2010

thewarrantygroupannual report

WHATEVER YOU NEEDWHEREVER YOU NEED ™

WHATEVER YOU NEEDWHEREVER YOU NEED

2010

thewarrantygroupannual report

CCCHAIRMAN’S LETTER

The Warranty Group’s 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 cus-tomer 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, fur-ther illuminating The Warranty Group’s value proposition of utilizing technology to drive ef-ficiency 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 in-creased 1% and total expens-es 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 con-tinues to provide us with earn-ings stability, offsetting regional volatility and producing positive results in the aggregate. Weak-nesses in some markets were mitigated by increased strength

in others, as with Latin Amer-ica’s aggressive growth com-pensating for Europe’s flat economy. Our choice of markets has always been strategic, identifying opportuni-ties that play to our skill sets and lessen our dependency upon single country or single prod-uct risk. The economic events of the last two years confirm this logic. Utilizing an in-coun-try approach to operations and marketing further enabled our success, with cross-market in-telligence becoming a valuable byproduct that benefited busi-ness development initiatives for

our global perspective guides us

our global perspective guides us

head, we completed the con-solidation of our US call cen-ter operations into our global headquarters in Chicago, re-ducing headcount while im-proving response times by standardizing our service levels. In North America our third-party ad-ministration revenues in-creased, while our auto seg-ment launched an innovative client Web portal, further so-lidifying our leadership position with manufacturers and dealer networks. Interna-tionally, we took advantage of

ourselves and for our clients. Further, our commitment to dis-ciplined 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 part-ners, our clients and prospects found safe harbor in our high-ly-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-

market opportunities to evalu-ate and restructure vendor rela-tionships and real estate com-mitments, improving ROE and sales margins. We introduced a new sales and marketing team in China and immediately saw results. Looking for-ward, we see the rebound of consumer spending giving lift to all of our businesses, as indicated by our robust pipe-line of agreements in pro-cess and new client launches, across all of our business seg-ments. Our goal is operation-al 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 cus-tomers worldwide will drive our growth in 2011 and beyond.

David L. Cole Chairman & CEO

ppPEOPLE

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

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

wwWHAT SETS US APART

No one else in the world provides a truly global single-source solution for marketing, underwriting, and ad-ministration for programs that drive revenue and attract and retain cus-tomers. 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 you’re looking for a turnkey solution to maximize your global opportunities, we can help. One stop—one solution. Anywhere in the world. There’s no one else like us.

wwWHAT SETS US APART

uuOur global corporate underwriters, Virginia Surety Company, London General Insurance, and London General Life, each maintain an A- (Excellent) rating, accord-ing 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 you’re 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. We’ve done it for over forty years, and can do it for you.

uuUNDERWRITING

mmMARKETING

The Warranty Group provides global solutions that are market specific. We work with retail, financial, mem-bership, manufacturing and real es-tate companies to design programs tailored to accomplish revenue or market-share goals. Once we de-cide on the right program, we work through the most effective chan-nels to create a seamless campaign that’s 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, we’re here to help.

The Warranty Group is focused on creating programs that attract customers, retain cus-tomers, and provide a new revenue stream for our clients. It’s about getting the most out of every transaction, for you and for your custom-ers. And long after the transaction is complete, we’re 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 that’s seam-less for your customers because we know how important their loyalty is, and we know how frustrating it can be when the process is con-fusing or inadequate. You can’t stick around in this business for as long as we have with-out 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; there’s 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.

aaADMINISTRATION

nNORTH AMERICA

proved lending practices and an invigorated product line. Auto manufacturers and retail-ers continually looked to us to help them return to profitability by providing innovative solu-tions that address the evolving market conditions and maxi-mize opportunity with every transaction. Our dedicated business devel-opment 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 ad-vantage of the momentum the

