit spreads for non-investment grade
securities with similar maturities.
Fair
Value of Investments
The Company utilizes the provisions of ASC 820 in its estimation
and disclosures about fair value. ASC 820 defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. ASC 820
applies to other accounting pronouncements that require or
permit fair value measurements. The Company adopted ASC 820
effective for its fiscal year beginning January 1, 2008.
ASC 820 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 ASC 820 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).
|
84
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The Company did not
have any material assets or liabilities measured at fair value
on a non-recurring basis as of December 31, 2009. The
following table summarizes the assets measured at fair value on
a recurring basis and the source of the inputs in the
determination of fair value as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
December 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
784,830
|
|
|
$
|
|
|
|
$
|
782,836
|
|
|
$
|
1,994
|
|
Short-term investments
|
|
|
26,651
|
|
|
|
|
|
|
|
26,651
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
21,839
|
|
|
|
|
|
|
|
21,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
833,320
|
|
|
$
|
|
|
|
$
|
831,326
|
|
|
$
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
40,653
|
|
|
|
|
|
|
|
40,653
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
39,940
|
|
|
|
|
|
|
|
39,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
935,362
|
|
|
$
|
583
|
|
|
$
|
932,244
|
|
|
$
|
2,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
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 2009 and 2008, respectively.
Fair
Value Measurement Using Significant
Unobservable Inputs (Level 3)
Certain Bonds in Fixed Maturities AFS Portfolio
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Beginning balance
|
|
$
|
2,535
|
|
|
$
|
7,402
|
|
Total gains and losses (realized and unrealized):
|
|
|
|
|
|
|
|
|
Included in operations
|
|
|
(341
|
)
|
|
|
(270
|
)
|
Included in other comprehensive income
|
|
|
293
|
|
|
|
(819
|
)
|
Purchases, issuances and settlements
|
|
|
(493
|
)
|
|
|
(3,983
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,994
|
|
|
$
|
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
|
|
$
|
(49
|
)
|
|
$
|
(1,815
|
)
|
|
|
|
|
|
|
|
|
|
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.
In June 2008, the Company recorded an accrual for certain exit
costs in connection with the transition of its business into
run-off. As part of the transition to run-off, Triad implemented
a reduction in workforce by terminating approximately
100 employees based primarily in the sales, marketing,
technology and underwriting functions.
As a result of the transition into run-off, the Company recorded
an estimated pre-tax charge of approximately $8.3 million
in other operating costs on the Statements of Operations for the
quarter ended June 30, 2008. 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 the Companys
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. At December 31, 2009,
there remained approximately $0.6 million of accrued
severance and related personnel costs and approximately
$0.1 million of lease abandonment costs. Due to the
subleasing arrangement related to the sale of the mortgage
insurance operating platform, the Company recorded a reduction
in the lease abandonment estimate established at June 30,
2008 of $0.2 million.
Subsequent to 2008, the Company has recorded an additional
$0.4 million in employee severance costs related to
supplemental reductions in the workforce as the run-off
continues. For the majority of these individuals, the severance
payment is made as a single lump sum payment in the month
following termination.
86
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 1, 2009, the Company sold its information
technology and operating platform to Essent, an unrelated new
mortgage insurer. Under the terms of the purchase agreement,
Essent acquired all of the proprietary mortgage insurance
software and substantially all of the supporting hardware, as
well as certain other assets, in exchange for up to
$30 million in cash and the assumption by Essent of certain
contractual obligations. Approximately $15 million of the
consideration is fixed and up to an additional $15 million
is contingent on Essent writing a certain minimum amount of
insurance in the five-year period following closing. During the
2009 fourth quarter, the Company received the initial
$10 million installment of the purchase price and recorded
a gain of approximately $12 million related to the fixed
component of the purchase agreement. Essent has established its
operations and technology center in Winston-Salem, North
Carolina and a number of the former information technology and
operations employees have joined Essent as contemplated by the
agreement. At the closing of the transaction with Essent, the
Company also entered into a services agreement, pursuant to
which Essent is providing ongoing information systems
maintenance and services, customer service and policy
administration support to Triad. Until December 2010, the
Company pays a pre-determined amount for each month of service;
after December 2010 the fees will be based on the number of
policies in force.
