Add
TGIC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TGIC > SEC Filings for TGIC > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes our consolidated financial condition, changes in financial position, and results of operations for the three months and six month periods ended June 30, 2012 and 2011. This discussion supplements Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011, and should be read in conjunction with the interim financial statements and notes contained herein.
Certain of the statements contained in this Quarterly Report on Form 10-Q 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 we do not operate our business in accordance with the revised financial and operating plan and the Corrective Orders, or for other reasons, 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; legal and other proceedings regarding modifications and refinancing of mortgages and/or foreclosure proceedings; the possibility that there will not be adequate interest in our common stock to ensure efficient pricing; and the relevant factors described in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 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 (the "SEC"). 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. Any forward-looking statements that are made are current only as of the date on which we filed this report.
Overview
Triad Guaranty Inc. ("TGI") is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("TGIC"), is a nationwide mortgage guaranty insurer pursuing a run-off of its existing in-force book of business. The term "run-off" means continuing to service existing mortgage guaranty insurance policies but not writing any new policies. Unless the context requires otherwise, references to "Triad" in this Quarterly Report on Form 10-Q 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.
· billing and collecting premiums on policies that remain in force;
· working with borrowers in default to remedy or cure 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 Triad's obligations following the submission of valid claims by our policyholders. As required by the second Corrective Order, 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 surplus notes payable to TGI by Triad, and include restrictions on the payment of claims.
TGI is the public company whose stock is traded on the OTC Markets Group's OTCQB tier ("Pink Sheets") under the symbol "TGIC". TGI owns TGIC, which is its only operating subsidiary. Aside from its ownership of TGIC, TGI's assets amount to approximately $1.3 million, which consist primarily of cash holdings. The remainder of the $848.0 million of assets reported on the Consolidated Balance Sheets presented in this Form 10-Q are the assets of Triad. Triad is prohibited from paying dividends or distributing assets to TGI without the approval of the Department. We believe that, absent significant positive changes in the economy and the residential real estate market, the existing assets combined with the future premiums of Triad likely will not be sufficient to meet Triad's current and future policyholder obligations and, therefore, none of Triad's assets would be available to TGI and its stockholders other than to reimburse certain TGI expenses incurred on behalf of TGIC. Therefore, the ultimate value of TGI could be considered its cash holdings less any future expenses not reimbursed by Triad (see "Liquidity and Capital Resources" for more information). TGI is exploring strategies to acquire profitable, growing businesses and leverage its insurance industry knowledge, management expertise, and Net Operating Loss ("NOL") carryforwards that were generated on a consolidated basis with Triad in order to increase its future value for the benefit of its stockholders. No assurance can be given that TGI will be able to successfully implement such a strategy, or, if implemented, to increase its stockholder value.
We have historically provided Primary and Modified Pool mortgage guaranty
insurance coverage on U.S. residential mortgage loans. We classify a policy as
Primary insurance when the policy is not part of a structured bulk transaction
that includes an aggregate stop-loss limit applied to the entire group of loans.
We classify all other insurance as Modified Pool insurance. Policies insured as
part of a Modified Pool transaction have individual coverage but there is an
aggregate stop-loss limit applied to the entire group of insured loans.
Persistency, which measures the percentage of insurance in force remaining from one-year prior, is an important metric in understanding our future premium revenue. The longer a policy remains on our books, or "persists", the greater the amount of total premium revenue we will earn from the policy.
In run-off, our revenues principally consist of earned renewal premiums, which are reported net of reinsurance premiums ceded to captive reinsurers and premium refunds paid or accrued related primarily to rescissions, and investment income. 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: settled claims (including loss adjustment expenses) net of any losses ceded to captive reinsurers; changes in reserves for estimated future claim payments on loans that are currently in default (including new defaults that are reported during the period) net of any reserves ceded to captive reinsurers; general and administrative costs of servicing existing policies; other general business expenses; and interest expense on the DPO.
