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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
/X/ For the fiscal year ended December 31, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from ___________ to ______________
Commission file number 0-27146
___________________
AMERIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3085148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Randolph Drive, 49th Floor, Chicago, IL 60601-7125
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 540-0078
_____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name Of Each Exchange
Title Of Each Class On Which Registered
------------------- ---------------------
Common Stock, $.01 par value Nasdaq National Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--------------------- --------------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price of said stock on the Nasdaq
National Market on March 21, 1997 ($21.75 per share): $397,776,789.
As of March 21, 1997, 24,454,699 shares of the Common Stock, $.01 par
value, and 1,656,909 shares of the Nonvoting Common Stock, $.01 par value, of
the Registrant were outstanding.
Documents Incorporated by Reference: Portions of the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A are
incorporated herein by reference in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Amerin Corporation (the "Company" or "Amerin") is a holding company which,
through Amerin Guaranty Corporation ("Amerin Guaranty"), is a provider of
private mortgage insurance coverage in the United States to mortgage bankers,
savings institutions, commercial banks and other lenders. Primary mortgage
insurance provides mortgage default protection on individual loans. Amerin
Guaranty issues primary insurance for first mortgage loans on owner occupied,
one-to-four unit residential properties, including condominiums. Home
purchasers who make down payments of less than 20% of the value of their home
are usually required by the mortgage lender to qualify and pay for primary
mortgage insurance on their mortgage loans. If the homeowner defaults on the
mortgage loan, mortgage insurance reduces and, in some instances, eliminates
any loss to the insured lender. Mortgage insurance does not cover losses that
result from damage to the property. Private mortgage insurance is used by
mortgage lenders to reduce their credit risk in mortgage loans with high loan
to value ratios ("LTV") as well as to enhance their ability to sell the loans
into the secondary mortgage market, principally to the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
Amerin Guaranty's claims-paying ability is rated "Aa3" by Moody's Investors
Service, Inc. ("Moody's") and "AA" by Standard & Poor's Corporation ("S&P").
Amerin Guaranty commenced writing insurance in April 1993.
The Company is a Delaware corporation. Its office is located at 200 East
Randolph Drive, 49th Floor, Chicago, Illinois 60601-7125 (telephone number
(312) 540-0078).
PRODUCTS
Traditionally, all mortgage insurance has been sold in the form of borrower
paid mortgage insurance ("BPMI"), whereby mortgage insurance premiums are
charged to the borrower by the mortgage lender or loan servicer, which in
turn remits the premiums to the mortgage insurer. Amerin Guaranty first
offered BPMI on a limited basis in California beginning in June 1993, and
began offering BPMI nationwide in February 1994 at rates which are generally
lower than those currently approved for use in most states by other private
mortgage insurers. In December 1996, the Company introduced an alternative
set of premium rates ("Retail Rates"). The Retail Rates, which are
substantially similar to the premium rates charged by other mortgage
insurers, will be used with certain mortgage lenders which have requested
that Amerin provide additional services and support beyond those provided by
the Company under its lower premium plans. Management believes that the cost
of such services and support will be offset by the additional premium revenue
to be received under the Retail Rates.
In addition to BPMI, Amerin Guaranty also offers comparable mortgage
insurance coverage in the form of lender paid mortgage insurance ("LPMI"),
whereby mortgage insurance premiums are charged to the mortgage lender or
loan servicer, which pays the premiums to the mortgage insurer. In April
1993, Amerin Guaranty was the first private mortgage insurer to offer LPMI,
and was the first mortgage insurer to be approved for the use of LPMI by
Fannie Mae and Freddie Mac. Amerin Guaranty offers a program known as the
Award Plus Plan to lenders utilizing LPMI. Under the Award Plus Plan, the
lender is charged lower premium rates for loans insured and, based on
performance of such loans over an extended period of time, is entitled to
receive cash awards from, or
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required to pay cash surcharges to, Amerin Guaranty with respect to such
loans.
The coverage percentage provided by Amerin Guaranty on a given loan is
determined by the lender, usually in order to comply with Fannie Mae and
Freddie Mac requirements to reduce loss exposure on loans purchased by them.
Freddie Mac and Fannie Mae changed, and in most cases raised, their coverage
requirements for most new loans closed after January 1, 1995, and March 1,
1995, respectively. As a result of these changes, Amerin Guaranty's average
coverage percentage on new insurance written increased from 24.1% for 1995 to
24.8% for 1996. The Company expects that the increased coverage requirements
will cause Amerin Guaranty's risk-to-capital ratio to increase and its
average claim amount to increase, but will not have a material impact on
underwriting expenses. Although Amerin Guaranty's premium rates for higher
coverages were derived in the same manner as rates for other coverage levels,
there can be no assurance that the higher premium rates are adequate to
reflect risks associated with higher coverages.
The following table shows Amerin Guaranty's direct insurance in force and net
(after giving effect to applicable reinsurance) primary risk in force as of
the dates indicated:
PRIMARY INSURANCE AND RISK IN FORCE
Year ended December 31,
---------------------------
1996 1995 1994
------- ------ ------
(in millions of dollars)
Direct Primary
Insurance In Force ............... $14,777 $8,262 $2,750
Net Primary
Risk In Force .................... 3,335 1,847 580
Amerin Guaranty may not terminate coverage except for non-payment of premium,
and such coverage is renewable at the option of the insured lender at the
renewal rate in effect at the time the loan was originally insured. Lenders
may cancel insurance at any time at their option or because of loan
repayment, which may be accelerated in times of increased refinancing
activity. In the case of loans purchased by Fannie Mae or Freddie Mac,
borrowers which meet certain requirements may require lenders to cancel
insurance when the principal balance of the insured loan is less than 80% of
the property's current value and, in some cases, when such principal balance
is less than 80% of the property's original value.
Because maintenance of coverage is linked to LTV, coverage tends to be
cancelled earlier in areas which are experiencing housing price appreciation
and to continue in force longer in areas experiencing housing price
depreciation. These two factors, which may be exacerbated during periods of
heavy mortgage refinancing, may result in an increase in the percentage of an
insurer's portfolio comprised of loans in economically weak areas. The
following table shows the percentage of new insurance written representing
refinances in the last two years:
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PERCENTAGES OF PRIMARY RISK WRITTEN
1996 1995
---- ----
Purchase Loans 86.4% 89.0%
Refinance Loans 13.6% 11.0%
Amerin Guaranty's premium rates are based upon the expected risk of a claim
on the insured loan and take into account the LTV, loan type, mortgage term,
occupancy status and coverage percentage. Premium rates cannot be changed after
the issuance of coverage. The Company generally employs a national premium rate
policy, rather than a regional or local policy, because it believes that each
region of the United States is subject to similar factors affecting the risk of
loss on insurance written.
Amerin Guaranty has three basic types of premium payment plans. The most
popular is a monthly premium plan, introduced in March 1994, under which only
one or two months premium is paid at the mortgage loan closing, and
thereafter premiums are remitted on a monthly basis to Amerin Guaranty. Based
on the rapid market acceptance of monthly premium plans, the Company expects
that such percentage will remain at this level or continue to increase
slightly. The second type of premium payment plan is an annual premium plan
in which a first-year premium is paid at the mortgage loan closing and annual
renewal payments are paid thereafter. Renewal payments generally are (i)
collected monthly from the borrower along with the mortgage payment and held
in escrow by the loan servicer or (ii) reserved by the loan servicer for
annual remittance to Amerin Guaranty in advance of each renewal year. The
third type of premium payment plan is a single premium plan that involves a
lump-sum payment at the loan closing. The single premium can be financed by
the borrower by adding it to the principal amount of the mortgage. Premiums
written under any of these plans may be either non-refundable or refundable
if the coverage is canceled by the insured lender (which generally occurs
when the loan is repaid or the LTV is less than 80% as a result of loan
amortization and/or property appreciation).
The following table sets forth the dollar amounts and percentages of new
insurance written represented by each of the three premium plans in 1996 and
1995:
NEW PRIMARY INSURANCE WRITTEN
1996 1995
---- ----
(in millions of dollars)
Monthly premium plan $6,671 86.6% $4,825 81.5%
Annual premium plan 867 11.2 985 16.6
Single premium plan 167 2.2 114 1.9
------ ----- ------ -----
Total $7,705 100.0% $5,924 100.0%
------ ----- ------ -----
------ ----- ------ -----
CUSTOMERS
Amerin Guaranty's customers are mortgage originators. Mortgage originators
include mortgage bankers, savings institutions, commercial banks and other
mortgage lenders. Amerin Guaranty is dependent on a small number of lenders for
a substantial majority of its business. Amerin Guaranty's largest ten customers
were responsible for 78.3%, 85.8% and 91.0.% of the Company's net premiums
written for 1996, 1995 and 1994, respectively. Amerin Guaranty's
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three largest customers (including branches and affiliates of such customers)
in 1996 were Norwest Mortgage, Inc., Countrywide Home Loans and Bank of
America which accounted for 37.8%, 18.7% and 10.1%, respectively, of the
Company's net premiums written for 1996. Amerin Guaranty's three largest
customers (including branches and affiliates of such customers) in 1995 were
Norwest Mortgage, Countrywide Home Loans and Bank of America, which accounted
for 37.3%, 19.5% and 10.2%, respectively, of the Company's net premiums
written for 1995.
To obtain primary insurance from Amerin Guaranty, a mortgage lender must
first apply for and receive a master policy from Amerin Guaranty. Through
December 31, 1996 Amerin Guaranty had done business with 82 master
policyholders, of which it considered 47 to be active master policyholders
(lenders which had submitted applications for insurance within the preceding
90 days, excluding branches, affiliates and companies acquired or merged into
other lenders).
SALES AND MARKETING AND COMPETITION
SALES AND MARKETING
Amerin Guaranty sells its insurance products through its own employees, located
throughout the United States. At December 31, 1996, Amerin Guaranty had a total
of 24 sales and marketing employees, 5 of which work in Amerin Guaranty's office
in Chicago, Illinois.
COMPETITION
The U.S. private mortgage insurance industry consists of nine active
mortgage insurers. Amerin Guaranty is the seventh largest private mortgage
insurer in the United States, based on new primary insurance written in 1996.
General Electric Mortgage Insurance Corporation ("GEMICO"), an affiliate of
General Electric Capital Corporation, and United Guaranty Residential Insurance
Company ("UGC"), an affiliate of American International Group, Inc., have higher
claims-paying ability ratings from Moody's and S&P than Amerin Guaranty,
principally based on having definitive capital support agreements from
affiliated companies and, as a result, they may have greater access to capital
resources than Amerin Guaranty.
The Company believes that Amerin Guaranty competes with other private mortgage
insurers principally on the basis of its innovative approaches to sales,
products, underwriting and claims processing. The Company believes that these
innovations provide a lower cost product and greater efficiency and ease of
interaction for mortgage lenders. The Company believes that these benefits are
particularly attractive to larger mortgage lenders.
Amerin Guaranty and other private mortgage insurers also compete directly with
federal and state governmental and quasi-governmental agencies, principally the
Federal Housing Administration ("FHA") and, to a lesser degree, the Veterans
Administration ("VA"). These agencies sponsor government-backed mortgage
insurance programs which, according to data from HUD, VA and Inside Mortgage
Finance, accounted for 42.8%, 36.1%, and 49.8% of all loans insured by the FHA,
VA or by private mortgage insurers in 1996, 1995 and 1994, respectively.
Management believes that the market share of private mortgage insurers relative
to the FHA and VA is influenced by factors including: (i) the percentage of
loans exceeding the FHA and VA limits, which has generally increased over time
but may be reduced by increases in the FHA and VA limits; (ii) the percentage of
high-LTV borrowers making down payments of 5% or more, at which levels private
mortgage insurance has generally been more cost-effective than FHA borrowing;
(iii) the number of borrowers eligible for VA insurance, which has recently been
increased to include members of the
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National Guard and Reserves with at least six years' service; (iv) the level
of refinancing activity (beginning in 1992, the FHA ceased charging renewal
premiums on FHA refinancings of FHA loans, which made such refinancings
relatively attractive) and (v) the relative attractiveness of FHA and
privately insured mortgage products in various market conditions.
Management believes that the introduction of the monthly premium product and
lender paid mortgage insurance has increased the competitiveness of the private
mortgage insurers versus the FHA and VA by spreading the initial premium over a
12-month period and thereby lowering the borrower's closing costs.
In addition to competition from federal agencies, Amerin Guaranty and other
private mortgage insurers face competition from state-supported mortgage
insurance funds. As of December 31, 1996, several states (including California,
Connecticut, Maryland, Massachusetts, New York and Vermont) have state housing
insurance funds which are either independent agencies or affiliated with state
housing agencies.
Management believes the share of newly-originated mortgages carrying mortgage
insurance is influenced by several factors. The share of high-LTV loans carrying
mortgage insurance has been increased by higher regulatory capital requirements
for depository institutions holding uninsured high-LTV loans. The high-LTV share
of mortgage originations is influenced by the level of refinancing activity (the
share of high-LTV loans among refinancings is lower than among purchase money
mortgages), and may be increased by affordable housing and central-city housing
initiatives.
The following table indicates the relative share of the mortgage insurance
market based on new insurance written by FHA/VA and private mortgage insurers
for the periods shown.
FEDERAL GOVERNMENT AND PRIVATE MORTGAGE INSURANCE MARKET SHARE
Year ended December 31,
-------------------------------------
1996 1995 1994
------ ------ ------
FHA/V............................ 42.8% 36.1% 49.8%
Private mortgage insurance....... 57.2% 63.9% 50.2%
------ ------ ------
100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
- ---------------
Sources: Inside Mortgage Finance and the Mortgage Insurance Companies of
America.
Various proposals are being discussed by Congress and certain federal agencies
to reform or modify the FHA. The Company is unable at this time to predict the
scope and content of such proposals, or whether any such proposals will be
enacted into law, and, if enacted, the effect on the Company.
Amerin Guaranty and other private mortgage insurers also compete indirectly with
mortgage lenders that elect to retain the risk of loss from defaults on all or a
portion of their high LTV mortgage loans rather than obtain insurance for such
risk. Any change in legislation which affects the risk-based capital rules
imposed on savings institutions, like the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), may affect the desirability of
foregoing insurance for savings institutions and, therefore, Amerin Guaranty's
opportunity to insure more high LTV mortgage loans from such institutions.
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OVERVIEW OF DIRECT RISK IN FORCE
The Company believes that the risk of a claim on a low down payment mortgage
loan is principally a function of the following factors: (i) economic
conditions in the geographic market in which the property is located; (ii)
the credit quality of the borrower; (iii) the LTV; (iv) the type of loan
instrument (for example, whether the loan is a fixed rate mortgage or is an
adjustable rate mortgage -"ARM"); (v) the purpose for which the loan is made
(for example, a primary residence or a vacation home) and (vi) the
underwriting practices of the lender originating the loan. Beginning in the
second half of 1994, because of, among other factors, overcapacity in the
home mortgage lending industry, increased competition among home mortgage
lenders to expand their markets, particularly in response to affordable
housing initiatives, and higher mortgage interest rates that prevailed
through most of the first quarter of 1995, a higher proportion of new
insurance written by the mortgage insurance industry generally contained
factors (including reduced borrower credit quality and higher risk loan
instruments) indicating a higher risk profile. Such higher risk loan
instruments include loans with loan-to-value ratios of 95% ("95s"), ARMs, ARM
95s, ARMs with potential negative amortization, and mortgages with original
loan amounts in excess of $207,000. While the proportion of Amerin
Guaranty's new insurance written in 1996 with these risk factors is slightly
lower than the comparable proportion for the overall mortgage industry, the
proportion of loans with such risk factors in Amerin Guaranty's risk in force
is higher than the comparable proportion for the overall mortgage insurance
industry due to Amerin's recent entry into the mortgage insurance business
and an overall industry trend in recent years toward a greater percentage of
95s.
The Company believes that the claim incidence for 95s is substantially higher
than for loans with LTV ratios of 90% or less, that the claim incidence for
mortgages in which the original loan amount exceeds $200,000 is substantially
higher than for mortgages in which the original amount is $200,000 or less,
and that the claim incidence for ARMs during a prolonged period of rising
interest rates would be substantially higher than for fixed rate loans. While
there is no meaningful data on claim incidence for loans with LTVs of 97%
("97s") because this product has only been recently offered by the industry,
the Company anticipates that claim incidence on 97s will be higher than on
95s. Amerin Guaranty's premium rates take certain risk factors, such as
higher LTVs or ARMs, into account. However, the premiums earned on mortgage
insurance covering such types of loans, and the associated investment income,
may ultimately prove to be inadequate to compensate for related future losses.
The Company believes there was a decline in the credit quality of
newly-originated insured loans for the mortgage insurance industry generally
beginning in the second half of 1994. The Company believes that this decline
in credit quality resulted from, among other factors, overcapacity in the
home mortgage lending industry, increased competition among home mortgage
lenders to expand their markets, particularly in response to affordable
housing initiatives, and higher mortgage interest rates that prevailed
through most of the first quarter of 1995. The Company identified declining
overall credit quality among insured loans originated by certain lenders with
which it does business, and worked with these lenders to establish specific
measures for the improvement of the credit quality of these lenders'
originations. The Company believes that borrower credit quality has
subsequently improved and that originations made in the second quarter of
1995 and thereafter have been of generally higher quality than those made in
the second half of 1994 and the first quarter of 1995.
