Twg Annual Report 2007

annual report 2007

For business. For consumers. For the world.

adding value

to every transaction

For over 40 years, our warranty and product enhancement solutions have driven revenue and customer retention for our business partners worldwide.

thewarrantygroup.com

annual report 2007

chairman’s letter

Our team is our most valuable asset.

2007 marked the first anniversary of The Warranty Group as a stand-alone company. Much more than that, however, was the manner in which we reached this exciting milestone. No small feat was the seamless and successful manner in which we transitioned away from a parent company of over 40 years to become independent. Other organizations might lose focus when facing these challenges, but not The Warranty Group. In fact, throughout the organization, we leveraged the opportunity to look at how we might become more efficient and deliver even more value to our clients. It was truly a win/win effort for our colleagues and our customers. Our new brand gained traction globally, providing us an entrée into new markets. We established our first Board of Directors and created our first annual report. Over 600 employees relocated to our new global headquarters in the financial district of downtown Chicago, and we replaced critical, previously-shared services including tax, treasury, investments, internal audit, human resources, legal, corporate planning and others. Throughout, the passion that is unique to our company meant that we maintained a focus on the fundamentals and delivered record results, ending the year with $5 billion in assets, and $2 billion of gross written premium, fees and investment income. This marks another milepost in our journey.

In addition, we gained ground in all segments, including North America, Europe and Other International, which includes Asia and Latin America. The unique ability of our company to respond to market demands around the world positioned us perfectly, and it will continue to do so in the future. As we look to 2008, we see a global economy that is again providing new opportunities to deploy our unique human and capital resources and capture new markets with our innovative approaches and benchmark support. It has never been more clear that our most valuable asset is our global team of colleagues. Every hour of every day, an employee of The Warranty Group is responding to a client somewhere in the world, bringing the expertise of a long-time industry leader and the energy and attitude of a newly independent organization to every touchpoint. Without these resources, no one can do what we do. We are the one, the only, the original. We are The Warranty Group.

David L. Cole Chairman and CEO

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True to the culture that is The Warranty Group, our first year as a stand-alone company proved more fruitful than challenging, resulting in record revenues and assets. As expected, our global footprint, innovative products and customer-focus provided the engine for continued growth in all segments. North America delivered exceptional results, with increases across all units including automotive, consumer goods, and product enhancements. With increased scrutiny given to financial strength, The Warranty Group benefited from our vast database of product and program experience, intelligent underwriting and strong balance sheet. A flight to quality appears to be the emergent trend, and we and our client partners are clearly benefactors. European operations developed record revenues through thoughtful acquisition and cross-selling, with a significant increase in auto warranty. In addition, all mainland European offices were relocated, with a new hub in Amsterdam.

2007

International operations, including Asia and Latin America, reflected the dynamic mix of opportunity and challenge that characterize growth and emerging markets. Latin America reached record revenues through robust growth in Argentina, Brazil and Columbia, with Mexico showing measurable progress. In Asia, new clients in China along with expanded initiatives with partners in Japan, Korea, Malaysia, Australia and New Zealand position us for accelerated revenue growth in 2008 and beyond. 2007 was a successful year by any standard, but as year one of our new company, it represents an even grander achievement. A tradition of success has begun.

Year one: a success by any standard.

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people

The essence of The Warranty Group’s value proposition resides in our global team of colleagues. More than simple support, our worldwide family has shown enormous talent and enterprise in understanding our clients’ needs and delivering value. Our global diversity is important, but ultimately it’s about local delivery. Each market is different and our success has come from the dedicated group of individuals at The Warranty Group who are creating solutions that work at a local level. We think and act as a local company that happens to be American-owned—not an American company that happens to do business locally. The energy and creativity unleashed this year have resulted in benchmark production and performance. Our initiatives to reward and promote exceptional achievement continue to form the foundation for future growth. In all the markets we serve, a commitment to the basic principles of good corporate governance, transparency and fairness is shared. This informs our practices worldwide, and, beyond being a source of pride and the right thing to do, it has built trust in our brand and positive and enduring relations with our clients and the communities we serve.

The essence of value.

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It was another year of growth for our domestic markets, with the launch of several innovative products and a return of many clients to the brand they can trust. This presented a unique opportunity for us. The simple reason is quality. While we’re not able to create any new math for our clients, we can deliver a full spectrum of dependable services that are customized to meet their specific needs. Our single-source solution and over four decades of experience made things simple for our clients, allowing them to focus on what they do best. The roots of The Warranty Group are in the development of finance and insurance solutions for the North American automotive market. Building upon this heritage in 2007, our automotive division continued to grow its relationships with manufacturers and dealerships, unlocking their profit potentials and increasing their customer loyalty and retention rates. The ongoing trend of consolidation continued in 2007, and while manufacturers enjoy the efficiencies this model creates, it also demands more vigilance in maintaining employee engagement, focus and compliance.

