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| TGIC > SEC Filings for TGIC > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
In run-off, our revenues principally consist of (a) earned premiums from
flow insurance in force (net of reinsurance premiums ceded as part of our risk
management strategies and net of refunds), (b) earned premiums from structured
bulk insurance in force (net of refunds), and (c) investment income on invested
assets. We also realize investment gains and investment losses on the sale and
impairment of securities where the net gain or loss is reported as a component
of revenue.
Our expenses consist primarily of (a) amounts paid on claims submitted,
(b) changes in reserves for estimated future claim payments on loans that are
currently in default, (c) general and administrative costs of servicing existing
policies, (d) other general business expenses, and (e) interest expense on
long-term debt.
Our future profitability depends largely on (a) the conditions of the
housing, mortgage and capital markets that have a direct impact on default
rates, mitigation efforts, cure rates and ultimately the amount of claims paid,
(b) the overall general state of the economy and job market, (c) persistency
levels, (d) operating efficiencies, and (e) the level of investment yield,
including realized gains and losses, on our investment portfolio.
Persistency is an important metric in understanding our premium revenue.
The longer a policy remains on our books, or "persists", the greater the amount
of renewal premium revenue that we will derive from the policy. We define
persistency as the amount of insurance in force at the twelve-month end of a
financial reporting period as a percentage of the amount of insurance in force
at the beginning of the period. Cancellations of policies originated during the
past twelve months are not included in our calculation of persistency.
Cancellations result primarily from the borrower refinancing or selling insured
mortgaged residential properties, from policies being rescinded due to fraud,
misrepresentation or other underwriting violations, from a servicer choosing to
cancel the insurance, from the payment of a claim, and, to a lesser degree, from
the borrower achieving prescribed equity levels, at which point the lender no
longer requires mortgage guaranty insurance.
Recent Developments
On August 5, 2008, we agreed to a corrective order with the Illinois
Division of Insurance regarding restrictions on the distribution of funds from
Triad to the holding company as well as enhanced reporting requirements and
other matters. We have agreed to this corrective order as a result of the
following events:
• On June 19, 2008, we announced that we had ended negotiations with Lightyear
Capital LLC to form a new mortgage insurance company.
• We were suspended as an approved mortgage insurer by both Fannie Mae and Freddie Mac effective June 19, 2008.
• We voluntarily ceased issuing commitments for mortgage insurance effective July 15, 2008 and entered into a voluntary run-off of our remaining insurance business.
• Our level of statutory capital was and remains significantly below the thresholds required by all state insurance departments to write mortgage guaranty insurance business.
Under the corrective order, we were required to submit a corrective plan to
the Illinois Division of Insurance. The corrective plan we submitted included,
among other items, a five-year statutory financial projection and a detailed
description of our planned course of action to address our current financial
condition. The Illinois Division of Insurance has reviewed our preliminary
corrective plan and, based on initial discussions with the Division of
Insurance, we resubmitted our revised corrective plan on October 10, 2008. We
have received approval of the revised corrective plan from the Illinois Division
of Insurance and are in the process of reviewing the revised plan with both
Fannie Mae and Freddie Mac, the two primary beneficiaries of our insurance
coverage.
In connection with the decision to transition Triad's business into
run-off, we terminated all agreements with the rating agencies regarding the
issuance of ratings for us and our subsidiaries, including Triad. As a result,
Standard & Poor's Ratings Services, Moody's Investor Services and Fitch Ratings
withdrew their counterparty credit and financial strength ratings on Triad and
on Triad Guaranty Inc.
Effective July 18, 2008, Mark K. Tonnesen, our former President and Chief
Executive Officer and a former director, resigned from those positions and
subsequently retired on August 15, 2008. Also effective July 18, 2008, the Board
of Directors appointed William T. Ratliff, III, our existing Chairman of the
Board, as the interim President and Chief Executive Officer in addition to
continuing his role as Chairman. On October 22, 2008, the Board of Directors
appointed Kenneth W. Jones, who had been serving as our Chief Financial Officer,
as our new President and Chief Executive Officer, effective immediately.
Mr. Jones retained the responsibilities of Chief Financial Officer following his
appointment as our President and Chief Executive Officer. Mr. Ratliff continues
to serve as our Chairman of the Board following his relinquishment of the
positions of President and Chief Executive Officer and will remain as an
executive for the foreseeable future.
Recent adverse events in the real estate, mortgage and financial markets
have been unprecedented. Steep declines in real estate values, tightening
markets for obtaining capital or credit, and the liquidity concerns of financial
institutions have created a significant amount of uncertainty in the capital
markets, which has resulted in significant downward pressure on asset values,
especially single family homes. Like many other financial companies, we have not
been immune to these adverse developments and have seen our financial position
and results of operations deteriorate.