The Company is involved in litigation and other legal
proceedings in the ordinary course of business as well as the
matters identified below.
On September 4, 2009, Triad filed a complaint against
American Home Mortgage (AHM) in the United States
Bankruptcy Court for the District of Delaware seeking rescission
of multiple master mortgage guaranty insurance policies
(master policies) and declaratory relief. The
complaint seeks relief from AHM as well as all owners of loans
insured under the master policies by way of a defendant class
action. Triad alleged that AHM failed to follow the delegated
insurance underwriting guidelines approved by Triad, that this
failure breached the master policies as well as the implied
covenants of good faith and fair dealing, and that these
breaches were so substantial and fundamental that the intent of
the master policies could not be fulfilled and Triad should be
excused from its obligations under the master policies. The
total amount of risk originated under the AHM master policies,
accounting for any applicable stop loss limits associated with
modified pool contracts, was $1.6 billion, of which
$1.1 billion remains in force at December 31, 2009.
Triad continues to accept premiums and process claims under the
master policies but, as a result of this action, Triad ceased
remitting claim payments to companies servicing loans originated
by AHM. Both premiums and claim payments subsequent to the
filing of the complaint have been segregated pending resolution
of this action. We have not recognized any benefit in our
financial statements pending the outcome of the litigation.
On November 4, 2009, AHM filed an action in the Bankruptcy
Court seeking to recover $7.6 million of alleged
preferential payments made to Triad. AHM alleges that such
payments constitute a preference and are subject to recovery by
the bankrupt estate. The time period in which to respond to this
request has been tolled pending settlement discussions in the
above referenced AHM matter. In the event a settlement is not
successfully concluded, Triad intends to vigorously defend this
matter.
On December 11, 2009, American Home Mortgage Servicing
filed a complaint against Triad for damages, declaratory relief,
and injunction in the United States District Court, Northern
District of Texas. The complaint alleges that Triad denied
payment on legitimate claims on 15 mortgage insurance loans and
seeks damages, a declaration that our mortgage insurance
policies prohibit denial of claim without evidence of harm, and
an injunction against future like denials.
On February 6, 2009, 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
87
TRIAD
GUARANTY INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 26, 2006 and April 1, 2008 and the complaint
alleges violations of federal securities laws by the Company and
two of its present or former officers. The court has appointed
lead counsel for the plaintiff and an amended complaint was
filed on June 22, 2009. We filed our motion to dismiss the
amended complaint on August 21, 2009 and the plaintiff
filed its opposition to the motion to dismiss on
October 20, 2009. Our reply was filed on November 19,
2009.
Management has evaluated subsequent events to determine if
events or transactions occurring through the filing date of this
annual report on
Form 10-K
require potential adjustment or disclosure in the financial
statements. In March 2010, the Company entered into a
commutation agreement with its largest captive reinsurance
partner. Under terms of the commutation agreement, the Company
will assume all liability for the existing and future claims
covered by the reinsurance and trust agreement in exchange for
the entire trust balance of approximately $142.0 million.
As a result of the transaction, cash and investments will
increase and reinsurance recoverable will decrease on the
balance sheet. The Company does not expect the transaction will
have any impact on the statement of operations for the first
quarter of 2010. The Company is not aware of any other
significant events that occurred subsequent to the balance sheet
date but prior to the filing of this report that would have a
material impact on its Consolidated Financial Statements.
On March 5, 2010, Countrywide Home Loans, Inc. filed a
lawsuit in the Los Angeles County Superior Court of the State of
California alleging breach of contract and seeking a declaratory
judgment that bulk rescissions of flow loans is improper and
that Triad is improperly rescinding loans under the terms of its
master policies. Triad intends to vigorously defend this matter.
88
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
RELATED PARTIES
TRIAD GUARANTY INC.
