thewarrantygroupannual report

2010

WHATEVER YOU NEED WHEREVER YOU NEED

thewarrantygroupannual report

CHAIRMANS LETTER

The Warranty Groups results for 2010 provide a compelling validation of the strategy that has been the foundation of our success for 46 years. As world economies slowly began to gain traction, our proven success in providing our clients with customer acquisition and retention tools proved the right tactic at

the right time. From consumer goods to financial services, post-recession business plans mandated revenue growth and expense restraint, further illuminating The Warranty Groups value proposition of utilizing technology to drive efficiency and leverage the value of every customer touchpoint.

PERCENT INCREASE OVER 2009

Pre-tax income of $166 million was an increase of 22% over 2009 results. Total revenue increased 1% and total expenses decreased 1%. U.S. pre-tax income was up 34% over the prior year, while Europe saw a 6% decrease and Latin America and Asia Pacific saw an increase of 21%. Our results demonstrate the manner in which our global stance continues to provide us with earnings stability, offsetting regional volatility and producing positive results in the aggregate. Weaknesses in some markets were mitigated by increased strength

in others, as with Latin Americas aggressive growth compensating for Europes flat economy. Our choice of markets has always been strategic, identifying opportunities that play to our skill sets and lessen our dependency upon single country or single product risk. The economic events of the last two years confirm this logic. Utilizing an in-country approach to operations and marketing further enabled our success, with cross-market intelligence becoming a valuable byproduct that benefited business development initiatives for

our global perspective guides us

ourselves and for our clients. Further, our commitment to disciplined underwriting and the avoidance of catastrophic risk resulted in consistent earnings and profitable growth. With a renewed interest in the financial stability of their business partners, our clients and prospects found safe harbor in our highly-rated underwriting entities and our strong balance sheet. This has always been the core strength of our company. Now, it is one of our most valued differentiators. Continuing our focus on reducing over-

head, we completed the consolidation of our US call center operations into our global headquarters in Chicago, reducing headcount while improving response times by standardizing our service levels. In North America our third-party administration revenues increased, while our auto segment launched an innovative client Web portal, further solidifying our leadership position with manufacturers and dealer networks. Internationally, we took advantage of

market opportunities to evaluate and restructure vendor relationships and real estate commitments, improving ROE and sales margins. We introduced a new sales and marketing team in China and immediately saw results. Looking forward, we see the rebound of consumer spending giving lift to all of our businesses, as indicated by our robust pipeline of agreements in process and new client launches, across all of our business segments. Our goal is operational excellence and continued

financial strength, both of which we achieve with the participation and commitment of our global family of 1,800 associates. While our global perspective guides us, our local insight enables us. As we begin the next decade, I am more confident than ever that our strategy of innovative solutions for clients and customers worldwide will drive our growth in 2011 and beyond.

David L. Cole Chairman & CEO

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PEOPLE

Wed like to thank the 1,800 associates that have contributed to make our results possible this year. With the changing market conditions and headwinds 2010 offered, our associates continued to drive value and offer consistent results. We expect con-

ditions to improve, but we also know this may not happen overnight. What we do know is that the tenacity and expertise of our associates continues to eclipse whatever challenges the market presents. Thank you for your hard work and persistence.

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No one else in the world provides a truly global single-source solution for marketing, underwriting, and administration for programs that drive revenue and attract and retain customers. Other companies may dabble, but only The Warranty Group brings all these services together to provide a seamless operation for you and for your customers. Whether you need help with just one critical aspect of your current plan, or youre looking for a turnkey solution to maximize your global opportunities, we can help. One stopone solution. Anywhere in the world. Theres no one else like us.

WHAT SETS US APART

Our global corporate underwriters, Virginia Surety Company, London General Insurance, and London General Life, each maintain an A- (Excellent) rating, according to A.M. Best. Their prudent underwriting has been the foundation of our efforts, which allow us to create the right programs at the right time for our clients. When you work with us, you leverage this expertise. Whether youre looking to increase revenue or attract or retain customers, we can tailor a plan to fit your objective. From service contracts to travel protection, we can design the right plan. Weve done it for over forty years, and can do it for you.

