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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, 1997
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 ______________
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 on March 16, 1998, based on the closing price of said stock on the
Nasdaq National Market on such date $27.00: 588,113,784
As of March 16, 1998, 24,584,851 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"), "AA" by Standard & Poor's Corporation ("S&P"), and
"AA" by Fitch Investors Services, L.P. ("Fitch"). 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
Primary mortgage insurance provides mortgage default protection on individual
loans and covers unpaid loan principal, delinquent interest and certain
expenses associated with the default and subsequent foreclosure (collectively,
the "claim amount"). The insurer generally pays the coverage percentage of the
claim amount specified in the primary policy, but has the option to pay 100% of
the claim amount and acquire title to the property. The claim amount averages
approximately 115% of the unpaid principal balance of the loan. Primary
insurance generally applies to owner-occupied, first mortgage loans on one-to-
four family homes, including condominiums. Primary coverage can be used on any
type of residential mortgage loan instrument approved by the mortgage insurer.
References in this document to amounts of insurance written or in force, risk
written or in force and other historical data related to Amerin's insurance
refer only to direct (before giving effect to reinsurance) primary insurance,
unless otherwise indicated.
Amerin Guaranty offers two kinds of primary insurance. The majority of Amerin
Guaranty's primary insurance is written in the form of borrower paid mortgage
insurance ("BPMI"), whereby mortgage insurance premiums are charged to the
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borrower by the mortgage lender or loan servicer, which in turn remits the
premiums to the mortgage insurer. Amerin Guaranty 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. See "Certain Legal
Matters Relating to Lender Paid Mortgage Insurance." 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 required to pay cash surcharges to, Amerin
Guaranty with respect to such loans.
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
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
(in millions of dollars)
Direct Primary
Insurance In Force ................ $20,394 $14,777 $8,262
Direct Primary
Risk In Force...................... $5,149 3,671 1,989
</TABLE>
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
canceled 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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<TABLE>
<CAPTION>
PERCENTAGES OF PRIMARY RISK WRITTEN
1997 1996
---- ----
<S> <C> <C>
Purchase Loans 83.8% 86.4%
Refinance Loans 16.2% 13.6%
</TABLE>
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 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 1997 and
1996:
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<TABLE>
<CAPTION>
NEW PRIMARY INSURANCE WRITTEN
1997 1996
---- ----
(in millions of dollars)
<S> <C> <C> <C> <C>
Monthly premium plan $6,879 87.7% $6,671 86.6%
Annual premium plan 856 10.9 867 11.2
Single premium plan 107 1.4 167 2.2
------ ----- ------ ------
Total $7,842 100.0% $7,705 100.0%
====== ===== ====== ======
</TABLE>
In addition to primary insurance, Amerin Guaranty also provides a limited
amount of "pool" insurance. Amerin Guaranty offers pool insurance on a
selective basis to address the needs of certain customers under specific
circumstances. Pool insurance is generally used as an additional credit
enhancement for certain secondary market mortgage transactions. Pool insurance
generally covers a designated pool of mortgage loans rather than individual
loans, and provides for the payment of the loss on any defaulted mortgage loan
in the pool which exceeds the sum of the net proceeds of the ultimate
disposition of the underlying property and the claim payment under any
applicable primary insurance policy, up to a stated aggregate loss limit. At
December 31, 1997, Amerin Guaranty pool insurance in force was $738 million,
representing $7 million of risk in force.
Amerin Guaranty provided contract underwriting services to certain lenders on
a limited basis during 1997. Amerin Guaranty anticipates expanding the level
of contract underwriting services in 1998 and has established a regional
underwriting facility pursuant to a short term lease.
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 10
customers were responsible for 85.2%, 84.2% and 85.8% of the Company's net
premiums written for 1997, 1996 and 1995, respectively. Amerin Guaranty's
three largest customers (including branches and affiliates of such customers)
in 1997 were Norwest Mortgage, Inc., Countrywide Home Loans and Bank of
America which accounted for 42.0%, 18.9% and 7.9%, respectively, of the
Company's net premiums written for 1997. Amerin Guaranty's 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 41.9%, 19.2% and 10.6%, respectively, of the Company's net
premiums written for 1996.
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, 1997 Amerin Guaranty had done business with 105 master
policyholders, of which it considered 55 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).
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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, 1997, Amerin Guaranty had a
total of 42 sales and marketing employees, 17 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 1997.
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, Fitch, 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 43.1%, 42.8% and 36.1% of all loans insured by the FHA,
VA or by private mortgage insurers in 1997, 1996 and 1995, 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 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
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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, 1997, 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
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
FHA/VA ................................... 43.1% 42.8% 36.1%
Private mortgage insurance............... 56.9 57.2 63.9
--------- --------- ----------
100.0% 100.0% 100.0%
========= ========= ==========
</TABLE>
________________
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.
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
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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 $214,600.
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 following table reflects certain characteristics of Amerin Guaranty's
primary risk in force (as determined on the basis of information available on
the date of mortgage insurance) by the categories and as of the dates
indicated:
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<TABLE>
<CAPTION>
CHARACTERISTICS OF PRIMARY RISK IN FORCE
December 31,
------------------------------------------
1997 1996 1995
----------- ------------ ----------
(in millions of dollars except percentages)
<S> <C> <C> <C>
DIRECT RISK IN FORCE: $5,148.9 $3,671.0 $1,989.4
LENDER CONCENTRATION:
Top 3 lenders(1)..................................... 69.3% 70.5% 70.8%
Top 10 lenders(1).................................... 85.6% 87.4% 86.8%
LTV:
97s.................................................. 0.7% 0.2% 0.1%
95s.................................................. 49.1% 48.8% 50.6%
90s(2)............................................... 45.8% 46.7% 45.3%
85s and below........................................ 4.4% 4.3% 4.0%
AVERAGE COVERAGE PERCENTAGE: 25.2% 24.8% 24.1%
LOAN TYPE:
Fixed(3)............................................. 80.1% 77.7% 72.3%
ARMs................................................. 8.6% 11.4% 18.5%
ARMs with potential negative amortization............ 0.4% 0.6% 1.2%
Fixed/Adjustable(4).................................. 6.4% 5.4% 5.2%
Balloon.............................................. 3.9% 4.6% 2.6%
Other................................................ 0.6% 0.3% 0.3%
MORTGAGE TERM:
15 years and under................................... 2.5% 2.5% 2.3%
Over 15 years........................................ 97.5% 97.5% 97.7%
PROPERTY TYPE:
Single family detached............................... 94.4% 94.5% 94.5%
Condominium.......................................... 4.7% 4.5% 4.3%
Other(5)............................................. 0.9% 1.0% 1.2%
OCCUPANCY STATUS:
Primary residence.................................... 98.9% 99.2% 99.6%
Second home.......................................... 1.1% 0.8% 0.4%
Non-owner occupied................................... --% --% --%
LOAN AMOUNT:
$100,000 or less........................................ 21.5% 22.7% 24.0%
Over $100,000 to $155,250(6)............................ 38.4% 38.3% 37.6%
Over $155,250 to $214,600(6)(7)......................... 27.5% 26.5% 25.2%
Over $214,600 to $250,000(7)............................ 4.7% 7.2% 5.9%
Over $250,000........................................... 8.0% 7.8% 8.0%
______________________
</TABLE>
(1) Based on original application volume.
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(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, 1997, .7% 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) The maximum individual loan amount that the FHA could insure was
set at $152,363 in the third quarter of 1994 and increased to $155,250
in the first quarter of 1996.
(7) The maximum individual loan amount for single unit properties
eligible for purchase by Fannie Mae and Freddie Mac was $207,000 for
1995 and 1996, and $214,600 for 1997. This limit has been increased
to $227,150 for 1998.
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, 1996 and 1997,
and the percentages of new insurance written in California in 1995, 1996 and
1997 were reduced to 27.0%, 20.5% and 19.4%, respectively. As a result,
management expects that the proportion of Amerin Guaranty's risk in force 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"):
<TABLE>
<CAPTION>
Primary Risk in Force
-------------------------------------------------
December 31,
-------------------------------------------------
1997 1996 1995
--------------- --------------- ------------
<S> <C> <C> <C>
TOP 10 STATES
California ............................ 22.8% 25.4% 31.1%
Texas.................................. 6.1% 5.4% 4.3%
Florida................................ 5.4% 5.0% 4.6%
Illinois............................... 4.4% 4.0% 3.5%
New York............................... 3.7% 3.5% 3.4%
Minnesota.............................. 3.4% 3.4% 2.7%
Colorado............................... 3.4% 3.3% 3.3%
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Pennsylvania........................... 3.3% 2.9% 2.5%
Massachusetts.......................... 3.2% 3.5% 3.4%
New Jersey............................. 3.1% * *
Arizona................................ * 2.9% 3.3%
------- ------ ------
Top 10 total......................... 58.8% 59.3% 62.1%
TOP 10 MSAs
Los Angeles............................ 6.2% 7.0% 9.0%
Chicago................................ 3.5% 3.2% 2.7%
Orange County.......................... 2.9% 3.2% 4.2%
Washington, D.C. ...................... 2.6% 2.3% 1.9%
Minneapolis............................ 2.3% 2.3% 1.7%
Oakland ............................... 2.2% 2.6% 3.3%
Phoenix ............................... 2.0% 2.1% 2.4%
San Diego ............................. 1.9% 2.0% 2.3%
Boston ................................ 1.9% 2.1% 2.1%
Riverside-San Bernardino............... 1.8% * *
San Francisco........... * 1.8% 2.3%
------- ------ ------
Top 10 total ........................ 27.3% 28.6% 31.9%
* Not a top ten location for the date indicated.
</TABLE>
INSURANCE IN FORCE BY POLICY YEAR
The following table sets forth the dispersion of Amerin Guaranty's insurance
in force as of December 31, 1997, by year of policy origination since Amerin
Guaranty began operations in April 1993:
PRIMARY INSURANCE IN FORCE BY POLICY YEAR
<TABLE>
<CAPTION>
Primary Insurance Percent of
Policy Year in Force Total
----------- -------- -----
(in millions of dollars)
<S> <C> <C>
1993 $ 197 1.0%
1994 1,61 7.9
1995 4,634 22.7
1996 6,720 33.0
1997 7,225 35.4
------- -----
Total $20,394 100.0%
======= =====
</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
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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 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
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 utilized 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. Depending on the lender, such review may
include 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.
By incorporating the use of borrower credit scoring and Amerin Guaranty's
proprietary mortgage scoring system, Amerin Guaranty has been able to
streamline both its lender approval process and its lender audit process
(discussed below). Amerin uses consumer credit scores to provide a timely,
objective evaluation of borrower creditworthiness. These scoring systems
also permit Amerin Guaranty to review the average scores of each lender's
12
<PAGE>
borrowers, the number of borrowers with scores below certain thresholds, and
the percentage of borrowers with insufficient credit histories to score.
MARKET ANALYSIS
Amerin Guaranty reviews economic and real estate market conditions in over 60
metropolitan areas on a quarterly basis. 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 it believes to present higher
risk.
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 weekly 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
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.
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<PAGE>
LENDER AUDITS
As noted above, through the use of borrower credit scoring and its own
proprietary mortgage scoring system, Amerin Guaranty is able to monitor the
credit quality of loans submitted for insurance on a daily basis. Amerin
Guaranty also conducts thorough on-site review of each lender periodically.
Lenders with significant insured volume are reviewed more frequently. Due to
the real-time picture of credit quality obtained through the use of credit
scoring and mortgage scoring, Amerin Guaranty has been able to streamline the
lender audit process to focus primarily on higher risk loans originated by the
lender in the preceding period. The sample of loans to be re-underwritten
during the audit 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 1997 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:
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<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Insured loans in force 164,314 120,685 68,112
Loans in default 2,352 1,439 605
Percentage of loans in default
(default rate) 1.43% 1.20% 0.89%
</TABLE>
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, 1997, 1996 and 1995. Amerin Guaranty's default rate
of 2.27% in California has been influenced by declines in home prices
experienced in the period between 1993 and 1996, and by greater seasoning of
Amerin's California business relative to its overall insured portfolio, as
the percentage of Amerin Guaranty's business have declined steadily since
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)
<TABLE>
<CAPTION>
Percent of
Amerin
Guaranty's Default Rate as of
Primary Risk in ----------------------------------
Force as of December 31,
December 31, ----------------------------------
1997 1997 1996 1995
---------------- ------ ------ ------
<S> <C> <C> <C> <C>
California ......... 22.8% 2.27% 2.06% 1.42%
Texas............... 6.1% 1.07% 0.86% 0.76%
Florida............. 5.4% 1.75% 1.50% 1.17%
Illinois............ 4.4% 1.87% 1.08% 0.96%
New York............ 3.7% 2.23% 2.03% 1.32%
Minnesota........... 3.4% 0.68% 0.69% 0.45%
Colorado............ 3.4% 0.73% 0.70% 0.45%
Pennsylvania........ 3.3% 1.38% 1.27% 0.73%
Massachusetts....... 3.2% 0.85% 0.64% 0.39%
New Jersey.......... 3.1% 1.46% 1.06% 0.86%
Total Portfolio..... 100.0% 1.43% 1.20% 0.89%
_____________________
</TABLE>
(1) Top 10 states as determined by total risk in force as of December
31, 1997. Default rates are shown by state based on location of the
underlying property.
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<PAGE>
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 requiring prior approval by the insurer) necessary for the
protection and preservation of the property.
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.
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<PAGE>
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 a claim is filed, 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.
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, 1996 represented 68.4% of Amerin Guaranty's
insurance in force as of December 31, 1997. This means that only 31.6% 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.
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 estimates for incurred but not reported
("IBNR") defaults. 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
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<PAGE>
amount assumptions on at least a semi-annual basis and adjusts its loss
reserves accordingly. 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, set forth on page F-7.
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.
