The Company leases office space in its Winston-Salem headquarters and its six underwriting offices located throughout the country comprising approximately 27,578 square feet under leases expiring between 1997 and 1999 and which require annual lease payments of $435,295 in 1997. 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.
Net income for 1996 increased 44.3% to $11.2 million compared to $7.8 million in 1995. This improvement is attributable to a 59.8% increase in earned premiums, a 12.6% increase in net investment income, an improved expense ratio and a continuing low loss ratio.
According to industry data, Triad's share of total new mortgage insurance written increased to 1.7% (1.9% in the fourth quarter) for 1996 compared to 1.5% for all of 1995. This increase is primarily the result of the Company's geographic expansion into new territories and the success of a marketing focus on larger, national mortgage lenders.
Total direct premiums written were $26.2 million for 1996, an increase of 38.4% compared to $18.9 million in 1995. Contributing to this growth were the strong mortgage market, the Company's continued expansion into new territories, the secondary mortgage market requirements for deeper coverages and increased renewal premium due to the growth of our monthly premium product. Offsetting the growth somewhat was the decrease in Triad's persistency rate, reflecting the 1996 increase in refinancing activity. Persistency, or the percentage of insurance remaining in force from one year prior, was 85.3% in 1996 compared to 86.4% in 1995.
on a comparable annual premium plan. While in the short term monthly premium plans decrease the level of written premium, management expects the ultimate level of written premium on monthly premium plans to exceed the level of written premium produced by comparable annual premium plans as long as persistency remains strong. In 1996, Triad introduced a variation of the monthly premium plan in which the borrower does not pay any mortgage insurance premium at the time of the mortgage loan closing. This deferred monthly premium product decreases the amount of cash required from the borrower at closing, therefore, making home ownership more affordable. Management believes that the percentage of new insurance written under monthly premium plans will remain at or slightly above the current level.
Effective January 1, 1996, the Company eliminated its quota share reinsurance on new business, recaptured substantial portions of its quota share coverage on renewal business and secured excess of loss reinsurance to protect against catastrophic losses. These changes reduced the Company's quota share cede rate to 5.3% of direct premium written in 1996 compared to 20.8% in 1995. Premiums ceded under the Company's quota share reinsurance agreements for 1996 totaled $1.4 million compared to $3.9 million in 1995. Had the Company retained its quota share reinsurance in 1996 and maintained a cede rate comparable to 1995, the Company's net written premium would have increased approximately 38.0% rather than the 59.7% noted above.
Total direct insurance in force reached $6.6 billion at December 31, 1996 compared to $5.1 billion the previous year, an increase of 29.1%.
In keeping with the Company's established risk strategy, the Company has not aggressively solicited mortgage insurance under lender guidelines which allow relaxed credit standards, reduced borrower-paid down payment (e.g. 97% LTV loans) and expanded underwriting ratios. These products, especially popular with borrowers with weak credit histories, have generally resulted in undesirable loss ratios. Management believes that successful long term home ownership is not necessarily being promoted by many of these programs. The Company does not routinely delegate the underwriting of its 97% LTV product.
strict criteria regarding property type and minimum credit standards. The Company also performs extensive post-issuance quality control reviews of certificates issued through each approved mortgage originator under the program.
The Company's loss ratio (the ratio of incurred losses to earned premiums) was 13.3% for 1996 compared to 14.3% for 1995. The loss ratio was 14.3% for the 1996 fourth quarter compared to 18.3% for the same period of 1995. The favorable loss ratio reflects the low level of delinquencies compared to the number of insured loans and the fact that 71% of the 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. 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 47.9% in 1996 to $3.3 million compared to $2.2 million in 1995, reflecting the increase in the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching its higher claim frequency years. A decrease in reinsurance recoveries, attributable to the Company's restructuring of its reinsurance program for 1996, also contributed to the increase in net losses and loss adjustment expenses.
Other operating expenses increased to $7.3 million for 1996 compared to $4.8 million for 1995. This increase in expenses is primarily attributable to personnel, facilities and equipment costs required to support Triad's geographic expansion and increased production coupled with a reduction in ceding commissions earned following changes in the Company's reinsurance program. Ceding commissions paid to the Company are reported as a reduction in other operating expenses and decreased to $572,000 in 1996 compared to $1.5 million in 1995.
The Company's expense ratio (ratio of underwriting expenses to net premiums written) for 1996 was 43.8% compared to 46.9% for 1995. Contributing to this improvement was the higher level of written premiums for 1996 offset somewhat by the increase in expenses.
The effective tax rate for all of 1996 was 31.0% compared to 30.9% for 1995. In 1996, the Company began a phase-in of the 35% Federal statutory income tax rate applicable to companies with annual taxable income above $10 million. Management expects the Company's effective tax rate to remain about the same or increase slightly as long as yields from new funds invested in tax-preferred securities remain favorable in relation to fully taxable securities.
Total direct premiums written were $18.9 million for 1995, an increase of 16.8% over 1994. Contributing to this growth were the strong mortgage market, the Company's expansion into new territories, the movement by consumers to higher premium products in early 1995, the secondary mortgage market requirements for deeper coverages and Triad's continued high persistency rate. Persistency improved to 86.4% in 1995 compared to 85.8% in 1994. Improved persistency combined with higher production in recent years contributed to the increase in renewal premiums in 1995.
Premiums ceded under the Company's quota share reinsurance agreements for 1995 totaled $3.9 million, representing a slight decrease from $4.0 million in 1994. The ratio of premiums ceded to total direct written premiums decreased to 20.8% in 1995 compared to 24.9% in 1994. The Company ceded only 9.9% of new insurance written in 1995 compared to 20.9% of 1994 new insurance written.
