Tuesday, August 12, 2008

Triage Too Late for Triad Guaranty -- Except for CEO Tonnesen

Following unsuccessful efforts to raise capital and to participate in building a new mortgage insurance business, Triad Guaranty (TGIC-$1.65) warned investors it would discontinue writing new mortgage-insurance business on July 15 and pursue the "transition of its existing business to voluntary runoff." In other words, the company's forward revenue will come from servicing current policy obligations in force, set to expire over the next seven to 12 years.

The mortgage insurer has posted a combined loss of $423.8 million in its past three quarters, related to the spreading collapse of the housing and mortgage markets, specifically in the soft markets of California, Florida, Arizona, and Nevada.

The gross default rate for the second-quarter ended June 30 stood at 7.3 percent, up 460 basis points from the prior year period. The composition of default inventories shifted more to newer policy years and the distressed markets.

The company admitted on its earnings call to analysts that it uncovered a much higher than expected amount of fraud and misrepresentation in its recent loan years.

CEO Mark Tonnesen's Golden Years

How did the Board of Directors reward its chief executive of nearly three years, Mark Tonnesen, who oversaw the implosion of the mortgage insurer? An early retirement, complete with a severance and bonus package worth at least $525,000, according to regulatory filings.

Tonnesen, 56, will retire August 15—about 4½ months ahead of the December 31 date set in an employment-contract agreement previously reached in April.

Benefits payable to Tonnesen under his amended severance agreement:

  • A retention bonus of $150,000 paid to him in July 2008 for staying on as chief executive through July 1; and, a retention bonus of $300,000 and a severance bonus of $225,000, which will be paid to Mr. Tonnesen in August 2008 as a result of his retirement effective August 15, 2008.

Retention bonus is most likely a euphemism for “don’t let the door hit ya' where the dog should have bit ya'.

  • Following his retirement, Triad will also pay Tonnesen $675,000 for work as a consultant.

Not to be rhetorical—but, given the company is not issuing any new mortgage insurance, why does Triad need him around as a consultant for two more years?

This is the same chief executive who
waited until October 2007 to tell analysts that "the implementation of more stringent underwriting guidelines focused on agency conforming products by lenders… was prudent and good for the mortgage insurance industry."

Ironically, when production volume surged through its flow channel—from preferred customers like Wells Fargo Home Mortgage and Countrywide Credit—underwriting guidelines were not a chief concern of Tonnesen.

Could the $675,000 consultancy agreement be nothing more than a feeble ruse to reimburse Tonnesen for monies lost in previously awarded equity/option grants and phantom stock, which are now worthless? Fellow investors in Triad stock can take solace in the wretched knowledge that Tonnesen did lose more than $3.9 million—or almost 99 percent—in market value of the aforementioned equity awards.

We doubt the 45 percent of the workforce recently terminated got as good a severance deal as Tonnesen.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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