Amerin Guaranty is party to an agreement (the "Centre Re Agreement") with the
Centre Reinsurance Group ("Centre Re") pursuant to which Centre Re 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 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
entered into reinsurance arrangements ("Captive Arrangements") with mortgage
reinsurance affiliates of seven of its major mortgage lending customers.
Management believes that the existence of Captive Arrangements enhances the
Company's long-term relationships with these lenders. 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
18
<PAGE>
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.
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, 1997
limited investments in the securities of a single issuer (other than the U.S.
government and certain of its agencies).
At December 31, 1997, based on carrying value, 100% of the Company's
investments were in fixed income securities, 96% of which were securities
rated "A" or better, with 71.2% rated "AAA" and 15.9% rated "AA," in each
case
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<PAGE>
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, 1997, the carrying value of the Company's investment
portfolio was $377.7 million and amortized cost was $365.1 million. At
December 31, 1997, municipal securities represented 76.6% of carrying value
of the total investment portfolio.
The effective duration of the investment portfolio is 6.26 years at December
31, 1997. The following table indicates the aging of investment portfolio:
<TABLE>
<CAPTION>
Duration Percent
-------- -------
<S> <C> <C>
0 - 1 years 2.9
1 - 3 years 9.1
3 - 5 years 17.9
5 - 7 years 22.8
7 - 10 years 40.9
After 10 years 6.4
</TABLE>
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, set forth on pages F-12 through F-13 herein.
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, set forth on page F-20
herein.
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<PAGE>
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 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.
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<PAGE>
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.
According to published reports, HUD has recently sent letters to Mortgage
Guaranty Insurance Company ("MGIC") and Freddie Mac with respect to so-called
"agency pool insurance," in which a mortgage insurer provides pool insurance
to either Fannie Mae or Freddie Mac. As a result of the agency pool insurance
policy, Fannie Mae or Freddie Mac reduces the guarantee fee paid by the
lender whose loans are covered by the policy. HUD's letter raised the
question of whether this type of pool insurance "could be seen as giving a
thing of value - the below-cost pool policy - through Freddie Mac to the
lender (the guarantee fee reduction), by means of an agreement to refer
settlement (primary mortgage insurance) business" and thereby prohibited
under RESPA. Amerin Guaranty has to date issued a minimal amount of agency
pool insurance. Management believes that if HUD were to conclude that RESPA
prohibits agency pool insurance, or if HUD established material restrictions
on the use of agency pool insurance, such actions would not have a material
adverse effect on the Company.
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,
the President of the United States has recently proposed a significant
increase in the maximum individual loan amount that the FHA may insure, which
would in turn increase the number of persons
22
<PAGE>
eligible for FHA mortgages. Enactment of this proposal or any other
legislation which 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.
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.
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.
The Senate and the House of Representatives of the United States each passed
bills in 1997 providing for mandatory notice to borrowers with respect to
their right to cancel private mortgage insurance under certain circumstances
and mandating cancellation of private mortgage insurance under certain
specified conditions. Because the Senate and House bills contain differing
provisions, enactment of a law will require the Senate and House to reach
agreement in conference on a final bill. In addition to this federal
legislation, legislation with respect to cancellation of private mortgage
insurance has been introduced or enacted recently in more than 10 states.
23
<PAGE>
Such legislation is similar to the federal legislation, in that most states
appear to be focusing 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 also 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 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.
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 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.
24
<PAGE>
CERTAIN LEGAL MATTERS RELATING TO CAPTIVE MORTGAGE REINSURANCE ARRANGEMENTS
In October 1996, the Office of the Comptroller of the Currency (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, an affiliate of Chase
Manhattan Mortgage Corporation, to enter into a Captive Arrangement. During
1997, the OCC granted similar approvals to at least five other banks. In
December 1996, the OTS, which regulates thrifts, announced that it would
consider, on a case-by-case basis, 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 various Captive Arrangements,
increase the likelihood of Captive Arrangements with Amerin Guaranty or other
mortgage insurers. To date, the Company is not aware that the OTS has
withheld approval of 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. By
letter dated August 6, 1997, HUD concluded that "...so long as payments for
reinsurance under captive reinsurance arrangements are solely 'payment for
goods or facilities actually furnished or for services actually performed,'
these arrangements are permissible under RESPA." The HUD letter set forth a
list of factors that may cause HUD to give particular scrutiny to a
particular Captive Arrangement, and a two-part test for determining if a
particular Captive Arrangement violates RESPA. Based on management's review
of the HUD letter, Amerin believes that its Captive Arrangements comply with
RESPA. There can be no assurance, however, that HUD will not challenge the
compliance of specific 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.
25
<PAGE>
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 American 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 American 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. Amerin Guaranty has met with the New York
Superintendent of Insurance and, at the request of the Superintendent,
submitted written materials setting forth Amerin Guaranty's recommendations
as to proposed regulation of Captive Arrangements. The NYID has since
informed Amerin that the NYID is the process of formulating an overall
regulatory position with respect to Captive Arrangements. A ruling or
regulation by the NYID that limits or prohibits the use of Captive
Arrangements could have a material adverse effect on Amerin's business and
financial results.
EMPLOYEES
At December 31, 1997, the Company had 124 full-time employees. Of its total
work force, 91 were assigned to the Company's headquarters in Chicago,
Illinois, and 33 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 and
maintains a satellite office in Westchester, Illinois, which consists of
approximately 6,000 square feet. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
Registrant's executive officers as of March 16, 1998:
<TABLE>
<CAPTION>
Name and Age Title
- ------------ -------------------------------------
<S> <C>
Gerald L. Friedman (60) .......... Chairman of the Board of Directors and Chief
Executive Officer of the Company and Amerin
Guaranty
Roy J. Kasmar (42) ............... President, Chief Operating Officer and Director
of the Company and Amerin Guaranty
Jerome J. Selitto (56) ........... Vice Chairman of the Company and Amerin
Guaranty and Director of Amerin Guaranty
David I. Vickers (37).............. Senior Vice President, Chief Financial Officer
and Treasurer of the Company and Amerin
Guaranty and Director of Amerin Guaranty
Randolph C. Sailer II (43).......... Senior Vice President, General Counsel and
Secretary of the Company and Amerin Guaranty
and Director of Amerin Guaranty
James G. Engelhardt (46) ......... Executive Vice President, Director of Risk
Management of Amerin Guaranty
Sean P. Connelly (31) ............. Senior Vice President, Director of Information
technology of Amerin Guaranty
Michael J. Dirrane (41) ........... Senior Vice President, National Sales Director
of Amerin Guaranty
Matthew K. Lindland (35) .......... Senior Vice President, Director of Corporate
Transactions of Amerin Guaranty
Sergio E. Murer (33) .............. Senior Vice President, Operations of Amerin
Guaranty
R. Bruce Van Fleet, III (46) ...... Senior Vice President, National Accounts
Director, of Amerin Guaranty
Philip P. Yee (44) ................ Senior Vice President, Marketing Services and
Corporate Communications, of Amerin Guaranty
</TABLE>
Mr. Friedman founded the Company and has been Chairman and Chief Executive
Officer of the Company and Amerin Guaranty since April 1992. 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 President and Chief Operating Officer of the Company and
Amerin Guaranty since December 1997, Executive Vice President of Operations of
Amerin Guaranty from May 1996 to December 1997, 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. Selitto has been Vice Chairman of the Company and Amerin Guaranty since
November 1997, Executive Vice President and National Director of Marketing and
Sales of Amerin Guaranty from December 1995 through November 1997, Senior Vice
27
<PAGE>
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. Vickers has been Senior Vice President, Chief Financial Officer and
Treasurer of the Company and Amerin Guaranty since September 1997. Prior
thereto, he was Senior Vice President, Chief Financial Officer, and Treasurer
of Pioneer Financial Services from June 1992 to August 1997. He was with the
public accounting firm of Ernst & Young from July 1983 to May 1992 where he
was a Senior Manager in the Insurance Division. Mr. Vickers has been a
member of Amerin Guaranty's board of directors since September 1997.
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 the Company 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 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. Connelly has been Senior Vice President and Director of Information
Technology of Amerin Guaranty since December 1997, and Vice President and
Director of Management Information Systems of Amerin Guaranty from January
1996 through December 1997. Prior thereto, he was Vice President of
Information Technology for Prudential Home Mortgage from January 1993 to
December 1995, and worked in various technology positions within Prudential
Home Mortgage from June 1987 through December 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. Lindland has been Senior Vice President and Director of Corporate
Transactions of Amerin Guaranty since December 1997, Vice President of Amerin
Guaranty from December 1995 through December 1997, Director of Risk Analysis
Assistant of Amerin Guaranty from December 1993 through December 1995, and
Financial Analyst of Amerin Guaranty from July 1993 through December 1995.
Prior thereto, Mr. Lindland was a Vice president of Rothschild Inc. from May
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<PAGE>
1992 through November 1992 and an Associate of Kidder, Peabody & Co.
Incorporated from May 1988 through May 1992.
Mr. Murer has been Senior Vice President, Operations of Amerin Guaranty since
December 1997, and Vice President of Amerin Guaranty since September 1996.
Prior thereto, Mr. Murer was Vice President of Finance for Norwest Mortgage
from May 1996 through September 1996, Vice President of Correspondent Lending
for Prudential Home Mortgage from August 1992 through May 1996, and Vice
President of Secondary Marketing for Prudential Home Mortgage from April 1988
through July 1992.
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
10, 1997, the approximate number of record holders of the Registrant's Common
Stock was 89. 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.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
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
1997:
First Quarter .................................. $26 1/4 $19 3/4
Second Quarter ................................. $25 1/2 $17 1/2
Third Quarter .................................. $29 $22 5/8
Fourth Quarter ................................. $33 3/8 $19 1/2
</TABLE>
The Registrant has never paid any cash dividends on its capital stock. The
Registrant currently intends to retain its future earnings to finance the
29
<PAGE>
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.
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(in thousands of dollars except ratios and per
share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Net premiums written .............. $ 94,740 $70,000 $33,946 $10,274 $1,611
Increase in unearned premiums...... (2,411) (7,651) (6,387) (5,037) (1,285)
Net premiums earned ............... 92,329 62,349 27,559 5,237 326
Net investment income ............. 18,607 16,871 7,612 4,818 4,251
Realized investment gains ......... 1,167 161 491 435 707
Total revenues .................. 112,103 79,381 35,662 10,490 5,284
Expenses:
Losses incurred ................... 30,272 20,681 7,757 262 --
Policy acquisition costs .......... 10,520 8,485 6,641 2,456 2,677
Underwriting and other expenses ... 14,643 10,623 6,915 5,765 5,403
Compensation charge resulting
from initial public offering ... -- -- 35,741 -- --
Total expenses ............... 55,435 39,789 57,054 8,482 8,080
Income tax expense 15,909 11,363 1,419 -- --
Net income (loss) .................. 40,759 28,229 (22,811) 2,008 (2,795)
Pay-in-kind dividends on
preferred stock ................... -- -- 5,287 5,067 4,437
Net income (loss) applicable to
common stockholders ............... 40,759 28,229 (28,098) (3,059) (7,232)
OTHER OPERATING DATA:
Mortgage insurance operating ratios:
(GAAP)(1)
Loss ratio ...................... 32.8% 33.2% 28.2% 5.0% --
Expense ratio ................... 27.3% 30.6% 49.2% 157.0% (2)
Combined ratio .................. 60.1% 63.8% 77.3% 162.0% (2)
(SAP)(1)
Loss ratio ...................... 32.8% 33.2% 28.2% 5.0% --
Expense ratio ................... 25.6% 27.4% 42.8% 97.4% (2)
Combined ratio .................. 58.4% 60.6% 70.9% 102.4% (2)
PER SHARE DATA:(3)
Net Income (loss) - Basic ........... $1.56 $1.08 $(2.32) $(0.36) $(0.99)
Net Income (loss) - Diluted ......... $1.54 $1.07 $(2.32) $(0.36) $(0.99)
31
<PAGE>
Weighted average shares
outstanding (in thousands):
Basic ............................ 26,119 26,038 12,106 8,467 7,328
Diluted .......................... 26,483 26,351 12,106 8,467 7,328
Book value (at period end) ......... $13.39 $11.53 $10.55 $5.59 $5.66
As of and for the year ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
OPERATING AND STATUTORY DATA:
Number of policies in force ...... 164,314 120,385 68,112 22,937 2,473
Default rate ..................... 1.43% 1.20% 0.89% 0.18% 0.16%
Persistency ...................... 87.2% 87.6% 93.0% 96.2% --
Direct primary insurance in
force (in millions)............. $ 20,394 $ 14,777 $ 8,262 $ 2,750 $ 272
Direct primary risk in force
(in millions)................... $ 5,149 $ 3,671 $ 1,989 $ 580 $ 57
Amerin Guaranty Corporation:
Statutory capital (in
millions)...................... $ 307.8 $ 260.7 $ 227.0 $ 90.5 $ 70.8
Risk-to-capital ratio ......... 16.1 13.3 8.2 6.4 0.8
As of December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
(in thousands of dollars)
CONSOLIDATED BALANCE SHEETS DATA:
Total investments ............ $ 377,720 $ 328,793 $ 296,982 $ 96,246 $ 72,094
Total assets.................. 415,301 354,824 316,328 107,261 79,421
Unearned premiums............. 23,352 20,525 12,710 6,323 1,286
Loss reserves................. 31,280 18,730 7,092 262 --
13.5% Convertible Preferred
Stock(4).................... -- -- -- 40,755 35,687
Total common stockholders'
equity ..................... 350,155 300,609 274,137 58,081 40,840
____________________
</TABLE>
(1) Generally accepted accounting principles (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.
32
<PAGE>
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) The per share data for all periods prior to 1997 has been restated
for the required adoption on December 31, 1997 of the new
accounting standard on earnings per share. For 1995, 1996, and
1997, 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF CONSOLIDATED OPERATIONS
1997 COMPARED TO 1996
Total revenues for 1997 were $112.1 million, an increase of 41.2% over total
revenues of $79.4 million for 1996. The growth in revenues was due primarily
to the increases in net premiums earned as discussed below. New insurance
written in 1997 was $7.8 billion, compared to $7.7 billion in 1996. Amerin's
primary insurance in force was $20.4 billion as compared with $14.8 billion
as of December 31, 1996, which represents a 38% increase.