As we are operating in run-off and are issuing no new insurance commitments, our future results of operations largely depend on the amount of future premium that we earn less the amount of losses that we incur each period on the new defaults reported to us. In addition, our results may be significantly impacted by the favorable or adverse development of our loss reserves. Our results from operations will benefit if we are able to settle our loss reserves at a lesser amount than that reported on our balance sheet through loss mitigation, litigation and settlements with servicers. Conversely, our results from operations will be negatively impacted if the settled losses are greater than the loss reserves provided. Our results of operations also depend on a number of other factors, many of which are not under our control. These factors include:
· the conditions of the housing, mortgage and capital markets that have a direct impact on default rates, loss mitigation efforts, cure rates, and ultimately, the amount of claims settled;
· the overall general state of the economy and job market;
· persistency levels on our remaining insurance in force; and
· operating efficiencies.
Our results of operations in run-off could also be impacted significantly by Federal government and private initiatives to limit foreclosures through loan modifications, refinancing mortgages at lower interest rates, or debt forgiveness. See the discussion below for further details on these initiatives. Lastly, our results of operations in run-off could be materially affected by our ability to recognize benefits from our NOL carryforwards.
Accounting Principles
To better comprehend our financial position and results of operations, it is important to understand the difference between accounting principles generally accepted in the United States of America ("GAAP") and statutory accounting principles ("SAP") applicable to insurance companies and how we use these accounting principles.
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 at any particular point in time under GAAP is not necessarily a measure of insolvency. However, we believe that if Triad were to report a deficiency in policyholders' surplus under SAP for an extended period of time, Illinois law may require the Department to seek receivership of Triad, which could compel TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws, or otherwise consider dissolution of the Company. The second Corrective Order was designed in part to help Triad maintain its policyholders' surplus.
Corrective Orders
Triad has entered into two Corrective Orders with the Department as detailed below and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Among other things, the Corrective Orders:
· Require oversight by the Department on substantially all operating matters;
· Prohibit stockholder dividends from Triad to TGI without the prior approval of the Department;
· Prohibit the accrual of interest and the payment of interest and principal on Triad's surplus note to TGI without the prior approval of the Department;
· Restrict 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;
· Require Triad to obtain prior written approval from the Department before entering into certain transactions with unaffiliated parties;
· Require that all valid claims under Triad's mortgage guaranty insurance policies are settled 60% in cash and 40% by recording a DPO;
· Require the accrual of simple interest on the DPO at the same average net rate earned by Triad's investment portfolio; and
· Require that loss reserves in financial statements prepared in accordance with SAP be established to reflect the cash portion of the estimated claim settlement but not the DPO.
The DPO is an interest bearing subordinated obligation of Triad with no stated
repayment terms. The second Corrective Order requires that Triad hold assets to
support the DPO liability in a separate account pursuant to a custodial
arrangement. At June 30, 2012, the recorded DPO, including accrued interest of
$40.5 million, amounted to $723.6 million or 98% of total invested assets
compared to $629.7 million or 81% of total invested assets at December 31, 2011.
We are currently in discussions with the Department regarding a possible
amendment to the second Corrective Order that would require the escrow of DPOs
and accrued carrying charges only if requested by the Director and would limit
the amount of carrying charges credited to the DPO holders to the amount of net
investment income earned by Triad.
The second Corrective Order provides financial thresholds, specifically regarding the statutory risk-to-capital ratio and the level of statutory policyholders' surplus that, if met, may indicate that the Department should reduce the DPO percentage and/or require distributions to DPO holders. In January 2012, the Department notified Triad that as of December 31, 2011, based upon Triad's surplus position, risk-to-capital ratio and the continued economic uncertainty, the Department had determined that no change to the DPO percentage was in order nor would it be appropriate for Triad to make a distribution to the DPO holders.
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. Any such actions would likely lead TGI to institute a proceeding seeking relief from creditors under U.S. bankruptcy laws, or otherwise consider dissolution of the Company. See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 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 have been working with
the Department in the administration and oversight of the Corrective Orders.