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and agencies
|
|
$
|
24,958
|
|
|
$
|
25,261
|
|
|
$
|
25,261
|
|
Foreign government and corporate debt
|
|
|
9,991
|
|
|
|
10,302
|
|
|
|
10,302
|
|
Corporate debt
|
|
|
468,999
|
|
|
|
501,000
|
|
|
|
501,000
|
|
Residential mortgage-backed
|
|
|
102,391
|
|
|
|
107,405
|
|
|
|
107,405
|
|
Asset-backed
|
|
|
36,844
|
|
|
|
39,392
|
|
|
|
39,392
|
|
State and municipal bonds
|
|
|
94,966
|
|
|
|
101,470
|
|
|
|
101,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
738,149
|
|
|
|
784,830
|
|
|
|
784,830
|
|
Equity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
26,650
|
|
|
|
26,651
|
|
|
|
26,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments other than investments in related parties
|
|
$
|
764,799
|
|
|
$
|
811,481
|
|
|
$
|
811,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Fixed maturities,
available-for-sale
|
|
$
|
4,710
|
|
|
$
|
5,045
|
|
Notes receivable from subsidiary
|
|
|
|
|
|
|
25,000
|
|
Short-term investments
|
|
|
956
|
|
|
|
1,752
|
|
Cash
|
|
|
3,016
|
|
|
|
3,963
|
|
Accrued investment income
|
|
|
77
|
|
|
|
2,244
|
|
Income taxes recoverable
|
|
|
|
|
|
|
53
|
|
Other assets
|
|
|
182
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,941
|
|
|
$
|
38,058
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
34,540
|
|
|
$
|
34,529
|
|
Accrued interest
|
|
|
1,275
|
|
|
|
1,275
|
|
Investment in subsidiaries deficit
|
|
|
679,469
|
|
|
|
138,918
|
|
Accrued expenses and other liabilities
|
|
|
15
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
715,299
|
|
|
|
174,724
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
153
|
|
|
|
151
|
|
Additional paid-in capital
|
|
|
113,848
|
|
|
|
112,629
|
|
Accumulated other comprehensive income
|
|
|
30,782
|
|
|
|
6,063
|
|
Retained earnings (accumulated deficit)
|
|
|
(851,141
|
)
|
|
|
(255,509
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(706,358
|
)
|
|
|
(136,666
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
8,941
|
|
|
$
|
38,058
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
90
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Interest (loss) income
|
|
$
|
(1,873
|
)
|
|
$
|
3,040
|
|
Realized investment (loss) gains
|
|
|
(24,977
|
)
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(26,850
|
)
|
|
|
6,228
|
|
Other Income
|
|
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,602
|
)
|
|
|
6,228
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2 ,776
|
|
|
|
3,558
|
|
Operating expenses
|
|
|
3 ,116
|
|
|
|
4,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,892
|
|
|
|
8,085
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and deficit in undistributed
loss of subsidiaries
|
|
|
(30,494
|
)
|
|
|
(1,857
|
)
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
Current
|
|
|
24
|
|
|
|
831
|
|
Deferred
|
|
|
38
|
|
|
|
3,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
4,668
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before equity in undistributed loss of subsidiaries
|
|
|
(30,432
|
)
|
|
|
2,811
|
|
Equity in undistributed loss of subsidiaries
|
|
|
(565,200
|
)
|
|
|
(633,938
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(595,632
|
)
|
|
$
|
(631,127
|
)
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
91
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
TRIAD GUARANTY INC.