The following table reflects certain characteristics of Amerin Guaranty's
primary risk in force (as determined on the basis of information available on
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the date of mortgage insurance) by the categories and as of the dates indicated:
CHARACTERISTICS OF PRIMARY RISK IN FORCE
December 31,
-----------------------------
1996 1995 1994
-------- -------- -------
(in millions of dollars, except percentages)
DIRECT RISK IN FORCE: $3,671.0 $1,989.4 $580.3
LENDER CONCENTRATION:
Top 3 lenders(1) . . . . . . . . . . . 70.5% 70.8% 64.3%
Top 10 lenders(1). . . . . . . . . . . 87.4% 86.8% 89.9%
LTV:
97s . . . . . . . . . . . . . . . . . 0.2% 0.1% --%
95s . . . . . . . . . . . . . . . . . 48.8% 50.6% 54.1%
90s(2) . . . . . . . . . . . . . . . . 46.7% 45.3% 42.4%
85s and below . . . . . . . . . . . . 4.3% 4.0% 3.5%
AVERAGE COVERAGE PERCENTAGE: 24.8% 24.1% 21.1%
LOAN TYPE:
Fixed(3) . . . . . . . . . . . . . . . 77.7% 72.3% 58.9%
ARMs . . . . . . . . . . . . . . . . . 11.4% 18.5% 36.2%
ARMs with potential negative
amortization . . . . . . . . . . . . 0.6% 1.2% 0.3%
Fixed/Adjustable(4) . . . . . . . . . 5.4% 5.2% 2.1%
Balloon . . . . . . . . . . . . . . . 4.6% 2.6% 2.0%
Other . . . . . . . . . . . . . . . . 0.3% 0.3% 0.5%
MORTGAGE TERM:
15 years and under . . . . . . . . . . 2.5% 2.3% 2.1%
Over 15 years . . . . . . . . . . . . 97.5% 97.7% 97.9%
PROPERTY TYPE:
Single family detached . . . . . . . . 94.5% 94.5% 92.8%
Condominium . . . . . . . . . . . . . 4.5% 4.3% 6.0%
Other(5) . . . . . . . . . . . . . . . 1.0% 1.2% 1.2%
OCCUPANCY STATUS:
Primary residence . . . . . . . . . . 99.2% 99.6% 99.8%
Second home . . . . . . . . . . . . . 0.8% 0.4% 0.2%
Non-owner occupied . . . . . . . . . . --% --% --%
LOAN AMOUNT:
$100,000 or less . . . . . . . . . . . 22.7% 24.0% 23.8%
Over $100,000 to $155,250(6) . . . . . 35.9% 37.6% 39.1%
Over $155,250 to $207,000(6)(7) . . . 26.4% 24.3% 26.4%
Over $207,000 to $250,000(7) . . . . . 7.2% 5.9% 5.1%
Over $250,000 . . . . . . . . . . . . 7.8% 8.0% 5.3%
______________________
(1) Based on original application volume.
(2) For the purposes of applying underwriting standards and determining
premiums, Amerin Guaranty considers loans under which the borrower
makes a down payment of at least 10% and finances the mortgage
insurance premium as part of the loan (resulting in a final LTV over
90%) to be 90s. Such loans are classified as 95s in the above table,
and are so classified by Fannie Mae. At December 31, 1996, .6% of
Amerin Guaranty's risk in force consisted of these types of loans.
(3) Fixed rate loans with temporary buydowns are included as fixed loans.
(4) Loans with fixed interest rates for the first five years or more (and
adjustable rates thereafter).
(5) Includes two-to-four unit dwellings.
(6) $151,725 was the maximum individual loan amount that the FHA could
insure. Such amount was increased to $152,363 in the third quarter of
1994 and $155,250 in the first quarter of 1996.
(7) $207,000 was the maximum principal balance of loans originated
eligible for purchase by Fannie Mae and Freddie Mac. Such amount was
increased to $214,600 in the first quarter of 1997.
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GEOGRAPHIC DISPERSION
Amerin Guaranty's long-term strategy is to diversify the geographic mix of its
portfolio to approximate the national distribution of high LTV loans. Amerin
Guaranty seeks to implement this strategy by focusing its marketing efforts on
high quality national and selected regional lenders to balance the geographic
mix of its new business. In 1994, Amerin developed a high concentration of
business in California, with 45.9% of that year's new insurance written in the
state. This concentration resulted from greater early market penetration by
Amerin Guaranty of lenders active in California relative to other regions.
Amerin achieved greater market share in other regions in 1995 and 1996, and the
percentages of new insurance written in California in 1995 and 1996 were reduced
to 27.0% and 20.5%, respectively. Management expects that the proportion of
Amerin Guaranty's business in California will continue to decline.
The following table reflects the percentages of primary risk in force at the
dates indicated for each of Amerin Guaranty's top 10 states and top 10
Metropolitan Statistical Areas ("MSAs"):
Primary Risk in Force
--------------------------
December 31,
--------------------------
1996 1995 1994
------ ------ ------
TOP 10 STATES
California . . . . . . . . . . . . 25.4% 31.1% 43.2%
Texas . . . . . . . . . . . . . . 5.4% 4.3% 4.5%
Florida . . . . . . . . . . . . . 5.0% 4.6% 3.2%
Illinois . . . . . . . . . . . . . 4.0% 3.5% 2.7%
Massachusetts . . . . . . . . . . 3.5% 3.4% 2.4%
New York . . . . . . . . . . . . . 3.5% 3.4% 2.5%
Minnesota . . . . . . . . . . . . 3.4% 2.7% 1.5%
Colorado . . . . . . . . . . . . . 3.3% 3.3% 3.0%
Pennsylvania . . . . . . . . . . . 2.9% 2.5% 1.3%
Arizona . . . . . . . . . . . . . 2.9% 3.3% 3.3%
---- ---- ----
Top 10 total . . . . . . . . . 59.3% 62.1% 67.6%
TOP 10 MSAS
Los Angeles . . . . . . . . . . . 7.0% 9.0% 15.1%
Orange County . . . . . . . . . . 3.2% 4.2% 6.7%
Chicago . . . . . . . . . . . . . 3.2% 2.7% 1.9%
Oakland . . . . . . . . . . . . . 2.6% 3.3% 3.9%
Minneapolis . . . . . . . . . . . 2.3% 1.7% 1.0%
Washington, D.C. . . . . . . . . . 2.3% 1.9% 1.6%
Phoenix . . . . . . . . . . . . . 2.1% 2.4% 2.4%
Boston . . . . . . . . . . . . . . 2.1% 2.1% 1.5%
San Diego . . . . . . . . . . . . 2.0% 2.3% 3.2%
San Francisco . . . . . . . . . . 1.8% 2.3% 2.7%
---- ---- ----
Top 10 total . . . . . . . . . 28.6% 31.9% 40.0%
INSURANCE IN FORCE BY POLICY YEAR
The following table sets forth the dispersion of Amerin Guaranty's insurance in
force as of December 31, 1996, by year of policy origination since Amerin
Guaranty began operations in April 1993:
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PRIMARY INSURANCE IN FORCE BY POLICY YEAR
<TABLE>
Primary Insurance Percent of
Policy Year in Force Total
----------- ----------------- ----------
(in millions of dollars)
<S> <C> <C>
1993 $ 226 1.5%
1994 2,033 13.8
1995 5,484 37.1
1996 7,034 47.6
------- ------
Total $14,777 100.0%
------- ------
------- ------
</TABLE>
UNDERWRITING PRACTICES
The Company writes substantially all of its insurance on a delegated
underwriting basis. Under delegated underwriting, participating lenders are
permitted to commit a mortgage insurer to insure a loan based on mutually
agreed criteria. Management believes that the various underwriting and risk
management features discussed below, taken together, provide acceptable
protection to the Company against the possible risks associated with writing
substantially all business on a delegated underwriting basis.
Amerin Guaranty generally is not able to cancel coverage on loans which it
insures under delegated underwriting, but may seek reimbursement from lenders
in respect to claims on loans so insured which violate specific loan
eligibility standards. The performance of loans insured through programs of
delegated underwriting, including Amerin's program of delegated underwriting,
has not been tested over an extended period of time or over portfolios almost
exclusively written based on delegated underwriting, nor has the performance
of such loans been tested in a period of adverse economic conditions. The
Company does not generally offer delegated underwriting on 97s and certain
other loans with specific risk factors. To date, the Company has not written
any pool insurance, but may do so on a limited basis in the future, depending
on market and competitive conditions.
The Company publishes underwriting guidelines which are employed by lenders
in determining if loans qualify for insurance under Amerin Guaranty's
delegated underwriting, and are also employed by the Company's underwriters
in evaluating loans submitted for insurance under non-delegated underwriting.
The Company believes that its underwriting standards are generally
consistent with the industry. In certain areas, the Company's underwriting
standards are more restrictive than those required by Fannie Mae and Freddie
Mac. Amerin regularly reviews its underwriting guidelines to address changes
in the mortgage market and economic conditions.
Mortgage insurance coverage cannot be canceled by Amerin Guaranty, except for
nonpayment of premiums or certain material violations of Amerin Guaranty's
master policy, and remains renewable at the option of the insured for the
life of the loan at a rate fixed when the insurance on the loan was initially
issued. As a result, the impact of increased claims and incurred losses from
policies originated in a particular year generally cannot be offset by
renewal premium increases on policies in force or mitigated by nonrenewal of
insurance coverage. If a lender should commit Amerin Guaranty to insure a
loan which does not comply with the applicable underwriting guidelines,
Amerin Guaranty is generally obligated to insure such a loan.
The Company's risk management objective is to build a portfolio of insured
loans whose claims incidence is equal to or less than the long-term average
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expected claims rates on which its premium rates are based. In order to meet
this objective, the Company's risk management efforts are concentrated in
four principal areas: lender approval; market analysis; loan and portfolio
monitoring; and lender audits.
LENDER APPROVAL
Because the Company writes substantially all of its insurance on a delegated
underwriting basis, the Company has stringent lender approval requirements.
The Company assigns delegated underwriting authority only to lenders with
adequate financial resources, acceptable management and operations, and
established records of originating good quality loans over a period of time.
The Company's risk management personnel conduct a thorough review of each
candidate lender, including reviews of the lender's financial statements, the
historical performance of loans originated by the lender, on-site interviews
with the lender's executive and line management, and review of the lender's
policies, procedures and loan programs. Special attention is paid to the
quality of a lender's underwriting, on-site quality control and servicing,
and to its compliance with underwriting guidelines. The Company also performs
an underwriting review of a statistically valid sample of loans recently
closed by the candidate lender.
MARKET ANALYSIS
Amerin Guaranty reviews economic and real estate market conditions in over 60
metropolitan areas on a quarterly basis and publishes these analyses and
market ratings in its National Housing Market Review, which is distributed to
its lenders. Amerin Guaranty considers the results of its market analysis in
evaluating new business opportunities and the composition of its portfolio.
Amerin Guaranty also may impose more restrictive underwriting guidelines on
markets adversely rated in its National Housing Market Review.
LOAN AND PORTFOLIO MONITORING
Amerin Guaranty's systems generate reports of all loans committed for
insurance which possess certain high risk criteria. These criteria include
elements such as high debt ratios, self-employed borrowers and attached
housing. Risk management personnel review the data received by Amerin in
respect to all such loans on a daily basis, and contact the lender to
establish that the level of risk on these loans is acceptable. If it is
determined that a lender is approving loans with excessive risk for Amerin
insurance, Amerin's senior risk management personnel will promptly contact
the lender's management and take appropriate corrective action with the
lender, up to and including restrictions on or termination of the lender's
delegated underwriting authority.
Amerin obtains credit scores from a third-party vendor for all loans
committed for insurance on a daily basis. Amerin uses these scores to provide
a timely, objective evaluation of borrower creditworthiness. Amerin reviews
the average scores of each lender's borrowers, the number of borrowers with
scores below certain thresholds, and the percentage of borrowers with
insufficient credit histories to score. Management believes that borrower
creditworthiness is the greatest manageable source of risk to Amerin in
current market conditions. Amerin Guaranty uses credit scores to evaluate the
quality of a lender's business, and may take appropriate corrective action
with a lender if credit scores indicate that the lender's business presents
an undue level of risk to Amerin Guaranty.
Amerin reviews the composition of its overall portfolio and its business by
lender and within geographic markets to identify concentrations of risk.
Specific elements which are reviewed by Amerin include LTV, loan type, loan
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<PAGE>
amount, property type, occupancy status and borrower employment. Amerin may
take appropriate corrective actions with a lender or adjust its underwriting
guidelines on a regional or national basis to correct concentrations of risk
at these levels.
LENDER AUDITS
Amerin Guaranty conducts thorough on-site reviews of each lender
periodically. Lenders with significant insured volume are reviewed at least
quarterly. These audits center on the re-underwriting of a statistically
valid sample of the Amerin-insured loans originated by the lender in the
preceding period. This sample is augmented by any loans with certain risk
factors or insured under waivers to Amerin's underwriting guidelines, if any,
granted to the lender, and may be further increased to target specific risk
factors identified in the periodic monitoring of the lender's business. Loans
are reviewed to identify errors in the loan data transmitted to Amerin, to
determine compliance with Amerin's underwriting guidelines and eligible loan
criteria, to assess the quality of a lender's underwriting decisions and to
rate the risk of the loans. Audits are graded based on the risk ratings of
the loans reviewed, lender compliance and data integrity. In addition to the
re-underwriting, any changes in the lender's policies, procedures or
management are examined and lender quality control reports are reviewed. The
results of each audit are set forth in a report to the lender which requires
the lender to address any deficiencies identified in the review. If issues
raised by the report are not resolved in a manner and within a time period
acceptable to Amerin Guaranty, the lender's delegated underwriting authority
may be restricted or terminated.
DEFAULTS AND CLAIMS
DEFAULTS
The claim process begins with the insurer's receipt of notification of a
default from the insured on an insured loan. Default is defined in the
primary master policy as the failure by the borrower to pay when due an
amount at least equal to the scheduled monthly mortgage payment under the
terms of the mortgage. The master policy requires insureds to notify Amerin
Guaranty of defaults, generally within 120 days after the initial default.
Generally, defaults are reported sooner, and the average time for default
reporting in 1996 by Amerin Guaranty insureds was approximately 60 days after
initial default. In certain cases, Amerin Guaranty uses this earlier
notification to facilitate workout analysis and loss mitigation efforts. The
incidence of default is affected by a variety of factors, including the
reduction of the borrower's income, unemployment, divorce, illness, the
inability to manage credit and, in the case of ARMs, the level of interest
rates. Borrowers may cure defaults by making all delinquent loan payments or
by selling the property in full satisfaction of all amounts due under the
mortgage. Defaults that are not cured result in a claim to Amerin Guaranty.
The following table shows the number of loans insured by Amerin Guaranty, the
related number of loans in default and the percentage of loans in default
(default rate) as of the dates indicated:
<TABLE>
December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Insured loans in force............. 120,385 68,112 22,937
Loans in default................... 1,439 605 42
Percentage of loans in default
(default rate).................... 1.20% 0.89% 0.18%
</TABLE>
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<PAGE>
Default rates differ from region to region in the United States depending
upon economic conditions and cyclical growth patterns. The table below sets
forth the default rates in Amerin Guaranty's 10 largest states by risk in
force as of December 31, 1996, 1995 and 1994. Due to continuing economic
recessionary conditions in California and policy aging, the default rate on
all policies in force in that state was 2.06% at December 31, 1996, compared
to 1.42% at December 31, 1995 and 0.30% December 31, 1994. Claim sizes on
California policies tend to be larger than the average claim size due to high
loan balances relative to other states.
DEFAULT RATES BY TOTAL RISK IN FORCE(1)
Percent of
Amerin Guaranty's
Primary Risk in Default Rate as of
Force as of December 31,
December 31, -------------------------
1996 1996 1995 1994
----------------- ---- ---- ----
California ............ 25.4% 2.06% 1.42% 0.30%
Texas ................. 5.4% 0.86% 0.76% 0.28%
Florida ............... 5.0% 1.50% 1.17% --%
Illinois .............. 4.0% 1.08% 0.96% --%
Massachusetts ......... 3.5% 0.64% 0.39% --%
New York .............. 3.5% 2.03% 1.32% --%
Minnesota ............. 3.4% 0.69% 0.45% 0.23%
Colorado .............. 3.3% 0.70$ 0.45% --%
Pennsylvania .......... 2.9% 1.27% 0.73% --%
Arizona ............... 2.9% 1.12% 0.86% 0.57%
Total Portfolio ....... 100.0% 1.20% 0.89% 0.18%
- ------------------------
(1) Top 10 states as determined by total risk in force as of December 31, 1996.
Default rates are shown by state based on location of the underlying
property.
CLAIMS
Claims result from defaults that are not cured. The frequency of claims does
not directly correlate to the frequency of defaults due primarily to
borrowers' ability to overcome temporary financial setbacks. Whether an
uncured default leads to a claim principally depends on the borrower's equity
at the time of default and the borrower's (or the insured's) ability to sell
the home for an amount sufficient to satisfy all amounts due under the
mortgage loan. In some cases, during the default period, Amerin Guaranty
works with the insured for possible early disposal of the underlying property
when the chance of the loan reinstating is minimal. Such dispositions
typically result in a savings to Amerin Guaranty over the percentage coverage
amount payable under the master policy.
Under the terms of Amerin Guaranty's master policy, the lender is required to
file a claim with Amerin Guaranty no later than approximately 60 days after
it has acquired title to the underlying property, usually through foreclosure.
Generally, private mortgage insurers calculate claims payments by applying a
stated coverage percentage to an aggregate amount consisting of (i) the
outstanding principal loan balance at the date of default, (ii) accrued
interest from the date of default to the date a claim is filed, (iii)
advances made by the insured or the servicer with respect to normal and
customary real estate property taxes, hazard insurance premiums, foreclosure
costs, reasonable attorney's fees not exceeding 3% of the sum of such
principal amount plus such accrued interest, and (iv) reasonable expenses
(generally
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<PAGE>
requiring prior approval by the insurer) necessary for the protection and
preservation of the property. See "-Defaults and Claims-Claims."
Through December 31, 1996, Amerin was the only private mortgage insurer that
calculated claims payments by applying a specified coverage percentage to the
original principal amount of the insured loan. While this method was
designed to simplify claims processing for clients, most submitted claims
reflected the claims calculation used by other mortgage insurers and some
clients advised Amerin Guaranty that it was confusing to use more than one
method of calculating claims. As a result, management concluded that
Amerin's unique coverage method was not being integrated into most lenders'
claims processing. In addition, technological developments in claims
reporting and processing over the past few years have resulted in the
establishment of a single industry standard for electronic transmission of
claims data which would have prevented Amerin Guaranty from participating in
standardized electronic claims processing using its unique coverage method.
