Ar2008 Nxtbook[1]

thewarrantygroup.com

Global Headquarters 175 W. Jackson Blvd. Chicago, Illinois 60604 312.356.3000

thewarrantygroup annual report 2008

thewarrantygroup annual report 2008

wherever you are

thewarrantygroup.com

chairman’s letter

2008 was a year that tested the fundamentals of our company. With financial markets in turmoil and consumer credit constrained, our global strategy was challenged – and we delivered near record results.

New business includes the nation’s largest furniture TPA(Third Party Administrator), the nation’s largest hearing aid TPA, and the addition of three new auto TPA’s. As important, our pipeline of new opportunities remains strong.

But as it has been since the beginning of our company in 1964, under circumstances such as these our 2300 worldwide colleagues not only rise to the challenge, but leverage it to our advantage. This is the very essence of The Warranty Group brand and represents not only what we accomplish for ourselves, but also for our clients.

The European community experienced a market slowdown midyear which caused serious issues with a number of our major clients. However, with a very strong performance from mainland Europe, gross written premium finished ahead of 2007, and profitability exceeded plan.

For example, with the US auto industry suffering the combined pain of high gasoline prices, a credit crunch and a 20% drop in sales, our auto segment not only maintained the high production levels of 2007, but delivered increased market share as well. Asian markets delivered a year of solid growth in all countries. Written revenues increased by more than 33% across the region, with most countries demonstrating no less than double-digit growth. We also saw solid pre-tax net income gains in 2008 versus 2007.

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In the year ahead, each of us will be required to deliver our best to meet the challenges of the world economy. We will need to place an even greater focus on anticipating our clients’ needs and to stay focused on developing products and programs that will better serve their customers. We must identify every way to make our company more efficient, while maintaining an even higher level of performance. As we do this, we will be continuing a tradition of over four decades – a tradition that has positioned us as the industry leader. Our reputation as a company that finds opportunity where others find failure will define us once again.

Latin America produced a breakout year of solid growth in all countries. Written revenues increased by more than 60% across the region, with all countries demonstrating double-digit growth. Pre-tax net income also marked a new record for the Latin American markets, due to a combination of better underwriting results and improved investment income.

As Chairman and CEO, I am proud of our 44-year history, and, especially, of our colleagues. With their hard work and support, The Warranty Group will continue its leadership position and make the most of current opportunities and of those yet to come.

In our consumer goods segment, despite market challenges, new clients and the expansion of existing relationships continue to drive revenue.

David L. Cole Chairman and CEO The Warranty Group, Inc.

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people

In our globally competitive industry, the value we provide our clients is dependent upon our ability for perpetual innovation. It’s important that we have the resources to support the large initiatives our clients look to us for, but it’s equally important that we have a systemic understanding of our need to be nimble, efficient and smart. In other words, our greatest competitive advantage is the collective talent of our people, and this past year we have demonstrated that talent amid turbulent conditions that required nothing less. Where others saw only challenge, our colleagues saw opportunity and worked from a confidence in core principles, as well as an openness to grow and evolve with the dynamic conditions that lay ahead. This past year marked our second as a standalone company. Around the globe, we continued to align our offices to create more efficient models for our clients, and managed to avoid the growing pains that usually accompany an endeavor of this scope. The ability of our colleagues to remain focused on anticipating our clients’ needs has been unwavering. As we continue to grow organically, we continue to think and act locally with the added ability to leverage global resources and expertise for our growing roster of clients. The Warranty Group’s greatest asset is its people; another year has demonstrated this, and this is the foundation from which we look ahead with confidence.