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UNDERWRITING

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MARKETING

The Warranty Group provides global solutions that are market specific. We work with retail, financial, membership, manufacturing and real estate companies to design programs tailored to accomplish revenue or market-share goals. Once we decide on the right program, we work through the most effective channels to create a seamless campaign thats proven to attract and retain the right customers. Whether you are looking for a partner to help with your current service plans or would like to learn more about how we can help you enhance the profit potential of your offerings, were here to help.

The Warranty Group is focused on creating programs that attract customers, retain customers, and provide a new revenue stream for our clients. Its about getting the most out of every transaction, for you and for your customers. And long after the transaction is complete, were there to make sure your customers are satisfied. Quality is what separates us from the other players. We specialize in the work we do and have the foundation that goes with over 40 years of experience. We back our solutions with administration thats seamless for your customers because we know how important their loyalty is, and we know how frustrating it can be when the process is confusing or inadequate. You cant stick around in this business for as long as we have without being able to deliver the quality people expect. We can administer your programs in the environment your customers are most comfortable with, whether high-tech or low. And we can help you decide what the best solution is for your needs; theres no one-size-fits-all approach. Behind the programs we create is a knowledgeable, trained staff, well-versed in the technologies that move the world of commerce.

ADMINISTRATION

NORTH AMERICA

As North America began the journey back from recession with vastly improved credit and rising consumer confidence, we benefited from a number of factors. First, our position as a profit enhancer to manufacturers and retailers of consumer goods led to new opportunities, especially given the US consumers renewed desire to extend the life cycle of their products. Second, the resilience of our operations and consistency of our earnings brought the flight to quality to our doorstep. Overall, our pre-tax income increased 34% over prior year results. The recovery in the automotive industry began in early 2010 largely due to im-

proved lending practices and an invigorated product line. Auto manufacturers and retailers continually looked to us to help them return to profitability by providing innovative solutions that address the evolving market conditions and maximize opportunity with every transaction. Our dedicated business development team added several large retail dealer groups to our client list, as the industry retrenched and started on the path to profitability. Our ability to provide custom solutions for every aspect of the retail and manufacturer channels puts us squarely in the industry lead and allows us to take advantage of the momentum the

market is beginning to show. From sales, to service, to training, our capabilities play perfectly to the needs of our auto clients. Several large auto manufacturers relied on our capabilities to measure and improve the skill sets of their staffs, enabling them to better serve their dealers and their customers. Utilizing both our marketing and creative skills, we assisted in the distribution of content to their partners in support of their improvement initiatives. Our direct underwriting and compliance capabilities, coupled with our strong balance sheet led to significant new business with leading TPAs, original equipment manufacturers

and retailers. Credit card, travel benefits, and technology covers showed an increase in revenue, driven by our competencies in compliance, administration, logistics, and technical support. Overall, North America embraced a focused approach of being more things to more clients, with the ability to fulfill any combination of underwriting, administration and marketing requirements. As we extend our range of offerings, we increase our opportunities for growth. Focusing on large, profitable accounts with superior client support, 2010 further validated our single-source solution approach to customer acquisition and retention.

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EUROPE

With the prolonged economic downturn in Europe, our operations saw a 6% decline in pretax earnings, after allowing for foreign exchange movements. Our diverse product lines and geographical spread mitigated the impact of the lingering recession, while client retention and servicing was our focus throughout the difficult market conditions. Despite the conclusion of federal stim-

ulus programs, we were able to buck the downward trend through strong new business acquisition and thorough loss control. It was also another year of good organic business growth, with appliance gross written revenue growing by 18%. Despite challenging conditions, appliance continues to offer strong opportunities across Europe. Creditor continued

to feel the effects of low lending levels and regulatory uncertainty, particularly in the UK and the Netherlands our key creditor markets. Despite this, we posted consistent results, thanks to strong client agreements and welltimed business exits. Market conditions are expected to er regulatory clarity and imimprove in 2011 with great-

proved lending. Additionally, new product initiatives are expected to open new business channels. Interest rates remain low across the EU, suppressing both investment income on new funds and yields on the reinvestment of maturing funds. As interest rates rise from these historic growth in investment income. low levels, we expect strong