Net premiums written for 1997 were $94.7 million compared to $70.0 million
for 1996, which represents a 35.3% increase. The increase was primarily
attributable to the 38% increase in insurance in force. Management believes
that Amerin Guaranty was able to increase revenues due primarily to continued
strong levels of new business with the Company's top 10 lenders, the addition
of new lenders during 1997, and an annualized persistency rate on in force
business of 87.2% at December 31, 1997.
Net premiums earned increased by $30.0 million to $92.3 million for 1997 from
$62.3 million for 1996. This increase was primarily due to the increase in
insurance in force in 1997 as compared to 1996.
33
<PAGE>
Net investment income of $18.6 million for 1997 increased by $1.7 million (or
10.3%) over 1996, due primarily to investment of Amerin's net operating cash
flows over the course of 1997, which resulted in an increase of 16.1% in the
monthly average amount of invested assets. Realized investment gains for 1997
were $1.2 million compared to realized investment gains of $.2 million for
1996. This increase reflected higher sales activity within the portfolio due
to the Company's desire to maintain a certain duration of the investment
portfolio. As of December 31, 1997 and 1996, the yields to maturity on the
investment portfolio were 5.6% and 5.8%, respectively, and the average
durations of the investment portfolio were 6.3 years and 6.4 years,
respectively.
Losses incurred in 1997 were $30.3 million, compared to $20.7 million in
1996, as a result of aging of the Company's policies. The Company's loss
ratio decreased from 33.2% for 1996 to 32.8% for 1997 due to favorable
delinquency rates on business issued during the last three years. Because of
its limited operating history, the Company expects it loss experience to
increase as its policies age.
Policy acquisition costs during 1997 of $10.5 million increased by $2.0
million (or 24.0%) compared to 1996 principally due to the growth in the
level of marketing and underwriting activity in connection with the
production of new insurance written in 1997. Underwriting and other expenses
during 1997 increased by $4.0 million or 37.8% due to the increase in
insurance in force which resulted in various administrative, technology, and
occupancy costs relating to growth in the Company's personnel.
The Company's effective tax rate was 28.1% in 1997. The effective tax rate
for 1997 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 has net income of $40.8
million for 1997 or $1.54 per share on a diluted basis, compared to net
income of $28.2 million for 1996 or $1.07 per share on a diluted basis.
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. 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
34
<PAGE>
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 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.
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 operating 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 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 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
35
<PAGE>
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 1995 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 on a diluted basis, 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 provisions of a management 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 on a diluted basis for 1995. The 13.5% Convertible Preferred Stock
was redeemed in connection with the Initial Public Offering.
FINANCIAL CONDITION
The Company's consolidated total investments were $377.7 million at December
31, 1997, compared with $328.8 million at December 31, 1996. The Company
generated consolidated cash flows from operating activities of $54.6 million
during 1997, compared to $43.3 million generated during 1996. All of the
Company's $374.3 million of fixed maturity securities at December 31, 1997
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 maturity securities
was greater than amortized cost at December 31, 1997 by $12.7 million. At
December 31, 1996, the aggregate fair value (carrying value) of the Company's
fixed maturity securities was greater than amortized cost by $.3 million. The
increase during 1997 in the fair value of the Company's fixed maturity
securities compared to amortized cost is due primarily to the decrease in
interest rates during 1997. Fixed maturity securities of $168.8 million or
45.1% of total fixed maturity securities at December 31, 1997 have stated
maturities of 10 years or greater. As a result of these long-term holdings,
if interest rates should
36
<PAGE>
increase, the fair value of these securities will decline and common
stockholders' equity will decrease.
Consolidated loss reserves increased by $12.6 million to $31.3 million at
December 31, 1997 from $18.7 million at December 31, 1996, primarily due to
the ongoing maturation of the Company's book of business, which is at an
early stage of development, and the growth of insurance in-force. See "--
Results of Consolidated Operations -- 1997 Compared to 1996." 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 $2.9 million from $20.5 million at
December 31, 1996 to $23.4 million at December 31, 1997, reflecting the
increase in insurance in force during 1997 versus 1996. The unearned premium
reserve growth rate is significantly lower then the increase in insurance in
force due to the increased concentration of monthly business.
Consolidated stockholders' equity increased to $350.2 million at December 31,
1997, from $300.6 million at December 31, 1996, an increase of 16.5%. This
increase resulted primarily from the results of 1997 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
$54.6 million, $43.3 million and $22.2 million, respectively, in 1997, 1996
and 1995, as shown on the Consolidated Statements 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 $6
million in 1998 primarily 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 16.1:1 at December 31, 1997, compared to
37
<PAGE>
13.3:1 at December 31, 1996. This increase was due to the growth in Amerin
Guaranty's risk in force during 1997.
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 a major reinsurer effective January 1, 1996, and
cancelable by the Company for a fee beginning in 2000. The claims-paying
ability of the reinsurer is rated AA by S&P. This agreement provides
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.
YEAR 2000 ISSUE
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. In April 1996 the Company
commenced a major initiative to enhance its entire computer system. While
this initiative was not undertaken with the primary goal of addressing the
Year 2000 issue, all internal matters relating to the Year 2000 issue will be
fully addressed upon completion of this initiative.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff and outside consultants. The team's activities are designed
to ensure that there is no adverse effect on the Company's core business
operations and that transactions with customers are fully supported. The
Company is well under way with these efforts, which are scheduled to be
completed in early 1999. The cost of the Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
position.
The Company also has initiated discussions with its large customers and
certain servicing companies to ensure that those parties have appropriate
plans to fully address Year 2000 issues where their systems interface with
the Company's systems or could otherwise impact its operations. The Company
is assessing the extent to which its operations are vulnerable should those
organizations fail to properly convert their computer systems on a timely
basis. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems
and operations of other companies on which the Company's systems and
operations rely will be converted on a timely basis. The failure of these
other companies to fully convert their systems and operations on a timely
basis could have a material adverse effect on the Company.
38
<PAGE>
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 with respect to directors 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.
39
<PAGE>
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:
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 41 to 42 for exhibits filed with this
report on Form 10-K.
(b) Reports on Form 8-K:
On November 6, 1997, the Registrant filed one report on Form 8-K
with respect to a distribution of Amerin Corporation Common Stock
by The Morgan Stanley Leveraged Equity Fund II, L. P. ("MSLEF") to
its various limited partners. Prior to such distribution, MSLEF
was the single largest holder of Amerin Corporation Common Stock.
40
<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).
41
<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).
10.8 Severance Agreement dated as of September 17, 1997
between Amerin Corporation and Gerald L. Friedman.
10.9 Severance Agreement dated as of September 17, 1997
between Amerin Corporation and Roy J. Kasmar.
10.10 Severance Agreement dated as of September 17, 1997
between Amerin Corporation and Jerome J. Selitto.
10.11 Release and Separation Agreement, dated as of
March 1, 1998, between Amerin Guaranty Corporation
and John F. Peterson.
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.
42
<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 26, 1998
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 26, 1998
- ---------------------- the Board and Chief
Gerald L. Friedman Executive Officer
(PRINCIPAL EXECUTIVE
OFFICER)
/s/ David I. Vickers Senior Vice President, March 26, 1998
- --------------------- Chief Financial Officer
David I. Vickers (PRINCIPAL FINANCIAL
OFFICER and PRINCIPAL
ACCOUNTING OFFICER)
/s/ Alan E. Goldberg Director March 26, 1998
- --------------------
Alan E. Goldberg
/s/ Timothy A. Holt Director March 26, 1998
- -------------------
Timothy A. Holt
/s/ Howard I.Hoffen Director March 26, 1998
- -------------------
Howard I. Hoffen
/s/ Larry E. Swedroe Director March 26, 1998
- -------------------
Larry E. Swedroe
43
<PAGE>
Amerin Corporation and Subsidiaries
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . . . . F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 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
</TABLE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 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.
ERNST & YOUNG LLP
Chicago, Illinois
January 22, 1998
F-2
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
------ ------
<S> <C> <C>
ASSETS
Investments (NOTE 4):
Fixed maturities available-for-sale, at
fair value (amortized cost $361,660 in 1997
and $307,734 in 1996). . . . . . . . . . . . . $ 374,320 $ 308,076
Short-term investments . . . . . . . . . . . 3,400 20,717
--------- ---------
Total investments . . . . . . . . . . . . . . . . 377,720 328,793
Cash and cash equivalents . . . . . . . . . . . . 4,456 1,176
Accrued investment income . . . . . . . . . . . . 5,872 4,393
Premiums receivable . . . . . . . . . . . . . . . 5,020 5,833
Deferred policy acquisition costs . . . . . . . . 7,776 5,569
Leasehold improvements, furniture and
equipment, at cost, net of accumulated
depreciation of $2,775 in 1997
and $1,625 in 1996 . . . . . . . . . . . . . . . 9,315 4,368
Goodwill, net of accumulated amortization
of $844 in 1997 and $695 in 1996 . . . . . . . . 2,133 2,282
Other intangibles, net of accumulated
amortization of $1,616 in 1997 and $1,460 in
1996 . . . . . . . . . . . . . . . . . . . . . . -- 156
Other assets . . . . . . . . . . . . . . . . . . 3,009 2,254
--------- ---------
Total assets $ 415,301 $ 354,824
========= =========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Liabilities:
Loss reserves (NOTE 5) . . . . . . . . . . . . $ 31,280 $ 18,730
Unearned premiums . . . . . . . . . . . . . . 23,352 20,525
Current income taxes . . . . . . . . . . . . . 790 111
Deferred income taxes . . . . . . . . . . . . 5,015 289
Payable for securities . . . . . . . . . . . -- 9,677
Accrued expenses and other liabilities . . . . 4,709 4,883
--------- ---------
Total liabilities 65,146 54,215
Commitments and contingencies (NOTES 7, 11, AND 12)
Common stockholders' equity (NOTE 10):
Voting Common Stock, $.01 par, 50,000,000 shares
authorized, 24,488,725 and 22,471,214 shares
issued and outstanding in 1997 and 1996,
respectively . . . . . . . . . . . . . . . 245 225
Nonvoting Common Stock, $.01 par, 50,000,000
shares authorized, 1,656,909 and 3,609,625
shares issued and outstanding in 1997 and 1996,
respectively . . . . . . . . . . . . . . . 17 36
Additional paid-in capital . . . . . . . . . . 316,642 315,863
Net unrealized investment gains . . . . . . . 8,229 222
Retained earnings (deficit) . . . . . . . . . 25,022 (15,737)
--------- ---------
Total common stockholders' equity . . . . . . . . 350,155 300,609
--------- ---------
Total liabilities and common stockholders'
equity $ 415,301 $ 354,824
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES:
Net premiums written ............................ $ 94,740 $ 70,000 $ 33,946
Increase in unearned premiums.................... (2,411) (7,651) (6,387)
-------- -------- --------
Net premiums earned ............................. 92,329 62,349 27,559
Net investment income (NOTE 4)................... 18,607 16,871 7,612
Realized investment gains (NOTE 4)............... 1,167 161 491
-------- -------- --------
Total revenues .................................... 112,103 79,381 35,662
EXPENSES:
Losses incurred ................................. 30,272 20,681 7,757
Policy acquisition costs......................... 10,520 8,485 6,641
Underwriting and other expenses ................. 14,643 10,623 6,915
Compensation charge resulting from initial
public offering (NOTE 10) .................... -- -- 35,741
-------- -------- --------
Total expenses .................................... 55,435 39,789 57,054
-------- -------- --------
Income (loss) before income taxes ................. 56,668 39,592 (21,392)
-------- -------- --------
Income tax expense:
Current ......................................... 15,494 11,239 1,375
Deferred ........................................ 415 124 44
-------- -------- --------
Total ........................................ 15,909 11,363 1,419
-------- -------- --------
Net income (loss) ................................. 40,759 28,229 (22,811)
Pay-in-kind dividends on preferred stock (NOTE 10). -- -- 5,287
-------- -------- --------
Net income (loss) applicable to common stockholders $40,759 $28,229 $(28,098)
======== ======== ========
Net income (loss) per common share (NOTE 15):
Basic ........................................ $ 1.56 $ 1.08 $ (2.32)
======== ======== ========
Diluted....................................... $ 1.54 $ 1.07 $ (2.32)
======== ======== ========
</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
-----------------------------------------------------------------------------
NET
UNREALIZED
REDEEMABLE VOTING NONVOTING ADDITIONAL INVESTMENT RETAINED
PREFERRED COMMON COMMON PAID-IN GAINS EARNINGS
STOCK STOCK STOCK CAPITAL (LOSSES) (DEFICIT) TOTAL
---------- ------ ---------- ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance, January 1, 1995 ......... $ 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
Net income........................ -- -- -- -- -- 40,759 40,759
Shares issued under long-term
incentive plan................ -- 1 -- 779 -- -- 780
Nonvoting conversion.............. -- 19 (19) -- -- -- --
Net unrealized investment gains .. -- -- -- -- 8,007 -- 8,007
---------- ------ ---------- ---------- -------- --------- ---------
Balance December 31, 1997......... $ -- $ 245 $ 17 $ 316,642 $ 8,229 $25,022 $ 350,155
========== ====== ========== ========== ======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 40,759 $ 28,229 $ (22,811)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Change in:
Accrued investment income ......................... (1,479) (2,017) (825)
Premiums receivable ............................... 813 (3,458) (1,231)
Unearned premiums.................................. 2,827 7,815 6,387
Loss reserves ..................................... 12,550 11,638 6,830
Accrued expenses and other liabilities ............ 101 1,301 180
Federal income taxes .............................. 1,094 (365) 644
Policy acquisition costs deferred ................... (9,309) (9,087) (6,812)
Policy acquisition costs amortized .................. 7,102 7,937 5,267
Amortization ........................................ 304 472 472
Depreciation ........................................ 1,211 718 501
Realized investment gains ........................... (1,167) (161) (491)
Non-cash compensation charge resulting from
initial public offering ......................... -- -- 35,741
Other items, net .................................... (230) 240 (1,680)
---------- ---------- ----------
Net cash provided by operating activities ........... 54,576 43,262 22,172
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Fixed maturity securities ........................... (115,530) (223,025) (70,842)
Short-term investments, net ......................... -- -- (136,011)
Property and equipment .............................. (6,294) (1,422) (1,383)
Sale or maturity of:
Fixed maturity securities ........................... 52,431 55,350 32,271
Short-term investments, net ......................... 17,318 125,242 --
Property and equipment .............................. 29 2 43
---------- ---------- ----------
Net cash used by investing activities (52,046) (43,853) (175,922)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock .................................. 750 713 200,152
Redemption of preferred stock ............................. -- -- (46,042)
---------- ---------- ----------
Net cash provided by financing activities ................. 750 713 154,110
---------- ---------- ----------
Net increase in cash and cash equivalents ................. 3,280 122 360
Cash and cash equivalents at beginning of year ............ 1,176 1,054 694
---------- ---------- ----------
Cash and cash equivalents at end of year .................. $ 4,456 $ 1,176 $ 1,054
========== ========== ==========
</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 69%, 71%, and 71% of net
premiums written in 1997, 1996 and 1995, respectively. Additionally, net
premiums written in 1997 for the Company's three largest customers were $40
million, $19 million, and $7 million. Similarly, net premiums written in 1996
for the Company's three largest customers were $29 million, $14 million, and $7
million, while in 1995, net premiums written for the Company's three largest
customers were $14 million, $7 million, and $3 million. Approximately 23% of the
Company's risk in force at December 31, 1997 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 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
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 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 at the date of
purchase.