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(595,632
|
)
|
|
$
|
(631,127
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed loss of subsidiaries
|
|
|
565,200
|
|
|
|
633,938
|
|
Accrued investment loss (income)
|
|
|
2,167
|
|
|
|
(731
|
)
|
Other assets
|
|
|
(181
|
)
|
|
|
366
|
|
Deferred income taxes
|
|
|
(38
|
)
|
|
|
(3,837
|
)
|
Income taxes recoverable
|
|
|
53
|
|
|
|
76
|
|
Accretion of discount on investments
|
|
|
(11
|
)
|
|
|
39
|
|
Amortization of deferred compensation
|
|
|
1,220
|
|
|
|
4,257
|
|
Amortization of debt issue costs
|
|
|
11
|
|
|
|
9
|
|
Accrued interest
|
|
|
|
|
|
|
(80
|
)
|
Realized investment losses (gains) on securities
|
|
|
24,977
|
|
|
|
(3,188
|
)
|
Other liabilities
|
|
|
13
|
|
|
|
(972
|
)
|
Other operating activities
|
|
|
87
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,134
|
)
|
|
|
(1,287
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(1,864
|
)
|
|
|
(5,131
|
)
|
Sales and maturities
|
|
|
2,255
|
|
|
|
41,855
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
44,295
|
|
Change in short-term investments
|
|
|
796
|
|
|
|
2,217
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
1,187
|
|
|
|
83,236
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
|
|
|
|
(80,000
|
)
|
Excess tax benefits related to share based payments
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
(79,985
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash
|
|
|
(947
|
)
|
|
|
1,964
|
|
Cash at beginning of year
|
|
|
3,963
|
|
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
3,016
|
|
|
$
|
3,963
|
|
|
|
|
|
|
|
|
|
|
See supplementary notes to condensed financial statements.
92
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, investment in
subsidiaries is stated at cost plus equity in undistributed
losses of the subsidiaries. Dividends received from the
subsidiaries are shown as investment income. The share of net
income of 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 annual report on
Form 10-K.
Triad Guaranty Inc. (TGI) is a holding company
which, through its wholly-owned subsidiary, Triad Guaranty
Insurance Corporation (TGIC), historically has
provided mortgage insurance coverage in the United States.
Unless the context requires otherwise, references to
Triad in this annual report on
Form 10-K
refer to the operations of TGIC and its wholly-owned subsidiary,
Triad Guaranty Assurance Corporation (TGAC).
References to the Company refer collectively to the
operations of TGI and Triad. 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 its business in run-off
under two Corrective Orders issued by the Illinois Department of
Insurance (the Department). The first Corrective
Order was issued in August 2008. The second Corrective Order was
issued in March 2009 and subsequently amended in May 2009. As
used in these financial statements, the term run-off
means writing no new mortgage insurance policies, but continuing
to service 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; reviewing policies for the
existence of misrepresentation, fraud or non-compliance with
stated programs; and settling all legitimate filed claims per
the provisions of the two Corrective Orders issued by the
Department. The term settled, as used in these
financial statements in the context of the payment of a claim,
refers to the satisfaction of Triads obligations following
the submission of valid claims by its policyholders. Prior to
June 1, 2009, valid claims were settled solely by a cash
payment. Effective on and after June 1, 2009, valid claims
are settled by a combination of 60% in cash and 40% in the form
of a deferred payment obligation (DPO). The
Corrective Orders, among other things, allow management to
continue to operate Triad under the close supervision of the
Department, include restrictions on the distribution of
dividends or interest on notes payable to TGI by Triad, and
include restrictions on the payment of claims.
The Company prepares its financial statements presented in this
annual report on
Form 10-K
in conformity with accounting principles generally accepted in
the United States of America (GAAP). The financial
statements for Triad that are provided to the Department and
that form the basis for our corrective plan required by the
Corrective Orders were prepared in accordance with Statutory
Accounting Principles (SAP) as set forth in the
Illinois Insurance Code or prescribed by the Department. The
primary differences between GAAP and SAP for Triad at
December 31, 2009 were the methodology utilized for the
establishment of reserves and the reporting requirements
relating to the DPO stipulated in the second Corrective Order. A
deficit in assets occurs when recorded liabilities exceed
recorded assets in financial statements prepared under GAAP. A
deficiency in policyholders surplus occurs when recorded
liabilities exceed recorded assets in financial statements
prepared under SAP. A deficit in assets is not necessarily a
measure of insolvency. However, the Company believes that if
Triad were to report an
other-than-temporary
deficiency in policyholders surplus under SAP, Illinois
law may require the Department to seek receivership of Triad,
which could lead TGI to institute a proceeding seeking relief
from creditors under U.S. bankruptcy laws. The second
Corrective Order attempts to mitigate the possibility of a
deficiency in policyholders surplus by providing for the
settlement of claims 60% in cash and 40% in the form of a DPO,
which is accounted for as a component of policyholders
surplus under SAP.