diverse product line

ASIA PACIFIC AND LATIN AMERICA

The emerging markets in Latin America and Asia Pacific all demonstrated results that point to the normalization and growth of their respective economies, and our operational excellence in these regions yielded a gross written revenue improvement of 42% over the previous year. Latin America led the way, posting a 17% improvement in pre-tax income, thanks largely to the healthy economies and robust automotive and consumer goods sales in Brazil and Argentina. Our investments and improve-

ments in infrastructure were well-timed in this region, and our global strategy allowed for this success. While our associates in these markets proceed with the strong reputation The Warranty Group has earned worldwide, they utilize local expertise, providing flexibility and more efficient operations. They have the resources and the speed, as well as the regulatory know-how, to react to changing conditions and leverage upticks in the market. In Japan and Malaysia, our overall gross

flexibility , local expertise

written revenue was up 24%, with a very promising surge in the latter part of the year when lending had improved and customer confidence began to thaw, pointing to more growth potential in the near future. In Australia, we appointed a new chief of operations, and were excited about the new energy and opportunities that have recently come to light. China continues to provide large-scale opportunities to leverage our consumer goods expertise. Discretionary spending keeps increasing

as the purchasing power and middle class in China rises, and while the warranty concept is a relatively new proposition, it continues to gain traction at a rapid pace. Our global reputation and solid financials are our calling cards throughout Asia, and China is yet another example of the strength our brand brings to emerging markets. Critical to our success in all of these markets is our in-country operation, representing our strategic, financial, and intellectual commitment to the region.

CORPORATE SOCIAL RESPONSIBILITY

As we at The Warranty Group have expanded our global footprint and enjoyed the additional revenue this has provided, we also acknowledge that our responsibilities for corporate citizenship have also grown. For our customers and stakeholders, we ascribe a shared value between our success and the welfare of the communities we serve. Working to enhance sustainability, cultural pride, and expanded access to cultural and learning institutions allows for our shared success into the future. We increased our charitable donations by more than 60% over last year, and have not turned our backs on

the non-profits and other organizations that needed our help more than ever. Our support of the Juvenile Diabetes Research Foundation, Heartland Alliance, Chicago Architecture Foundation, The 100 Club of Chicago, Field Museum, UNICEF, Perspectives, and other Charter Schools continued in 2010. Mexico, Japan, and Australia participated in our Casual for a Cause program, raising funds each week for charitable needs as they arose. Our European offices raised money to help rebuild a school damaged by the recent earthquake in Haiti, while the UK directed their fundraising efforts to Haitis

of a re

the spirit f compassion and esponsibility

hospitals. And in Brazil, TWG employees helped to collect and distribute food to over 7,000 families in Sato Andre. Our CSR initiatives in 2010 were expanded across many new countries. Companywide, weve expanded our paperless process to include claims management, and started conducting our international meetings using VoIP systems, further reducing fuel and paper consumption. Our corporate mission is deeply tied to the longevity and continuing efficient use of goods sold across the planet. We are deeply committed to sustainability efforts. Keeping our associates engaged with

volunteerism opportunities and wellness initiatives remained a priority in 2010. Take Our Sons and Daughters to Work, Bike to Work Week, Bridge to Success, and the Chase Corporate Challenge, just to name a few, were initiatives we instituted to make personal and community wellness some thing fun that can also create a positive impact. The spirit of compassion and responsibility demonstrated by The Warranty Group family in 2010 was inspiring. But more than this, the alignment of our business goals with the betterment of the communities we serve makes clear our priority for continued corporate citizenship.