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
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 losses and loss 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 and commissions are accounted for on a basis
consistent with the accounting for the original policies issued and the terms of
the reinsurance contracts. Prepaid reinsurance premium amounts are reported as
assets.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT
Leasehold improvements, furniture and equipment consist of office
improvements, furniture and fixtures, office equipment, 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
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other intangibles include organization and start-up costs incurred in the
first year of operations. These costs are amortized using the straight-line
method over five years and are fully amortized at December 31, 1997.
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, 1997, the Company had investments in Tax and
Loss Bonds of $25.3 million.
NET INCOME (LOSS) PER COMMON SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128 (SFAS 128), "Earnings Per Share", which was required to be adopted on
December 31, 1997. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of stock options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements.
EFFECT OF NEW PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130 (SFAS 130), "Reporting
Comprehensive Income," which is effective for years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 will require that enterprises (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the common stockholders'
equity section of the consolidated balance sheets.
In June 1997, the FASB also issued Statement No. 131 (SFAS 131),
"Disclosure about Segments of an Enterprise and Related Information," which is
effective for years beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
anticipates adopting these standards in its 1998 financial statements as
required.
Implementation of these standards is not expected to have a material
effect on the Company's financial statements.
F-9
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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
statutory basis accounting practices. The following are the significant
differences between statutory basis accounting practices and GAAP:
- - 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
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The following is a reconciliation of the Company's 1997, 1996 and 1995
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 Stockholders'
Net Income (Loss) Equity
---------------- --------------------
(in thousands)
<S> <C> <C>
1997:
Consolidated GAAP basis amounts .................... $ 40,759 $ 350,155
Company and non-insurance subsidiary amounts
and eliminations ................................. 2,192 (9,899)
--------- -----------
Insurance subsidiaries GAAP basis amounts .......... 42,951 340,256
Fixed maturities available-for-sale ................ -- (12,635)
Deferred policy acquisition costs .................. (2,207) (7,776)
Contingency reserve ................................ -- (95,488)
Nonadmitted assets ................................. -- (7,961)
Deferred income taxes .............................. 355 4,943
Contingency reserve tax deduction .................. 14,350 25,257
--------- -----------
Statutory basis amounts ............................ $ 55,449 $ 246,596
========= ===========
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 reserve ................................ -- (49,330)
Nonadmitted assets ................................. -- (3,587)
Deferred income taxes .............................. 122 302
Contingency reserve tax deduction .................. 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 costs .................. (1,545) (4,419)
Compensation expense ............................... 35,741 --
Contingency reserve ................................ -- (18,892)
Nonadmitted assets ................................. -- (3,045)
Deferred income taxes .............................. 44 1,787
Contingency reserve tax deduction .................. 607 607
--------- -----------
Statutory basis amounts ............................ $ 12,294 $ 239,407
========= ===========
</TABLE>
F-11
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. INVESTMENTS
The amortized cost and fair value of investments in fixed-maturity
securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gain Loss Fair Value
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
At December 31, 1997:
U.S. Treasury........................ $ 30,785 $ 349 $ 58 $ 31,076
States and political subdivisions.... 277,547 11,918 -- 289,465
Corporate securities................. 18,416 317 37 18,696
Mortgage-backed securities........... 34,912 267 96 35,083
--------- ---------- ---------- ----------
Total fixed maturities.................... $ 1,660 12,851 191 $374,320
========= ========== ========== ==========
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
========= ========== ========== ==========
</TABLE>
The carrying amount of the Company's fixed-maturity securities 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, 1997, by contractual maturity,
follows:
<TABLE>
<CAPTION>
Amortized Cost Fair Value
-------------- ----------
(in thousands)
<S> <C> <C>
Due in one year or less........................ $ 601 $ 601
Due after one year through five years.......... 45,171 45,794
Due after five years through ten years......... 151,918 157,553
Due after ten years............................ 129,058 135,289
Mortgage-backed securities..................... 34,912 35,083
-------------- ----------
$361,660 $374,320
============== ==========
</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
6. INVESTMENTS (CONTINUED)
Proceeds from sales of fixed-maturity securities were $40.6 million,
$46.1 million, and $28.4 million in 1997, 1996 and 1995, respectively.
Gross gains and losses realized on those sales are presented below:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Realized on sales of fixed-maturity securities:
Gains......................................... $1,224 $ 676 $ 520
Losses........................................ (57) (515) (29)
------ ------ ------
Net realized gains.................................. $1,167 $ 161 $ 491
====== ====== ======
</TABLE>
The changes in net unrealized gains (losses) on investments in
fixed-maturity securities were $12.3 million in 1997, ($4.6 million) in
1996, and $10.0 million in 1995.
At December 31, 1997, investments with a carrying amount of $8.5
million were on deposit with state insurance departments to satisfy
regulatory requirements.
The composition of net investment income is as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Fixed-maturity securities $18,580 $15,701 $6,684
Short-term investments 422 1,529 1,087
------- ------- ------
19,002 17,230 7,771
Less: Investment expenses 395 359 159
------- ------- ------
Net investment income $18,607 $16,871 $7,612
======= ======= ======
</TABLE>
F - 13
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
5. LOSS RESERVES
The following table is a reconciliation of the beginning and ending
loss reserves for the years shown:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1997 1996 1995
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Balance, January 1....................................... $18,730 $ 7,092 $ 262
Losses and loss adjustment expenses, principally in
respect of default notices occurring in:
Current year................................... 29,196 20,344 7,037
Prior years.................................... 1,076 337 720
------- ------- ------
Total losses and loss adjustment expenses...... 30,272 20,681 7,757
------- ------- ------
Loss and loss adjustment expense payments principally
in respect of default notices occurring in:
Current year................................... 4,537 3,821 520
Prior years.................................... 13,185 5,222 407
------- ------- ------
Total payments................................. 17,722 9,043 927
------- ------- ------
Balance, December 31..................................... $31,280 $18,730 $7,092
======= ======= ======
</TABLE>
6. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
At December 31, 1997 1996
------ ------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs........... $2,722 $1,949
Unrealized gain on investments.............. 4,431 120
Tax over book depreciation.................. 396 205
Other....................................... 323 192
------ ------
Total deferred tax liabilities................... 7,872 2,466
Deferred tax assets:
Unearned premium reserves................... 1,594 1,425
Accrued liabilities......................... 43 43
Reserve discounting......................... 773 520
Other....................................... 447 189
------ ------
Total deferred tax assets........................ 2,857 2,177
------ ------
Net deferred tax liability....................... $5,015 $ 289
====== ======
</TABLE>
F - 14
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6. INCOME TAXES (CONTINUED)
The nature of the Company's deferred tax assets and liabilities at
December 31, 1997 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 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
$14.4 million and $10.9 million of Tax and Loss Bonds in 1997 and 1996,
respectively, as payment of current income taxes, and paid income taxes of
$.8 million in 1995.
The Company's income tax provision varied from the statutory federal
income tax rate applied to its net income (loss) before taxes as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Statutory federal income tax rate applied to
income (loss) before taxes........................ $19,834 $13,857 $(7,487)
Add (deduct) tax effect of:
Nondeductible compensation........................ -- -- 12,509
Tax-exempt interest............................... (4,016) (2,785) (533)
Decrease in valuation allowance................... -- -- (2,753)
Nondeductible goodwill amortization and
other nondeductible expenses................. 113 106 77
Other (net)....................................... (22) 185 (394)
------- ------- -------
Income tax provision................................... $15,909 $11,363 $1,419
======= ======= =======
</TABLE>
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 $5.2 million in 1997,
$1.8 million in 1996 and $.4 million in 1995. Amerin Guaranty would remain
liable to its policyholders to the extent that such reinsurers do not meet
their obligations under these arrangements.
8. RELATED PARTY TRANSACTIONS
During 1997 and 1996, both the Company and its subsidiaries maintained
cash accounts at an affiliate of one of the principal stockholders.
F - 15
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 8.3 million shares of common stock may 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.
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:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income (loss).................... $38,013 $27,788 $(22,857)
Pro forma net income (loss) per common share
Basic..................................... $ 1.46 $ 1.07 $ (2.32)
Diluted................................... $ 1.45 $ 1.06 $ (2.32)
</TABLE>
For purposes of the pro forma disclosures, the estimated fair values of
the option grants are amortized to expenses 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:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Dividend yield........................ 0% 0% 0%
Risk-free interest rate............... 6.5% 6.5% 6.5%
Volatility............................ 49.4% 51.3% 51.3%
Expected life (years)................. 6.0 6.0 6.0
</TABLE>
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 1997, 1996 and 1995 pro forma amounts do not include pro forma
compensation expense related to grants made prior to 1995.
F - 16
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
9. INCENTIVE COMPENSATION (CONTINUED)
Transactions related to all stock options are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------ -------- ------ -------- ------ --------
(in thousands, except price data)
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 943 $11.40 692 $ 5.11 5,053 $ .85
Granted 1,030 19.04 329 23.02 71 10.32
Exercised (63) 4.54 (73) 4.25 -- --
Canceled (90) 18.10 (5) 5.30 (4,432) .33
----- ------ --- ------ ------ ------
Ending Balance 1,820 $15.64 943 $11.40 692 $ 5.11
===== ====== === ====== ====== ======
Exercisable at end of year 445 295 198
=====
</TABLE>
Under the plan, 1,016,000 shares were available for grant as awards or
options at December 31, 1997.
Information regarding options outstanding and exercisable at December
31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Weighted
Number Contractual Life Average Number Average Exercise
Outstanding (in years) Exercise Price Exercisable Price
----------- ---------------- -------------- ----------- ----------------
(in thousands, except price data)
<S> <C> <C> <C> <C> <C>
$ 4.24 - $ 5.30 504 8.4 $ 4.60 383 $ 4.57
$16.00 - $17.75 830 9.3 17.70 11 16.00
$21.25 - $26.875 486 9.1 23.56 51 23.74
----------- ---------------- -------------- ----------- -----------
1,820 9.0 $15.64 445 $ 7.05
=========== ================ ============== =========== ===========
</TABLE>
The weighted average fair value per share of options granted was $10.60,
$13.07, and $12.11 in 1997, 1996, and 1995, respectively.
F - 17
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
PREFERRED STOCK
Prior to the redemption on December 1, 1995 of the outstanding shares of
13.5% Redeemable Cumulative Convertible Preferred Stock, each such share was
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 totaled $5.3 million and were paid in additional
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 diluted share would have been reduced to $(1.58).
The Company has 10,000,000 authorized shares of preferred stock with a $.01
par value.
COMMON STOCK
Activity for Amerin Corporation's outstanding Common Stock, $.01 par
value, is as follows:
<TABLE>
<CAPTION>
Number of Shares
---------------------------
Voting Nonvoting
Common Common
Stock Stock
---------- ----------
<S> <C> <C>
Outstanding at January 1, 1995.................. 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 --
Options surrendered............................. (5,978) --
---------- ---------
Outstanding at December 31, 1996................ 22,471,214 3,609,625
Shares issued under long-term incentive plan.... 1,263 --
Options exercised............................... 63,532 --
Conversion to voting common stock............... 1,952,716 (1,952,716)
---------- ---------
Outstanding at December 31, 1997................ 24,488,725 1,656,909
========== =========
</TABLE>
F - 18
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
Prior to the Company's initial public offering, the Company's Chairman and
President owned 11 million 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 shall 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.
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.
The Company entered into a noncancelable operating lease for office
space that expires in 2005. 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 1998, $.2 million in 1999,
$.2 million in 2000, $.3 million in 2001, $.3 million in 2002 and $.8 million
thereafter. Rent expense for 1997, 1996 and 1995 was $.6 million, $.6
million and $.3 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.
F - 19
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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
$218.6 million and $214.1 million at December 31, 1997 and 1996 respectively.
The statutory basis capital and surplus of Amerin Re was $28.0 million and
$32.6 million at December 31, 1997 and 1996, 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, 1997, the Company's insurance subsidiaries' risk-to-capital
ratios were below these limits.
The payment of dividends from unassigned surplus 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 surplus or net income. The
total amount of dividends that could be paid in 1998 without regulatory approval
is approximately $2.8 million.