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

market is beginning to show. From sales, to service, to train-ing, our capabilities play per-fectly 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 com-pliance capabilities, coupled with our strong balance sheet led to significant new busi-ness with leading TPA’s, origi-nal equipment manufacturers

and retailers. Credit card, trav-el benefits, and technology covers showed an increase in revenue, driven by our com-petencies in compliance, ad-ministration, logistics, and technical support. Over-all, 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 in-crease our opportunities for growth. Focusing on large, profitable accounts with supe-rior client support, 2010 further validated our single-source solution approach to custom-er acquisition and retention.

eEUROPE

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 appli-ance gross written revenue growing by 18%. Despite challenging conditions, appli-ance continues to offer strong opportunities across Eu-

rope. Creditor continued

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

diverseproduct line

to feel the effects of low lend-

ing levels and regulatory un-

certainty, particularly in the

UK and the Netherlands—

our key creditor markets. De-

spite this, we posted consis-

tent results, thanks to strong

client agreements and well-

timed business exits. Market

conditions are expected to

improve in 2011 with great-

er regulatory clarity and im-

proved lending. Additionally,

new product initiatives are ex-

pected to open new business

channels. Interest

rates remain low across the

EU, suppressing both invest-

ment income on new funds

and yields on the reinvestment

of maturing funds. As interest

rates rise from these historic

low levels, we expect strong

growth in investment income.

aaASIA PACIFIC AND LATIN AMERICA

ments in infrastructure were well-timed in this region, and our global strategy allowed for this success. While our asso-ciates in these markets pro-ceed with the strong reputa-tion The Warranty Group has earned worldwide, they utilize local expertise, providing flex-ibility and more efficient opera-tions. They have the resourc-es 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

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

flexibility, localexpertise

written revenue was up 24%, with a very promising surge in the latter part of the year when lending had improved and customer confidence be-gan to thaw, pointing to more growth potential in the near fu-ture. In Australia, we appoint-ed a new chief of operations, and we’re excited about the new energy and opportuni-ties that have recently come to light. China continues to provide large-scale opportu-nities to leverage our consum-er goods expertise. Discretion-ary spending keeps increasing

as the purchasing power and middle class in China rises, and while the warranty con-cept is a relatively new propo-sition, it continues to gain trac-tion at a rapid pace. Our global reputation and solid financials are our calling cards through-out Asia, and China is yet an-other example of the strength our brand brings to emerging markets. Critical to our success in all of these markets is our in-country op-eration, representing our stra-tegic, financial, and intellectu-al commitment to the region.

CORPORATE SOCIAL RESPONSIBILITY

the spiritof compassion and responsibility

the non-profits and other orga-nizations that needed our help more than ever. Our support of the Juvenile Diabetes Re-search Foundation, Heartland Alliance, Chicago Architecture Foundation, The 100 Club of Chicago, Field Museum, UNI-CEF, Perspectives, and other Charter Schools continued in 2010. Mexico, Ja-pan, and Australia participat-ed in our Casual for a Cause program, raising funds each week for charitable needs as they arose. Our European of-fices raised money to help re-build a school damaged by the recent earthquake in Hai-ti, while the UK directed their fundraising efforts to Haiti’s

As we at The Warranty Group have expanded our global footprint and enjoyed the ad-ditional revenue this has pro-vided, we also acknowledge that our responsibilities for corporate citizenship have also grown. For our custom-ers and stakeholders, we as-cribe a shared value between our success and the welfare of the communities we serve. Working to enhance sustain-ability, cultural pride, and ex-panded 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 spiritof compassion and responsibility

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. Company-wide, we’ve expanded our paperless process to include claims management, and started conducting our inter-national meetings using VoIP systems, further reducing fuel and paper consumption. Our corporate mission is deeply tied to the longevity and con-tinuing efficient use of goods sold across the planet. We are deeply committed to sustain-ability 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 Suc-cess, and the Chase Corporate Challenge,® just to name a few, were initiatives we instituted to make personal and commu-nity wellness some thing fun that can also create a positive impact. The spirit of compassion and respon-sibility demonstrated by The Warranty Group family in 2010 was inspiring. But more than this, the alignment of our busi-ness goals with the betterment of the communities we serve makes clear our priority for con-tinued corporate citizenship.

cCONSOLIDATED FINANCIAL STATEMENTSTHE WARRANTY GROUP, INC.