In light of the above, management decided to implement the industry claims
payment method for all loans insured on and after January 1, 1997. Fannie
Mae and Freddie Mac have agreed that, with respect to all loans owned or
securitized by them, they will accept claims payments from Amerin Guaranty
calculated under the industry claims method for all claims submitted on and
after January 1, 1997, irrespective of when the related loan was originally
insured by Amerin Guaranty. With respect to all other loans insured prior to
January 1, 1997, Amerin Guaranty will continue to pay claims under its
original coverage method. Management believes that it will still be able to
offer streamlined claims processing to its clients and that the change will
have no material impact on its business.
Depending on the applicable state foreclosure law, an average of
approximately 12 months elapses from the date of default to payment of a
claim on an uncured default. To ensure continued coverage should the loan
reinstate, the insured frequently continues to pay premiums after notice of
default until the insured acquires title to the underlying property. Amerin
Guaranty's current master policy excludes coverage on loans secured by
property with physical damage, whether caused by fire, earthquake or other
hazard, unless the property is restored to its condition at the time the
policy was originated. Amerin Guaranty must pay each claim within 60 days
after a claim has been filed. Before final settlement of a claim, Amerin
Guaranty may also agree with a lender on a settlement amount based on a
prearranged sale of the property, which settlement amount may be less than an
amount equal to the claim payment calculated under Amerin's master policy.
Of the 326 claim payments paid by Amerin Guaranty from inception of business
in 1993 through December 31, 1996 (32 in 1995, 294 in 1996), 53 were settled
on the basis of a prearranged sale.
Claim activity is not spread evenly throughout the coverage period of a
primary book of business. Based on historical overall mortgage insurance
industry experience, the majority of claims occur in the third through sixth
years after loan origination, and substantially fewer claims are paid during
the first two years after loan origination. Insurance written by Amerin
Guaranty since January 1, 1995 represented 85.6% of Amerin Guaranty's
insurance in force as of December 31, 1996. This means that only 14.4% of
Amerin Guaranty's insurance in force has reached the beginning of its
expected peak claims period. Because of the Company's limited operating
history and historical industry claim experience, the Company's loss
experience is expected to significantly increase as its policies continue to
age.
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<PAGE>
LOSS RESERVES
A significant period of time may elapse between the occurrence of the
borrower's default on mortgage payments (the event triggering a potential
future claims payment), the reporting of such default to Amerin Guaranty and
the eventual payment of the claim related to such uncured default. To
recognize the liability for unpaid losses related to the default inventory,
in accordance with industry practice and generally accepted accounting
principles ("GAAP"), Amerin Guaranty establishes loss reserves in respect of
defaults included in such inventory, based upon the estimated claim rate and
estimated average claim amount. Included in loss reserves are loss adjustment
expenses ("LAE"), if any, and incurred but not reported ("IBNR") reserves.
These reserves are estimates and there can be no assurance that Amerin
Guaranty's reserves will prove to be adequate to cover ultimate loss
developments on reported defaults. The Company's profitability and financial
condition would be adversely affected to the extent that the Company's loss
reserves are insufficient to cover the actual related claims paid and
expenses incurred. Consistent with industry practices and GAAP, Amerin
Guaranty does not establish loss reserves in respect of estimated potential
defaults that may occur in the future.
Amerin Guaranty's reserving process for primary insurance utilizes an
industry data base of mortgage insurers' nationwide report year delinquency
experience for over 10 years. Delinquencies of various ages for such report
years are tracked to determine the rate at which such delinquencies convert
to actual claims. Such rates are then applied to Amerin Guaranty's population
of actual reported delinquencies, multiplying the covered amount for
delinquencies of various ages by the appropriate rate. Amerin reviews its
claim rate and claim amount assumptions on at least a semi-annual basis and
adjusts its loss reserves accordingly, when indicated. The impact of
inflation is not explicitly isolated from other factors influencing the
reserve estimates, although inflation is implicitly included in the
estimates. Amerin Guaranty does not discount its loss reserves for financial
reporting purposes.
For a further description of loss reserves, see Note 2 to the consolidated
financial statements of the Company.
REINSURANCE
Amerin Guaranty currently uses reinsurance from Amerin Re Corporation, a
wholly-owned subsidiary of the Company ("Amerin Re"), to remain in compliance
with the insurance regulations of certain states requiring that a mortgage
insurer limit its coverage percentage of any single risk to 25%. Amerin
Guaranty currently intends to use reinsurance provided by Amerin Re solely
for purposes of such compliance. Amerin Guaranty began ceding reinsurance to
Amerin Re in the fourth quarter of 1994. Amerin Re does not currently intend
to provide reinsurance to other mortgage guaranty insurance companies.
On December 28, 1995, Amerin Guaranty entered into an agreement (the "Centre
Re Agreement") with the Centre Reinsurance Group ("Centre Re") pursuant to
which Centre is obligated to repay, up to an aggregate amount of $100
million, all losses and allocated loss adjustment expenses paid by Amerin
Guaranty during periods in which (i) the ratio of Amerin Guaranty's risk in
force divided by policyholders' reserves and (ii) the sum of Amerin
Guaranty's expense ratio and loss ratio both exceed certain stated levels.
The claims-paying ability of Centre Re is rated "AA" by S&P. Amerin also
uses a minimal amount of third-party reinsurance to manage risk.
Amerin Guaranty has developed a program that permits mortgage lenders to
participate on a limited basis in the risks and rewards of insuring loans
originated by such lenders. To date, under this program, Amerin Guaranty had
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<PAGE>
entered into reinsurance arrangements ("Captive Arrangements") with mortgage
reinsurance affiliates of two of its mortgage lending customers. Such
customers are not affiliated with a national bank or a federal savings and
loan association and therefore are not subject to regulation by federal
banking authorities. See "Certain Legal Matters Relating to Captive Mortgage
Reinsurance Arrangements."
In the future Amerin Guaranty may elect to use reinsurance involving the
proportional sharing of risks, commonly known as quota share reinsurance, or
may elect to use excess loss reinsurance. Reinsurance that provides capital
support (such as the Centre Re Agreement) also can be used to help support
the claims-paying ability rating of the insurer.
Reinsurance does not discharge Amerin Guaranty, as the primary insurer, from
liability to a policyholder. The reinsurer agrees to indemnify Amerin
Guaranty for the reinsurer's share of losses incurred under a reinsurance
agreement, unlike an assumption arrangement, where the assuming reinsurer's
liability to the policyholder is substituted for that of Amerin Guaranty.
CLAIMS-PAYING ABILITY RATINGS
Certain national mortgage lenders and a large segment of the mortgage
securitization market, including Fannie Mae and Freddie Mac, generally will
not purchase mortgages or mortgage-backed securities unless the private
mortgage insurance on the mortgages has been issued by an insurer with a
claims-paying ability rating of at least "Aa3" from Moody's or "AA-" from
S&P, Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.
The Company and Amerin Guaranty are parties to agreements (the "Rating Agency
Agreements") required by Moody's and S&P as a condition of the issuance to
Amerin Guaranty and maintenance of their respective claims-paying ratings of
"Aa3" and "AA." Failure to comply with the provisions of either of the
Rating Agency Agreements could result in the withdrawal or reduction of
Amerin Guaranty's claims-paying rating by one or both of the rating agencies,
which would have a material adverse effect on the Company.
The Rating Agency Agreements each contain certain limitations on the ability
of the Company and Amerin Guaranty to declare or pay dividends or other
distributions on their capital stock or to redeem or repurchase capital
stock, to issue additional stock, to enter into certain transactions which
might result in a change of control (as defined) of Amerin Guaranty, or to
incur indebtedness (subject to certain exceptions). The Rating Agency
Agreements also contain certain risk to capital requirements which prohibit
Amerin Guaranty from writing additional insurance if minimum ratios are not
met. Upon an initial failure to observe certain of such limitations, the
Company is obligated to take corrective action, which could include making
adjustments to Amerin Guaranty's investment portfolio, entering into quota
share reinsurance arrangements and limiting underwriting of further risks.
Management believes that the limitations set forth in the Rating Agency
Agreements are not materially more restrictive than those that would be
otherwise imposed on the Company and Amerin Guaranty by the rating agencies
as a condition of maintenance of Amerin Guaranty's claims-paying ratings,
absent such agreements.
15
<PAGE>
INVESTMENT PORTFOLIO
POLICY AND STRATEGY
The income from the Company's investment portfolio is one of its primary
sources of cash flow and earnings. All investments of the Company are managed
by Scudder, Stevens & Clark pursuant to the terms of an agreement which
provides for an annual management fee based on the average value of the
portfolio under management. The agreement may be terminated earlier upon 90
days' notice by either party.
Amerin Guaranty's investment strategy is the result of various interrelated
investment considerations including protection of principal, appreciation
potential, tax consequences and yield. The Company typically maintains its
investment portfolio with a longer average duration than its anticipated
claims development in order to achieve higher yields. The Company intends to
meet any cash mismatch with cash generated from operations or sales of
investments. The Company's investment policies in effect at December 31, 1996
limited investments in the securities of a single issuer (other than the U.S.
government and certain of its agencies).
At December 31, 1996, based on carrying value, approximately 93.7% of the
Company's investments were in fixed income securities, 96.1% of which were
securities rated "A" or better, with 73.6% rated "AAA" and 15.2% rated "AA,"
in each case by at least one nationally recognized rating organization. The
Company does not currently intend to invest in equity securities.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the existing or
anticipated financial condition and operating requirements, including the tax
position, of the Company.
INVESTMENT OPERATIONS
At December 31, 1996, the carrying value of the Company's investment
portfolio was $328.8 million and amortized cost was $328.5 million. At
December 31, 1996, municipal securities represented 67.9% of carrying value
of the total investment portfolio. Securities due within one year, within
two to five years, within five to ten years, and after ten years, represented
8.9%, 8.1%, 21.1% and 61.9%, respectively, of such total carrying value.
For further information concerning investment operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Financial Condition" and Note 4 of Notes to Consolidated Financial
Statements of the Company.
16
<PAGE>
REGULATION
DIRECT REGULATION
The Company, Amerin Guaranty and Amerin Re are subject to comprehensive,
detailed regulation for the protection of policyholders by the insurance
departments of the various states in which they are licensed to transact
business. Although their scope varies, state insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect
of the insurance business. These include the licensing of companies to
transact business and varying degrees of control over claims handling
practices, reinsurance arrangements, premium rates, the forms and policies
offered to customers, financial statements, periodic financial reporting,
permissible investments and adherence to financial standards relating to
statutory surplus, establishment and maintenance of required reserves,
dividends and other criteria of solvency intended to assure the satisfaction
of obligations to policyholders. Most states also regulate transactions
between insurance companies and their parents or affiliates. For a
description of limits on dividends payable, see Note 12 of Notes to
Consolidated Financial Statements of the Company.
Mortgage insurers are generally restricted by state insurance laws and
regulations to writing residential mortgage insurance business only. This
restriction prohibits Amerin Guaranty and Amerin Re from directly writing
other types of insurance.
Mortgage insurance premium rates are subject to state regulation to protect
policyholders against the adverse effects of excessive, inadequate or
unfairly discriminatory rates and to encourage competition in the insurance
marketplace. Changes in premium rates are subject to being justified,
generally on the basis of the insurer's loss experience, expenses and future
trend analysis. The general default experience in the mortgage insurance
industry may also be considered. Premium rates are subject to review and
challenge by state regulators.
A number of states generally limit the amount of insurance risk which may be
written by a private mortgage insurer to 25 times the insurer's total
policyholders' reserves, commonly known as the "risk-to-capital" requirement.
Amerin Guaranty is required to contribute to a contingency loss reserve an
amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for
a period of 10 years, except under certain circumstances.
Certain restrictions apply under the laws of several states to any licensed
company ceding business to unlicensed reinsurers. Under such laws, if a
reinsurer is not admitted or approved in such states, the company ceding
business to the reinsurer cannot take credit in its statutory financial
statements for the risk ceded to such reinsurer absent compliance with
certain reinsurance security requirements. Amerin Re is admitted in Illinois,
and therefore Amerin Guaranty receives credit on its statutory financials for
business ceded to Amerin Re. In addition, several states also have special
restrictions on mortgage guaranty reinsurance.
As the dominant purchasers and sellers of conventional mortgage loans and
beneficiaries of private mortgage insurance, Fannie Mae and Freddie Mac
impose eligibility requirements, which may change from time to time, on
private mortgage insurers in order for such insurers to be eligible to insure
loans sold to such agencies. To the extent that Fannie Mae or Freddie Mac
implements new eligibility requirements, or alters or liberalizes
underwriting guidelines on low down payment mortgages they purchase, private
mortgage
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<PAGE>
insurers, including Amerin Guaranty, are likely to respond to or comply with
such actions in order to remain eligible with both agencies, and thereby
maintain market share of new insurance written. Currently, Amerin Guaranty is
an approved mortgage insurer for both Freddie Mac and Fannie Mae.
INDIRECT REGULATION
Private mortgage insurers are indirectly, but significantly, impacted by
regulations affecting purchasers of mortgage loans, such as Freddie Mac and
Fannie Mae, and regulations affecting governmental insurers, such as the FHA
and VA, and mortgage lenders. As a result, changes in federal housing
legislation and other laws and regulations that affect the demand for private
mortgage insurance may have a material effect on private mortgage insurers,
including Amerin Guaranty. Various proposals are being discussed by Congress
and certain federal agencies with respect to the reform or modification of
the FHA, but the nature and extent of actual enacted legislation and possible
effects of such legislation on Amerin Guaranty cannot be predicted.
The Real Estate Settlement and Procedures Act of 1974 ("RESPA") applies to
most residential mortgages insured by Amerin Guaranty, and related
regulations provide that mortgage insurance is a "settlement service" for
purposes of loans subject to RESPA. Subject to limited exceptions, RESPA
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. The recently renewed interest of HUD in
pursuing violations of RESPA has increased awareness of both mortgage
insurers and their customers of the possible sanctions of this law.
Most originators of mortgage loans are required to collect and report data
relating to a mortgage loan applicant's race, nationality, gender, marital
status and census tract to HUD or the Federal Reserve under the Home Mortgage
Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect possible
discrimination in home lending and, through disclosure, to discourage such
discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis
of certain classifications. The active mortgage insurers, through their
trade association, MICA, have entered into an agreement with the Federal
Financial Institutions Examinations Council ("FFIEC") to report the same data
on loans submitted for insurance as is required for most mortgage lenders
under HMDA.
Mortgage lenders are subject to various laws, including HMDA, the Community
Reinvestment Act and the Fair Housing Act, and Fannie Mae and Freddie Mac are
subject to various laws, including laws relating to government sponsored
enterprises, which may impose obligations or create incentives for increased
lending to low and moderate income persons or in targeted areas.
The Company and Amerin Guaranty are also indirectly, but significantly,
impacted by laws and regulations affecting originators and purchasers of
mortgage loans, particularly Fannie Mae and Freddie Mac, and regulations
affecting governmental insurers such as the FHA. Private mortgage insurers,
including Amerin Guaranty, are highly dependent upon federal housing
legislation and other laws and regulations which affect the demand for
private mortgage insurance and the housing market generally. For example,
housing legislation enacted in 1992 permits up to 100% of borrower closing
costs to be financed by loans insured by the FHA, a significant increase from
the previous 57% limit. Also, in April 1992, the FHA stopped charging
renewal premiums if a loan insured by the FHA was refinanced, which made FHA
insurance for refinancings relatively more attractive. In April 1994, HUD
reduced the initial premium (payable at loan origination) for FHA insurance
from 3.0% to
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<PAGE>
2.25%. This reduction has not had a significant effect to date on the
relative market shares of FHA insurance and private mortgage insurance. In
addition, in the third quarter of 1994, the maximum individual loan amount
that the FHA could insure was increased from $151,725 to $152,363, and was
recently increased to $155,250 and, in the fourth quarter of 1994, the
maximum individual loan amount that the VA could insure was increased from
$184,000 to $203,150 and has since been increased to $207,000. Legislation
that increases the number of persons eligible for FHA or VA mortgages could
have an adverse effect on the Company's ability to compete with the FHA or VA.
The Cranston-Gonzalez National Affordable Housing Act and the Omnibus Budget
Reconciliation Act of 1990 and the rules and regulations thereunder
(collectively, the "1990 National Housing Legislation") made major revisions
to the FHA's mortgage insurance programs, effective July 1, 1991. The
revisions included requiring the FHA to charge additional premiums based on
the LTV of the loan. For example, under FHA pricing for a 95% LTV loan, the
new rules require (i) an annual renewal premium of 0.5% of the mortgage
principal amount payable for 12 years for loans originated in 1994 and for 30
years for loans originated in 1995 and thereafter, (ii) a premium payable at
loan origination which is 3.0% for loans originated prior to April 17, 1994
and 2.25% for loans originated thereafter and (iii) renewal premium increases
from .50% to .55% for LTVs over 95%. These revisions have increased the cost
of FHA mortgage insurance and, therefore, made private mortgage insurance
relatively more attractive. Accordingly, the Company believes that the 1990
National Housing Legislation increased demand for private mortgage insurance.
Pursuant to FIRREA, the Office of Thrift Supervision ("OTS") issued
risk-based capital rules in 1990 for savings institutions. These rules
establish a lower capital requirement for a low down payment loan that is
insured with private mortgage insurance, as opposed to remaining uninsured.