In addition, dividend restrictions have been placed on the Company and
its subsidiaries by Moody's Investors Services, Inc., Fitch Investors
Services, L.P., 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.
13. STANDBY COMMITMENTS
The claims-paying ability of Amerin Guaranty is rated "AA" by Standard &
Poor's Corporation, "AA" by Fitch Investors Services, L.P., 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. The Company was charged
fees for the standby commitments that amounted to $.9 million in 1995.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1997
Net premiums earned................ $ 20,491 $ 21,913 $ 24,001 $ 25,924
Net investment income and other.... 4,461 4,597 4,775 5,941
Net income......................... 8,669 9,715 10,529 11,846
Net income per common share:
Basic............................ .33 .37 .40 .45
Diluted.......................... .33 .37 .40 .45
1996
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 per common share:
Basic............................ .22 .26 .29 .32
Diluted.......................... .22 .25 .29 .31
</TABLE>
F - 20
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
15. NET INCOME (Loss) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Net income (loss) $40,759 $28,229 $(22,811)
Less pay-in-kind dividends on preferred stock -- -- (5,287)
------- ------- --------
Net income (loss) applicable to common stockholders $40,759 $28,229 $(28,098)
======= ======= ========
Weighted average number of common shares outstanding 26,119 26,038 12,106
Dilutive effect of stock options using the treasury stock method 364 313 --
------- ------- --------
Weighted average number of common and common equivalent
shares outstanding 26,483 26,351 12,106
======= ======= ========
Net income (loss) per common share:
Basic $ 1.56 $ 1.08 $ (2.32)
Diluted 1.54 1.07 (2.32)
</TABLE>
For 1997, 1996 and 1995, the weighted average number of common shares
includes 13,340,000 shares issued on November 28, 1995, in conjunction with
the Company's initial public offering. Weighted average shares in 1997, 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 common and
common equivalent shares outstanding. During 1995, the Company's stock
options are antidilutive and are excluded from average common and common
equivalent shares outstanding. 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 diluted
net loss per share in 1995.
F - 21
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
--------- --------
ASSETS
<S> <C> <C>
Investment in subsidiaries......................................... $340,499 $294,436
Investments
Fixed maturities available-for-sale, at fair value............. 805 1,936
Short-term investments......................................... 4 350
-------- --------
Total investments........................................... 809 2,286
Cash............................................................... 20 128
Accrued investment income.......................................... 16 46
Goodwill, net of accumulated amortized (1997 -- $844;
1996 -- $695).................................................. 2,133 2,282
Other intangibles, net of accumulated amortization (1997 -- $1,616;
1996 -- $1,460)................................................ -- 156
Due from Subsidiaries.............................................. 4,682 --
Federal income taxes recoverable................................... 1,803 847
Other assets....................................................... 490 619
-------- --------
Total assets................................................ $350,452 $300,800
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
LIABILITIES
Due to subsidiaries................................................ -- 64
Accounts payable and other liabilities............................. 297 127
-------- --------
Total liabilities............................................ 297 191
COMMON STOCKHOLDERS' EQUITY
Voting Common Stock............................................. 245 225
Non-voting Common Stock......................................... 17 36
Additional paid-in capital...................................... 316,642 315,863
Net unrealized investment gains................................. 8,229 222
Retained earnings (deficit)..................................... 25,022 (15,737)
-------- --------
Total common stockholders's equity................................. 350,155 300,609
-------- --------
Total liabilities and common stockholders' equity.................. $350,452 $300,800
======== ========
See notes to consolidated financial statements
F - 22
</TABLE>
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
------ ------- --------
(in thousands)
REVENUES
<S> <C> <C> <C>
Net investment income......................................... $ 80 $ 149 $ 283
Realized investment losses.................................... (3) -- (2)
------- ------- ---------
Total revenues............................................. 77 149 281
EXPENSES
Administrative and other...................................... 1,611 1,084 581
------- ------- ---------
Loss before equity in undistributed net income or
loss of subsidiaries and income-tax benefit................... (1,534) (935) (300)
Equity in undistributed net income
(loss) of subsidiaries.................................... 41,860 28,906 (22,554)
------- ------- ---------
Net income (loss) before income taxes............................. 40,326 27,971 (22,854)
Federal income-tax benefit........................................ (433) (258) (43)
------- ------- ---------
Net income (loss)........................................... 40,759 28,229 (22,811)
Pay-in-kind dividends on preferred stock.......................... -- -- 5,287
------- ------- ---------
Net income (loss) applicable to common stockholders............... $40,759 $28,229 $(28,098)
======= ======= =========
See notes to consolidated financial statements
</TABLE>
F - 23
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
----------- -------------- -------------
<S> <C> <C> <C>
(in thousands)
Net cash provided (used) by operating activities.. $ (1,159) $(1,778) $ 974
Investing activities:
Capital contribution to subsidiaries.......... (1,243) -- (152,000)
Purchase of:
Fixed maturities............................. -- -- (1,977)
Short-term investments, net.................. -- -- (1,295)
Sale of:
Fixed maturities............................. 1,198 -- --
Short-term investments, net.................. 346 945 --
----------- -------------- -------------
Net cash provided (used) by
investing activities........................ 301 945 (155,272)
Financing activities:
Issuance of common stock....................... 750 713 200,152
Redemption of preferred stock.................. -- -- (46,042)
----------- -------------- -------------
Net cash provided by financing
activities.................................. 750 713 154,110
----------- -------------- -------------
Decrease in cash............................. (108) (120) (188)
Cash at beginning of year......................... 128 248 436
----------- -------------- -------------
Cash at end of year............................... $ 20 $ 128 $ 248
----------- -------------- -------------
----------- -------------- -------------
</TABLE>
See notes to consolidated financial statements
F-24
<PAGE>
<TABLE>
<CAPTION>
Amerin Corporation and Subsidiaries
Schedule III -- Supplementary Insurance Information
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
Loss and Benefits, Amortization
Deferred Loss Claims, of Deferred
Policy Adjustment Unearned Future Net Losses and Policy Other Net
Acquisition Expense Premium Policy Premium Investment Settlement Acquisition Operating Premiums
Costs Reserves Reserves Benefits Revenues Income Expenses Costs Expenses Written
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 Mortgage Guaranty $7,776 $31,280 $23,352 $ -- $92,329 $19,774 $30,272 $7,102 $18,061 $94,740
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
</TABLE>
F - 25
<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
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Accumulated amortization of goodwill $ 695 $ 149 $ -- $ 844
Accumulated amortization of furniture and equipment 1,625 1,211 61 2,775
Accumulated amortization of other intangibles 1,460 156 -- 1,616
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
</TABLE>
F - 26
<PAGE>
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997,
is made and entered by and between Amerin Corporation, a Delaware corporation
(the "Company"), and Gerald L. Friedman (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company or one or more of
its Subsidiaries and has made and is expected to continue to make major
contributions to the short- and long-term profitability, growth and financial
strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most publicly held
companies, the possibility of a Change in Control (as defined below) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior executives are not
practically disabled from discharging their duties in respect of a proposed
or actual transaction involving a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement
with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not less
than the Executive's annual fixed or base compensation as in effect
for Executive immediately prior to the occurrence of a Change in
Control or such higher rate as may be determined from time to time by
the Board or a committee thereof.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section 3(b),
the Executive shall have committed:
<PAGE>
(i) an intentional act of fraud, embezzlement or theft in connection
with his duties or in the course of his employment with the
Company or any Subsidiary;
(ii) intentional wrongful damage to property of the Company or any
Subsidiary;
(iii) intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary; or
(iv) intentional wrongful engagement in any Competitive Activity;
and any such act shall have been materially harmful to the Company.
For purposes of this Agreement, no act or failure to act on the part
of the Executive shall be deemed "intentional" if it was due primarily
to an error in judgment or negligence, but shall be deemed
"intentional" only if done or omitted to be done by the Executive not
in good faith and without reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for "Cause" hereunder unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the Board then in
office at a meeting of the Board called and held for such purpose,
after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel (if the Executive chooses to have
counsel present at such meeting), to be heard before the Board,
finding that, in the good faith opinion of the Board, the Executive
had committed an act constituting "Cause" as herein defined and
specifying the particulars thereof in detail. Nothing herein will
limit the right of the Executive or his beneficiaries to contest the
validity or propriety of any such determination.
(d) "Change in Control" means the occurrence during the Term of any of the
following events:
(i) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than a majority
of the combined voting power of the then-outstanding Voting Stock
of such corporation or person immediately after such transaction
are held in the aggregate by the holders of Voting Stock of the
Company immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or substantially all
of its assets to another corporation or other legal person, and
as a result of such sale or transfer less than [a majority] of
the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or
transfer is held in the aggregate by the holders of Voting Stock
of the Company immediately prior to such sale or transfer; or
2
<PAGE>
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Exchange Act, disclosing that
any person (as the term "person" is used in Section 13(d)(3)
or Section 14(d)(2) of the Exchange Act) other than an
Original Investor has become the beneficial owner (as the
term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange
Act) of securities representing 25% or more of the combined
voting power of the then-outstanding Voting Stock of the
Company;
Notwithstanding the foregoing provisions of Section 1(d)(iii), unless
otherwise determined in a specific case by majority vote of the Board,
a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(d)(iii) solely because (A) the Company, (B) a
Subsidiary, or (C) any Company-sponsored employee stock ownership plan
or any other employee benefit plan of the Company or any Subsidiary
either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form
8-K or Schedule 14A (or any successor schedule, form or report or item
therein) under the Exchange Act disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of 25% or otherwise, or
because the Company reports that a change in control of the Company
has occurred or will occur in the future by reason of such beneficial
ownership.
(e) "Competitive Activity" means the Executive's participation, without
the written consent of an officer of the Company, in the management of
any business enterprise if such enterprise engages in substantial and
direct competition with the Company and such enterprise's sales of any
product or service competitive with any product or service of the
Company amounted to 10% of such enterprise's net sales for its most
recently completely fiscal year and if the Company's net sales of said
product or service amounted to 10% of the Company's net sales for its
most recently completed fiscal year. "Competitive Activity" will not
include (i) the mere ownership of securities in any such enterprise
and the exercise of rights appurtenant thereto or (ii) participation
in the management of any such enterprise other than in connection with
the competitive operations of such enterprise.
(f) "Employee Benefits" means the perquisites, benefits and service credit
for benefits as provided under any and all employee retirement income
and welfare benefit policies, plans, programs or arrangements in which
Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension,
supplemental executive retirement, or other retirement income or
welfare benefit, deferred compensation, incentive compensation, group
or other life, health, medical/hospital or other insurance (whether
funded by actual insurance or self-insured by the Company),
disability, salary continuation, expense reimbursement and other
employee benefit policies, plans, programs or arrangements that may
now exist or any equivalent successor
3
<PAGE>
policies, plans, programs or arrangements that may be adopted
hereafter by the Company, providing perquisites, benefits and
service credit for benefits at least as great in the
aggregate as are payable thereunder prior to a Change in Control.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Incentive Pay" means an annual amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash
compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company, or any successor
thereto providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control.
(i) "Original Investor" means any of the five institutional investors
which owned any capital stock of the Company as of November 1, 1995.
(j) "Severance Period" means the period of time commencing on the date of
the first occurrence of a Change in Control and continuing until the
earliest of (i) the second anniversary of the occurrence of the Change
in Control, (ii) the Executive's death, or (iii) the Executive's
attainment of age 65.
(k) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
(l) "Term" means the period commencing as of the date hereof and expiring
as of the later of (i) the close of business on December 31, 2002, or
(ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that
(A) commencing on January 1, 2002 and each January 1 thereafter, the
term of this Agreement will automatically be extended for an
additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given notice
that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 9,
if, prior to a Change in Control, the Executive ceases for any reason
to be an employee of the Company and any Subsidiary, thereupon without
further action the Term shall be deemed to have expired and this
Agreement will immediately terminate and be of no further effect. For
purposes of this Section 1(k), the Executive shall not be deemed to
have ceased to be an employee of the Company and any Subsidiary by
reason of the transfer of Executive's employment between the Company
and any Subsidiary, or among any Subsidiaries.
(m) "Termination Date" means the date on which the Executive's employment
is terminated, the effective date of which shall be the date of
termination, or such other date that may be specified by the Executive
if the termination is pursuant to Section 3(b).
4
<PAGE>
(n) "Voting Stock" means securities entitled to vote generally in the
election of directors.
2. OPERATION OF AGREEMENT. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, this Agreement will not be operative unless and
until a Change in Control occurs. Upon the occurrence of a Change in
Control at any time during the Term, without further action, this Agreement
shall become immediately operative; PROVIDED, HOWEVER, that this Agreement
shall not become operative and shall be of no force and effect if operation
of this Agreement would cause the Company to be unable to use the pooling
of interests method of accounting in connection with the transactions
resulting in such Change in Control.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) In the event of the occurrence of a Change in Control, the Executive's
employment may be terminated by the Company during the Severance
Period and the Executive shall be entitled to the benefits provided by
Section 4 unless such termination is the result of the occurrence of
one or more of the following events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled within the meaning
of, and begins actually to receive disability benefits pursuant
to, the long-term disability plan in effect for, or applicable
to, Executive immediately prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is
terminated by the Company or any Subsidiary other than pursuant to
Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled
to the benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the Executive
may terminate employment with the Company and any Subsidiary during
the Severance Period with the right to severance compensation as
provided in Section 4 upon the occurrence of one or more of the
following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for such termination exists or has
occurred, including without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially
equivalent office or position, of or with the Company and/or a
Subsidiary, as the case may be, which the Executive held
immediately prior to a Change in Control, or the removal
5
<PAGE>
of the Executive as a Director of the Company (or any successor
thereto) if the Executive shall have been a Director of the
Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or
duties attached to the position with the Company and any
Subsidiary which the Executive held immediately prior to the
Change in Control, (B) a reduction in the aggregate of the
Executive's Base Pay and Incentive Pay received from the
Company and any Subsidiary, or (C) the termination or denial
of the Executive's rights to Employee Benefits or a
reduction in the scope or value thereof (except that the
level of any such Employee Benefits may be reduced in the
event of a corresponding reduction generally applicable to
all recipients of or participants in such Employee
Benefits), any of which is not remedied by the Company
within 10 calendar days after receipt by the Company of
written notice from the Executive of such change, reduction
or termination, as the case may be;
(ii) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially
all of its business and/or assets, unless the successor or
successors (by liquidation, merger, consolidation,
reorganization, transfer or otherwise) to which all or
substantially all of its business and/or assets have been
transferred (directly or by operation of law) assumed all duties
and obligations of the Company under this Agreement pursuant to
Section 11(a); or
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor
thereto.