At September 30, 2008, the Company reported a deficiency in assets of
$28.4 million compared to stockholders' equity of $140.9 million at June 30,
2008 and $498.9 million at December 31, 2007. A deficiency in assets occurs when
recorded liabilities exceed recorded assets. The deficiency in assets is the
result of five straight quarters of losses totaling $615.7 million. The largest
portion of our losses is the result of an increase in loss and loss adjustment
expense reserves of over $900 million since June 30, 2007, the last quarter for
which we reported a profit. In addition, we have paid in excess of $230 million
of claims during these last five quarters, an amount greater than the total
claims paid during the first 18 years of the Company's existence. At
September 30, 2008 we had over $900 million of cash and invested assets,
approximately $240 million more than at June 30, 2007. We reported
$150.6 million of cash flow from operations for the first nine months of 2008,
with $116.0 million derived from the early redemption of ten-year non-interest
bearing United States Mortgage Guaranty Tax and Loss Bonds ("Tax and Loss
Bonds") that will not be an ongoing source of cash. While we reported a
deficiency in assets at September 30, 2008 for GAAP purposes, the underlying
performance of our insurance portfolio was generally consistent with our run-off
plan, which projects significant losses in the early stages of the plan.
Additionally, we expect to recognize additional benefits resulting from the
Modified Pool stop losses and captive reinsurance in future periods that have
not been reflected in our financial statements. We expect to continue to report
a deficiency in assets in future periods. While we do not expect the deficiency
in net assets to have a direct impact on our operations, it could adversely
impact our continued listing on The NASDAQ Stock Market.
In addition to the anticipated captive and structured benefits mentioned
above, our GAAP financial statements do not reflect the net benefit from the
$95 million Excess-of-Loss reinsurance treaty that is currently in arbitration.
While we believe we will ultimately prevail in the arbitration proceedings, GAAP
currently restricts the recognition of this net benefit. However, in
consultation with the Illinois Division of Insurance, we recorded in our second
quarter statutory financial statements the full net benefit of the reinsurance
treaty, which included the $95 million benefit and an accrual for the present
value of the future 10-year premium expense due the reinsurer.
Our intention is to pay all legitimate claims and expenses. Based on
information currently available to us, we believe the combination of our current
cash, investments and anticipated future premiums will provide sufficient
resources to enable Triad to meet these obligations. Our focus remains on the
efficient and effective servicing of our insured portfolio, particularly with
respect to loss mitigation. We continue to improve our processes in this area by
examining and refining all aspects of our default management and claims process,
particularly for recent policy years.
Included in Triad's policyholders' surplus for statutory purposes is a
"surplus note" of $25 million payable to the Company, its parent. In June of
2008, the Illinois Division of Insurance denied Triad's request for the payment
of the semi-annual interest of $1.1 million due on the surplus note.
Furthermore, the corrective order issued by the Illinois Division of Insurance
prohibits Triad from paying principal or interest on the surplus note for the
foreseeable future. See the "Liquidity and Financial Resources" section of this
report for additional information concerning the corrective order.
In July 2008, the Housing and Economic Recovery Act of 2008 was enacted,
which established the Federal Housing and Finance Agency (FHFA) as the successor
regulatory agency to both Fannie Mae and Freddie Mac. FHFA has broad legal and
regulatory authority to ensure the safety and soundness of the GSEs, including
the ability to place the GSEs into receivership or conservatorship. On
September 7, 2008, FHFA placed both Fannie Mae and Freddie Mac into
conservatorship. Conservatorship is a process designed to stabilize a troubled
institution with the objective of returning the troubled institution to normal
business operations. FHFA will act as the conservator of both GSEs. FHFA has
stated that the purpose of this action is to restore confidence in the GSEs, to
enhance their capacity to fulfill their mission, and to mitigate the systematic
risk that has contributed directly to the instability in the market. The impact
of this action on our results of operations and our financial condition is not
clear at this time.
During October 2008, the Emergency Economic Stabilization Act of 2008
("EESA") was enacted. EESA, among other things, authorizes the Secretary of the
United States Department of the Treasury to purchase from certain financial
institutions up to $700 billion of residential and commercial mortgages and any
other financial instrument as deemed necessary to promote financial market
stability. The Treasury already has allocated $250 billion of these funds to
purchase securities issued by certain financial institutions. Additionally,
several large lenders have announced plans to implement programs designed to
explore the possibility of modifications to certain loans. The impact of these
events on our results of operations and our financial condition is unclear at
this time.
Consolidated Results of Operations
Following is selected financial information for the three months and nine
months ended September 30, 2008 and 2007:
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