Furthermore, the guidelines for real estate lending policies applicable to
savings institutions and commercial banks provide that such institutions
should require appropriate credit enhancement in the form of either mortgage
insurance or readily marketable collateral for any mortgage with an LTV that
equals or exceeds 85% at origination. To the extent FIRREA's risk-based
capital rules or the guidelines for real estate lending policies applicable
to savings institutions and commercial banks are changed in the future, some
of the anticipated benefits of FIRREA and the guidelines for real estate
lending policies to the mortgage insurance industry, including Amerin
Guaranty, may be curtailed or eliminated.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize
as substitutes for private mortgage insurance. The Company cannot predict if
or when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand
for private mortgage insurance may be adversely affected. There can be no
assurance that other federal laws affecting such institutions and entities
will not change, or that new legislation or regulations will not be adopted.
In addition, Fannie Mae and Freddie Mac have entered into, and may in the
future seek to enter into, alternative recourse arrangements or other credit
enhancements based on their existing legislative authority.
Political and monetary pressures to reduce the nation's budget deficit could,
among other things, result in the partial or entire loss of the U.S. federal
income tax deduction for mortgage loan interest, which could result in
downward pressure on housing prices. Any reduction or loss of such deduction
could reduce the volume of low down payment mortgages originated and private
mortgage insurance written and adversely impact mortgage default patterns,
and would materially adversely affect the Company's LPMI business.
19
<PAGE>
There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private
and governmental mortgage insurers, or purchasers of insured mortgage loans,
will not be amended, or that new legislation or regulations will not be
adopted, in either case in a manner which will adversely affect the demand
for private mortgage insurance.
From time to time, proposals have been advanced in Congress which would
permit or require cancellation of mortgage insurance under certain
conditions. No prediction can be made as to the eventual disposition of such
proposals by Congress or the impact of any such legislation on the mortgage
insurance industry.
RECENT DEVELOPMENTS
In recent months, legislation has been introduced in both houses of Congress
relating to the cancellation of private mortgage insurance. The House bill
currently provides for mandatory notice to borrowers with respect to their
right to cancel private mortgage insurance under certain circumstances. The
Senate bill contains similar provisions and, in addition, mandates
cancellation of private mortgage insurance under certain specified
conditions. In addition to this federal legislation, legislation with
respect to cancellation of private mortgage insurance has been introduced or
enacted recently in more than ten states. Such legislation is similar to the
federal legislation, in that most states appear to focus on disclosure to
borrowers, while the legislation in some other states requires both
disclosure and, under certain specified circumstances, mandatory cancellation
of private mortgage insurance. Fannie Mae has recently announced a proposed
new policy with respect to disclosure and, under specified conditions,
mandatory cancellation of private mortgage insurance. No prediction can be
made at this time as to the eventual disposition of any of the
above-described federal and state legislation or the Fannie Mae proposal, or
the separate or cumulative impact of any such legislation or proposals on the
mortgage insurance industry.
CERTAIN LEGAL MATTERS RELATING TO LENDER PAID MORTGAGE INSURANCE
In March 1993, Amerin Guaranty submitted a written request to HUD which asked
that HUD provide written confirmation that Amerin Guaranty's lender-paid
mortgage insurance and the Award Plus Plan were in compliance with the
requirements of RESPA. In January 1996, Rick Lazio (R-NY), Chairman of the
House Subcommittee on Banking and Community Opportunity, sent a letter to HUD
asking for written guidance with respect to whether LPMI complies with RESPA.
In August 1996, HUD responded to Representative Lazio. While not passing on
the legality of any private mortgage insurer's LPMI product or marketing
practice, the HUD response stated that regular, non-experience-based "LPMI
products pose no RESPA concerns." With respect to LPMI products that offer
mortgage lenders experience-based premiums, such as Amerin's Award Plus Plan,
HUD further concluded that "there is nothing inherently violative of Section
8 of RESPA." The Company believes its Award Plus Plan satisfies the general
criteria discussed in the HUD response regarding compliance with Section 8 of
RESPA.
Because the cost of LPMI is paid by the lender, to recover such additional
cost, the mortgage loans insured pursuant to LPMI policies generally bear
interest at a rate in excess of comparable loans insured by BPMI policies.
Based on the advice of counsel, Amerin believes that the use of LPMI on a
mortgage loan does not affect the deductibility from gross income for U.S.
federal income tax purposes of otherwise deductible mortgage interest paid by
the borrower on such loan. There can be no assurance, however, that the
United States Internal Revenue Service ("IRS") may not challenge the
conclusions reached by Amerin Guaranty's counsel, and a ruling by the IRS that
20
<PAGE>
did so could have a material adverse effect on Amerin's business and
financial results. The Company does not intend to seek a ruling from the IRS.
CERTAIN LEGAL MATTERS RELATING TO CAPTIVE MORTGAGE REINSURANCE ARRANGEMENTS
In October 1996, the OCC, which regulates banks, announced that Captive
Arrangements were permissible for subsidiaries of banks, and that the OCC
would consider applications from banks for approval of Captive Arrangements.
On January 22, 1997, the OCC granted approval to Chase Manhattan Bank USA, NA
("Chase"), an affiliate of Chase Manhattan Mortgage Corporation, to enter
into a Captive Arrangement. In December 1996, the OTS, which regulates
thrifts, announced that it would consider applications from thrifts for
approval of Captive Arrangements. Management believes that these
announcements by the OCC and the OTS, and the approval by the OCC of the
Chase Captive Arrangement, increase the likelihood of Captive Arrangements
with Amerin Guaranty or other mortgage insurers. To date, the OTS has not
approved any Captive Arrangements. No assurance can be given as to when or
whether any approvals from the OTS or additional approvals from the OCC will
be forthcoming or whether such approvals will contain any conditions on any
Captive Arrangements.
In April 1996, Amerin Guaranty met with HUD and presented its position that
Amerin Guaranty's Captive Arrangements are in compliance with RESPA. To
date, HUD has not made any pronouncement with respect to Captive
Arrangements. Based on the advice of Patton Boggs, L.L.P., Amerin believes
that its Captive Arrangements comply with RESPA. There can be no assurance,
however, that HUD will not challenge the compliance of Captive Arrangements
under RESPA. A ruling by HUD that limits or prohibits the use of Captive
Arrangements could have a material adverse effect on Amerin's business and
financial results.
By letter dated March 17, 1997, the New York Insurance Department ("NYID")
notified Amerin Guaranty that the Office of the General Counsel of the NYID
had issued a legal opinion to the effect that Captive Arrangements violated
certain provisions of the New York Insurance Law ("NYIL") relating to
impermissible rebates and controlled business arrangements. The Company
believes that similar letters were sent by the NYID to all other private
mortgage insurers licensed to do business in New York. Subsequently, it was
reported in the March 27, 1997 issue of the Amerin Banker that a spokesman
for the NYID stated that one mortgage insurance company "has violated some of
the laws" relating to doing business with reinsurance companies affiliated
with mortgage lenders. The Amerin Banker article further stated that,
according to the NYID spokesman, "payment to the reinsurance subsidiary must
be proportional to the risk it assumes." Based on this test and on
management's prior analysis of the applicable provisions of the NYIL,
management believes that Amerin Guaranty's Captive Arrangements are not in
violation of the NYIL, and has requested a meeting with the NYID to discuss
this issue. Management does not believe that the issues raised by the NYID
regarding Captive Arrangements will have a material adverse effect on the
Company's business.
EMPLOYEES
At December 31, 1996, the Company had 95 full-time employees. Of its total work
force, 66 were assigned to the Company's headquarters in Chicago, Illinois, and
29 operated out of their homes around the country. None of the Company's
employees is a member of a labor union. The Company believes that it maintains
good relations with is employees.
ITEM 2. PROPERTIES.
The Registrant leases its principal executive offices in Chicago, Illinois,
which consists of approximately 30,000 square feet of office space. The Company
believes its existing property is adequate for its present operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company and its subsidiaries are involved in certain
routine legal proceedings arising in the normal course of their business, none
of which is currently expected to have a material adverse effect on the
Company's consolidated financial condition or results of operations.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
Registrant's executive officers as of March 21, 1997:
Name and Age Title
- ---------------------------- -------------------------------------------------
Gerald L. Friedman, 59 . . . Chairman of the Board of Directors, President
and Chief Executive Officer of Amerin Corporation
and Amerin Guaranty
Roy J. Kasmar, 41. . . . . . Executive Vice President, Operations, Chief
Operating Officer and Director of Amerin Guaranty
George G. Freudenstein, 43 . Senior Vice President, Chief Financial Officer
and Treasurer of Amerin Corporation and Amerin
Guaranty and Director of Amerin Guaranty
Randolph C. Sailer II, 42. . Senior Vice President, General Counsel and
Secretary of Amerin Corporation and Amerin
Guaranty
James G. Engelhardt, 45. . . Executive Vice President, Director of Risk
Management of Amerin Guaranty
Jerome J. Selitto, 55. . . . Executive Vice President, National Director of
Marketing and Sales of Amerin Guaranty and
Director of Amerin Guaranty
Michael J. Dirrane, 40 . . . Senior Vice President, National Sales Director of
Amerin Guaranty
Ronald D. Gaither, 39. . . . Senior Vice President, Operations of Amerin
Guaranty
John F. Peterson, 49 . . . . Senior Vice President, Western Regional Sales, of
Amerin Guaranty
R. Bruce Van Fleet, III, 45. Senior Vice President, National Accounts
Director, of Amerin Guaranty
Philip P. Yee, 43. . . . . . Senior Vice President, Marketing Services and
Corporate Communications, of Amerin Guaranty
Mr. Friedman founded the Company and has been Chairman of the
Company and Amerin Guaranty since April 1992 and President of the Company and
Amerin Guaranty since December 1996. Prior thereto, he founded and served as
Chairman and President of Financial Guaranty Insurance Corporation ("FGIC"), a
AAA rated financial guarantor, from September 1983 to December 1990. Mr.
Friedman began his career with MGIC in 1961, and, from 1978 to 1981, Mr.
Friedman was President of MGIC Investment Corporation, the holding company of
MGIC. Mr. Friedman has been a member of Amerin Corporation's and Amerin
Guaranty's boards of directors since April 1992.
Mr. Kasmar has been Executive Vice President of Operations at Amerin Guaranty
since May 1996 and Chief Operating Officer of Amerin Guaranty and a director of
Amerin Guaranty since December 1996. Prior to joining Amerin Guaranty, Mr.
Kasmar was Managing Director for Prudential Home Mortgage's Capital Markets from
May 1988 to April 1996. He was Vice President in charge of Secondary Marketing
and Chief Operating Officer at First Boston Capital Group from 1984 to 1988.
Mr. Freudenstein has been Senior Vice President, Chief Financial Officer,
Treasurer and Chief Administrative Officer of the Company and Amerin Guaranty
since July 1992. Prior thereto, he was an independent financial consultant in
Israel from July 1987 to July 1992. From May 1984 to August 1986, Mr.
22
<PAGE>
Freudenstein served as chief accounting officer of FGIC, with primary
responsibility for accounting, financial reporting and regulatory compliance.
From February 1977 to May 1984, he served on the professional staff of Coopers &
Lybrand, most recently as a general practice manager specializing in reporting
for property and casualty companies. Mr. Freudenstein has been a member of
Amerin Guaranty's board of directors since June 1993.
Mr. Sailer has been Senior Vice President, General Counsel and Secretary of the
Company and Amerin Guaranty since November 1992 and Vice President, General
Counsel and Secretary of Amerin Corporation and Amerin Guaranty from August 1992
to November 1992. Prior thereto, he was Vice President and Assistant General
Counsel of Connie Lee Insurance Company in Washington, D.C. from February 1990
to July 1992. He served as Vice President and Assistant General Counsel of FGIC
from October 1985 to January 1990, and worked in the securities law and
corporate and municipal finance departments of three major New York firms from
September 1980 to September 1985. Mr. Sailer has been a member of Amerin
Guaranty's board of directors since September 1993.
Mr. Engelhardt has been Executive Vice President and Director of Risk Management
since December 1995 and Senior Vice President and Director of Risk Management of
Amerin Guaranty since from November 1992 through December 1995. Prior thereto he
was Regional Director of MGIC's mid-Atlantic region from April 1990 to October
1992, and Director of Underwriting for the Northeast Division of MGIC from March
1987 to March 1990.
Mr. Selitto has been Executive Vice President and National Director of Marketing
and Sales of Amerin Guaranty since December 1995 and Senior Vice President and
National Director of Marketing of Amerin Guaranty from September 1994 through
December 1995 and a director of Amerin Guaranty since December 1996. Prior
thereto he was Senior Vice President and Director of Marketing for Amerin
Guaranty's Central Region from October 1992 to September 1994. Prior to joining
Amerin Guaranty, Mr. Selitto was managing director and manager of the
Asset-Backed Securities Group at First Chicago Capital Markets, Inc. from August
1989 to October 1992.
Mr. Dirrane has been Senior Vice President and National Field Sales Director of
Amerin Guaranty since January 1997. Prior thereto, Mr. Dirrane was Vice
President and Northeast Regional Marketing Director of Amerin Guaranty from
February 1993 to January 1997. Mr. Dirrane was Vice President of Correspondent
Lending at Salem Five Mortgage from July 1992 to February 1993 and an Account
Executive for MGIC from October 1987 to July 1992.
Mr. Gaither has been Senior Vice President of Operations at Amerin Guaranty
since May 1996. Prior thereto, he was Senior Vice President and Senior Credit
Policy Officer at The Prudential Home Mortgage Company ("PHMC") from May 1994 to
April 1996, Senior Vice President & Treasurer in the Treasury Department of PHMC
from May 1992 to May 1994, and Vice President of Warehouse Lending for PHMC from
January 1992 to June 1992. Mr Gaither was Manager in Mortgage Banking Finance
Division at First Union National Bank ("First Union") from August 1989 to
January 1992, and was Vice President & Manager in First Union's Syndicated
Credits Division from September 1988 to August 1989.
Mr. Peterson has been Senior Vice President and Director of Marketing for Amerin
Guaranty's Western Region since December 1992. Prior to joining Amerin Guaranty,
Mr. Peterson was Vice President, Manager of Asset Sales and Acquisitions at Bank
of America's Residential Loan Division from August 1989 to December 1992, and
regional manager of sales in the western United States for Bear Stearns &
Company, Mortgage Capital Division from May 1986 to July 1989.
23
<PAGE>
Mr. Van Fleet has been Senior Vice President and National Accounts Director
since January 1997 and Senior Vice President and Director of Marketing for
Amerin Guaranty's Eastern Region from December 1995 to January 1997. Prior
to joining Amerin Guaranty, Mr. Van Fleet was Senior Vice President of
Corporate Sales for Strategic Mortgage Services from August 1993 until
December 1995, and a Director of National Accounts at PMI Mortgage Insurance
Company from December 1990 until August 1993.
Mr. Yee has been Senior Vice President, Marketing Services and Corporate
Communications for Amerin Guaranty since December 1995 and Vice President,
Director of Marketing Services and Corporate Communications from June 1994 to
December 1995. Prior thereto, he was Director of Creative Services at
Chemical Residential Mortgage Corporation from January 1993 to June 1994, and
Director of Marketing for Bank of America's Residential Loan Division from
January 1990 to April 1992.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDERS MATTERS.
On November 22, 1995, the Registrant's Common Stock began trading on the
Nasdaq National Market under the symbol "AMRN". Prior to such date, no
established public trading market for the Registrant's common equity existed.
As of March 21, 1997, the approximate number of record holders of the
Registrant's Common Stock was 99. The following table sets forth, for the
period indicated, the high and low sale prices of the Registrant's Common
Stock as reported on The Nasdaq National Market.
High Low
------- -------
1995:
Fourth Quarter (from November 22) . . . . . . . $28 1/2 $18
1996:
First Quarter . . . . . . . . . . . . . . . . . $28 1/2 $22 3/4
Second Quarter . . . . . . . . . . . . . . . . $27 1/4 $19 3/4
Third Quarter . . . . . . . . . . . . . . . . . $26 $20
Fourth Quarter. . . . . . . . . . . . . . . . . $25 3/4 $19
The Registrant has never paid any cash dividends on its capital stock. The
Registrant currently intends to retain its future earnings to finance the
growth and development of its business and therefore does not anticipate
paying cash dividends on its Common Stock for the foreseeable future. Amerin
Corporation is a holding company whose principal source of cash flow is
dividends and other permitted payments from its subsidiaries, Amerin Guaranty
and Amerin Re. For a description of restrictions on the payment of dividends
applicable to the Registrant and Amerin Guaranty, see Note 12 of Notes to
Consolidated Financial Statements of the Registrant set forth on page F-20
herein.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(in thousands of dollars except policies, ratios,
per share data or as otherwise indicated)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Net premiums written .................. $70,000 $33,946 $10,274 $1,611 $ --
Increase in unearned premiums ......... (7,651) (6,387) (5,037) (1,285) --
Net premiums earned ................... 62,349 27,559 5,237 326 --
Net investment income ................. 16,871 7,612 4,818 4,251 1,380
Realized investment gains ............. 161 491 435 707 15
Total revenues ....................... 79,381 35,662 10,490 5,284 1,395
Expenses:
Losses incurred ....................... 20,681 7,757 262 -- --
Policy acquisition costs .............. 8,485 6,641 2,456 2,677 --
Underwriting and other expenses ....... 10,623 6,915 5,765 5,403 5,721
Compensation charge resulting from
initial public offering .............. -- 35,741 -- -- --
Total expenses ....................... 39,789 57,054 8,482 8,080 5,721
Income tax expense ..................... 11,363 1,419 -- -- --
Net income (loss) ...................... 28,229 (22,811) 2,008 (2,795) (4,326)
Pay-in-kind dividends on preferred
stock ................................. -- 5,287 5,067 4,437 1,250
Net income (loss) applicable to
common stockholders ................... 28,229 (28,098) (3,059) (7,232) (5,576)
OTHER OPERATING DATA:
Mortgage insurance operating
ratios (GAAP)(1)
Loss ratio ........................... 33.2% 28.2% 5.0% -- --
Expense ratio ........................ 30.6 49.2 157.0 (2) N/A
Combined ratio ....................... 63.8% 77.3% 162.0% (2) N/A
Mortgage insurance operating
ratios (SAP)(1)
Loss ratio ........................... 33.2% 28.2% 5.0% -- --
Expense ratio ........................ 27.4 42.8 97.4 (2) N/A
Combined ratio ....................... 60.6% 70.9% 102.4% (2) N/A
PER SHARE DATA:(3)
Net Income (loss) ..................... $1.07 (2.32) $(0.36) $(0.99) $(1.98)
Weighted average shares
outstanding (in thousands) ........... 26,351 12,106 8,467 7,328 2,810
Book value (at period end) ............ $11.53 $10.55 $5.59 $5.66 $6.67
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(in thousands of dollars except policies, ratios,
per share data or as otherwise indicated)
<S> <C> <C> <C> <C> <C>
OPERATING AND STATUTORY DATA:
Number of policies in force ........... 120,385 68,112 22,937 2,473 --
Default rate .......................... 1.20% 0.89% 0.18% 0.16% --
Persistency ........................... 87.6% 93.0% 96.2% -- --
Direct primary insurance in force
(in billions) ........................ $14,777 $8,262 $2,750 $ 272 --
Direct primary risk in force (in
millions) ............................ $ 3,671 $1,989 $ 580 $ 57 --
Amerin Guaranty Corporation:
Statutory capital (in millions) ...... $ 260.7 $227.0 $ 90.5 $ 70.8 $73.8
Risk-to-capital ratio ................ 13.3 8.2 6.4 0.8 N/A
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Total investments ..................... $328,793 $296,982 $ 96,246 $ 72,094 $73,580
Total assets .......................... 354,824 316,328 107,261 79,421 80,126
Unearned premiums ..................... 20,525 12,710 6,323 1,286 --
Loss reserves ......................... 18,730 7,092 262 -- --
13.5% Convertible Preferred
Stock ................................ -- -- 40,755 35,687 31,250
Total common stockholders' equity ..... 300,609 274,137 58,081 40,840 47,978
</TABLE>
- --------------------------
(1) GAAP and statutory basis (SAP) ratios reflect the Company's status as a new
company and include start-up and other expenses incurred prior to the
commencement of significant operations. SAP ratios reflect the combined
results of the Company's insurance subsidiaries and do not include holding
company costs. Expense ratios exclude the compensation charge resulting
from the Company's Initial Public Offering.