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north america

The broad story of what became a financially memorable year was the recession and the imperiling effects of complicated financial instruments. As underwriters, we have a close understanding of how debilitating undefined or incorrectly defined risk can be, and that’s why our approach has always been conservative. This approach has kept our balance sheet strong and may, in part, explain why we haven’t felt the effects of the recession as acutely as many of our competitors. Rather than focus on short-term profit, we provide sustainable returns and refined data for our clients, which in turn leads to profitability and growth. Our numbers show that we were not immune to the economic slowdown of 2008, but they also reflect the positive outcome of our approach. Our consumer goods unit continued to drive revenue through a combination of organic growth and portfolio expansion with the acquisition of new business in the medical, appliance and furniture segments. Additionally, we partnered with several TPA’s and a new Web-based warranty channel. Throughout the year we innovated not only with new programs, such as travel assistance, but also with the way warranties can be bundled and purchased by the end user. While challenges remain with the plunge in consumer confidence, the reputation for quality our consumer goods division has built enables us to aggressively capture market share and position ourselves forwardly for when economic conditions improve.

In 2008, the embattled US auto industry faced climbing gas prices, a credit crisis and the lowest sales numbers recorded in half a century. These conditions famously threatened not just their bottom lines, but their existence. In this challenging environment we were able to maintain our production levels of 2007 and achieve an increase in market share. Our DriverPlus™ program launched successfully and continues to add value for our clients with new revenue opportunities critically needed in this challenging market. Our highly-respected industry insight and resources led us to help with the successful national marketing campaign and launch of an exciting new energy-efficient automobile, which we expect will lead to more opportunity. And our Operational Excellence program continues to drive efficiencies for dealerships and manufacturers across the nation. Being the only provider that’s able to propel every automotive profit center to greater efficiency continues to provide us an unparalleled competitive advantage. As manufacturers rein in operations and focus on their core strengths, we are positioned to enable them to do what they do best.

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europe

In Europe, our newly aligned operational Centers of Excellence provided a more focused position from which we could extend our offerings and leverage our reputation for prudent underwriting, incisive marketing and flawless administration. This improved focus and communication has further strengthened our unique Pan-European capabilities, which, in 2008, led to some very high profile opportunities in the UK and throughout continental Europe. Against an increasingly challenging marketplace, we maintained our preeminent position in the Dutch creditor market, and our presence in the Eastern European arena continues to be consolidated with steady growth. Our reputation for market-leading client service was further recognized in 2008 when the administration and insurance business of the UK’s leading retailer, renowned for quality and service, was secured. The contraction of the global credit markets proved challenging across all of Europe, but we have continued to adapt and develop alternative product structures and distribution channels that will pay dividends in 2009. The timing for our investments in infrastructure over the last two years has given us an advantage in a market where other players are facing deeper challenges. Along with our strong balance sheet and minimal exposure to catastrophic risk, our powerful database has grown, allowing us to demonstrate with hard numbers how our programs will deliver. Beyond generating new revenue streams, we are able to offer our clients one of the most valuable assets of all: stability. In the coming year there will be many challenges in Europe’s embattled markets, but there will also be opportunity for strong companies that can adapt. Companies like The Warranty Group.

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international

The narrative for our emerging markets in 2008 has two parts — one before the tightening of the global credit market and one after. The first two quarters showed breakout growth throughout Latin America and Asia. Numbers for the second half reflect the tightening and following deterioration of consumer confidence. Despite these conditions, we ended the year with double-digit growth in all regions. Our infrastructure investment in Brazil paid early dividends with a more efficient and more focused center of operations. The Latin markets continue to be subject to heavy federal regulation, which has kept much of the competition away and positioned us as the company to partner with for smart, compliant business models that deliver on every transaction. A large luxury automobile manufacturer reaped large returns from our expertise in Latin America. When they asked for help gaining traction in an untapped market, we created a new program that led to the sale of 4,000 luxury vehicles, exceeding their revenue targets and generating excitement for their brand. In Asia and Australia written revenue increased over 33% while maintaining overall pre-tax profit margins and increasing overall profits. Australia, Malaysia and China each showed exceptional growth. We partnered with the largest reseller of computers and related products in China to establish a web-based customer registration system that has streamlined processes, established a powerful database and greatly improved customer service.