(d) A termination by the Company pursuant to Section 3(a) or by the
Executive pursuant to Section 3(b) will not affect any rights that the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights
shall be governed by the terms thereof.
4. SEVERANCE COMPENSATION.
(a) If, following the occurrence of a Change in Control, the Company
terminates the Executive's employment during the Severance Period
other than pursuant to Section 3(a), or if the Executive terminates
his employment pursuant to Section 3(b), the Company will pay to the
Executive the following amounts within thirty business days after the
Termination Date and continue to provide to the Executive the
following benefits:
(i) A lump sum payment in an amount equal to three (3) times the Base
Pay (at the highest rate in effect for any period prior to the
Termination Date).
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(ii) For a period of two years following the Termination Date (the
"Continuation Period"), the Company will arrange to provide the
Executive with Employee Benefits that are welfare benefits (but
not stock option, stock purchase, stock appreciation or similar
compensatory benefits) substantially similar to those that the
Executive was receiving or entitled to receive immediately prior
to the Termination Date (or, if greater, immediately prior to the
reduction, termination, or denial described in Section 3(b)(ii)),
except that the level of any such Employee Benefits to be
provided to the Executive may be reduced in the event of a
corresponding reduction generally applicable to all recipients of
or participants in such Employee Benefits. If and to the extent
that any benefit described in the immediately preceding sentence
is not or cannot be paid or provided under any policy, plan,
program or arrangement of the Company or any Subsidiary, as the
case may be, then the Company will itself pay or provide for the
payment to the Executive, his dependents and beneficiaries, of
such Employee Benefits. Without otherwise limiting the purposes
or effect of Section 5, Employee Benefits otherwise receivable by
the Executive pursuant to the first sentence of this
Section 4(a)(ii) will be reduced to the extent comparable welfare
benefits are actually received by the Executive from another
employer during the Continuation Period following the Executive's
Termination Date, and any such benefits actually received by the
Executive shall be reported by the Executive to the Company.
(b) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will
pay interest on the amount or value thereof at an annualized rate of
interest equal to the so-called composite "prime rate" as quoted from
time to time during the relevant period in the Northeast Edition of
THE WALL STREET JOURNAL. Such interest will be payable as it accrues
on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(c) Notwithstanding any provision of this Agreement to the contrary, the
parties' respective rights and obligations under this Section 4 and
under Sections 5 and 7 will survive any termination or expiration of
this Agreement or the termination of the Executive's employment
following a Change in Control for any reason whatsoever.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, but
subject to Section 5(h), in the event that this Agreement shall become
operative and it shall be determined (as hereafter provided) that any
payment or distribution by the Company or any of its affiliates to or
for the benefit of the Executive paid or payable or distributed or
distributable pursuant to the terms of this Agreement (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the
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Internal Revenue Code of 1986, as amended (the "Code") (or any
successor provision thereto) by reason of being considered "contingent
on a change in ownership or control" of the Company, within the
meaning of Section 280G of the Code (or any successor provision
thereto) or to any similar tax imposed by state or local law, or any
interest or penalties with respect to such tax (such tax or taxes,
together with any such interest and penalties, being hereafter
collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment or payments
(collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be
in an amount such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such
taxes), including any Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations required
to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether
a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, shall be
made by a nationally recognized accounting firm (the "Accounting
Firm") selected by the Executive in his sole discretion. The
Executive shall direct the Accounting Firm to submit its determination
and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if
applicable, and any such other time or times as may be requested by
the Company or the Executive. If the Accounting Firm determines that
any Excise Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to the Executive within fifteen business
days after receipt of such determination and calculations with respect
to any Payment to the Executive. If the Accounting Firm determines
that no Excise Tax is payable by the Executive, it shall, at the same
time as it makes such determination, furnish the Company and the
Executive an opinion that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or
other tax return. As a result of the uncertainty in the application
of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or
local tax law at the time of any determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have
been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In
the event that the Company exhausts or fails to pursue its remedies
pursuant to Section 5(f) and the Executive thereafter is required to
make a payment of any Excise Tax, the Executive shall direct the
Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting
calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment shall be promptly paid by the Company
to, or for the benefit of, the Executive within fifteen business days
after receipt of such determination and calculations.
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(c) The Company and the Executive shall each provide the Accounting Firm
access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by
Section 5(b). Any determination by the Accounting Firm as to the
amount of the Gross-Up Payment shall be binding upon the Company and
the Executive.
(d) The federal, state and local income or other tax returns filed by the
Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax
payable by the Executive. The Executive shall make proper payment of
the amount of any Excise Payment, and at the request of the Company,
provide to the Company true and correct copies (with any amendments)
of his federal income tax return as filed with the Internal Revenue
Service and corresponding state and local tax returns, if relevant, as
filed with the applicable taxing authority, and such other documents
reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting
Firm determines that the amount of the Gross-Up Payment should be
reduced, the Executive shall within fifteen business days pay to the
Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
Section 5(b) shall be borne by the Company. If such fees and expenses
are initially paid by the Executive, the Company shall reimburse the
Executive the full amount of such fees and expenses within fifteen
business days after receipt from the Executive of a statement therefor
and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up
Payment. Such notification shall be given as promptly as practicable
but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise
the Company of the nature of such claim and the date on which such
claim is requested to be paid (in each case, to the extent known by
the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following
the date on which he gives such notice to the Company and (ii) the
date that any payment of amount with respect to such claim is due. If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the
Company;
9
<PAGE>
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the
subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all
costs and expenses (including interest and penalties) incurred in
connection with such contest and shall indemnify and hold harmless the
Executive, on an after-tax basis, for and against any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and
expenses. Without limiting the foregoing provisions of this Section
5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and,
at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim (provided, however, that the
Executive may participate therein at his own cost and expense) and
may, at its option, either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
PROVIDED, HOWEVER, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and
shall indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such
advance; and PROVIDED FURTHER, HOWEVER, that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which the contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of any such contested claim shall
be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(f), the Executive receives any refund
with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 5(f)) promptly
pay to the Company the amount of such refund (together with any
interest paid or credited thereon after any taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced
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<PAGE>
by the Company pursuant to Section 5(f), a determination is made
that the Executive shall not be entitled to any refund with respect
to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial or refund prior to the
expiration of 30 calendar days after such determination, then such
advance shall be forgiven and shall not be required to be repaid
and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the
Company to the Executive pursuant to this Section 5.
(h) Notwithstanding any provision of this Agreement to the contrary, if
(i) but for this sentence, the Company would be obligated to make a
Gross-Up Payment to the Executive, (ii) the aggregate "present value"
of the "parachute payments" to be paid or provided to the Executive
under this Agreement or otherwise does not exceed 1.15 multiplied by
three times the Executive's "base amount," and (iii) but for this
sentence, the net after-tax benefit to the Executive of the Gross-Up
Payment would not exceed $50,000 (taking into account both income
taxes and any Excise Tax) as compared to the maximum net after-tax
benefit to the Executive of parachute payments the present value of
which is not equal to or greater than three times the Executive's base
amount, then the payments and benefits to be paid or provided under
this Agreement will be reduced to the minimum extent necessary (but in
no event to less than zero) so that no portion of any payment or
benefit to the Executive, as so reduced, constitutes an "excess
parachute payment." For purposes of this Section 5(h), the terms
"excess parachute payment," "present value," "parachute payment," and
"base amount" will have the meanings assigned to them by Section 280G
of the Code. The determination of whether any reduction in such
payments or benefits to be provided under this Agreement is required
pursuant to the preceding sentence will be made at the expense of the
Company, if requested by the Executive or the Company, by the
Accounting Firm. The fact that the Executive's right to payments or
benefits may be reduced by reason of the limitations contained in this
Section 5(h) will not of itself limit or otherwise affect any other
rights of the Executive other than pursuant to this Agreement. In the
event that any payment or benefit intended to be provided under this
Agreement or otherwise is required to be reduced pursuant to this
Section 5(h), the Executive will be entitled to designate the payments
and/or benefits to be so reduced in order to give effect to this
Section 5(h). The Company will provide the Executive with all
information reasonably requested by the Executive to permit the
Executive to make such designation. In the event that the Executive
fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner
it deems appropriate.
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be
difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date and that the non-
competition covenant contained in Section 8 will further limit the
employment opportunities for the Executive. Accordingly, the payment of the
severance compensation by the Company to the Executive in accordance with
the terms of this Agreement is hereby acknowledged by the Company to
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be reasonable, and the Executive will not be required to mitigate the
amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor will any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part
of the Executive hereunder or otherwise, except as expressly
provided in the last sentence of Section 4(a)(ii).
7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to
be extended to the Executive hereunder. Accordingly, if it should appear
to the Executive that the Company has failed to comply with any of its
obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this
Agreement void or unenforceable, or institutes any litigation or other
action or proceeding designed to deny, or to recover from, the Executive
the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to
time to retain counsel of Executive's choice, at the expense of the Company
as hereafter provided, to advise and represent the Executive in connection
with any such interpretation, enforcement or defense, including without
limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive's entering into an attorney-client relationship
with such counsel, and in that connection the Company and the Executive
agree that a confidential relationship shall exist between the Executive
and such counsel. Without respect to whether the Executive prevails, in
whole or in part, in connection with any of the foregoing, the Company will
pay and be solely financially responsible for any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
of the foregoing.
8. COMPETITIVE ACTIVITY. During a period ending one year following the
Termination Date, if the Executive shall have received or shall be
receiving benefits under Section 4, and, if applicable, Section 5, the
Executive shall not, without the prior written consent of the Company,
which consent shall not be unreasonably withheld, engage in any Competitive
Activity.
9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will
create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office
or position in the Company or any Subsidiary following the commencement of
any discussion with a third person that ultimately results in a Change in
Control shall be deemed to be a termination or removal of the Executive
after a Change in Control for purposes of this Agreement.
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10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as the Company
is required to withhold pursuant to any law or government regulation or
ruling.
11. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all
or substantially all of the business or assets of the Company, by
agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform
if no such succession had taken place. This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the
Company, including without limitation any persons acquiring directly
or indirectly all or substantially all of the business or assets of
the Company whether by purchase, merger, consolidation, reorganization
or otherwise (and such successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise
be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 11(a) and 11(b). Without limiting the
generality or effect of the foregoing, the Executive's right to
receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest, or
otherwise, other than by a transfer by Executive's will or by the laws
of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 11(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
12. NOTICES. For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to
the Company (to the attention of the Secretary of the Company) at its
principal executive office and to the Executive at his principal residence,
or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of
address shall be effective only upon receipt.
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13. GOVERNING LAW. The validity, interpretation, construction and performance
of this Agreement will be governed by and construed in accordance with the
substantive laws of the State of Illinois, without giving effect to the
principles of conflict of laws of such State.
14. VALIDITY. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will
not be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance
with any condition or provision of this Agreement to be performed by such
other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements
or representations, oral or otherwise, expressed or implied with respect to
the subject matter hereof have been made by either party which are not set
forth expressly in this Agreement. References to Sections are to
references to Sections of this Agreement.
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16. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together
will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
Amerin Corporation
By: /S/Randolph C. Sailer II
________________________
Senior Vice President
/s/ GERALD L. FRIEDMAN
_________________________
Gerald L. Friedman
<PAGE>
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997,
is made and entered by and between Amerin Corporation, a Delaware corporation
(the "Company"), and Roy J. Kasmar (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company or one or more of
its Subsidiaries and has made and is expected to continue to make major
contributions to the short- and long-term profitability, growth and financial
strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most publicly held
companies, the possibility of a Change in Control (as defined below) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior executives are not
practically disabled from discharging their duties in respect of a proposed
or actual transaction involving a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement
with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not less
than the Executive's annual fixed or base compensation as in effect
for Executive immediately prior to the occurrence of a Change in
Control or such higher rate as may be determined from time to time by
the Board or a committee thereof.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section 3(b),
the Executive shall have committed:
<PAGE>
(i) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment
with the Company or any Subsidiary;
(ii) intentional wrongful damage to property of the Company or any
Subsidiary;
(iii) intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary; or
(iv) intentional wrongful engagement in any Competitive Activity;
and any such act shall have been materially harmful to the Company.
For purposes of this Agreement, no act or failure to act on the part
of the Executive shall be deemed "intentional" if it was due primarily
to an error in judgment or negligence, but shall be deemed
"intentional" only if done or omitted to be done by the Executive not
in good faith and without reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for "Cause" hereunder unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the Board then in
office at a meeting of the Board called and held for such purpose,
after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel (if the Executive chooses to have
counsel present at such meeting), to be heard before the Board,
finding that, in the good faith opinion of the Board, the Executive
had committed an act constituting "Cause" as herein defined and
specifying the particulars thereof in detail. Nothing herein will
limit the right of the Executive or his beneficiaries to contest the
validity or propriety of any such determination.
