As of December 31, 1998, the Company leases office space in its Winston-Salem headquarters and its nine underwriting offices located throughout the country comprising approximately 38,475 square feet under leases expiring between 1999 and 2002 and which require annual lease payments of $586,348 in 1999. With respect to all facilities, the Company has, or believes it will be able to obtain, lease renewals on satisfactory terms. The Company believes its existing properties are well utilized and are suitable and adequate for its present circumstances.
(1) Periods have been restated to reflect the three-for-two stock split on June 28, 1996, and the two-for-one stock split on October 28, 1997.
(2) Based on statutory accounting practices and derived from consolidated statutory financial statements of Triad.
Net income for 1998 increased 41.4% to $24.4 million compared to $17.2million in 1997. This improvement is attributable to a 37.1% increase in earned premiums, a 49.0% increase in net investment income, and an improved combined loss and expense ratio.
Total direct premiums written were $53.0 million for 1998, an increase of 32.2% compared to $40.1 million for 1997. Net premiums written increased by 35.4% to $51.9 million in 1998 compared to $38.3 million for 1997. Earned premiums increased 37.1% to $52.8 million for 1998 from $38.5 million for 1997. This growth in written and earned premium resulted from the increase in new insurance written offset by a decline in the Company's persistency rate. The Company's persistency, or the percentage of policies remaining in force from one year prior, was 73.4% at December 31, 1998, compared to 84.2% at December 31, 1997. The decline in persistency experienced can be expected to cause future renewal premiums to be lower than would have been expected, which would, in
The Company's loss ratio (the ratio of incurred losses to earned premiums) was 13.3% for 1998 compared to 13.4% for 1997. The loss ratio was 18.6% for the fourth quarter of 1998 compared to 12.1% for the fourth quarter of 1997. The Company's favorable loss ratio reflects the low level of delinquencies compared to the number of insured loans and the fact that approximately 78% of the Company's insurance in force was originated in the last 36 months. Management believes, based upon its experience and industry data, that claims incidence for it and other private mortgage insurers is generally highest in the third through sixth years after loan origination. Although the claims experience on new insurance written in previous years has been quite favorable, the Company expects its incurred losses to increase as a greater amount of its insurance in force reaches its anticipated highest claim frequency years. The increase in the loss ratio in the fourth quarter of 1998 reflects an increase in delinquent loans reported in the latter half of 1998 as well as reduced earned premiums due to lower persistency. Due to the inherent uncertainty of future premium levels, losses, economic conditions, and other factors that impact earnings, it is impossible to predict with any degree of certainty the impact of such higher claims frequencies on future earnings.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 35.4% in 1998 to $7.0 million compared to $5.2 million in 1997. This increase reflects the growing amount of the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching its higher claim frequency years.
Amortization of deferred policy acquisition costs increased by 44.5% to $6.0 million in 1998 compared to $4.1 million for 1997. The increase in amortization reflects an increasing deferred policy acquisition costs asset to amortize as the Company builds its total insurance in force and a higher cancellation rate during 1998.
Other operating expenses increased 21.2% to $12.4 million for 1998 compared to $10.3 million for 1997. This increase in expenses is primarily attributable to advertising, personnel, and facilities and equipment costs required to support the Company's product development, technology enhancements, geographic expansion, and increased production.
The effective tax rate for 1998 was 30.5% compared to 31.7% for 1997. This decrease is primarily the result of the increase in investment in tax preferred securities. Management expects the Company's effective tax rate to remain about the same as long as yields from new funds invested in tax-preferred securities remain favorable in relation to fully taxable securities.
Net income per share on a diluted basis increased 52.1% to $1.26 for 1997 compared to $0.83 per share for 1996. Operating earnings per share were $1.26 for 1997 compared to $0.84 for 1996, an increase of 50.3%. Operating earnings exclude net realized investment gains of approximately $34,000 in 1997 and net realized investment losses of approximately $162,000 in 1996.
Net new insurance written was $2.9 billion for 1997 as compared to $2.2 billion in 1996, an increase of 30.9%. For the fourth quarter, net new insurance written increased 32.9% to $740 million in 1997 compared to $557 million in 1996. The Company also produced approximately $950 million of new insurance written on seasoned loans in 1997. This increase in new insurance written was the result of continued geographic expansion, the penetration of Triad's products in the marketplace, and the introduction of new products. According to industry data, Triad's national market share of new insurance written increased to 2.4% for 1997 compared to 1.7% for 1996.
The growth in new insurance written also reflected the favorable interest rate environment in 1997 which caused home buying activities to remain strong. Refinance activity was 14.0% of new insurance written in 1997 compared to 16.9% of insurance written in 1996. Total direct insurance in force reached $9.2 billion at December 31, 1997, compared to $6.6 billion at December 31, 1996, an increase of 40.0%.
The expense ratio for 1997 was 37.5% compared to 43.8% for 1996. Contributing to this improvement was the higher level of written premiums partially offset by the increase in expenses.
The Company generated positive cash flow from operating activities for 1998 of $23.3 million compared to $17.9 million for 1997. The increase in Triad's operating cash flow reflects the growth in renewal premiums and insurance written that has more than offset the increases in claims paid, interest, and other expenses.
The Company's business does not routinely require significant capital expenditures. Positive cash flows are invested pending future payments of claims and expenses. Cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities.
The $35.0 million private offering of notes was completed in January 1998. The notes are non-callable and represent unsecured obligations of the Company. They are rated "A" by Standard and Poor's Corporation and "A+" by Fitch IBCA. The parent company contributed $25.0 million of the net proceeds to Triad in exchange for a surplus debenture. The parent company is dependent upon payments under the surplus debenture issued by Triad and upon possible future dividends from Triad, all of which will be subject to significant payment restrictions under Illinois insurance laws, to provide funds for the payment of the Company's obligations under the notes. The parent company retained the balance of the net proceeds of the offering, approximately $9.4 million, and these proceeds are available for general corporate purposes, including, without limitation, investment, payments of principal and interest on the notes, and possible future contributions to its subsidiaries.