In 1995, the Company reported realized investment gains of $173,000 primarily from the sale of equity securities. This compares to $163,000 of realized investment losses in 1994 resulting primarily from the sale of approximately $7 million in lower yielding short-term U.S. Treasury securities.
The Company's loss ratio was 14.3% for 1995 compared to 11.5% for 1994. While the Company experienced an increase in its loss ratio, paid losses continue to remain low at 6.3% and 5.5% for the years ending December 31, 1995 and 1994, respectively. The favorable loss ratio reflects the low level of delinquencies compared to the number of insured loans and the fact that 82% of the insurance in force was originated in 1993, 1994 and 1995.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 75.7% in 1995 to $2.2 million compared to $1.3 million in 1994. This increase in 1995 reflects the increase in the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching its higher claim frequency years.
Other operating expenses, before deducting ceding commissions of approximately $1.5 million for both 1995 and 1994, increased to $6.3 million for 1995 compared to $5.1 million for 1994. This increase in expenses was primarily attributable to costs incurred in expanding into new territories, an increase in the number of sales and support personnel, and growth in renewal commissions not deferred.
The effective tax rate for 1995 was 30.9% compared to 31.0% in 1994. This decrease reflected an increasing investment in tax-preferred securities.
The Company generated positive cash flow from operating activities for 1996 and 1995 of $12.5 and $6.5 million, respectively. The significant increase in the Company's operating cash flow is attributable to growth in insurance written and the restructuring of its reinsurance agreements effective January 1, 1996.
The parent company's cash flow is dependent on cash dividends and revenues from management fees 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 and limit the amount of dividends that may be paid without prior approval of the Illinois Insurance Department. Because of Triad's rapid growth in written premiums and the requirement to add amounts to the statutory contingency reserve equal to at least 50% of earned premiums (which reduces statutory earned surplus), Triad reported a deficit in statutory earned surplus of $1.3 and $2.5 million at December 31, 1996 and 1995, respectively. Accordingly, Triad may not presently pay cash dividends to the parent company. The Illinois Insurance Department permits expenses of the parent company to be charged to Triad in the form of management fees.
Included in the Company's fixed maturity portfolio of mortgage backed securities at December 31, 1996 was $5.4 million invested in planned amortization class ("PAC") collateralized mortgage obligations ("CMOs"). PACs are tranches of CMOs specifically designed to amortize in a more predictable manner and to protect against prepayments as interest rates decline. In periods
of declining interest rates, prepayments are first applied to the non-PAC tranches of the CMO, creating improved call protection for the PAC tranche. Only after all non-PAC tranches have been paid off are prepayments applied to the PAC tranche. In periods of increasing interest rates, prepayments are first applied to the PAC tranche, thus reducing extension risk for PACs. As a result, PACs have a more stable cash flow than most other mortgage securities because they have better call protection and less extension risk. All principal balances invested in CMOs by the Company are U.S. Government agency sponsored or guaranteed.
The Company's loss reserves increased to $6.3 million at December 31, 1996 compared to $4.6 million at December 31, 1995. This growth is the result of 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 $23,000 at December 31, 1996 compared to $22,000 at December 31, 1995. The Company's delinquency ratio, the ratio of delinquent insured loans to total insured loans, was 0.44% at December 31, 1996 compared to 0.41% at December 31, 1995.
The Company's unearned premium reserve of $8.2 million at December 31, 1996 decreased from $9.1 million at December 31, 1995. This decline is attributable to the increased production of the monthly premium product which produces little unearned premium compared to annual and single premium products. Also, the Company experienced a higher level of refinance activity in 1996 whereby older annual premium policies were replaced by monthly premium policies resulting in a decline in the unearned premium reserve.
Total stockholders' equity increased to $91.7 million at December 31, 1996 from $80.4 million at December 31, 1995. This increase resulted from net income of $11.2 million and from additional paid-in capital of $205,000 resulting from the exercise of employee stock options. The increase was partially offset by a decrease in net unrealized gains on invested assets classified as available-for-sale of $163,000 (net of income tax).
Triad's total statutory policyholders' surplus increased to $57.1 million at December 31, 1996 from $56.0 million at December 31, 1995, an increase of $1.1 million. This increase is primarily derived from statutory net income of $13.4 million and unrealized gains on invested assets of $1.0 million, offset by an increase in the contingency reserve of $12.8 million. Triad's deficit in statutory earned surplus was $1.3 million at December 31, 1996, compared to a deficit of $2.5 million at December 31, 1995, reflecting a growth in statutory net income greater than the increase in the contingency reserve. The balance in the contingency reserve was $35.1 million at December 31, 1996 compared to $22.3 million at December 31, 1995.
The Company currently has no plans for significant capital expenditures. However, Triad continues to upgrade and enhance its computer systems and technological capabilities.
The Company's ability to write insurance depends on the adequacy of its capital in relation to risk in force. A significant reduction of capital or a significant increase in risk may impair the Company's ability to write additional insurance. Freddie Mac and Fannie Mae require the Company to maintain a risk-to-capital ratio of no more than 25-to-1. A number of states also generally limit the Company's risk-to-capital ratio to 25-to-1. As of December 31, 1996 Triad's risk-to-capital ratio was 15.8-to-1, and as of December 31, 1995 was 11.1-to-1, as compared to 20.3-to-1 for the industry as a whole at December 31, 1995, the latest industry data available. The 1996 increase is due to increased production and the elimination of substantial portions of the Company's quota share reinsurance as of January 1, 1996. Management believes its risk-to-capital ratio can increase up to the current industry level without an adverse effect on its claims-paying ability ratings.