(d) "Change in Control" means the occurrence during the Term of any of the
following events:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization less
than a majority of the combined voting power of the
then-outstanding Voting Stock of such corporation or person
immediately after such transaction are held in the aggregate
by the holders of Voting Stock of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or substantially
all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than [a
majority] of the combined voting power of the then-outstanding
Voting Stock of such corporation or person immediately after
such sale or transfer is held in the aggregate by the holders
of Voting Stock of the Company immediately prior to such sale
or transfer; or
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(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated
pursuant to the Exchange Act, disclosing that any person (as
the term "person" is used in Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act) other than an Original
Investor has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange
Act) of securities representing 25% or more of the combined
voting power of the then-outstanding Voting Stock of the
Company;
Notwithstanding the foregoing provisions of Section 1(d)(iii), unless
otherwise determined in a specific case by majority vote of the Board,
a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(d)(iii) solely because (A) the Company, (B) a
Subsidiary, or (C) any Company-sponsored employee stock ownership plan
or any other employee benefit plan of the Company or any Subsidiary
either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form
8-K or Schedule 14A (or any successor schedule, form or report or item
therein) under the Exchange Act disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of 25% or otherwise, or
because the Company reports that a change in control of the Company
has occurred or will occur in the future by reason of such beneficial
ownership.
(e) "Competitive Activity" means the Executive's participation, without
the written consent of an officer of the Company, in the management of
any other mortgage guaranty insurance company or any majority or sole
owner of any mortgage guaranty insurance company, including becoming
an employee, owner (except for passive investments of not more than
one percent of the outstanding shares of, or any other equity interest
in, any company or entity listed or traded on a national securities
exchange or in an over-the-counter security market), officer, agent,
consultant or director of any such company or owner thereof.
(f) "Employee Benefits" means the perquisites, benefits and service credit
for benefits as provided under any and all employee retirement income
and welfare benefit policies, plans, programs or arrangements in which
Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension,
supplemental executive retirement, or other retirement income or
welfare benefit, deferred compensation, incentive compensation, group
or other life, health, medical/hospital or other insurance (whether
funded by actual insurance or self-insured by the Company),
disability, salary continuation, expense reimbursement and other
employee benefit policies, plans, programs or arrangements that may
now exist or any equivalent successor policies, plans, programs or
arrangements that may be adopted hereafter by the Company, providing
perquisites, benefits and service credit for benefits at least as
great in the aggregate as are payable thereunder prior to a Change in
Control.
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(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Incentive Pay" means an annual amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash
compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company, or any successor
thereto providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control.
(i) "Original Investor" means any of the five institutional investors
which owned any capital stock of the Company as of November 1, 1995.
(j) "Severance Period" means the period of time commencing on the date of
the first occurrence of a Change in Control and continuing until the
earliest of (i) the second anniversary of the occurrence of the Change
in Control, (ii) the Executive's death, or (iii) the Executive's
attainment of age 65.
(k) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
(l) "Term" means the period commencing as of the date hereof and expiring
as of the later of (i) the close of business on December 31, 2002, or
(ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that
(A) commencing on January 1, 2002 and each January 1 thereafter, the
term of this Agreement will automatically be extended for an
additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given notice
that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 9,
if, prior to a Change in Control, the Executive ceases for any reason
to be an employee of the Company and any Subsidiary, thereupon without
further action the Term shall be deemed to have expired and this
Agreement will immediately terminate and be of no further effect. For
purposes of this Section 1(k), the Executive shall not be deemed to
have ceased to be an employee of the Company and any Subsidiary by
reason of the transfer of Executive's employment between the Company
and any Subsidiary, or among any Subsidiaries.
(m) "Termination Date" means the date on which the Executive's employment
is terminated, the effective date of which shall be the date of
termination, or such other date that may be specified by the Executive
if the termination is pursuant to Section 3(b).
(n) "Voting Stock" means securities entitled to vote generally in the
election of directors.
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2. OPERATION OF AGREEMENT. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, this Agreement will not be operative unless and
until a Change in Control occurs. Upon the occurrence of a Change in
Control at any time during the Term, without further action, this Agreement
shall become immediately operative; PROVIDED, HOWEVER, that this Agreement
shall not become operative and shall be of no force and effect if operation
of this Agreement would cause the Company to be unable to use the pooling
of interests method of accounting in connection with the transactions
resulting in such Change in Control.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) In the event of the occurrence of a Change in Control, the Executive's
employment may be terminated by the Company during the Severance
Period and the Executive shall be entitled to the benefits provided by
Section 4 unless such termination is the result of the occurrence of
one or more of the following events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled within the
meaning of, and begins actually to receive disability benefits
pursuant to, the long-term disability plan in effect for, or
applicable to, Executive immediately prior to the Change in
Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is
terminated by the Company or any Subsidiary other than pursuant to
Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled
to the benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the Executive
may terminate employment with the Company and any Subsidiary during
the Severance Period with the right to severance compensation as
provided in Section 4 upon the occurrence of one or more of the
following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for such termination exists or has
occurred, including without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially
equivalent office or position, of or with the Company and/or a
Subsidiary, as the case may be, which the Executive held
immediately prior to a Change in Control, or the removal of
the Executive as a Director of the Company (or any successor
thereto) if the Executive shall have been a Director of the
Company immediately prior to the Change in Control;
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(ii) (A) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties
attached to the position with the Company and any Subsidiary
which the Executive held immediately prior to the Change in
Control, (B) a reduction in the aggregate of the Executive's
Base Pay and Incentive Pay received from the Company and any
Subsidiary, or (C) the termination or denial of the
Executive's rights to Employee Benefits or a reduction in the
scope or value thereof (except that the level of any such
Employee Benefits may be reduced in the event of a
corresponding reduction generally applicable to all recipients
of or participants in such Employee Benefits), any of which is
not remedied by the Company within 10 calendar days after
receipt by the Company of written notice from the Executive of
such change, reduction or termination, as the case may be;
(ii) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or
substantially all of its business and/or assets, unless the
successor or successors (by liquidation, merger,
consolidation, reorganization, transfer or otherwise) to which
all or substantially all of its business and/or assets have
been transferred (directly or by operation of law) assumed all
duties and obligations of the Company under this Agreement
pursuant to Section 11(a); or
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any
successor thereto.
(d) A termination by the Company pursuant to Section 3(a) or by the
Executive pursuant to Section 3(b) will not affect any rights that the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights
shall be governed by the terms thereof.
4. SEVERANCE COMPENSATION.
(a) If, following the occurrence of a Change in Control, the Company
terminates the Executive's employment during the Severance Period
other than pursuant to Section 3(a), or if the Executive terminates
his employment pursuant to Section 3(b), the Company will pay to the
Executive the following amounts within thirty business days after the
Termination Date and continue to provide to the Executive the
following benefits:
(i) A lump sum payment in an amount equal to three (3) times the
Base Pay (at the highest rate in effect for any period prior
to the Termination Date).
(ii) For a period of two years following the Termination Date (the
"Continuation Period"), the Company will arrange to provide
the Executive with Employee Benefits that are welfare benefits
(but not stock
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option, stock purchase, stock appreciation or similar
compensatory benefits) substantially similar to those that
the Executive was receiving or entitled to receive
immediately prior to the Termination Date (or, if greater,
immediately prior to the reduction, termination, or denial
described in Section 3(b)(ii)), except that the level of any
such Employee Benefits to be provided to the Executive may
be reduced in the event of a corresponding reduction
generally applicable to all recipients of or participants in
such Employee Benefits. If and to the extent that any
benefit described in the immediately preceding sentence is
not or cannot be paid or provided under any policy, plan,
program or arrangement of the Company or any Subsidiary, as
the case may be, then the Company will itself pay or provide
for the payment to the Executive, his dependents and
beneficiaries, of such Employee Benefits. Without otherwise
limiting the purposes or effect of Section 5, Employee
Benefits otherwise receivable by the Executive pursuant to
the first sentence of this Section 4(a)(ii) will be reduced
to the extent comparable welfare benefits are actually
received by the Executive from another employer during the
Continuation Period following the Executive's Termination
Date, and any such benefits actually received by the
Executive shall be reported by the Executive to the Company.
(b) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will
pay interest on the amount or value thereof at an annualized rate of
interest equal to the so-called composite "prime rate" as quoted from
time to time during the relevant period in the Northeast Edition of
THE WALL STREET JOURNAL. Such interest will be payable as it accrues
on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(c) Notwithstanding any provision of this Agreement to the contrary, the
parties' respective rights and obligations under this Section 4 and
under Sections 5 and 7 will survive any termination or expiration of
this Agreement or the termination of the Executive's employment
following a Change in Control for any reason whatsoever.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, but
subject to Section 5(h), in the event that this Agreement shall become
operative and it shall be determined (as hereafter provided) that any
payment or distribution by the Company or any of its affiliates to or
for the benefit of the Executive paid or payable or distributed or
distributable pursuant to the terms of this Agreement (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any
successor provision thereto) by reason of being considered "contingent
on a change in ownership or control" of the Company, within the
meaning of Section 280G of the
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Code (or any successor provision thereto) or to any similar tax
imposed by state or local law, or any interest or penalties with
respect to such tax (such tax or taxes, together with any such
interest and penalties, being hereafter collectively referred to as
the "Excise Tax"), then the Executive shall be entitled to receive
an additional payment or payments (collectively, a "Gross-Up
Payment"). The Gross-Up Payment shall be in an amount such that,
after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any
Excise Tax imposed upon the Gross-Up Payment, the Executive retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed
upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations required
to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether
a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, shall be
made by a nationally recognized accounting firm (the "Accounting
Firm") selected by the Executive in his sole discretion. The
Executive shall direct the Accounting Firm to submit its determination
and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if
applicable, and any such other time or times as may be requested by
the Company or the Executive. If the Accounting Firm determines that
any Excise Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to the Executive within fifteen business
days after receipt of such determination and calculations with respect
to any Payment to the Executive. If the Accounting Firm determines
that no Excise Tax is payable by the Executive, it shall, at the same
time as it makes such determination, furnish the Company and the
Executive an opinion that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or
other tax return. As a result of the uncertainty in the application
of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or
local tax law at the time of any determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have
been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In
the event that the Company exhausts or fails to pursue its remedies
pursuant to Section 5(f) and the Executive thereafter is required to
make a payment of any Excise Tax, the Executive shall direct the
Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting
calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment shall be promptly paid by the Company
to, or for the benefit of, the Executive within fifteen business days
after receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting Firm
access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in
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connection with the preparation and issuance of the determinations
and calculations contemplated by Section 5(b). Any determination
by the Accounting Firm as to the amount of the Gross-Up Payment
shall be binding upon the Company and the Executive.
(d) The federal, state and local income or other tax returns filed by the
Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax
payable by the Executive. The Executive shall make proper payment of
the amount of any Excise Payment, and at the request of the Company,
provide to the Company true and correct copies (with any amendments)
of his federal income tax return as filed with the Internal Revenue
Service and corresponding state and local tax returns, if relevant, as
filed with the applicable taxing authority, and such other documents
reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting
Firm determines that the amount of the Gross-Up Payment should be
reduced, the Executive shall within fifteen business days pay to the
Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
Section 5(b) shall be borne by the Company. If such fees and expenses
are initially paid by the Executive, the Company shall reimburse the
Executive the full amount of such fees and expenses within fifteen
business days after receipt from the Executive of a statement therefor
and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up
Payment. Such notification shall be given as promptly as practicable
but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise
the Company of the nature of such claim and the date on which such
claim is requested to be paid (in each case, to the extent known by
the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following
the date on which he gives such notice to the Company and (ii) the
date that any payment of amount with respect to such claim is due. If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by
the Company;
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including without limitation accepting legal
representation with respect to such claim by an attorney
competent in respect of the subject matter and reasonably
selected by the Company;
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(iii) cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) permit the Company to participate in any proceedings relating
to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all
costs and expenses (including interest and penalties) incurred in
connection with such contest and shall indemnify and hold harmless the
Executive, on an after-tax basis, for and against any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and
expenses. Without limiting the foregoing provisions of this Section
5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and,
at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim (provided, however, that the
Executive may participate therein at his own cost and expense) and
may, at its option, either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
PROVIDED, HOWEVER, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and
shall indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such
advance; and PROVIDED FURTHER, HOWEVER, that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which the contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of any such contested claim shall
be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(f), the Executive receives any refund
with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 5(f)) promptly
pay to the Company the amount of such refund (together with any
interest paid or credited thereon after any taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(f), a determination is made that the
Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest such denial or refund prior to the expiration of 30
calendar days after such determination, then such advance shall be
forgiven and shall not be required to be
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repaid and the amount of any such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid
by the Company to the Executive pursuant to this Section 5.
(h) Notwithstanding any provision of this Agreement to the contrary, if
(i) but for this sentence, the Company would be obligated to make a
Gross-Up Payment to the Executive, (ii) the aggregate "present value"
of the "parachute payments" to be paid or provided to the Executive
under this Agreement or otherwise does not exceed 1.15 multiplied by
three times the Executive's "base amount," and (iii) but for this
sentence, the net after-tax benefit to the Executive of the Gross-Up
Payment would not exceed $50,000 (taking into account both income
taxes and any Excise Tax) as compared to the maximum net after-tax
benefit to the Executive of parachute payments the present value of
which is not equal to or greater than three times the Executive's base
amount, then the payments and benefits to be paid or provided under
this Agreement will be reduced to the minimum extent necessary (but in
no event to less than zero) so that no portion of any payment or
benefit to the Executive, as so reduced, constitutes an "excess
parachute payment." For purposes of this Section 5(h), the terms
"excess parachute payment," "present value," "parachute payment," and
"base amount" will have the meanings assigned to them by Section 280G
of the Code. The determination of whether any reduction in such
payments or benefits to be provided under this Agreement is required
pursuant to the preceding sentence will be made at the expense of the
Company, if requested by the Executive or the Company, by the
Accounting Firm. The fact that the Executive's right to payments or
benefits may be reduced by reason of the limitations contained in this
Section 5(h) will not of itself limit or otherwise affect any other
rights of the Executive other than pursuant to this Agreement. In the
event that any payment or benefit intended to be provided under this
Agreement or otherwise is required to be reduced pursuant to this
Section 5(h), the Executive will be entitled to designate the payments
and/or benefits to be so reduced in order to give effect to this
Section 5(h). The Company will provide the Executive with all
information reasonably requested by the Executive to permit the
Executive to make such designation. In the event that the Executive
fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner
it deems appropriate.