(2) Not meaningful.
(3) For 1996 and 1995, includes 13,340,000 shares issued in conjunction with
the Company's November 28, 1995 initial public offering and also includes
2,250,068 shares, as of the date of such offering, out of a total of
11,000,000 shares that were previously excluded from weighted average
shares. Such shares were subject to contingent recall provisions and the
conditions required for the removal of recall provisions on the 11,000,000
shares had not been met. The Company's initial public offering removed the
recall provisions on 2,250,068 of the shares and resulted in the
cancellation of the remaining 8,749,932 common shares.
(4) The 13.5% Convertible Preferred Stock was redeemed on December 1, 1995 at a
redemption price of $46.0 million.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF CONSOLIDATED OPERATIONS
1996 COMPARED TO 1995
Total revenues for 1996 were $79.4 million, an increase of 122.6% over total
revenues of $35.7 million for 1995. The growth in revenues was due primarily
to the increases in net premiums earned and investment income in 1996 as
compared to 1995, as discussed below.
New insurance written in 1996 was $7.7 billion, compared to $5.9 billion in
1995. New insurance written was $1.7 billion in the fourth quarter of 1996
as compared with $1.9 billion in the fourth quarter of 1995. As of December
31, 1996, Amerin's primary insurance in force was $14.8 billion as compared
with $8.3 billion as of December 31, 1995, which represents a 78.9% increase.
Net premiums written for 1996 were $70.0 million compared to $33.9 million
for 1995, which represents a 106.2% increase. The increase was primarily
attributable to a 30.1% increase in Amerin Guaranty's new insurance written
to $7.7 billion and growth in insurance in force and related renewal
premiums. Management believes that Amerin Guaranty was able to increase
revenues due primarily to increased use by existing lenders of the Company's
BPMI, the addition of new, large lenders which began doing business with the
Company during the second half of 1995 and in 1996, and increased sales of
LPMI. The increase in net premiums written was also due to a lesser extent
to higher average premiums during 1996 compared to 1995, principally due to
the increased coverage requirements imposed by Fannie Mae and Freddie Mac
during the first quarter of 1995, which requirements took effect over the
course of 1995. Amerin Guaranty's monthly premium plan represented 86.6% and
81.5% of new insurance written for 1996 and 1995, respectively.
Renewal premiums for 1996 increased 148.6% from 1995 to $56.9 million, due
primarily to the growth of insurance in force throughout 1995, as well as
increased popularity of the monthly premium plan in 1996. With respect to
the monthly premium product, the first month's premium is recorded as new
business and all subsequent premiums are recorded as renewals. Net premiums
written for new business in 1996 increased 18.6% from 1995 to $13.1 million
due to a greater volume of new business written in 1996. However, net
premiums written for new business declined in the fourth quarter of 1996 as
compared to the fourth quarter of 1995 due to the increased percentage of the
Company's business written under the monthly premium plan in the fourth
quarter of 1996.
Net premiums earned increased by $34.8 million to $62.3 million for 1996 from
$27.6 million for 1995. This increase was primarily due to the increase in
insurance written and in force in 1996 as compared to 1995.
Net investment income of $16.9 million for 1996 increased by $9.3 million (or
121.6%) over 1995, due primarily to investment of the proceeds from the
Company's initial public offering in November 1995 (the "Initial Public
Offering"), as well as Amerin's net operation cash flows over the course of
1996, which together resulted in an increase of 138.4% in the monthly average
amount of invested assets. Realized investment gains for 1996 were $.2
million compared to realized investment gains of $.5 million for 1995. This
decrease reflected lower sales activity within the portfolio due to the
Company's desire to maintain a certain composition of the investment
portfolio. Sales of investments in 1996 were made primarily in connection
with the continuation of the Company's current investment strategy to
increase investment in tax-exempt
27
<PAGE>
securities. As of December 31, 1996 and 1995, the yields to maturity on the
investment portfolio were 5.8% and 6.2%, respectively, and the average
durations of the investment portfolio were 6.4 years and 3.3 years,
respectively, The average duration at December 31, 1995 reflected the
investment of the net proceeds of the Initial Public offering in short-term
investments pending their investment in tax-exempt securities with longer
maturities.
Losses incurred in 1996 were $20.7 million, compared to $7.8 million of
losses incurred in 1995, as a result of aging of the Company's policies.
Because of the Company's limited operating history, its loss experience is
expected to increase significantly as its policies continue to age. Policy
acquisition costs during 1996 of $8.5 million increased by $1.8 million (or
27.8%) compared to 1995 principally due to the growth in the level of
marketing and underwriting activity in connection with the increased
production of new insurance written in 1996 compared to 1995. Underwriting
and other expenses during 1996 increased by $3.7 million or 53.6% compared to
1995 due to the institution of an excess loss treaty, the increase in
insurance in force and increases in various administrative and occupancy
costs relating to growth in the Company's personnel, offset in part by the
elimination in the 1996 period of standby commitment fees previously paid to
certain of the Company's original stockholders.
The Company's effective tax rate was 28.7% in 1996. The Company incurred tax
expense in 1995 notwithstanding the fact that the Company reported a loss
before taxes, which loss resulted from the Company's recording of the
non-recurring non-deductible charge of $35.7 million discussed in the
following paragraph. The Company fully utilized its net operating losses in
1995, with the result that no additional net operating losses were available
for utilization in 1996. The effective tax rate for 1996 was below the
statutory rate of 35%, principally reflecting the benefits of tax-exempt
investment income.
As a result of the foregoing factors, the Company had net income of $28.2
million for 1996, or $1.07 per share, compared to a net loss before
pay-in-kind dividends on its previously outstanding 13.5% Convertible
Preferred Stock of $22.8 million for 1995. The 1995 net loss was due to a
non-recurring non-deductible charge of $35.7 million in the fourth quarter of
1995 as a result of its Chairman and President being entitled to shares of
Common Stock pursuant to the MSV Agreement upon consummation of the Initial
Public Offering. The net loss applicable to common shareholders (after
pay-in-kind dividends) was $28.1 million, or $2.32 per share, for 1995. The
13.5% Convertible Preferred Stock was redeemed in connection with the Initial
Public Offering.
1995 COMPARED TO 1994
Net premiums written for 1995 were $33.9 million compared to $10.3 million
for 1994, which represents a 230.4% increase. The increase was primarily
attributable to a 137.1% increase in Amerin Guaranty's new insurance written
and growth in insurance in force and related renewal premiums. Management
believes that Amerin Guaranty was able to increase revenues due primarily to
increased use by existing lenders of the Company's BPMI, which was introduced
nationwide in February 1994 at rates which the Company believes are lower
than those generally offered by other mortgage insurance companies, the
addition of new, large lenders which began doing business with the Company
during the second half of 1994 and 1995, and increased sales of LPMI. The
increase in new insurance written was further enhanced to a lesser extent by
higher average premiums during 1995 compared to 1994, principally due to the
increased coverage requirements imposed by Fannie Mae and Freddie Mac. Amerin
Guaranty's monthly premium plan represented 81.5% of new insurance written
for 1995. Renewal premiums for 1995 increased from 1994 due primarily to the
increased popularity of the monthly premium plan.
28
<PAGE>
Net premiums earned increased by $22.4 million to $27.6 million for 1995 from
$5.2 million for 1994. This increase was primarily due to the increase in
insurance written and in force in 1995 as compared to 1994.
Net investment income of $7.6 million for 1995 increased by $2.8 million (or
58.3%) over 1994. Substantially all of such increase was due to 55.0% growth
in the monthly average amount of invested assets. Realized investment gains
for 1995 of $0.5 million increased by 12.7% compared to 1994 due to a greater
number of sales with higher profits in the latter period. Sales of
investments in the latter period were made primarily in connection with the
Company's current investment strategy to increase investment in tax-exempt
securities. See "--Financial Condition" below. As of December 31, 1995 and
1994, the yields to maturity on the investment portfolio were 6.2% and 6.3%,
respectively, and the average durations of the investment portfolio were 3.3
years and 4.6 years, respectively.
Losses incurred in 1995 were $7.8 million, compared to $0.3 million of losses
incurred in 1994 as a result of the fact that the Company's book of business
was at an early stage of development. Policy acquisition costs during 1995 of
$6.6 million increased by $4.2 million (or 170.4%) compared to 1994
principally due to the growth in the level of marketing and underwriting
activity in connection with the increased production of new insurance written
in 1995 compared to 1994.
Underwriting and other expenses increased by $1.1 million or 19.9% due to the
increase in insurance in force and increases in various administrative and
occupancy costs relating to growth in the Company's personnel.
The Company recorded a non-recurring charge of $35.7 million in the fourth
quarter of 1995 as a result of its Chairman and President being entitled to
shares of Common Stock pursuant to the provisions of a management agreement
upon consummation of its initial public offering on November 28, 1995. The
non-recurring charge was not deductible by the Company for federal income tax
purposes because the Chairman and President previously made 83(b) elections
in 1992 with respect to such shares.
As a result of the foregoing factors, the Company had a net loss before
pay-in-kind dividends on the 13.5% Convertible Preferred Stock of $22.8
million for 1995, compared to net income before such pay-in-kind dividends of
$2.0 million for 1994. Net loss applicable to common stockholders (after such
pay-in-kind dividends) was $28.1 million for 1995 compared to a net loss
applicable to common stockholders of $3.1 million for 1994.
FINANCIAL CONDITION
The Company's consolidated total investments were $328.8 million at December
31, 1996, compared with $297.0 million at December 31, 1995. The Company
generated consolidated cash flows from operating activities of $43.3 million
during 1996, compared to $22.2 million generated during 1995. All of the
Company's $308.0 million of fixed income securities at December 31, 1996 are
rated "investment grade," which is defined by the Company as a security
having a National Association of Insurance Commissioners ("NAIC") rating of 1
or 2 or an S&P rating ranging from "AAA" to "BBB-."
The aggregate fair value (carrying value) of the fixed income securities was
greater than amortized cost at December 31, 1996 by $.3 million. At December
31, 1995, the aggregate fair value (carrying value) of the Company's fixed
income securities was greater than amortized cost by $5.0 million. The
decrease during 1996 in the market value of the Company's fixed income
securities compared to amortized cost reflects the increase in interest rates
during 1996 as well as the percentage of the Company's fixed income
securities with long-term maturities. Fixed income securities of $203.5
million or 66% of total fixed
29
<PAGE>
income securities at December 31, 1996 have maturities of 10 years or greater.
As a result of these substantial long-term holdings, if interest rates should
increase, the fair value of these securities will decline and common
stockholders' equity will decrease.
Consolidated loss reserves increased by $11.6 million to $18.7 million at
December 31, 1996 from $7.1 million at December 31, 1995, primarily due to the
ongoing maturation of the Company's book of business, which is at an early stage
of development. See "-- Results of Consolidated Operations -- 1996 Compared to
1995." Consistent with industry practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.
Consolidated unearned premiums increased $7.8 million from $12.7 million at
December 31, 1995 to $20.5 million at December 31, 1996, reflecting the increase
in new insurance written in 1996 versus 1995, offset in part by increased levels
of the monthly premium product which does not produce unearned premiums.
Consolidated stockholders' equity increased to $300.6 million at December 31,
1996, from $274.1 million at December 31, 1995, an increase of 9.7%. This
increase resulted primarily from the results of 1996 operations and net
unrealized investment gains.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated sources of funds consist primarily of premiums
written and investment income. The principal uses of funds are the payment of
claims and expenses. The Company's principal expense categories are policy
acquisition costs, underwriting and other expenses and losses incurred on
insurance policies. Policy acquisition costs include only those expenses that
relate directly to, and vary with premium production, such as compensation of
employees involved in underwriting, marketing and policy issuance functions,
state premium taxes, and certain other underwriting expenses. Underwriting and
other expenses include occupancy costs, personnel-related costs of
non-production personnel, and administrative support and compliance costs.
The Company generated positive cash flows from operations of approximately $43.3
million, $22.2 million and $5.1 million, respectively, in 1996, 1995 and 1994,
as shown on the Consolidated Statement of Cash Flows. Positive cash flows are
invested pending future payments of claims and other expenses. Should Amerin
Guaranty experience cash flow shortfalls due to significantly higher than
anticipated claims, or for other reasons, the Company anticipates funding such
shortfalls through sales of short-term investments and, if required, other
investment portfolio securities.
The Company expects to incur aggregate capital costs of approximately $4 million
in 1997 to expand and enhance its computer hardware and software. The Company
expects to fund such expenditures with cash flow from operations.
Amerin Guaranty is the principal insurance subsidiary of the Company. Amerin
Guaranty's risk-to-capital ratio was 13.3:1 at December 31, 1996, compared to
8.2:1 at December 31, 1995. This increase was due to the growth in Amerin
Guaranty's risk in force during 1996. The Company's combined insurance
risk-to-capital ratio was 12.4:1 at December 31, 1996, compared to 7.7:1 at
December 31, 1995. The increase was due to the reasons described above.
To provide against the possibility that rapid growth of the Company's
business may generate levels of risk in force that could not be supported
solely by internally-generated capital, the Company entered into an excess
loss agreement with Centre Re at the end of 1995, with coverage provided
effective January 1, 1996, and cancelable by the Company for a fee beginning
in 2000. The claims-paying ability of Centre Re is rated AA by S&P. This
agreement provides
30
<PAGE>
additional support in the event that the Company's risk-to-capital ratio and
its combined ratio both exceed specified levels and will be taken into
account by S&P in measuring the Company's risk-to-capital ratio to the extent
required by rapid growth. Premiums payable with respect to any quarterly
period may vary to the extent that the Company's combined insurance
risk-to-capital ratio exceeds certain specified levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data are indexed in the
Index to Financial Statements and Schedules which appears on Page F-1 hereof and
incorporated in this Item by reference thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There were no disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will appear in the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the fiscal year covered by this report on
Form 10-K, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the fiscal year covered by this report on
Form 10-K, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the fiscal year covered by this report on
Form 10-K, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will appear in the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the fiscal year covered by this report on
Form 10-K, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K:
(a) 1. Financial Statements:
The consolidated financial statements are indexed in the Index to
Financial Statements and Schedules which appears on Page F-1
hereof and incorporated by reference in this Item by reference
thereto.
2. Financial Statement Schedules:
31
<PAGE>
The financial statement schedules are indexed in the Index to
Financial Statements and Schedules which appears on Page F-1
hereof and incorporated by reference in this Item by reference
thereto.
Other schedules are omitted due to the absence of conditions
under which they are required or because the required information
is provided in the financial statements or notes thereto.
3. Exhibits:
See Exhibit Index on pages 36 to 39 for exhibits filed with this
report on Form 10-K.
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report on Form 10-K.
32
<PAGE>
(c)
EXHIBITS
FORM 10-K
INDEX TO EXHIBITS
Exhibit Page
Number Description of Document Number
- ------- ----------------------- ------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-97514)
and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Registrant (filed as
Exhibit 3.2 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-97514) and
incorporated herein by reference).
4.1 Amended and Restated Shareholders Agreement dated as of
November 1, 1995 among the Registrant, Gerald L. Friedman,
Stuart M. Brafman and the Investors party thereto (filed as
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-19757) and incorporated herein
by reference).
4.2 Amendment No. 1 to the Amended and Restated Management Stock
and Voting Agreement dated as of November 1, 1995 among the
Registrant, Gerald L. Friedman and Stuart M. Brafman (filed as
Exhibit 4.4 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-97514) and incorporated herein by
reference).
4.3 Amended and Restated Employee-Shareholders Agreement dated as of
November 1, 1995 among the Registrant and the Employee Grantees
party thereto (filed as Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-97514)
and incorporated herein by reference).