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

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

$ 1,090,143

91,680

27,723

(6,182)

13

1,203,377

561,839

175,197

52,575

2,866

142,708

100,727

1,036,912

166,465

60,836

$ 105,629

$ 1,097,086

88,288

12,138

(11,160)

710

1,187,062

561,857

160,851

80,811

2,858

145,562

98,369

1,050,308

136,754

41,690

$ 95,064

YEAR ENDED DECEMBER 31 2010 2009

(In Thousands)

consolidated balance sheets

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

Cash and cash equivalents

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

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

$ 1,742,891

48,224

390,599

22,857

2,204,571

105,857

26,197

599,921

171,988

798,106

22,174

18,426

15,602

418,121

694,761

39,806

343,659

29,808

60,760

85,004

$ 4,836,655

$ 1,792,061

23,915

328,365

29,725

2,174,066

57,326

32,842

716,908

138,925

888,675

24,784

3,158

15,116

471,331

567,275

42,801

343,659

62,851

80,292

86,974

$ 4,818,308

(In Thousands, Except Share Data)DECEMBER 31

2010 2009

consolidated balance sheetsTHE WARRANTY GROUP, INC.

Liabilities and stockholders’ equity

Reserves: Unearned premiums and contract fees

Claims and benefits payable

Total reserves

Deferred income taxes

Ceded reinsurance premiums payable

Funds held under reinsurance treaties

Debt

Other liabilities

Total liabilities

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

Total liabilities and stockholders’ equity

$ 2,600,920

765,288

3,366,208

15,270

65,892

59,068

192,000

304,476

4,002,914

506,207

–

10,504

284,305

32,725

833,741

$ 4,836,655

$ 2,572,137

889,781

3,461,918

18,482

57,131

67,289

194,000

257,012

4,055,832

506,207

–

10,208

220,832

25,229

762,476

$ 4,818,308

DECEMBER 31 2010 2009

David L. ColeChairman and Chief Executive OfficerThe Warranty Group, Inc.

John D. CurtisGeneral CounselThe Warranty Group, Inc.

Peter C. GodsoeFormer Chairman and CEOThe Bank of Nova Scotia

Elizabeth HarringtonCEOHarrington Global

John M. KellyFormer Chief Executive OfficerMan Investments Inc.North American Operations (retired)

Robert M. Le BlancManaging DirectorOnex Corporation

Harvey H. MedvinFormer Executive Vice President and Chief Financial OfficerAon Corporation (retired)

Thomas C. RameyFormer Chairman and PresidentLiberty International Liberty Mutual Group

Independent AuditorErnst & Young, LLP.

BOARD OF DIRECTORS

David L. ColeChairman Chief Executive Officer

John D. CurtisSenior Vice PresidentGeneral Counsel

Anthony M. JackovichSenior Vice President Chief Information Officer

Jeanne T. Jurasek Senior Vice PresidentDirector of Internal Audit/SOX

Barbara J. GoffSenior Vice President Human Resources

Laurie HubbardSenior Vice PresidentGlobal Tax Director

Robert P. MancusoSenior Vice President Corporate Communications Investor Relations Officer

Brian K. Ollech Senior Vice President Global Controller

John H. SerafinSenior Vice PresidentChief Risk Officer

David I. VickersExecutive Vice PresidentChief Financial Officer

Perry DizijManaging DirectorEurope

James L. DonaldsonPresident and Chief Operating OfficerAsia Pacific and Latin America

Michael F. FroschPresident and Chief Operating Officer North America

Roger C.J. PowellManaging DirectorEuropeChief ExecutiveLondon General Insurance Company, Ltd.London General Life Company, Ltd.

SENIOR MANAGEMENT CORPORATE OFFICERS THE WARRANTY GROUP, INC.

2010

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WHATEVER YOU NEEDWHEREVER YOU NEED

WHATEVER YOU NEEDWHEREVER YOU NEED

2010

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