Triad Guaranty reports dismal Q3, downgraded on rising claims
Shares of Triad Guaranty Inc. (Nasdaq: TGIC) tumbled to a 52-week low after the company was downgraded today by Bear Stearns to “underperform” from “peer perform,” on account of claims that rose at a higher-than-expected pace in the third quarter.
The small cap, which provides private mortgage insurance products to residential mortgage lenders and investors, reported an abysmal third quarter late Wednesday evening. For the quarter ended Sept. 30, 2007, the Winston-Salem, NC.-based firm recorded a net loss of $31.8 million, or $2.13 per share, compared with net income of $19.4 million, or $1.30 per share, for the same quarter in 2006. The mean earnings estimate of six analysts polled by Thomson Financial was for earnings per share of $0.72.
Bear Stearns analyst Michael Nannizzi had estimated a loss of $0.31 per share for the third quarter assuming the company had built $50 million in reserves. Triad reported a loss on reserve-building of almost $80 million. Nannizzi lowered his rating on Triad Guaranty to reflect a much “sharper deterioration” in Triad’s portfolio than originally anticipated.
Primary delinquencies increased upwards of 27% to 7,541 from 5,940 from the second to the third quarter of 2007, according to Nannizzi. Over the same period, according to Nannizzi, primary claims paid increased roughly 38% to $23.1 million from $16.7 million.
Nannizzi said he’s concerned with the company’s combination of high risk/capital ratio and higher than expected losses. He estimates the company’s risk/capital ratio at almost 18:1, compared with the industry average of below 10 times, and said he believes it would be “prudent” for Triad to remain below 20 times leverage.
“If losses continue to rise, in order to stay below 20 times leverage, the company’s ability to write new business will be limited,” Nannizzi wrote in a research note. “We believe losses will force the company to either allow its ratio to climb above 20x or not write new business—neither of which is an attractive option.”
Triad may experience more difficulty in writing new business than its peers, according to Nannizzi. One of Triad’s largest customers was American Home Mortgage and the analyst said he believes it will be very difficult for Triad to replace the volume it lost via American Home Mortgage.
Additionally, Nannizzi says a high and rising risk/capital ratio could result in rating agency attention. According to Nannizzi, in previous reports, rating agencies looked favorably upon Triad’s minimal exposure to bulk and subprime; however, Nannizzi says the delinquency and claim performance of Triad’s portfolio has deteriorated even without a heavy concentration in bulk and subprime.
“The company's portfolio deteriorated substantially, despite its low exposure to bulk and
subprime,” Nannizzi wrote in a research note. “We had previously felt that Triad's focus on higher credits would allow it to experience lower losses.”
Nannizzi is lowering his estimates based on the belief that it will be difficult for the company to realize the value implied by its current net worth. The analyst is now estimating a loss of $2.07 for the fourth quarter. As of Oct. 25, six analysts surveyed by Thomson Financial are on average estimating net income of $0.65 per share.
Shares of Triad Guaranty (TGIC) sank 31%, or $2.56, to $5.68 at 1:00 p.m. ET. Shares of Triad Guaranty have been trading in the range of $7.40 to $58.62 for the past 52 weeks.