CONSOLIDATED FINANCIAL STATEMENTS THE WARRANTY GROUP INC. ,

(In Thousands) Revenue Premium earned and contract fees Net investment income Net realized available-for-sale investment gains Other-than-temporary impairment losses on investments recognized in income Net realized other gains (losses) Total revenue

YEAR ENDED DECEMBER 31 2010 2009

$ 1,090,143 91,680 27,723 (6,182) 13 1,203,377

$ 1,097,086 88,288 12,138 (11,160) 710 1,187,062

Expenses Benefits incurred Amortization of deferred acquisition costs Amortization of intangible assets Interest expense Salaries and employee benefits Other operating expenses Total expenses Income before income taxes Income tax expense Net income $ 561,839 175,197 52,575 2,866 142,708 100,727 1,036,912 166,465 60,836 105,629 $ 561,857 160,851 80,811 2,858 145,562 98,369 1,050,308 136,754 41,690 95,064

(In Thousands, Except Share Data) Assets Invested assets: Fixed-maturity securities available-for-sale, at fair value (amortized cost, 2010 - $1,675,116; 2009 - $1,737,220) Equity securities available-for-sale, at fair value (cost, 2010 - $42,070; 2009 - $18,900) Short-term investments Other investments Total invested assets $

DECEMBER 31 2009 2010

1,742,891 48,224 390,599 22,857 2,204,571

1,792,061 23,915 328,365 29,725 2,174,066

Cash and cash equivalents

105,857

57,326

Receivables: Reinsurance balances recoverable (net of allowance, (2010 - $816; 2009 - $842) Ceded claims recoverable Premiums and contract fees receivable (net of allowance, (2010 - $5,619; 2009 - $2,699) Total receivables 26,197 599,921 171,988 798,106 32,842 716,908 138,925 888,675

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 $

22,174 18,426 15,602 418,121 694,761 39,806 343,659 29,808 60,760 85,004 4,836,655 $

24,784 3,158 15,116 471,331 567,275 42,801 343,659 62,851 80,292 86,974 4,818,308

c b

DECEMBER 31 2009 2010 Liabilities and stockholders equity Reserves: Unearned premiums and contract fees Claims and benefits payable Total reserves $ 2,600,920 765,288 3,366,208 $ 2,572,137 889,781 3,461,918

Deferred income taxes Ceded reinsurance premiums payable Funds held under reinsurance treaties Debt Other liabilities Total liabilities

15,270 65,892 59,068 192,000 304,476 4,002,914

18,482 57,131 67,289 194,000 257,012 4,055,832

Stockholders equity: Preferred stock, par value $0.001 per share, 100,000 shares authorized, 51,132 shares issued and outstanding Common stock, par value $0.001 per share, 100,000 shares authorized, 57,434 and 57,340 shares issued and outstanding at December 31, 2010 and 2009, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income, net of taxes Total stockholders equity 506,207 506,207

10,504 284,305 32,725 833,741

10,208 220,832 25,229 762,476

Total liabilities and stockholders equity

4,836,655

4,818,308

consolidated balance
THE WARRANTY GROUP INC. ,

BOARD OF DIRECTORS

David L. Cole Chairman and Chief Executive Officer The Warranty Group, Inc. John D. Curtis General Counsel The Warranty Group, 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 (retired) Robert M. Le Blanc Managing Director Onex Corporation Harvey H. Medvin Former Executive Vice President and Chief Financial Officer Aon Corporation (retired) Thomas C. Ramey Former Chairman and President Liberty International Liberty Mutual Group

Independent Auditor Ernst & Young, LLP.

CORPORATE OFFICERS THE WARRANTY GROUP, INC.

SENIOR MANAGEMENT

David L. Cole Chairman Chief Executive Officer John D. Curtis Senior Vice President General Counsel Anthony M. Jackovich Senior Vice President Chief Information Officer Jeanne T. Jurasek Senior Vice President Director of Internal Audit/SOX Barbara J. Goff Senior Vice President Human Resources Laurie Hubbard Senior Vice President Global Tax Director Robert P. Mancuso Senior Vice President Corporate Communications Investor Relations Officer Brian K. Ollech Senior Vice President Global Controller John H. Serafin Senior Vice President Chief Risk Officer David I. Vickers Executive Vice President Chief Financial Officer

Perry Dizij Managing Director Europe James L. Donaldson President and Chief Operating Officer Asia Pacific and Latin America Michael F Frosch . President and Chief Operating Officer North America Roger C. J. Powell Managing Director Europe Chief Executive London General Insurance Company, Ltd. London General Life Company, Ltd.

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