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While we expect the economic slowdown to continue next year in the emerging markets, our hard work this past year puts us in good position to meet the challenges. Through the leaner times, our strong balance sheet, lack of exposure to complex risk and ability to think and act locally with the leverage of a global business will allow us to capture more market share and plant seeds for long-term growth.

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CSR is fundamental to our culture and core values. We care about the communities in which we live and work, and actively support endeavors that sustain and enhance the quality of life of our employees, customers and the community at large. Our CSR initiatives also reflect our commitment to ensuring sound corporate governance, transparency and compliance. This past year we have broadened our commitment to cultural institutions in Chicago and have further driven corporate philanthropy across the over 30 countries we serve with the launch of our Global Goodwill Ambassador Program. Through volunteerism, charity drives and wellness initiatives, we are able to attract and retain talent by offering opportunity and incentive for employees to take an active stake in the betterment of themselves and their communities. And our commitment to the communities we serve goes beyond simply giving money: we want to be engaged. In 2008, we stepped up our efforts by partnering with a leading social service agency to provide ongoing support to their organization through board appointments, donations and monthly drives for school supplies, toys and food. By implementing and expanding environmentally sustainable practices and offering environmental and social options for our products, we not only do our part as good corporate citizens, we also rise to the growing demands of our clients and business partners.

corporate social responsibility

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looking ahead The economic freefall of the latter half of 2008 will not quickly abate, and full recovery will likely not occur without unprecedented public and private investment. What everyone seems to agree on is that stabilization will pave the way for a vigorous turnaround. As we enter into our third year as a standalone company, we see a lot of opportunity in the broad and sweeping changes that directly affect our industry and the industries we support. Our ability to unlock the profit potential for our clients’ products on a global stage provides a strong competitive advantage. But more than structure and position, our reputation for quality, transparency and compliance, which are really just big words for “Taking the time to do things the right way,” continues to guide us and separate us from the competition. We hear it everywhere: Never squander the opportunities a crisis presents. Our strong balance sheet, prudent underwriting and commitment to quality provide a resilient base from which we can confidently seek out the different opportunities the shifting markets provide. While economic conditions remain unclear for 2009, our core values and commitment to quality will not waver. In this spirit, we look forward to what the new year brings.

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The Warranty Group, Inc. Years Ended December 31, 2008 and 2007

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December 31 2008 2007 Assets Invested assets: Fixed-maturity securities, at fair value (amortized cost, 2008 – $1,571,922; 2007 – $1,542,643)

$

Short-term investments

1,515,443

$

1,574,240

474,357

588, 174

26,173

30,055

17,653

28,990

2,818 2,036,444

2,553 2,224,012

46,762

51,443

Dealer loans (net of allowance, 2008 – $2,672; 2007 – $0) Equity securities, at fair value (cost, 2008 – $27,225; 2007 – $29,762) Other investments Total invested assets Cash and cash equivalents Receivables: Reinsurance balances recoverable (net of allowance, 2008 – $0; 2007 – $807) Ceded claims recoverable

34,804

60,852

928,773

1,096,183

118,485 1,082,062

116,465 1,273,500

21,373

21,925

Premiums and contract fees receivable (net of allowance, 2008 – $3,782; 2007 – $857) Total receivables Accrued investment income Current income taxes receivable Deferred income taxes

19,550

36,358

38,098

Deferred acquisition costs

430,804

267,691

Prepaid reinsurance premiums

560,541

624,058

Property and equipment, net

41,130

40,487

Goodwill

343,659

343,659

Value of business acquired

124,025

276,373

Other intangible assets Other assets Total assets

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2,626

99,929

118,044

69,596 $ 4,895,309

102,491 5,401,331

$

December 31 2008 2007 Liabilities and stockholders’ equity Reserves: Unearned premiums