10.1 Form of Second Amended and Restated Employment Agreement dated
as of November 1, 1995 between Amerin Guaranty and Gerald L.
Friedman (filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-97514) and
incorporated herein by reference).
10.2 Form of Second Amended and Restated Employment Agreement dated
as of November 1, 1995 between Amerin Guaranty and Stuart M.
Brafman (filed as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-97514) and
incorporated herein by reference).
10.3 Amended and Restated 1992 Long-Term Incentive Plan dated as of
November 1, 1995 (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-97514)
and incorporated herein by reference).
33
<PAGE>
Exhibit Page
Number Description of Document Number
- ------- ----------------------- ------
10.5 Support Agreement (Moody's Investors Service, Inc.) dated as of
August 26, 1992 among the Registrant (as successor in interest
to USMIC Corporation), Amerin Guaranty Corporation (as successor
in interest to Merit Mortgage Assurance Corporation) and Security
Pacific National Trust Company (filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-97514) and incorporated herein by reference).
10.6 Support Agreement (Second) dated as of August 26, 1992 among
the Registrant (as successor in interest to USMIC Corporation),
Amerin Guaranty Corporation (as successor in interest to Merit
Mortgage Assurance Corporation) and Security Pacific National
Trust Company (filed as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-97514)
and incorporated herein by reference).
10.7 Office Lease dated April 13, 1995 by and between Amoco
Properties Incorporated and Amerin Guaranty Corporation (filed
as Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-97514) and incorporated herein by
reference).
11.1 Statement Regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-97514) and incorporated herein by reference).
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERIN CORPORATION
By:
/s/ Gerald L. Friedman
----------------------------------
Gerald L. Friedman
Chairman of the Board and
Chief Executive Officer
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gerald L. Friedman Director; Chairman of March 31, 1997
- -------------------------- the Board and Chief
Gerald L. Friedman Executive Officer
(PRINCIPAL EXECUTIVE
OFFICER)
/s/ George G. Freudenstein Senior Vice President, March 31, 1997
- -------------------------- Chief Financial
George G. Freudenstein Officer and Chief
Administrative Officer
(PRINCIPAL FINANCIAL
OFFICER and PRINCIPAL
ACCOUNTING OFFICER)
/s/ Peter H. Gleason Director March 31, 1997
- --------------------------
Peter H. Gleason
/s/ Alan E. Goldberg Director March 31, 1997
- --------------------------
Alan E. Goldberg
/s/ Howard I. Hoffen Director March 31, 1997
- --------------------------
Howard I. Hoffen
/s/ Timothy A. Holt Director March 31, 1997
- --------------------------
Timothy A. Holt
/s/ Larry E. Swedroe Director March 31, 1997
- --------------------------
Larry E. Swedroe
35
<PAGE>
AMERIN CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 . . . . . . . . . F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . F-7
FINANCIAL STATEMENT SCHEDULES
II. Condensed Financial Information of Registrant
Condensed Balance Sheets. . . . . . . . . . . . . . . . . . . . . . S-1
Condensed Statements of Operations. . . . . . . . . . . . . . . . . S-2
Condensed Statements of Cash Flows. . . . . . . . . . . . . . . . . S-3
III. Supplementary Insurance Information . . . . . . . . . . . . . . . . . S-4
V. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . S-5
Schedules other than those listed above have been omitted because they
are either not required, are not applicable, or the required information is
shown in the Consolidated Financial Statements and related notes.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Amerin Corporation
We have audited the accompanying consolidated balance sheets of Amerin
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, redeemable preferred stock and
common stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amerin
Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for investments in debt securities.
ERNST & YOUNG LLP
Chicago, Illinois
March 17, 1997
F-2
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31,
------------------------------------
1996 1995
---- ----
(in thousands, except per share data)
ASSETS
Investments (NOTE 4):
Fixed maturities available-for-sale,
at fair value (amortized cost $307,734
in 1996 and $146,054 in 1995) . . . . . $308,076 $151,021
Short-term investments. . . . . . . . . . 20,717 145,961
-------- --------
Total investments . . . . . . . . . . . . . 328,793 296,982
Cash and cash equivalents . . . . . . . . . 1,176 1,054
Accrued investment income . . . . . . . . . 4,393 2,376
Premiums receivable . . . . . . . . . . . . 5,833 2,375
Deferred policy acquisition costs . . . . . 5,569 4,419
Leasehold improvements, furniture
and equipment, at cost, net of
accumulated depreciation of
$1,625 in 1996 and $939 in 1995 . . . . . 4,368 4,199
Goodwill, net of accumulated
amortization of $695 in 1996 and
$546 in 1995. . . . . . . . . . . . . . . 2,282 2,431
Other intangibles, net of accumulated
amortization of $1,460 in 1996 and
$1,137 in 1995. . . . . . . . . . . . . . 156 478
Other assets. . . . . . . . . . . . . . . . 2,254 2,014
-------- --------
Total assets $354,824 $316,328
-------- --------
-------- --------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Liabilities:
Unearned premiums . . . . . . . . . . . . $ 20,525 $ 12,710
Loss reserves (NOTE 5). . . . . . . . . . 18,730 7,092
Current income taxes. . . . . . . . . . . 111 600
Deferred income taxes . . . . . . . . . . 289 1,783
Payable for securities. . . . . . . . . . 9,677 15,724
Accrued expenses and other liabilities. . 4,883 4,282
-------- --------
Total liabilities 54,215 42,191
Commitments and contingencies (NOTES 7, 11 AND 12)
Common stockholders' equity (NOTE 10):
Voting Common Stock, $.01 par,
50,000,000 shares authorized,
22,471,214 and 22,381,818 shares
issued and outstanding in 1996 and
1995, respectively. . . . . . . . . . . 225 224
Nonvoting Common Stock, $.01 par,
50,000,000 shares authorized,
3,609,625 shares issued and
outstanding in 1996 and 1995. . . . . . 36 36
Additional paid-in capital. . . . . . . . 315,863 314,614
Net unrealized investment gains . . . . . 222 3,229
Retained-earnings deficit . . . . . . . . (15,737) (43,966)
-------- --------
Total common stockholders' equity . . . . . 300,609 274,137
-------- --------
Total liabilities and common
stockholders' equity. . . . . . . . . . $354,824 $316,328
-------- --------
-------- --------
See accompanying notes.
F-3
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Net premiums written ............................................. $70,000 $ 33,946 $10,274
Increase in unearned premiums .................................... (7,651) (6,387) (5,037)
------- -------- -------
Net premiums earned .............................................. 62,349 27,559 5,237
Net investment income (NOTE 4) ................................... 16,871 7,612 4,818
Realized investment gains (NOTE 4) ............................... 161 491 435
------- -------- -------
Total revenues .................................................... 79,381 35,662 10,490
Expenses:
Losses incurred .................................................. 20,681 7,757 262
Policy acquisition costs ......................................... 8,485 6,641 2,455
Underwriting and other expenses (NOTES 8, 9, 11 AND 13) .......... 10,623 6,915 5,765
Compensation charge resulting from initial public offering
(NOTE 10) ....................................................... -- 35,741 --
------- -------- -------
Total expenses .................................................... 39,789 57,054 8,482
------- -------- -------
Income (loss) before income taxes ................................. 39,592 (21,392) 2,008
------- -------- -------
Income tax expense:
Current .......................................................... 11,239 1,375 --
Deferred ......................................................... 124 44 --
------- -------- -------
Total ........................................................... 11,363 1,419 --
------- -------- -------
Net income (loss) ................................................. 28,229 (22,811) 2,008
Pay-in-kind dividends on preferred stock (NOTE 10) ................ -- 5,287 5,067
------- -------- -------
Net income (loss) applicable to common stockholders ............... $28,229 $(28,098) $(3,059)
------- -------- -------
------- -------- -------
Net income (loss) per common share (NOTE 10) ...................... $ 1.07 $ (2.32) $ (.36)
------- -------- -------
------- -------- -------
Average common and common equivalent shares outstanding ........... 26,351 12,106 8,467
</TABLE>
See accompanying notes.
F-4
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Redeemable Preferred
Stock and Common Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (NOTE 10)
-----------------------------------------------------------------
NET
UNREALIZED
REDEEMABLE VOTING NONVOTING ADDITIONAL INVESTMENT RETAINED-
PREFERRED COMMON COMMON PAID-IN GAINS EARNINGS
STOCK STOCK STOCK CAPITAL (LOSSES) DEFICIT TOTAL
---------- ------ --------- ---------- ---------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 .............. $ 35,688 $171 $11 $ 53,466 $ -- $(12,809) $ 40,839
Net income ............................. -- -- -- -- -- 2,008 2,008
Issuance of common stock ............... -- 6 25 24,979 -- -- 25,010
Pay-in-kind dividends on preferred
stock ................................. 5,067 -- -- -- -- (5,067) (5,067)
Shares issued under long-term
incentive plan ........................ -- 1 -- 278 -- -- 279
Cumulative effect of change in
accounting principle .................. -- -- -- -- 3,054 -- 3,054
Net unrealized investment losses ....... -- -- -- -- (8,042) -- (8,042)
---------- ------ --------- ---------- ---------- --------- --------
Balance, December 31, 1994 ............. 40,755 178 36 78,723 (4,988) (15,868) 58,081
Net loss ............................... -- -- -- -- -- (22,811) (22,811)
Issuance of common stock ............... -- 46 -- 235,847 -- -- 235,893
Pay-in-kind dividends on preferred
stock ................................. 5,287 -- -- -- -- (5,287) (5,287)
Redemption of preferred stock .......... (46,042) -- -- -- -- -- --
Shares issued under long-term
incentive plan ........................ -- -- -- 44 -- -- 44
Net unrealized investment gains ........ -- -- -- -- 8,217 -- 8,217
---------- ------ --------- ---------- ---------- --------- --------
Balance, December 31, 1995 ............. -- 224 36 314,614 3,229 (43,966) 274,137
Net income ............................. -- -- -- -- -- 28,229 28,229
Shares issued under long-term
incentive plan ........................ -- 1 -- 1,249 -- -- 1,250
Net unrealized investment losses ....... -- -- -- -- (3,007) -- (3,007)
---------- ------ --------- ---------- ---------- --------- --------
Balance, December 31, 1996 ............. $ -- $225 $36 $315,863 $ 222 $(15,737) $300,609
---------- ------ --------- ---------- ---------- --------- --------
---------- ------ --------- ---------- ---------- --------- --------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 28,229 $ (22,811) $ 2,008
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Change in:
Accrued investment income .................... (2,017) (825) (446)
Premiums receivable .......................... (3,458) (1,231) (1,046)
Unearned premiums ............................ 7,815 6,387 5,037
Loss reserves ................................ 11,638 6,830 262
Other intangibles and other assets ........... -- -- (24)
Accrued expenses and other liabilities ....... 1,301 180 1,233
Federal income taxes ......................... (365) 644 --
Policy acquisition costs deferred ............. (9,087) (6,812) (4,006)
Policy acquisition costs amortized ............ 7,937 5,267 1,388
Amortization .................................. 472 472 472
Depreciation .................................. 718 501 264
Realized investment gains ..................... (161) (491) (435)
Non-cash compensation charge resulting from
initial public offering ...................... -- 35,741 --
Other items, net .............................. 240 (1,680) 384
-------- --------- --------
Net cash provided by operating activities ..... 43,262 22,172 5,091
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Fixed maturity securities ..................... (223,025) (70,842) (38,749)
Short-term investments, net ................... -- (136,011) (8,988)
Property and equipment ........................ (1,422) (1,383) (292)
Sale or maturity of:
Fixed maturity securities ..................... 55,350 32,271 18,059
Short-term investments, net ................... 125,242 -- --
Property and equipment ........................ 2 43 1
-------- --------- --------
Net cash used by investing activities .......... (43,853) (175,922) (29,969)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock ....................... 713 200,152 25,010
Redemption of preferred stock .................. -- (46,042) --
-------- --------- --------
Net cash provided by financing activities ...... 713 154,110 25,010
-------- --------- --------
Net increase in cash and cash equivalents ...... 122 360 132
Cash and cash equivalents at beginning of year . 1,054 694 562
-------- --------- --------
Cash and cash equivalents at end of year ....... $ 1,176 $ 1,054 $ 694
-------- --------- --------
-------- --------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. BUSINESS
Amerin Corporation (Company), through its primary insurance subsidiary,
Amerin Guaranty Corporation (Amerin Guaranty), provides mortgage guaranty
insurance through lending institutions on first mortgages secured by
residential property. A second wholly owned insurance subsidiary, Amerin Re
Corporation (Amerin Re) reinsures mortgage guaranty insurance written by
Amerin Guaranty. The Company's three largest customers accounted for 66.6%,
67.0% and 66.3% of net premiums written in 1996, 1995 and 1994, respectively.
Additionally, net premiums written in 1996 for the Company's three largest
customers, each amounting to more than 10% of total net premiums written in
1996, were $26.5, $13.1 and $7.1 million. Similarly, net premiums written in
1995 for the Company's three largest customers were $12.7, $7.0 and $3.5
million, while in 1994, net premiums written for the Company's three largest
customers were $2.7 million, $2.4 million and $1.6 million. Approximately
25% of the Company's risk in force at December 31, 1996 was concentrated in
California.
On November 28, 1995, the Company completed an initial public offering of
its common stock (see Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of the Company and its insurance and other subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These financial
statements have been prepared in conformity with generally accepted
accounting principles (GAAP) which, for the insurance subsidiaries, differ in
certain respects from the accounting practices prescribed or permitted by
state insurance regulatory authorities (statutory basis) (see Note 3).
Significant accounting policies are as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
INVESTMENTS
The Company adopted the provisions of Financial Accounting Standards
Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," as of January 1, 1994. As a result, fixed maturities
that are available for sale are carried at fair value. Unrealized gains and
losses on fixed maturities available for sale are excluded from operations
and are recorded directly to common stockholders' equity, net of related
deferred income taxes. The cumulative effect of the adoption of Statement
No. 115 increased common stockholders' equity by $3.0 million, net of
deferred income taxes, to reflect the net unrealized gains on fixed
maturities previously carried at amortized cost.
The amortized cost of fixed maturities is adjusted for amortization of
premiums to the first call date and the accretion of discounts to maturity.
Such adjustments are included in net investment income. Included in fixed
maturities are investments in mortgage-backed securities whose amortized cost
is determined using the interest method including anticipated prepayments.
Prepayment assumptions are obtained from dealer surveys.
Short-term investments are carried at cost, which approximates fair
value. Cash equivalents are highly liquid investments. Both short-term
investments and cash equivalents have maturities of three months or less.
Realized gains and losses on investments are computed using specific
amortized costs of the securities sold and are reflected in the statements of
operations.
F-7
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The fair values recorded in the financial statements for
available-for-sale fixed maturity securities are based principally on quoted
market prices. The carrying amounts for other financial instruments
approximate their fair values.
PREMIUM REVENUE RECOGNITION
Premiums are written on an annual, monthly and single premium basis.
Annual and monthly premiums written with respect to a policy year are earned
on a daily pro rata basis over the policy year. Portions of annual premiums
which relate to risk periods extending beyond the policy year are amortized
over the period at risk in correspondence with the expiration of risk.
Single premiums written for a coverage period of more than one year are
amortized over the entire coverage period, principally in correspondence with
the expiration of risk.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those costs that relate directly
to, and vary with, premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance functions,
state premium taxes, and certain other underwriting expenses. Net
acquisition costs are deferred and amortized over the period in which the
related premiums are earned. Anticipated claims and claim adjustment expenses
are considered in determining the recoverability of acquisition costs.
LOSS RESERVES
Reserves are established for reported insurance losses based on when
notices of default of insured mortgage loans are received. Reserves also
reflect estimates for losses incurred on notices of default not yet reported
by the lender. Reserves are established by management using estimated claim
rates and claim amounts in estimating the ultimate loss. Although
considerable variability is inherent in such estimates, management believes
that the reserves for losses are adequate. Adjustments to reserve estimates
are reflected in the financial statements in the periods in which the
adjustments are made.
REINSURANCE
Reinsurance premiums are accounted for on a basis consistent with the
accounting for the original policies issued and the terms of the reinsurance
contracts.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT
Leasehold improvements, furniture and equipment consist of office
improvements, furniture and fixtures, office equipment, and computer hardware
and software, which are recorded at cost and charged against income
principally over their estimated service lives or, in the case of leasehold
improvements, over the term of the lease. Depreciation is computed on the
straight-line method over a period of five to ten years. Maintenance and
repairs are charged to expense as incurred.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of cost over net assets purchased in
connection with the 1992 acquisition of Amerin Guaranty by the Company and is
amortized on a straight-line basis over 20 years.
F-8
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other intangibles include organizational and start-up costs incurred in
the first year of operations. These costs are amortized using the
straight-line method over five years.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities.
Mortgage guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to statutory
basis contingency loss reserves. The amounts deducted must be included in
taxable income in the 10th year after being added to the contingency reserves
or upon prior release of such reserves to cover excess losses as permitted by
insurance regulators. The deductions from taxable income are only allowed to
the extent that United States Mortgage Guaranty Tax and Loss Bonds ("Tax and
Loss Bonds") are purchased and held in an amount equal to the tax benefit
attributable to such deductions. At December 31, 1996, the Company had
investments in Tax and Loss Bonds of $10.9 million.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share of common stock is determined by dividing net
income or loss, less dividends on preferred stock, by the weighted-average
number of common stock and common stock equivalents (dilutive stock options)
outstanding. For 1996 and 1995, the weighted average shares of common stock
includes 13,340,000 shares issued on November 28, 1995, in conjunction with
the Company's initial public offering. Weighted average shares in 1996 and
1995 also includes 2,250,068 shares as of November 28, 1995 out of a total of
11,000,000 shares that were previously excluded from weighted average shares
due to the fact that such shares were subject to contingent recall provisions
and the conditions required for the removal of the recall provisions on the
11,000,000 shares had not been met. The Company's initial public offering
removed the recall provisions on 2,250,068 of the 11,000,000 shares and
resulted in the cancellation of the remaining 8,749,932 shares (see Note 10).