93
The Company has prepared its financial statements on a going
concern basis under GAAP, 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, among other things, the
possible inability of Triad to comply with the provisions of the
Corrective Orders, the Companys recurring losses from
operations and the Company reporting an increasing deficit in
assets as of the end of the last two years. The Companys
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 2009 and
2008 which resulted in a deficit in assets of
$706.4 million at December 31, 2009. The ongoing
operating losses and the deficit in assets is primarily the
result of increased defaults and higher reserves relating to the
mortgages that the Company has insured. Contributing to the
defaults and claims have been declines in U.S home prices,
particularly in certain distressed markets, tightened credit
markets, rising unemployment, and the overall effects of the
economic recession in the United States. Additionally, the
Company is unable to offset these operating losses with revenue
from new, potentially more profitable, business as Triad is
operating in run-off under the two Corrective Orders issued by
the Department and can no longer issue commitments for new
insurance.
Triad has entered into two Corrective Orders with the
Department. The first Corrective Order was entered into on
August 5, 2008 and remains in effect. This 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, that Corrective Order:
|
|
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|
|
Required Triad to submit a corrective plan to the Department;
|
|
|
|
Prohibits all stockholder dividends from Triad to TGI without
the prior approval of the Department;
|
|
|
|
Prohibits interest and principal payments on Triads
surplus note to TGI without the prior approval of the Department;
|
|
|
|
Restricts Triad 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 Department;
|
|
|
|
Requires Triad to obtain prior written approval from the
Department before entering into certain transactions with
unaffiliated parties;
|
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|
|
Requires Triad to meet with the Department in person or via
teleconference as necessary; and
|
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|
|
Requires Triad to furnish to the Department certain reports,
agreements, actuarial opinions and information on an ongoing
basis at specified times.
|
The Company submitted a corrective plan to the Department as
required under the initial Corrective Order. The corrective plan
included, among other items, a five-year statutory financial
projection for Triad and a detailed description of the
Companys planned course of action to address its financial
condition. The financial projections that form the basis of the
corrective plan were prepared in accordance with SAP set forth
in the Illinois Insurance Code. The Company received approval of
the corrective plan from the Department in October 2008.
Following the approval of the initial corrective plan, in the
first quarter of 2009 the Company revised the assumptions
initially utilized as a result of continued deteriorating
economic conditions impacting its financial condition, results
of operations and future prospects. The revised assumptions
produced a range of potential ultimate outcomes for the run-off,
but included projections showing that absent additional action
by the Department or favorable changes in the Companys
business, Triad would have reported a deficiency in
policyholders surplus as calculated in accordance with SAP
as early as March 31, 2009. If this statutory insolvency
had occurred, the Department likely would have instituted a
receivership proceeding against Triad, which in turn would
likely have led to the institution of bankruptcy proceedings by
TGI. In an effort to protect existing policyholders, the
94
Department issued the second Corrective Order effective on
March 31, 2009, as amended on May 26, 2009. The second
Corrective Order stipulates or prescribes:
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|
|
Effective June 1, 2009, all valid claims under Triads
mortgage guaranty insurance policies are settled 60% in cash and
40% by recording a DPO;
|
|
|
|
At March 31, 2009, Triad was required to adjust surplus and
reserves reflecting the impact of the second Corrective Order on
future settled claims;
|
|
|
|
The DPO requires that Triad accrue a carrying charge based on
the investment yield earned by Triads investment portfolio;
|
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|
|
Triad will establish an escrow account at least equal to the DPO
balance and any associated carrying charges;
|
|
|
|
Triad will require that any risk or obligation of any captive
reinsurer must be paid in full, and will deposit any excess
reinsurance recovery above the 60% cash payment into an escrow
account;
|
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|
|
Payment of the DPO and the carrying charge is subject to
Triads future financial performance and requires the
approval of the Department;
|
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|
|
Procedures to account for the impact of the second Corrective
Order in the financial statements prepared in accordance with
SAP;
|
|
|
|
Upon payment of a claim under these provisions, Triad is deemed
to have fully satisfied its obligations under the respective
insurance policy;
|
|
|
|
Other restrictions and requirements affecting the payment and
transferability of the DPOs and associated carrying
charge; and
|
|
|
|
Certain reporting requirements.
