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.
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 Company’s 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.
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 insured’s 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.
proceeds from the sale of assets other than the sale of securities.
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.
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
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:
At March 31, 2009, Triad was required to adjust surplus and reserves reflecting the impact of the second Corrective Order on future settled claims;
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.
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.
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®
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.
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.
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.
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.
The following table provides detail on our direct insurance in force at December 31, 2009 and 2008:
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.
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.
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.
A summary of the individual components of our revenue for the past two years follows:
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
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.
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
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.
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:
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 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.
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.
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.
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.
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
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 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.
The following table summarizes by category our unrealized gains and losses in our securities portfolio at December 31, 2009:
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.
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.
Beginning on June 1, 2009 pursuant to the second Corrective Order, all valid claims under Triad’s 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 Triad’s investment portfolio and payment of both the DPO and the carrying charge is subject to Triad’s 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 Triad’s investment portfolio, we do not expect any ultimate financial benefit to us from recording a DPO.
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.
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
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.
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.
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 insurer’s 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.
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.
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. TGI’s 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 TGI’s operating expenses, the cash resources of TGI will be adversely affected.
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.
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.
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.
Management’s 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:
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;
our ability to operate our business in and maintain a solvent run-off;
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;
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;
we may not continue to realize benefits from rescissions at the levels that we have recently experienced;
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;