Bigger doesn’t have to mean more bureaucratic. Our consulting and training services ensure this. And we’ve engineered our programs to last, with modifications necessary to maintain compliance with current regulation. In 2007, we helped our clients realize their strategies—whether it was customer retention, acquisition, revenue generation or a combination, we delivered. Our innovative travel and identity-theft products and credit card enhancements demonstrated our ability to think beyond the numbers to what people truly value. While technology pushes consumer electronics into obsolescence with astonishing speed, it’s not always the product that people really value. It’s what the product holds—for instance, the data contained in a laptop or a cellphone. We understand and develop products that protect the things our clients really value. Our unique alignment of underwriting, administration and marketingallows us to think differently from other providers. This special alignment made 2007 a standout year for the domestic markets at The Warranty Group.

north america 10

Adding value to the customer experience.

Our European markets started the year with the formidable task of relocating operations in the Netherlands, Germany, Italy, Belgium and Ireland. As testament to the talented and resilient team of professionals in our European markets, we did not lose focus. We met this challenge and ended the year posting larger revenues throughout all operations with significant growth in assets. We also expanded our centers of excellence to the Nordic regions with the opening of our office in Malmö, Sweden. We made it a priority to expand distribution channels, and were able to do so by forging many new relationships made available as a result of our new, independent and more agile configuration. We continue to expand by equipping local expertise with global network resources.

european markets

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Whether our clients wanted to implement the most tax-efficient business model, navigate the diverse legal and regulatory environments or launch a targeted marketing campaign, we delivered results. In 2007, we leveraged our reputation and new alignment to create many cross-selling opportunities. We were the single source for many of our clients, allowing them to manage only one relationship, so they could focus on their core business. We ended 2007 retaining an A- (excellent) A.M. Best rating, and in an even better position to deliver even more opportunity to our partners in 2008 and beyond.

Delivering opportunity.

international

The Warranty Group is the largest independent provider of service plans in the world. In many countries, we are the only provider across all consumer product lines. And while our broad global reach is a key competitive strength, our ability to think locally has sustained our efforts. In emerging markets, our comprehensive range of warranty solutions continues to unlock the potential of our clients’ products, and offers opportunities on the world stage. In our Latin markets, 2007 saw growth in revenue and infrastructure enhancements, with the implementation of our new operating system and relocation to a more fully integrated headquarters in Brazil. We’ve enjoyed first-in-market advantages for over a decade, and have only begun to glimpse the fruit of our labors in developing compliant business models that create greater profit potential for our clients. In our Latin markets, we see the imminent rise of the global middle class and of monetary policies that empower entrepreneurial drive and innovation. We see vast opportunity for growth in 2008 and beyond. In our Asian markets, we were able to capitalize on the continuing trend of consolidation in the automotive and consumer electronics industries. While our focus is on organic growth, we were

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able to forge key partnerships with the two leading consumer electronic retailers in China. We were also able to capture more market share with the leading automotive group in South Korea. And, in Australia, we partnered with a major finance company that provides extended warranties, credit insurance and GAP products to their automotive-dealer clients.

The ability to think and act locally.

looking to 2008

At The Warranty Group, we understand the importance of sound financials and diversification. That’s part of our nature as the world’s leading provider of service plans. As the uncertain market conditions persist in 2008, our legacy of value creation and creativity look to be attractive commodities. Over the last twenty years we have made it a priority to expand geographically. We’ve developed more distribution channels domestically as well as abroad, and we’ve honed our customer-focus so that we can better tailor our products to the demands of our clients. These strategies provide stability through difficult market conditions. The strength of our balance sheet and our wide range of products will shepherd us through whatever market conditions lie ahead. With new Nordic operations in Sweden, a new South American headquarters in Brazil, new partnerships in China and Australia, among others, it’s an exciting time for The Warranty Group. Our second year as a stand-alone company looks to be a dynamic one. We will continue to provide consumers with confidence and peace of mind, and producers with enhanced customer loyalties and new revenue streams. At The Warranty Group, we look beyond the numbers to what people truly value, and that has been the key to our innovative approach and will be the key to our success in 2008 and beyond.

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Diversity of products and geography.

FINANCIAL SUMMARY

The Warranty Group, Inc. Year Ended December 31, 2007, and One-Month Period Ended December 31, 2006

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The Warranty Group, Inc.