|
The DPO recording requirements of the second Corrective Order
became effective on June 1, 2009. At December 31,
2009, the recorded DPO, including a carrying charge of
$2.1 million, amounted to $168.4 million. The
recording of a DPO does not impact reported settled losses as
the Company continues to report the entire amount of a claim in
its statement of operations. The accounting for the DPO on a SAP
basis is similar to a surplus note which is reported as a
component of statutory surplus; accordingly, any repayment of
the DPO or the associated carrying charge requires approval of
the Department. However, in the Companys financial
statements prepared in accordance with GAAP included in this
report, the DPO is reported as a liability.
The Companys recurring losses from operations and the
resulting decline in Triads policyholders surplus as
calculated in accordance with SAP increases the likelihood that
Triad 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 Triad 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 implementation of
its revised corrective plan.
95
The cost or amortized cost and the fair value of investments,
other than the investment in the subsidiaries held by TGI, is as
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
|
$
|
232
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
232
|
|
Corporate debt
|
|
|
4,371
|
|
|
|
107
|
|
|
|
|
|
|
|
4,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,603
|
|
|
|
107
|
|
|
|
|
|
|
|
4,710
|
|
Short-term investments
|
|
|
955
|
|
|
|
1
|
|
|
|
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,558
|
|
|
$
|
108
|
|
|
$
|
|
|
|
$
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major categories of TGIs investment income are summarized
as follows:
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
219
|
|
|
$
|
485
|
|
Cash and short-term investments
|
|
|
70
|
|
|
|
371
|
|
Interest on note receivable from subsidiary (Note 5)
|
|
|
(2,156
|
)
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867
|
)
|
|
|
3,081
|
|
Expenses
|
|
|
6
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
(1,873
|
)
|
|
$
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Note
Receivable from Subsidiary
|
In 1998, TGI contributed $25.0 million to Triad in exchange
for a surplus note that bears interest at 8.9%. The
$25.0 million note receivable reflects a surplus note on
the books of Triad. The terms of the surplus note currently
prohibit the payment of interest by Triad. Additionally, the
Corrective Orders prohibit the payment of interest or principal
on the surplus note without the prior approval of the
Department. Triad does not anticipate being able to resume the
payment of interest or principal for the foreseeable future.
Therefore, for the year ended December 31, 2009, it was
determined that the ability of TGI to collect the
$25.0 million note receivable and related accrued interest
from Triad was highly unlikely and, therefore, TGI recorded an
other-than-temporary
impairment of both the note receivable and the $4.4 million
of accrued interest. This
other-than-temporary
impairment did not affect TGIs consolidated results of
operations.
96
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.
97
EXHIBIT INDEX
Form 10-K
for Fiscal Year Ended December 31, 2009
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
2
|
.1
|
|
Asset Purchase Agreement between Triad Guaranty, Inc., Triad
Guaranty Insurance Corporation and Essent Guaranty, Inc., dated
October 7, 2009; previously filed as Exhibit 10.60 to
the Registrants Current Report on
Form 8-K,
filed October 7, 2009, and herein incorporated by reference.
|
|
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
|
.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.
|
99
|
|
|
|
|
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
|
.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
|
.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
|
.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
|
.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.
|
|
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.*
|
100
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
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, previously filed as Exhibit 10.59 to the
Registrants Annual Report on
Form 10-K,
filed March 16, 2009, and herein incorporated by reference.*
|
|
10
|
.60
|
|
Services Agreement between Triad Guaranty, Inc., Triad Guaranty
Insurance Corporation and Essent Guaranty, Inc., effective
December 1, 2009.
|
|
10
|
.61
|
|
Summary of Board of Directors Compensation Program, effective
October 1, 2009.*
|
|
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. |
101