The parent company's cash flow is dependent on interest income, cash dividends, revenues from management fees, and interest payments under the surplus debenture from Triad. The insurance laws of the State of Illinois impose certain restrictions on dividends from Triad. These restrictions, based on statutory accounting practices, include requirements that dividends may be paid only out of statutory earned surplus as of the end of the preceding fiscal year and limit the amount of dividends that may be paid without prior approval of the Illinois Insurance Department. The Illinois Insurance Department permits expenses of the parent company to be reimbursed by Triad in the form of management fees.
In December 1998, the Company announced that its Board of Directors had authorized the purchase of up to $3.0 million of the Company's outstanding Common Stock. The parent company will fund the purchase of these shares through either the sale of parent company invested assets or through dividends from Triad. Through February 1999, the Company had purchased 131,000 shares of its common stock for approximately $2.4 million.
Fixed maturity securities represent approximately 89% of the Company's invested assets at December 31, 1998, and the fair value of these fixed rate securities generally bears an inverse relationship to changes in prevailing market interest rates. The Company's long-term debt bears interest at a fixed rate of 7.9% per annum, and as a result, the fair value of this debt is sensitive to changes in prevailing interest rates. A 10% relative increase or decrease in market interest rates that affect the Company's financial instruments would not have a material impact on earnings during the next fiscal year, and would not materially affect the fair value of the Company's financial instruments.
The Company's loss reserves increased to $12.1 million at December 31, 1998, compared to $9.0 million at December 31, 1997. This growth is the result of the increases in new insurance written and the maturing of the Company's risk in force. Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. The Company's reserves per delinquent loan were $23,400 at December 31, 1998, compared to $23,100 at December 31, 1997. The Company's delinquency ratio, the ratio of reported delinquent insured loans to total insured loans, was 0.53% at December 31, 1998, compared to 0.47% at December 31, 1997. Beginning with year end 1998, the Company began reporting only delinquencies that are greater than 45 days delinquent to conform with the industry standard. Previously, the Company reported all delinquencies, including those 45 days or less past due. The change had no material impact on the Company's loss reserves.
The Company's unearned premium reserve of $7.1 million at December 31, 1998, decreased from $8.0 million at December 31, 1997. This decline is primarily attributable to the continued production of the monthly premium product, which produces little unearned premium compared to annual and single premium products. Cancellation activity also can contribute to the decrease in unearned premiums, whereby older annual premium policies are canceled or replaced by monthly premium policies.
Total stockholders' equity increased to $137.5 million at December 31, 1998, from $111.8 million at December 31, 1997. This increase resulted primarily from net income of $24.4 million for 1998, the tax benefit and additional paid-in capital of $1.9 million relating to the exercise of employee stock options, and the issuance of restricted stock in connection with the buyout of one of the Company's exclusive commissioned general agencies. These increases were offset somewhat by a decline in net unrealized gains on investments of $497,000 and the retirement of 15,000 shares of the Company's Common Stock purchased during October 1998 for $297,000.
increase in the statutory contingency reserve of $26.8 million. Triad's statutory earned surplus was $5.8 million at December 31, 1998, compared to $2.5 million at December 31, 1997, reflecting growth in statutory net income greater than the increase in the statutory contingency reserve. Approximately $1.9 million and $2.8 million of the statutory earned surplus for 1998 and 1997, respectively, was attributable to unrealized gains. The balance in the statutory contingency reserve was $81.6 million at December 31, 1998, compared to $54.8 million at December 31, 1997.
The Company is undertaking modifications and upgrades to enhance its computer systems and technological capabilities. The Company expects that aggregate costs of approximately $2.8 million will be expended for this system conversion and upgrade (approximately $1.8 million in capitalized costs have been incurred for the project thus far through December 31, 1998) and that the project will be funded through cash flow from operations.
Triad's ability to write insurance depends on the maintenance of its claims-paying ability ratings and the adequacy of its capital in relation to risk in force. A significant reduction of capital or a significant increase in risk may impair Triad's ability to write additional insurance. A number of states also generally limit Triad's risk-to-capital ratio to 25-to-1. As of December 31, 1998, Triad's risk-to-capital ratio was 16.2-to-1 as compared to 19.3-to-1 at December 31, 1997, and 17.8-to-1 for the industry as a whole at December 31, 1997, the latest industry data available.
Management's Discussion and Analysis and this Report contain forward looking statements relating to future plans, expectations, and performance which involve various risks and uncertainties, including but not limited to the following: interest rates may increase from their current levels; housing transactions and mortgage issuance may decrease for many reasons including changes in interest rates or economic conditions; the Company's market share may change as a result of changes in underwriting criteria or competitive products or rates; the amount of new insurance written could be affected by changes in federal housing legislation, including changes in the Federal Housing Administration loan limits and coverage requirements of Freddie Mac and Fannie Mae; rating agencies may revise methodologies for determining the Company's claims-paying ability ratings and may revise or withdraw the assigned ratings at any time; decreases in persistency, which are affected by loan refinancings in periods of low interest rates, may have an adverse effect on earnings; the Company's performance may be impacted by changes in the performance of the financial markets and general economic conditions. Economic downturns in regions where Triad's risk is more concentrated could have a particularly adverse effect on Triad's financial condition and loss development. Accordingly, actual results may differ from those set forth in the forward- looking statements. Attention is also directed to other risk factors set forth in documents filed by the Company with the Securities and Exchange Commission.