Consolidated Balance Sheets (In Thousands, Except Share Data)

December 31 2006

2007 Assets Cash and cash equivalents Invested assets: Fixed-maturity securities, at fair value (amortized cost, 2007 – $1,542,643; 2006 – $1,263,459) Short-term investments Dealer loans (net of allowance for credit losses, 2007 – $2,191; 2006 – $0) Equity securities, at fair value (amortized cost, 2007 – $29,762; 2006 – $0) Other investments Total cash and invested assets Receivables: Reinsurance balances recoverable (net of allowance for doubtful accounts, 2007 – $1,664; 2006 – $2,649) Ceded claims recoverable Premiums and contract fees receivable Total receivables Accrued investment income Current income taxes receivable Deferred income taxes Deferred acquisition costs Prepaid reinsurance premiums Property and equipment, net Goodwill Value of business acquired Other intangible assets Other assets Total assets

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$

51,443

(Restated)

$

89,044

1,574,240 588,174

1,257,500 708,030

30,055

30,411

28,990 2,553 2,275,455

– 3,841 2,088,826

75,741 1,081,992 104,109 1,261,842

20,777 1,280,981 103,072 1,404,830

21,925 19,550 38,098 293,420 646,629 40,487 343,659 276,373 118,044 100,470 $ 5,435,952

16,561 – 83,490 43,451 820,663 23,578 383,072 383,848 131,950 104,177 $ 5,484,446

December 31 2007

Liabilities and stockholders’ equity Reserves: Unearned premiums Unearned contract fees Claims and benefits payable Total reserves Current income taxes payable Deferred income taxes Ceded reinsurance premiums payable Notes payable Other liabilities Total liabilities Stockholders’ equity: Preferred stock, par value $.001 per share, 100,000 shares authorized, 51,132 and 51,100 shares issued and outstanding at December 31, 2007 and 2006, respectively Common stock, par value $.001 per share, 100,000 shares authorized, 54,231 and 51,100 shares issued and outstanding at December 31, 2007 and 2006, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss, net of taxes Total stockholders’ equity

Total liabilities and stockholders’ equity

2006

(Restated)

$ 2,677,528 170,581 1,264,664 4,112,773

$ 2,775,388 163,389 1,441,861 4,380,638

25,727 194,648 195,997 316,576 4,845,721

2,066 25,816 128,078 197,590 230,650 4,964,838

506,207

505,890

8,271 88,254 (12,501) 590,231

5,110 16,570 (7,962) 519,608

$ 5,435,952

$ 5,484,446

For a copy of our 2007 Ernst & Young audited financial statements, please call 312.356.2320.

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The Warranty Group, Inc.

Consolidated Statements of Income (In Thousands)

Year Ended December 31 2007

Revenue Premium earned Contract fees and other income Net investment income Net realized losses Total revenue

$ 1,028,561 179,769 109,832 (2,332) 1,315,830

Expenses Benefits to policyholders Amortization of deferred acquisition costs Amortization of intangible assets Profit commissions Other operating expenses Interest expense Total expenses Income before income taxes Income tax expense Net income

569,369 49,160 174,880 58,345 271,864 12,687 1,136,305 179,525 62,315 $ 117,210

For a copy of our 2007 Ernst & Young audited financial statements, please call 312.356.2320.

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One-Month Period Ended December 31 2006

$

$

82,891 18,211 8,437 (616) 108,923 42,548 1,560 13,402 5,942 19,207 1,203 83,862 25,061 8,491 16,570

Beyond the numbers to what people truly value.

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 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.

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board of directors

corporate officers and management

David L. Cole Chairman and Chief Executive Officer The Warranty Group, Inc. Mark H. Mishler President and Chief Operating Officer The Warranty Group, Inc. Patrick K. Donahue President Resource Dealer Group General Agents

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

James L. Donaldson Executive Vice President Latin American Markets

Ronald D. Markovits Senior Vice President and General Counsel

John E. England President Resource Automotive Solutions Michael F. Frosch President and COO TWG Innovative Solutions TWG Home Warranty North American Consumer Products Barbara J. Goff Senior Vice President Global Human Resources C. Steve Hayes Senior Vice President Chief Underwriting Officer Anthony M. Jackovich Senior Vice President Chief Information Officer

Roger C.J. Powell Chairman and Chief Executive Officer Europe David R. Scott Executive Vice President Asian Markets John H. Serafin Senior Vice President Chief Risk Officer Lester T. Shapiro Senior Vice President Worldwide Performance Improvement David I. Vickers Executive Vice President Chief Financial Officer

Independ Registered Public Accounting Firm Ernst & Young, LLP

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175 west jackson boulevard chicago, illinois 60604 312.356.3000

thewarrantygroup.com