Where the effect of common stock equivalents on net income or loss per
share would be antidilutive, they are excluded from the average shares
outstanding. During 1995 and 1994, all of the Company's common stock
equivalents (stock options) are antidilutive and are excluded from average
shares outstanding. However, common stock awards and options issued in the
12 months prior to the Company's initial public offering are treated as
common stock equivalents for 1995 and 1994, even if antidilutive. Fully
diluted net income (loss) per share is equal to primary net income (loss) per
share for 1996, 1995 and 1994. Because preferred stock which was redeemed in
1995 was not convertible until 2007, at which time it was mandatorily
convertible, conversion is not assumed for purposes of calculating primary or
fully-diluted net loss per share in 1995 and 1994.
RECLASSIFICATIONS
Certain amounts in these financial statements have been reclassified from
amounts reported in previously issued financial statements to conform to the
current presentation.
3. STATUTORY ACCOUNTING PRACTICES
The consolidated financial statements are prepared in conformity with
GAAP which, for Amerin Guaranty and Amerin Re, differ in certain respects
from accounting practices prescribed or permitted by state insurance
regulatory authorities (statutory basis). The following are the significant
differences between statutory basis accounting practices and GAAP:
F-9
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
- Investments in bonds are carried at amortized cost on a
statutory basis. GAAP requires that such fixed-maturity
securities be classified as held-to-maturity, trading, or
available-for-sale. Held-to- maturity securities are
carried at amortized cost, and securities classified as
trading or available-for-sale are carried at fair value.
Unrealized holding gains and losses are reported in
income for those securities classified as trading and as
a separate component of common stockholders' equity for
those securities classified as available-for-sale.
- Policy acquisition costs are charged to current
operations on a statutory basis as incurred rather than
deferred and amortized as related premiums are earned
under GAAP.
- A contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist; such reserves are not permitted under
GAAP.
- Certain assets designated as "nonadmitted assets" are
charged directly against surplus on a statutory basis but
are reflected as assets under GAAP.
- Federal income taxes on a statutory basis are only
provided on taxable income for which income taxes are
currently payable, while under GAAP, taxes are also
provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
- Purchases of Tax and Loss Bonds are recorded as
investments on a statutory basis while such purchases are
recorded as payments of current income taxes under GAAP.
In connection with the Company's November 1995 initial public offering, a
nonrecurring non-cash compensation charge was recorded under GAAP related to
ownership of the Company's common stock by two employees of Amerin Guaranty.
Such non-cash compensation charges, which have no effect on total
stockholders' equity, are not recorded on a statutory basis.
F-10
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The following is a reconciliation of the Company's 1996, 1995 and 1994
consolidated net income (loss) and common stockholders' equity presented on a
GAAP basis to the corresponding amounts reported on a statutory basis for the
insurance subsidiaries:
<TABLE>
<CAPTION>
COMMON
NET INCOME STOCKHOLDERS'
(LOSS) EQUITY
---------- -------------
(in thousands)
<S> <C> <C>
1996:
Consolidated GAAP basis amounts.................................. $ 28,229 $ 300,609
Company and non-insurance subsidiary amounts and
eliminations.................................................... 751 (6,265)
---------- -----------
Insurance subsidiaries GAAP basis amounts........................ 28,980 294,344
Fixed maturities available-for-sale.............................. -- (388)
Deferred policy acquisition costs................................ (1,150) (5,569)
Contingency reserves............................................. -- (49,330)
Nonadmitted assets............................................... -- (3,587)
Deferred income taxes............................................ 122 302
Accrued Tax and Loss Bonds....................................... 10,300 10,907
---------- -----------
Statutory basis amounts.......................................... $ 38,252 $ 246,679
---------- -----------
---------- -----------
1995:
Consolidated GAAP basis amounts.................................. $ (22,811) $ 274,137
Company only amounts and eliminations............................ 258 (5,789)
---------- -----------
Insurance subsidiaries GAAP basis amounts........................ (22,553) 268,348
---------- -----------
Fixed maturities available-for-sale.............................. -- (4,979)
Deferred policy acquisition cost................................. (1,545) (4,419)
Compensation expense............................................. 35,741 --
Contingency reserves............................................. -- (18,892)
Nonadmitted assets............................................... -- (3,045)
Deferred income taxes............................................ 44 1,787
Accrued Tax and Loss Bonds....................................... 607 607
---------- -----------
Statutory basis amounts.......................................... $ 12,294 $ 239,407
---------- -----------
---------- -----------
1994:
Consolidated GAAP basis amounts.................................. $ 2,008 $ 58,081
Company only amounts and eliminations............................ 647 36,856
---------- -----------
Insurance subsidiaries GAAP basis amounts........................ 2,655 94,937
Fixed maturities available-for-sale.............................. -- 4,987
Deferred policy acquisition costs................................ (2,655) (2,874)
Contingency reserves............................................. -- (4,320)
Nonadmitted assets............................................... -- (1,186)
---------- -----------
Statutory basis amounts.......................................... $ 38 $ 91,544
---------- -----------
---------- -----------
</TABLE>
F-11
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS
The amortized cost and fair value of investments in fixed-maturity
securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(in thousands)
<S> <C> <C> <C> <C>
At December 31, 1996:
U.S. Treasury..................................... $ 14,687 $ 90 $ 96 $ 14,681
Foreign Governments............................... 1,558 -- 14 1,544
States and political subdivisions................. 221,795 2,808 1,492 223,111
Corporate securities.............................. 25,240 112 210 25,142
Mortgage-backed securities........................ 44,454 161 1,017 43,598
--------- -------- ------- ---------
Total fixed maturities................................ $ 307,734 $ 3,171 $ 2,829 $ 308,076
--------- -------- ------- ---------
--------- -------- ------- ---------
At December 31, 1995:
U.S. Treasury..................................... $ 23,847 $ 897 $ 42 $ 24,702
Foreign governments............................... 1,559 -- 99 1,460
States and political subdivisions................. 74,230 3,100 64 77,266
Corporate securities.............................. 27,202 889 7 28,084
Mortgage-backed securities........................ 19,216 408 115 19,509
--------- -------- ------- ---------
Total fixed maturities................................ $146,054 $ 5,294 $ 327 $ 151,021
--------- -------- ------- ---------
--------- -------- ------- ---------
</TABLE>
The carrying amount of the Company's available-for-sale fixed-maturity
investments can increase or decrease significantly in the near term as a
result of changes in market interest rates.
A summary of the amortized cost and fair value of investments in
fixed-maturity securities at December 31, 1996, by contractual maturity,
follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- -----------
(in thousands)
<S> <C> <C>
Due in one year or less..................... $ 8,589 $ 8,602
Due after one year through five years....... 26,619 26,638
Due after five years through ten years...... 68,535 69,321
Due after ten years......................... 159,538 159,917
Mortgage-backed securities.................. 44,454 43,598
--------- ----------
$ 307,734 $ 308,076
--------- ----------
--------- ----------
</TABLE>
Expected maturities may differ from the contractual maturities shown in the
foregoing table because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
F-12
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
Proceeds from sales of fixed-maturity securities were $46.1 million,
$28.4 million and $17.4 million in 1996, 1995 and 1994, respectively. Gross
gains and losses realized on those sales are presented below:
1996 1995 1994
---------- --------- ---------
(in thousands)
Realized on sales of fixed-maturity
securities:
Gains. . . . . . . . . . . . . . . . . . . $ 676 $ 520 $ 442
Losses . . . . . . . . . . . . . . . . . . (515) (29) $ (7)
---------- --------- ---------
Net realized gains . . . . . . . . . . . . . $ 161 $ 491 $ 435
---------- --------- ---------
---------- --------- ---------
The changes in net unrealized gains (losses) on investments in
fixed-maturity securities were ($4.6 million) in 1996, $10.0 million in 1995,
and ($8.0 million) in 1994.
At December 31, 1996, investments with a carrying amount of $8.1 million
were on deposit with state insurance departments to satisfy regulatory
requirements.
The composition of net investment income is as follows:
1996 1995 1994
---------- --------- ---------
(in thousands)
Fixed-maturity securities . . . . . . . . . . $ 15,701 $ 6,684 $ 4,697
Short-term investments. . . . . . . . . . . . 1,529 1,087 238
---------- --------- ---------
17,230 7,771 4,935
Less: Investment expenses. . . . . . . . . . 359 159 117
---------- --------- ---------
Net investment income . . . . . . . . . . . . $ 16,871 $ 7,612 $ 4,818
---------- --------- ---------
---------- --------- ---------
F-13
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LOSS RESERVES
The following table is a reconciliation of the beginning and ending reserve
for losses and loss adjustment expenses for the years shown:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(in thousands)
Balance, January 1 . . . . . . . . . . . $ 7,092 $ 262
Losses and loss adjustment expenses,
principally in respect of default
notices occurring in:
Current year . . . . . . . . . . 20,344 7,037
Prior years . . . . . . . . . . . 337 720
------------ ------------
Total losses and loss adjustment
expense. . . . . . . . . . . . . . 20,681 7,757
------------ ------------
Loss and loss adjustment expense
payments principally in respect
of default notices occurring in:
Current year. . . . . . . . . . . 2,821 520
Prior year. . . . . . . . . . . . 5,222 407
------------ ------------
Total payment . . . . . . . . . . 9,043 927
------------ ------------
Balance, December 31 . . . . . . . . . . $ 18,730 $ 7,092
------------ ------------
------------ ------------
6. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
1996 1995
------------ ------------
Deferred tax liabilities: (in thousands)
Deferred policy acquisition costs . $ 1,949 1,547
Unrealized gain on investments. . . 120 1,738
Tax over book depreciation. . . . . 205 229
Other . . . . . . . . . . . . . . . 192 133
------------ ------------
Total deferred tax liabilities. . . . . 2,466 3,647
------------ ------------
Deferred tax assets:
Unearned premium reserves . . . . . 1,425 889
Accrued liabilities . . . . . . . . 43 43
Reserve discounting . . . . . . . . 520 234
Alternative minimum tax
carryforward. . . . . . . . . . . -- 324
Other . . . . . . . . . . . . . . . 189 374
------------ ------------
Total deferred tax assets . . . . . . . 2,177 1,864
------------ ------------
Net deferred tax liability. . . . . . . $ 289 $ 1,783
------------ ------------
------------ ------------
F-14
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The nature of the Company's deferred tax assets and liabilities at
December 31, 1996 is such that the general reversal pattern for these
temporary differences is expected to result in the full realization of the
Company's deferred tax assets.
Valuation allowances for deferred tax assets were provided in years prior
to 1995 because the Company's historical operating losses represented
negative evidence that it was more likely than not that the Company would not
be able to utilize the net operating loss carryforwards and unrealized
investment losses. For 1995, the Company decreased the valuation allowance by
$4.5 million, including a decrease of $1.7 million related to unrealized
gains on investments reported as a component of common stockholders' equity.
The remaining decrease in the valuation allowance was related principally to
the utilization of net operating loss carryforwards. The 1994 valuation
allowance increased $1.4 million principally due to unrealized losses in
investments.
The Company has elected to purchase non-interest bearing Tax and Loss
Bonds in lieu of paying federal income taxes to the extent permissible under
Internal Revenue Code Section 832(e). The Company accounts for these
purchases as a payment of current federal income taxes. The Company
purchased $10.9 million of Tax and Loss Bonds in 1996 as payment of current
income taxes and paid income taxes of $.8 million in 1995 and $.02 million in
1994.
The Company's income tax provision varied from the statutory federal
income tax rate applied to its net income (loss) before taxes as follows:
1996 1995 1994
-------- -------- ------
(in thousands)
Statutory federal income tax rate applied to
net income (loss) before taxes . . . . . . . $ 13,857 $ (7,487) $ 683
Add (deduct) tax effect of:
Nondeductible compensation . . . . . . . . . -- 12,509 --
Tax-exempt interest. . . . . . . . . . . . . (2,785) (533) (399)
Decrease in valuation allowance. . . . . . . -- (2,753) (369)
Nondeductible goodwill amortization
and other nondeductible expenses . . . . . 106 77 75
Other (net). . . . . . . . . . . . . . . . . 185 (394) 10
-------- -------- ------
Income tax provision. . . . . . . . . . . . . . $ 11,363 $ 1,419 $ --
-------- -------- ------
-------- -------- ------
7. REINSURANCE
Amerin Guaranty reinsures portions of its risks through reinsurance
treaties. This process serves to limit Amerin Guaranty's exposure on such
risks. Reinsurance ceded reduced premiums earned by $1.8 million in 1996,
$.4 million in 1995 and $4,000 in 1994. Amerin Guaranty would remain liable
to its policyholders to the extent that such reinsurers do not meet their
obligations under these arrangements.
F-15
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
During 1996 and 1995, both the Company and its subsidiaries maintained
cash accounts at an affiliate of one of the principal stockholders.
The Company has utilized the services of two travel agencies for its
business travel needs. The spouse of the former President of the Company has
been an employee of each such agency. The Company has spent $1.1 million,
$.8 million and $.7 million on travel expenses in 1996, 1995 and 1994,
respectively.
9. INCENTIVE COMPENSATION
The Company has a long-term incentive plan (Plan), which provides
additional compensation to officers of Amerin Guaranty. Under the Plan, an
aggregate of 8,300,000 shares of common stock were initially approved to be
issued or sold as restricted stock or sold under incentive stock options, as
the result of awards made to Plan participants. Incentive stock options
awarded under the Plan vest over a five-year schedule. Plan participants are
bound by an agreement not to vote any shares acquired under the Plan, until a
future date determined by the Company's board of directors.
Awards of shares made or approved in 1996, 1995 and 1994, including those
approved pursuant to the Plan, resulted in compensation expense of $.04
million, $.07 million and $.4 million, respectively. All of such
compensation expense represented the fair value of the shares of common stock
awarded, together with related gross-up payments to certain Plan participants
for the tax consequences of those share grants.
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and, accordingly, recognizes no compensation expense for stock
options granted to employees. Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", requires
disclosure of pro forma information regarding net earnings and earnings per
share, using pricing models to estimate the fair value of stock option
grants. Had compensation expense for the Company's stock option plans been
determined based on the estimated fair value at the date of grant consistent
with the methodology prescribed under SFAS 123, approximate net income (loss)
and net income (loss) per share would have been as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995
-------------- --------------
(in thousands, except per share data)
Pro forma net income (loss) . . . . . . . $27,788 $(28,144)
Pro forma net income (loss) per
common share. . . . . . . . . . . . . . $ 1.06 $ (2.32)
For purposes of the pro forma disclosures, the estimated fair values of
the option grants are amortized to expense over the options' vesting period.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995:
Dividend yield . . . . . . . . . . . . . . . 0.0%
Risk-free interest rate. . . . . . . . . . . 6.5%
Volatility . . . . . . . . . . . . . . . . . 51.3%
Expected life (years). . . . . . . . . . . . 6.0
F-16
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCENTIVE COMPENSATION (CONTINUED)
The pro forma effects on net income (loss) and net income (loss) per
share are not likely to be representative of the effects on reported net
income in future years as 1995 and 1996 pro forma amounts do not include pro
forma compensation expense related to grants made prior to 1995.
Transactions related to all stock options are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
---------------- ---------------- ------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES
UNDER EXERCISE UNDER EXERCISE UNDER PRICE
OPTION PRICE OPTION PRICE OPTION RANGE
------ -------- ------ -------- ------ ----------
(in thousands, except price data)
Beginning balance . . . . 692 $ 5.11 5,023 $ .85 4,860 $ .28-4.24
Granted . . . . . . . . . 329 23.02 71 10.32 220 4.24-5.26
Exercised . . . . . . . . (73) 4.25 -- -- -- --
Canceled. . . . . . . . . (5) 5.30 (4,432) .33 (27) 4.24
------ -------- ------ -------- ------ ----------
Ending balance. . . . . . 943 $11.40 692 $ 5.11 5,053 $ .28-5.26
------ -------- ------ -------- ------ ----------
------ -------- ------ -------- ------ ----------
Exercisable at end
of year . . . . . . . . 295 198 108
------ ------ ------
------ ------ ------
Under the plan, 1,957,605 shares were available for grant as awards or
options at December 31, 1996.
Information regarding options outstanding and exercisable at December 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
OUTSTANDING (IN YEARS) EXERCISABLE PRICE EXERCISABLE EXERCISABLE PRICE
----------- ---------------- ----------------- ----------- -----------------
(in thousands, except exercise price data)
<S> <C> <C> <C> <C> <C>
$ 4.24 - $ 5.30 586 9.4 $ 4.57 295 $4.42
$16.00 22 9.1 16.00 -- --
$21.25 - $26.50 335 10.0 23.02 -- --
----------- ---------------- ----------------- ----------- -----------------
943 9.6 $11.40 295 $4.42
----------- ---------------- ----------------- ----------- -----------------
----------- ---------------- ----------------- ----------- -----------------
</TABLE>
The weighted average fair value per share of options granted was $13.07
and $12.11 in 1996 and 1995, respectively.
F-17
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
PREFERRED STOCK
Activity for 1995 and 1994 with respect to shares of 13.5% Redeemable
Cumulative Convertible Preferred Stock, par value $.01, stated value $1,000,
is as follows:
NUMBER
OF SHARES
---------
Shares outstanding, January 1, 1994 . . . . . 35,687.50
Pay-in-kind dividends . . . . . . . . . . . . 5,067.24
---------
Shares outstanding, December 31, 1994 . . . . 40,754.74
Pay-in-kind dividends . . . . . . . . . . . . 5,287.30
---------
46,042.04
December 1, 1995 redemption . . . . . . . . . (46,042.04)
---------
Shares outstanding, December 31, 1995 . . . . --
---------
---------
Prior to the redemption on December 1, 1995 of the outstanding shares of
13.5% Redeemable Cumulative Convertible Preferred Stock, each such share was
mandatorily convertible into Common Stock on June 30, 2007. The Company had
the option to redeem the outstanding preferred shares at a price ranging from
$1,000 to $1,030 per share (plus all accrued and unpaid dividends). The
preferred shares were redeemable at the option of the holders upon a change
of control of the Company.
