Notes
Triad Guaranty, Inc., (TGIC) through its subsidiary, Triad Guaranty Insurance Corporation, provides private mortgage insurance products to residential mortgage lenders and investors in the United States. Its mortgage insurance products include primary insurance, which provides mortgage default protection to lenders on individual loans; and covers a percentage of unpaid loan principal, delinquent interest, and expenses associated with the default and subsequent foreclosure. The company also facilitates the sale of mortgage loans in the secondary market. It sells its products to residential mortgage lenders, such as mortgage bankers, mortgage brokers, commercial banks, and savings institutions through its sales force and a commissioned general agency.http://www.triadguaranty.com/
Most competetitors are larger, e.g. MTG. TGIC has better fundamentals and ratios across the board than MTG.
Expanding into Canada, an indirect (and doubtless small) commodities play (Canadaian economy very dependent on commodities).
http://www.triadguaranty.com/international/canada-english/
There are some interesting dynamics to the mortgage insurance market. Insurance is generally required when a homeowner has less than 20% equity in the home. Falling home prices increase the need for insurance, because they reduce the homeowner's equity. Tightening credit requirements (the current environment) also increases demand for insurance by decreasing the market for piggy-back loans. Falling real estate also increases the risk of defaults and, so, payments by mortgage insurers. So, there are counter-weights to the business in a falling market. Since insurance is for people who can't make a 20% downpayment, it tends not to cover the rich. So, it is very exposed to the struggles of the middle- and working-class, however, that is not the same as "subprime" struggles.
Mortgage insurance is a new idea outside o the United States, and insurers are starting to expand internationally.
2007
Congress passed a law (duration of one year) making mortgage insurance deductible (if income is less than $100,000).
3JUL07 $40
From Quarterly Report:RISK IN FORCE
Credit Quality (Primary Coverage):
Prime: 76%
...
Sub Prime: 0.5%
Trailing P/E (ttm, intraday): 10.19
Forward P/E (fye 31-Dec-08): 7.64
PEG Ratio (5 yr expected): 1
Price/Sales (ttm): 2.56
Price/Book (mrq): 1.11
Ratio of equity/assets: 58%
Five year growth estimated at 10%, but growth next year estimated at 15%.
One small insider purchase in January 07.
Revenue increased and earnings per share declined slightly from same quarter last year, due to an increase in mortage defaults.
In 2006 and first quarter 2007, prime mortgages account for 75% of written insurance and sub-prime accounts for less than 2%
Some articles...
Very bearish: http://financial.seekingalpha.com/article/28871
More bullish (S&P): http://www.businessweek.com/investor/content/feb2007/pi20070216_809773.htm
Bullish (Morningstar): http://biz.yahoo.com/ms/070430/192607.html?.v=1
26JUL07 $33
The company announced results for the quarter ended June 30. Earnings declined 20%, primarily because the company increased reserves in anticipation of increased claims. Overall, the market for the product is steadily improving: the company is increasing its insurance in force from quarter to quarter and year to year. Revenue increased roughly 30% from 2006.Credit quality of Primary insurance in force:
Prime... 75%
Alt-A... 21%
A-minus... 3%
Sub Prime... 1%
Investment portfolio totals roughly $600 million, and roughly 80% is either bonds rated AAA, or US treasuries. Its total assets are a little over $900 million, so high-quality debt makes up half its assets. High-quality debt is one of the few investments performing well at the moment. It has about $20 million invested in low-quality debt and stocks.
The CEO stated in the conference call that there were no plans for a share buyback, because: 1) The company wants to maintain healthy reserves, 2) It wants capital to expand into Canada.
Thoughts: It seems extremely oversold. Minimal subprime exposure, yet a massive dumping of shares in 2007. There was recent news that mortgage defaults are increasing among prime borrowers as well. Sentiment is certainly very negative. But the balance sheet is good and the revenue growth is good. A good, contrarian value play.
25NOV07 - $9.84
Crash!From the conference call:
There is $180 million in reinsurance if the losses from claims hit a certain level.
The statutory risk-to-capital ratio doesn't factor in the risk of the risk, so to speak. That a $50,000 policy on a subprime loan counts the same as a $50,000 coverage on a prime loan. TGIC has very little subprime, so the risk-to-capital ratio underestimates the financial strength. However, TGIC, as new company, does have a lot of new loans which are riskier than well-established loans.
Growth Estimates:
Earnings. Current Qtr. -331.5%; Next Qtr. -179.6%; This Year -120.6%; Next Year -346.1%; Next 5 Years (per annum) 11.72%
UGH. The company lost over $2/share last quarter, while analysts were predicting a profit of $0.73.
The Price/Book ratio is a lovely 0.24, but TGIC is expected to lose over $6/share in the next year and a half (assuming analysts know what they're talking about, which dooesn't seem to be thecase here).
Thoughts: Insurance is a simple idea that can get very complicated under the hood, and the current credit markets make it even more complicated. Avoid this stock until there is some clarity. A PE ratio of 26 coupled with expected losses for the next 18 months is not my kind of buy signal.
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