$

2,401,040 $

Claims and benefits payable Total reserves

2,629,228

175,91 5

170,581

1,095,519

1,264,664

3,672,474

4,064,473

Unearned contract fees

Deferred income taxes Ceded reinsurance premiums payable

15,277

25,727

122,282

193,093

Notes payable

196,000

198,000

Other liabilities

256,209

329,807

4,262,242

4,811 ,100

506,207

506,207

Total liabilities Stockholders’ equity: Preferred stock, par value $0.001 per share, 100,000 shares authorized, 51,132 shares issued and outstanding at December 31, 2008 and 2007 Common stock, par value $0.001 per share, 100,000 shares authorized, 55,824 and 54,231 shares issued and outstanding at December 31, 2008 and 2007, respectively Additional paid-in capital

–

–

9,437

8,271

Retained earnings

168,520

Accumulated other comprehensive loss, net of taxes

(51,097) 633,067

Total stockholders’ equity

Total liabilities and stockholders’ equity

$

4,895,309 $

88,254 (12,501) 590,231

5,401,331

For a copy of our 2008 Ernst & Young audited financial statements, please call 312.356.2320.

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consolidated statements of income (in thousands)

Year ended December 31 2008 2007 Revenue Premium earned

$

1,027,766

$

1,028,561

Contract fees and other income

183,931

179,769

Net investment income

101,641

109,832

Net realized losses

(14,357)

Total revenue

(2,332)

1,298,981

1, 315,830

581,296

569,369

Expenses Benefits to policyholders Amortization of deferred acquisition costs

43,011

49,160

170,463

174,880

Profit commissions

42,469

54,352

Interest crediting

11,049

19,678

Amortization of intangible assets

Interest expense Other operating expenses Total expenses Income before income taxes

8,660

12,687

259,188

256,179

1, 116,136

1,136,305

182,845

179,525

Income tax expense Net income

60,423 $

122,422

62,315 $

117,210

For a copy of our 2008 Ernst & Young audited financial statements, please call 312.356.2320.

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David L. Cole Chairman and Chief Executive Officer The Warranty Group, Inc. John D. Curtis Attorney Former Partner, Baker & McKenzie Former President and Chief Executive Officer First Extended, Inc. Peter C. Godsoe Former Chairman and CEO The Bank of Nova Scotia Elizabeth Harrington CEO Harrington Global John M. Kelly Former Chief Executive Officer Man Investments Inc. North American Operations Bobby Le Blanc Managing Director Onex Corporation Harvey H. Medvin Former Executive Vice President and Chief Financial Officer Aon Corporation (Retired) Mark H. Mishler President and Chief Operating Officer The Warranty Group, Inc. Thomas C. Ramey Chairman and President Liberty International

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David L. Cole Chairman and Chief Executive Officer The Warranty Group, Inc.

Ronald D. Markovits Senior Vice President General Counsel

Mark H. Mishler President and Chief Operating Officer The Warranty Group, Inc.

Thomas P. Murray President and Chief Operating Officer Resource Automotive

James L. Donaldson Executive Vice President Latin American Markets

Brian K. Ollech Senior Vice President Global Controller

John E. England Executive Vice President Resource Automotive Solutions

Roger C.J. Powell Managing Director and Chief Executive Officer Europe

Michael F. Frosch President and Chief Operating Officer North America Consumer Products

David R. Scott Executive Vice President Asian Markets

Barbara J. Goff Senior Vice President Global Human Resources

John H. Serafin Executive Vice President Chief Risk Officer

Anthony M. Jackovich Senior Vice President Chief Information Officer

David I. Vickers Executive Vice President Chief Financial Officer

Sophocles L. Karapas Executive Vice President North American Administrative Operations

Independent Auditor Ernst & Young LLP

Robert P. Mancuso Senior Vice President Corporate Communications Investor Relations Officer

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thewarrantygroup.com