Dividends on preferred shares were payable on the last day of each
quarter. Dividends for 1995 and 1994 totaled $5.3 million and $5.1 million,
respectively, and were paid in additional shares (including fractional
shares) of preferred stock. The preferred shares were nonvoting, unless
dividends were in arrears. Assuming 2,547,170 shares of the common stock and
related proceeds of the Company's November 1995 initial public offering had
been used to redeem the Preferred Stock at the beginning of the year, the
1995 net loss per share would have been reduced to $(1.58).
The Company has 10,000,000 authorized shares of preferred stock with a
$.01 par value.
F-18
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Activity for 1996, 1995 and 1994, with respect to Amerin Corporation's
outstanding Common Stock, $.01 par value, is as follows:
NUMBER OF SHARES
-------------------------
VOTING NONVOTING
COMMON COMMON
STOCK STOCK
---------- ---------
Outstanding at January 1, 1994.................... 17,103,625 1,113,750
Shares issued under long-term incentive plan...... 55,500 --
August 24, 1994 issuance.......................... 630,375 2,495,875
---------- ---------
Outstanding at December 31, 1994.................. 17,789,500 3,609,625
Shares issued under long-term incentive plan...... 2,250 --
November 28, 1995 issuance........................ 13,340,000 --
Cancellation of restricted shares................. (8,749,932) --
---------- ---------
Outstanding at December 31, 1995.................. 22,381,818 3,609,625
Shares issued under long-term incentive plan...... 22,665 --
Options exercised................................. 72,709 --
Shares surrendered................................ (5,978) --
---------- ---------
Outstanding at December 31, 1996.................. 22,471,214 3,609,625
---------- ---------
---------- ---------
Prior to the Company's initial public offering, the Company's Chairman and
President owned 11,000,000 shares of common stock. Such shares were subject to
certain restrictions including transfer limitations and contingent recall
provisions as described in a stock and voting agreement. Prior to 1995,
conditions required for the removal of the recall provisions had not been met.
On November 28, 1995, the Company completed an initial public offering of its
common stock (the Offering). The net proceeds of the Offering were $200.2
million and a portion of the proceeds were used to redeem all of the outstanding
shares of the Company's Redeemable Preferred Stock. When the Offering was
consummated, the contingent recall provisions on 2,250,068 shares of the common
stock owned by the Company's Chairman and President were removed and 8,749,932
shares of common stock owned by such officers, which were in excess of the
number of shares to which they were entitled upon consummation of the Offering
pursuant to the terms of a management agreement, were canceled without cost to
the Company. Additionally, options to purchase 4,374,966 shares of common stock
owned by the President prior to the Offering were canceled. The removal of the
contingent recall provisions for a portion of the shares owned by the officers
resulted in compensation expense of $35.7 million and a corresponding increase
in additional paid-in capital.
Shares of Voting Common Stock and Nonvoting Common Stock rank equally as
regards dividend rights, rights on liquidation, and winding up and dissolution.
Each holder of shares of Voting Common Stock shall be entitled to one vote
per share on each matter on which the stockholders of the Company shall be
entitled to vote. Except as otherwise required by law, each outstanding share
of Nonvoting Common Stock shall not be entitled to vote on any matter on which
the stockholders of the Company shall be entitled to vote. On any matter on
which the holders of shares of Voting Common Stock and the holders of Nonvoting
Common Stock are entitled to vote, they shall vote together as a single class,
and each holder of shares of Nonvoting Common Stock shall be entitled to one
vote for each share of such stock.
Notwithstanding the foregoing, holders of shares of Nonvoting Common Stock
shall be entitled to vote as a separate class on any amendment, repeal or
modification of any provision of the Certificate of Incorporation that adversely
affects the powers, preferences or special rights of holders of the Nonvoting
Common Stock.
F-19
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
The Voting Common Stock is convertible into the same number of shares of
Nonvoting Common Stock by any regulated stockholder, at any time, provided that
the Company will not be required to effect a conversion that would result in a
violation by the Company or its subsidiaries, of any law, rule, regulation, or
requirement of any governmental authority at that time. Additional restrictions
apply to this conversion as defined in the Certificate of Incorporation.
The Nonvoting Common Stock is convertible into the same number of shares of
Voting Common Stock by any stockholder, at any time, subject to restrictions as
defined in the Certificate of Incorporation.
11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company and its subsidiaries are involved in certain
routine legal proceedings arising in the normal course of their business, none
of which is currently expected to have a material adverse effect on the
Company's consolidated financial condition or results of operations.
During 1995, the Company entered into a noncancelable ten year operating
lease for office space. In addition to base rental costs, the lease provides
for rent escalations resulting from increased assessments for real estate taxes,
utilities and maintenance. Aggregate minimum rental commitments under the lease
are $.2 million in 1997, $.2 million in 1998, $.2 million in 1999, $.2 million
in 2000, $.3 million in 2001 and $1.1 million thereafter. Rent expense for
1996, 1995 and 1994 was $.6 million, $.3 million and $.2 million, respectively.
The Company has agreed to loan an officer an amount necessary to cover the
potential tax liability, if any, that may be incurred by the officer in the
event that a determination is made that the receipt of shares of Voting Common
Stock constituted a taxable event.
12. DIVIDEND RESTRICTIONS
Under Illinois insurance regulations, Amerin Guaranty and Amerin Re are
each required to maintain statutory basis capital and surplus of $1.5 million.
The statutory basis capital and surplus of Amerin Guaranty was $214.1 million
and $208.7 million at December 31, 1996 and 1995, respectively. The statutory
basis capital and surplus of Amerin Re was $32.6 million and $30.7 million at
December 31, 1996 and 1995, respectively.
Insurance regulations limit the writing of mortgage guaranty insurance to
an aggregate amount of insured risk no greater than 25 times the total of
statutory capital and surplus and the statutory basis contingency reserve. At
December 31, 1996, the Company's insurance subsidiaries' risk-to-capital ratios
were below these limits.
The payment of dividends by the insurance subsidiaries without prior
approval of the Illinois Insurance Department is subject to certain restrictions
principally including those relating to the greater of 10% of the prior year's
statutory basis earned surplus or net income. No dividends were paid in 1996,
and no dividends are allowed in 1997 without prior approval.
In addition, dividend restrictions have been placed on the Company and its
subsidiaries by both Moody's Investors Services, Inc. and Standard & Poor's
Corporation (collectively, Rating Agencies) as embodied in various support
agreements (Agreements). Those restrictions require that no dividend will be
declared or paid if the subsidiaries' net risk in force exceeds the maximum
multiple of capital, as specified in the Agreements, or the subsidiaries' rating
is less than the minimum rating allowed.
F-20
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. STANDBY COMMITMENTS
The claims-paying ability of Amerin Guaranty is rated "AA" by Standard &
Poor's Corporation and "Aa3" by Moody's Investor Services, Inc., based on the
respective assessments by each rating service of the creditworthiness of Amerin
Guaranty. Creditworthiness is a function of the level of paid-in and other
capital, as well as other qualitative considerations. Prior to November 28,
1995, additional capital support was provided via standby capital in the form of
standby commitments on the part of certain of the Company's stockholders. Such
standby commitments terminated upon the consummation of the Company's initial
public offering on November 28, 1995. The Company was charged fees for the
standby commitments that amounted to $.8 million in 1995 and 1994.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
------- ------- ------- -------
1996 (in thousands, except per share data)
<S> <C> <C> <C> <C>
Net premiums earned.................................... $12,122 $14,755 $16,680 $18,792
Net investment income and other........................ 4,086 3,816 4,366 4,764
Net income............................................. 5,674 6,711 7,588 8,256
Net income applicable to common stockholders........... 5,674 6,711 7,588 8,256
Net income per common share............................ .22 .25 .29 .31
1995
Net premiums earned.................................... $ 3,980 $ 5,538 $ 7,436 $10,605
Net investment income and other........................ 1,671 1,958 1,848 2,626
Net income (loss)...................................... 1,582 2,491 4,663 (31,547)
Net income (loss) applicable to common stockholders.... 226 1,073 3,182 (32,578)
Net income (loss) per common share..................... .02 .10 .30 (1.93)
</TABLE>
F-21
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant
Condensed Balance Sheets
DECEMBER 31,
---------------------
1996 1995
-------- -------
(in thousands)
ASSETS
Investment in subsidiaries............................... $294,436 $268,348
Investments
Fixed maturities available-for-sale, at fair value... 1,936 1,965
Short-term investments............................... 350 1,295
-------- --------
Total investments............................... 2,286 3,260
Cash..................................................... 128 248
Accrued investment income................................ 46 115
Goodwill, net of accumulated amortization (1996 -- $695;
1995 -- $546)........................................ 2,282 2,431
Other intangibles, net of accumulated amortization
(1996 -- $1,460; 1995 -- $1,137).................... 156 478
Federal income taxes recoverable......................... 847 43
Other assets............................................. 619 407
-------- --------
Total assets......................................... $300,800 $275,330
-------- --------
-------- --------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
LIABILITIES
Due to subsidiaries...................................... 64 1,110
Accounts payable and other liabilities................... 127 83
-------- --------
Total liabilities.................................... 191 1,193
COMMON STOCKHOLDERS' EQUITY
Voting Common Stock.................................. 225 224
Nonvoting Common Stock............................... 36 36
Additional paid-in capital........................... 315,863 314,614
Net unrealized investment gains...................... 222 3,229
Retained-earnings deficit............................ (15,737) (43,966)
-------- --------
Total common stockholders' equity........................ 300,609 274,137
-------- --------
Total liabilities and common stockholders' equity.... $300,800 $275,330
-------- --------
-------- --------
See notes to consolidated financial statements
S-1
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Operations
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- -------
(in thousands)
REVENUES
Net investment income.......................... $ 149 $ 283 $ 15
Realized investment losses..................... -- (2) --
------- -------- -------
Total revenues.................. 149 281 15
EXPENSES
Administrative and other....................... 1,084 581 662
------- -------- -------
Loss before equity in undistributed net
income or loss of subsidiaries and
income-tax benefit........................... (935) (300) (647)
Equity in undistributed net income
(loss) of subsidiaries................. 28,906 (22,554) 2,655
------- -------- -------
Net income (loss) before income tax benefit........ 27,971 (22,854) 2,008
Federal income-tax benefit......................... (258) (43) --
------- -------- -------
Net income (loss).............................. 28,229 (22,811) 2,008
Pay-in-kind dividends on preferred stock........... -- 5,287 5,067
------- -------- -------
Net income (loss) applicable to common
stockholders................................... $28,229 $(28,098) $(3,059)
------- -------- -------
------- -------- -------
See notes to consolidated financial statements
S-2
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- --------- --------
(in thousands)
Net cash provided (used) by operating
activities.................................. $(1,778) $ 974 $ 105
Investing activities:
Capital contribution to subsidiaries........ -- (152,000) (25,010)
Purchase of:
Fixed maturities......................... -- (1,977) --
Short-term investments, net.............. -- (1,295) --
Sale of:
Short-term investments, net.............. 945 -- --
------- --------- --------
Net cash provided (used) by
investing activities.................. 945 (155,272) (25,010)
Financing activities:
Issuance of common stock.................... 713 200,152 25,010
Redemption of preferred stock............... -- (46,042) --
------- --------- --------
Net cash provided by financing
activities............................ 713 154,110 25,010
------- --------- --------
Increase (decrease) in cash.............. (120) (188) 105
Cash at beginning of year...................... 248 436 331
------- --------- --------
Cash at end of year............................ $ 128 $ 248 $ 436
------- --------- --------
------- --------- --------
See notes to consolidated financial statements
S-3
<PAGE>
Amerin Corporation and Subsidiaries
Schedule III -- Supplementary Insurance Information
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
Loss and Benefits, Amortization
Deferred Loss Claims, of Deferred
Policy Adjustment Unearned Future Net Losses and Policy Other
Acquisition Expense Premium Policy Premium Investment Settlement Acquisition Operating Net Premiums
Costs Reserves Reserves Benefits Revenues Income Expenses Costs Expenses Written
----------- ---------- -------- -------- -------- ---------- ---------- ------------ --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 Mortgage Guaranty $5,569 $18,730 $20,525 $ -- $62,349 $17,032 $20,681 $7,937 $11,171 $70,000
1995 Mortgage Guaranty $4,419 $ 7,092 $12,710 $ -- $27,559 $ 8,103 $ 7,757 $5,268 $44,027 $33,946
1994 Mortgage Guaranty $2,874 $ 262 $ 6,323 $ -- $ 5,237 $ 5,253 $ 262 $1,388 $ 6,832 $10,274
</TABLE>
S-4
<PAGE>
Amerin Corporation and Subsidiaries
Schedule V -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Year Additions Deductions End of Year
------------ --------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Accumulated amortization of goodwill. . . . . . . . . . . . $ 546 $149 $-- $ 695
Accumulated amortization of furniture and equipment . . . . 939 718 32 1,625
Accumulated amortization of other intangibles . . . . . . . 1,137 323 -- 1,460
Year Ended December 31, 1995
Accumulated amortization of goodwill. . . . . . . . . . . . $ 397 $149 $-- $ 546
Accumulated amortization of furniture and equipment . . . . 466 501 28 939
Accumulated amortization of other intangibles . . . . . . . 814 323 -- 1,137
Year Ended December 31, 1994:
Accumulated amortization of goodwill. . . . . . . . . . . . $ 248 $149 $-- $ 397
Accumulated amortization of furniture and equipment . . . . 202 264 -- 466
Accumulated amortization of other intangibles . . . . . . . 491 323 -- 814
</TABLE>
S-5
<PAGE>
EXHIBIT 11.1
Amerin Corporation and Subsidiaries
Statement of Computation of Per Share Net Income or Loss
Year Ended December 31,
---------------------------------
1996 1995 1994
------- -------- -------
(in thousands, except per share data)
Net income (loss) .................. $28,229 $(22,811) $ 2,008
Less pay-in kind dividends on
preferred stock .................. -- 5,287 5,067
------- -------- -------
Primary and fully diluted basis-net
income (loss)(1) ................. $28,229 $(28,098) $(3,059)
------- -------- -------
------- -------- -------
Average shares outstanding(2) ...... 26,038 12,042 8,344
Stock issued within one year of
IPO(3) ........................... -- 64 123
Common stock equivalents from
dilutive stock options, based on
the treasury stock method using
average market price(4) .......... 313 -- --
------- -------- -------
Total shares - primary basis ... 26,351 12,106 8,467
Additional shares assuming
conversion of preferred stock(1) . -- -- --
Additional common stock equivalents
from dilutive stock options,
based on the treasury stock
method using closing market
price, if higher than average
market price(4) .................. 13 -- --
------- -------- -------
Total shares - fully diluted ... 26,364 12,106 8,467
------- -------- -------
------- -------- -------
Net income (loss) per share -
primary .......................... $ 1.07 $ (2.32) $ (0.36)
------- -------- -------
------- -------- -------
Net income (loss) per share - fully
diluted .......................... $ 1.07 $ (2.32) $ (0.36)
------- -------- -------
------- -------- -------
-------------------
(1) Preferred stock (redeemed in 1995) was not convertible until 2007 at which
time it was mandatorily convertible. Because conversion was not effective
within 10 years of each reporting period, conversion was not assumed for
all periods.
(2) For 1996 and 1995, the average shares outstanding includes 13,340,000
shares issued in conjunction with the Company's November 28, 1995
initial public offering and 2,250,068 shares, as of the date of such
offering, out of a total of 11,000,000 shares that were excluded from
weighted average shares prior to 1995. Such shares were subject to
contingent recall provisions and the conditions required for the removal
of recall provisions on the 11,000,000 shares had not been met. The
Company's initial public offering removed the recall provisions on
2,250,068 of the shares and resulted in the cancellation of the remaining
8,749,932 common shares.
(3) Stock awards and options issued in the twelve months prior to the
Company's inial public offering are treated as common stock equivalents
(based on the treasury stock method using the initial public offering
price) for all periods, even if antidilutive.
(4) Prior to the Company's November 28, 1995 inial public offering, excludes
options for 4,375,000 shares of common stock subject to contingent recall
provisions. Conditions required for the removal of the recall provision
were not met during the periods prior to 1995. Upon consummation of the
Company's inial public offering, options for 4,374,966 shares were
cancelled.
E-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-826) pertaining to the 1992 Long-Term Stock Incentive Plan of
Amerin Corporation of our report dated March 17, 1997, with respect to the
consolidated financial statements and schedules of Amerin Corporation and
subsidiaries included in its Annual Report on Form 10-K for the year ended
December 31, 1996.
ERNST & YOUNG LLP
Chicago, Illinois
March 25, 1997
E-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERIN
CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 308,076
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 328,793
<CASH> 1,176
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,569
<TOTAL-ASSETS> 354,824
<POLICY-LOSSES> 18,730
<UNEARNED-PREMIUMS> 20,525
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 261<F1>
<OTHER-SE> 300,348
<TOTAL-LIABILITY-AND-EQUITY> 354,824
62,349
<INVESTMENT-INCOME> 16,871
<INVESTMENT-GAINS> 161
<OTHER-INCOME> 0
<BENEFITS> 20,681
<UNDERWRITING-AMORTIZATION> 8,485
<UNDERWRITING-OTHER> 10,623
<INCOME-PRETAX> 39,592
<INCOME-TAX> 11,363
<INCOME-CONTINUING> 28,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,229
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<RESERVE-OPEN> 7,092
<PROVISION-CURRENT> 20,344
<PROVISION-PRIOR> 337
<PAYMENTS-CURRENT> 3,821
<PAYMENTS-PRIOR> 5,222
<RESERVE-CLOSE> 18,730
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Common Stock at Par Value
</FN>
</TABLE>