Going Concern
Our ability to continue as a going concern is dependent on the Department's ongoing review of our operating results compared to updated forecasts and our ability to reverse a large deficit in assets through possible future earnings.
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 $230.3 million at June 30, 2012, as opposed to what would have been a deficiency in policyholders' surplus of $801.5 million on the same date had the second Corrective Order not been implemented. Furthermore, we continued to report a deficit in assets under GAAP of $771.4 million at June 30, 2012. 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 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, if Triad fails to comply with provisions of the Corrective Orders, or for other reasons including those 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 or otherwise consider dissolution of the Company. Our consolidated financial statements that are presented in this report do not include any accounting adjustments that reflect the financial risks of Triad entering receivership proceedings or otherwise not continuing as a going concern.
Several programs have been initiated by the federal government, the GSEs, and certain lenders that are, in general, designed to prevent foreclosures and provide relief to homeowners. These programs may involve modifications to the original terms of existing mortgages or their complete refinancing. These programs seek to provide borrowers a more affordable mortgage by modifying the interest rate, extending the term of the mortgage or, in limited cases, reducing the principal amount of the mortgage. We are active participants in many of these programs, including government-initiated programs such as the Home Affordable Modification Program ("HAMP") and the Home Affordable Refinance Program ("HARP").
HAMP provides incentives to borrowers, servicers, and lenders to modify loans that are currently in default. HAMP and other such programs have been responsible for a large percentage of our cures since 2009. The number of policies cured under these programs declined in 2011 from levels experienced in 2010; however, recent changes to these programs have proven beneficial. In January 2012, the U.S. government announced that it was revising HAMP by expanding eligibility requirements and increasing the incentive it pays servicers/lenders for principal forgiveness. For the first time, beginning in the second quarter of 2012, the U.S. government will also pay Fannie Mae and Freddie Mac an incentive fee for principal forgiveness. HAMP was scheduled to expire at the end of 2012, but the U.S. government has extended the program until December 2013.
A number of the borrowers that have completed the trial modification period have subsequently re-defaulted and we believe the number of borrowers that re-default will increase in the future, especially if the economic recovery stalls or moves slowly. This could be exacerbated by additional deterioration in the housing market or economy in general. The ultimate impact of HAMP and other modification programs is dependent on the number of borrowers that successfully modify their loans and do not re-default. Currently, we are unable to estimate with any degree of precision the number of policies that will ultimately cure and not re-default and are, therefore, unable to estimate the ultimate impact of these programs on our results of operations and financial condition. If HAMP or similar programs prove to be effective in preventing ultimate foreclosure, future settled claim activity could be reduced.
If a loan is modified as part of one of these programs, the previously reported default would be cured, but we would maintain insurance on the loan and would be subject to the same ongoing risk if the policy were to re-default. Policies that re-default under these programs may ultimately result in losses that are greater than the loss that would have occurred if the policy were never modified. However, we do not provide loss reserves to account for the potential for re-default. These programs could adversely affect us to the degree that borrowers who otherwise could make their mortgage payment choose to default in an attempt to become eligible for modification.
Foreclosure moratoriums typically serve to temporarily reduce our claims settled because the completion of a valid foreclosure is a requirement for the filing of a claim for loss. However, such programs may lead to greater ultimate claim costs due to the accrual of interest and other expenses. While moratoriums have delayed our claims settled in recent years and increased the time a policy remains in our default inventory and may continue to do so, we do not expect a significant direct impact on our results of operations or financial condition from foreclosure moratoriums.
In February 2012, the federal government and state attorneys general reached a $25 billion settlement agreement with five of the nation's largest banks regarding claims that alleged, among other things, improper foreclosure practices. The funds generally will be used for principal reductions, refinancing underwater mortgages, forbearance and short sales, and foreclosure prevention programs. The banks have three years to implement the settlement agreement. A great deal of uncertainty currently remains over how the program will be implemented as well as borrower eligibility, but currently we do not believe the settlement will have a meaningful impact on our future results of operations or financial condition.
See Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information on the risks and uncertainties associated with foreclosure moratoriums.
|
|