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date and that the
non-competition covenant contained in Section 8 will further limit the
employment opportunities for the Executive. Accordingly, the payment of
the severance compensation by the Company to the Executive in accordance
with the terms of this Agreement is hereby acknowledged by the Company
to be reasonable, and the Executive will not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor will any profits, income, earnings or other
benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive
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hereunder or otherwise, except as expressly provided in the last sentence
of Section 4(a)(ii).
7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to
be extended to the Executive hereunder. Accordingly, if it should appear
to the Executive that the Company has failed to comply with any of its
obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this
Agreement void or unenforceable, or institutes any litigation or other
action or proceeding designed to deny, or to recover from, the Executive
the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to
time to retain counsel of Executive's choice, at the expense of the Company
as hereafter provided, to advise and represent the Executive in connection
with any such interpretation, enforcement or defense, including without
limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive's entering into an attorney-client relationship
with such counsel, and in that connection the Company and the Executive
agree that a confidential relationship shall exist between the Executive
and such counsel. Without respect to whether the Executive prevails, in
whole or in part, in connection with any of the foregoing, the Company will
pay and be solely financially responsible for any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
of the foregoing.
8. COMPETITIVE ACTIVITY. During a period ending one year following the
Termination Date, if the Executive shall have received or shall be
receiving benefits under Section 4, and, if applicable, Section 5, the
Executive shall not, without the prior written consent of the Company,
which consent shall not be unreasonably withheld, engage in any Competitive
Activity.
9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will
create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office
or position in the Company or any Subsidiary following the commencement of
any discussion with a third person that ultimately results in a Change in
Control shall be deemed to be a termination or removal of the Executive
after a Change in Control for purposes of this Agreement.
10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as the Company
is required to withhold pursuant to any law or government regulation or
ruling.
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11. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all
or substantially all of the business or assets of the Company, by
agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform
if no such succession had taken place. This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the
Company, including without limitation any persons acquiring directly
or indirectly all or substantially all of the business or assets of
the Company whether by purchase, merger, consolidation, reorganization
or otherwise (and such successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise
be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 11(a) and 11(b). Without limiting the
generality or effect of the foregoing, the Executive's right to
receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest, or
otherwise, other than by a transfer by Executive's will or by the laws
of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 11(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
12. NOTICES. For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to
the Company (to the attention of the Secretary of the Company) at its
principal executive office and to the Executive at his principal residence,
or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of
address shall be effective only upon receipt.
13. GOVERNING LAW. The validity, interpretation, construction and performance
of this Agreement will be governed by and construed in accordance with the
substantive laws of
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the State of Illinois, without giving effect to the principles of conflict
of laws of such State.
14. VALIDITY. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will
not be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance
with any condition or provision of this Agreement to be performed by such
other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements
or representations, oral or otherwise, expressed or implied with respect to
the subject matter hereof have been made by either party which are not set
forth expressly in this Agreement. References to Sections are to
references to Sections of this Agreement.
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16. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together
will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered as of the date first above written.
Amerin Corporation
By: /s/ Randolph C. Sailer II
_________________________
Senior Vice President
/s/ Roy J. Kasmar
_________________________
Roy J. Kasmar
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SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997,
is made and entered by and between Amerin Corporation, a Delaware
corporation (the "Company"), and Jerome J. Selitto (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company or one or more of
its Subsidiaries and has made and is expected to continue to make major
contributions to the short- and long-term profitability, growth and financial
strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most publicly held
companies, the possibility of a Change in Control (as defined below) exists;
WHEREAS, the Company desires to assure itself of both present and future
continuity of management and desires to establish certain minimum severance
benefits for certain of its senior executives, including the Executive,
applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior executives are not
practically disabled from discharging their duties in respect of a proposed
or actual transaction involving a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement
with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not less
than the Executive's annual fixed or base compensation as in effect
for Executive immediately prior to the occurrence of a Change in
Control or such higher rate as may be determined from time to time by
the Board or a committee thereof.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section 3(b),
the Executive shall have committed:
<PAGE>
(i) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment
with the Company or any Subsidiary;
(ii) intentional wrongful damage to property of the Company or any
Subsidiary;
(iii) intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary; or
(iv) intentional wrongful engagement in any Competitive Activity;
and any such act shall have been materially harmful to the Company.
For purposes of this Agreement, no act or failure to act on the part
of the Executive shall be deemed "intentional" if it was due primarily
to an error in judgment or negligence, but shall be deemed
"intentional" only if done or omitted to be done by the Executive not
in good faith and without reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for "Cause" hereunder unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the Board then in
office at a meeting of the Board called and held for such purpose,
after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel (if the Executive chooses to have
counsel present at such meeting), to be heard before the Board,
finding that, in the good faith opinion of the Board, the Executive
had committed an act constituting "Cause" as herein defined and
specifying the particulars thereof in detail. Nothing herein will
limit the right of the Executive or his beneficiaries to contest the
validity or propriety of any such determination.
(d) "Change in Control" means the occurrence during the Term of any of the
following events:
(i) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than a majority
of the combined voting power of the then-outstanding Voting Stock
of such corporation or person immediately after such transaction
are held in the aggregate by the holders of Voting Stock of the
Company immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or substantially all
of its assets to another corporation or other legal person, and
as a result of such sale or transfer less than [a majority] of
the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or
transfer is held in the aggregate by the holders of Voting Stock
of the Company immediately prior to such sale or transfer; or
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(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Exchange Act, disclosing that
any person (as the term "person" is used in Section 13(d)(3)
or Section 14(d)(2) of the Exchange Act) other than an
Original Investor has become the beneficial owner (as the
term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange
Act) of securities representing 25% or more of the combined
voting power of the then-outstanding Voting Stock of the
Company;
Notwithstanding the foregoing provisions of Section 1(d)(iii), unless
otherwise determined in a specific case by majority vote of the Board,
a "Change in Control" shall not be deemed to have occurred for
purposes of Section 1(d)(iii) solely because (A) the Company, (B) a
Subsidiary, or (C) any Company-sponsored employee stock ownership plan
or any other employee benefit plan of the Company or any Subsidiary
either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form
8-K or Schedule 14A (or any successor schedule, form or report or item
therein) under the Exchange Act disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of 25% or otherwise, or
because the Company reports that a change in control of the Company
has occurred or will occur in the future by reason of such beneficial
ownership.
(e) "Competitive Activity" means the Executive's participation, without
the written consent of an officer of the Company, in the management of
any business enterprise if such enterprise engages in substantial and
direct competition with the Company and such enterprise's sales of any
product or service competitive with any product or service of the
Company amounted to 10% of such enterprise's net sales for its most
recently completely fiscal year and if the Company's net sales of said
product or service amounted to 10% of the Company's net sales for its
most recently completed fiscal year. "Competitive Activity" will not
include (i) the mere ownership of securities in any such enterprise
and the exercise of rights appurtenant thereto or (ii) participation
in the management of any such enterprise other than in connection with
the competitive operations of such enterprise.
(f) "Employee Benefits" means the perquisites, benefits and service credit
for benefits as provided under any and all employee retirement income
and welfare benefit policies, plans, programs or arrangements in which
Executive is entitled to participate, including without limitation any
stock option, stock purchase, stock appreciation, savings, pension,
supplemental executive retirement, or other retirement income or
welfare benefit, deferred compensation, incentive compensation, group
or other life, health, medical/hospital or other insurance (whether
funded by actual insurance or self-insured by the Company),
disability, salary continuation, expense reimbursement and other
employee benefit policies, plans, programs or arrangements that may
now exist or any equivalent successor
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policies, plans, programs or arrangements that may be adopted
hereafter by the Company, providing perquisites, benefits and
service credit for benefits at least as great in the aggregate as
are payable thereunder prior to a Change in Control.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Incentive Pay" means an annual amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash
compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company, or any successor
thereto providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control.
(i) "Original Investor" means any of the five institutional investors
which owned any capital stock of the Company as of November 1, 1995.
(j) "Severance Period" means the period of time commencing on the date of
the first occurrence of a Change in Control and continuing until the
earliest of (i) the second anniversary of the occurrence of the Change
in Control, (ii) the Executive's death, or (iii) the Executive's
attainment of age 65.
(k) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
(l) "Term" means the period commencing as of the date hereof and expiring
as of the later of (i) the close of business on December 31, 2002, or
(ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that
(A) commencing on January 1, 2002 and each January 1 thereafter, the
term of this Agreement will automatically be extended for an
additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given notice
that it or the Executive, as the case may be, does not wish to have
the Term extended and (B) subject to the last sentence of Section 9,
if, prior to a Change in Control, the Executive ceases for any reason
to be an employee of the Company and any Subsidiary, thereupon without
further action the Term shall be deemed to have expired and this
Agreement will immediately terminate and be of no further effect. For
purposes of this Section 1(k), the Executive shall not be deemed to
have ceased to be an employee of the Company and any Subsidiary by
reason of the transfer of Executive's employment between the Company
and any Subsidiary, or among any Subsidiaries.
(m) "Termination Date" means the date on which the Executive's employment
is terminated, the effective date of which shall be the date of
termination, or such other date that may be specified by the Executive
if the termination is pursuant to Section 3(b).
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(n) "Voting Stock" means securities entitled to vote generally in the
election of directors.
2. OPERATION OF AGREEMENT. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, this Agreement will not be operative unless and
until a Change in Control occurs. Upon the occurrence of a Change in
Control at any time during the Term, without further action, this Agreement
shall become immediately operative; PROVIDED, HOWEVER, that this Agreement
shall not become operative and shall be of no force and effect if operation
of this Agreement would cause the Company to be unable to use the pooling
of interests method of accounting in connection with the transactions
resulting in such Change in Control.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) In the event of the occurrence of a Change in Control, the Executive's
employment may be terminated by the Company during the Severance
Period and the Executive shall be entitled to the benefits provided by
Section 4 unless such termination is the result of the occurrence of
one or more of the following events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled within the meaning
of, and begins actually to receive disability benefits pursuant
to, the long-term disability plan in effect for, or applicable
to, Executive immediately prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is
terminated by the Company or any Subsidiary other than pursuant to
Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled
to the benefits provided by Section 4 hereof.
(b) In the event of the occurrence of a Change in Control, the Executive
may terminate employment with the Company and any Subsidiary during
the Severance Period with the right to severance compensation as
provided in Section 4 upon the occurrence of one or more of the
following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for such termination exists or has
occurred, including without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially
equivalent office or position, of or with the Company and/or a
Subsidiary, as the case may be, which the Executive held
immediately prior to a Change in Control, or the removal
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of the Executive as a Director of the Company (or any
successor thereto) if the Executive shall have been a
Director of the Company immediately prior to the Change
in Control;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or
duties attached to the position with the Company and any
Subsidiary which the Executive held immediately prior to the
Change in Control, (B) a reduction in the aggregate of the
Executive's Base Pay and Incentive Pay received from the
Company and any Subsidiary, or (C) the termination or denial
of the Executive's rights to Employee Benefits or a
reduction in the scope or value thereof (except that the
level of any such Employee Benefits may be reduced in the
event of a corresponding reduction generally applicable to
all recipients of or participants in such Employee
Benefits), any of which is not remedied by the Company
within 10 calendar days after receipt by the Company of
written notice from the Executive of such change, reduction
or termination, as the case may be;
(ii) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or
substantially all of its business and/or assets, unless the
successor or successors (by liquidation, merger,
consolidation, reorganization, transfer or otherwise) to
which all or substantially all of its business and/or assets
have been transferred (directly or by operation of law)
assumed all duties and obligations of the Company under this
Agreement pursuant to Section 11(a); or
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any
successor thereto.
(d) A termination by the Company pursuant to Section 3(a) or by the
Executive pursuant to Section 3(b) will not affect any rights that the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights
shall be governed by the terms thereof.
4. SEVERANCE COMPENSATION.
(a) If, following the occurrence of a Change in Control, the Company
terminates the Executive's employment during the Severance Period
other than pursuant to Section 3(a), or if the Executive terminates
his employment pursuant to Section 3(b), the Company will pay to the
Executive the following amounts within thirty business days after the
Termination Date and continue to provide to the Executive the
following benefits:
(i) A lump sum payment in an amount equal to three (3) times the Base
Pay (at the highest rate in effect for any period prior to the
Termination Date).
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(ii) For a period of two years following the Termination Date (the
"Continuation Period"), the Company will arrange to provide the
Executive with Employee Benefits that are welfare benefits (but
not stock option, stock purchase, stock appreciation or similar
compensatory benefits) substantially similar to those that the
Executive was receiving or entitled to receive immediately prior
to the Termination Date (or, if greater, immediately prior to the
reduction, termination, or denial described in Section 3(b)(ii)),
except that the level of any such Employee Benefits to be
provided to the Executive may be reduced in the event of a
corresponding reduction generally applicable to all recipients of
or participants in such Employee Benefits. If and to the extent
that any benefit described in the immediately preceding sentence
is not or cannot be paid or provided under any policy, plan,
program or arrangement of the Company or any Subsidiary, as the
case may be, then the Company will itself pay or provide for the
payment to the Executive, his dependents and beneficiaries, of
such Employee Benefits. Without otherwise limiting the purposes
or effect of Section 5, Employee Benefits otherwise receivable by
the Executive pursuant to the first sentence of this
Section 4(a)(ii) will be reduced to the extent comparable welfare
benefits are actually received by the Executive from another
employer during the Continuation Period following the Executive's
Termination Date, and any such benefits actually received by the
Executive shall be reported by the Executive to the Company.
(b) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will
pay interest on the amount or value thereof at an annualized rate of
interest equal to the so-called composite "prime rate" as quoted from
time to time during the relevant period in the Northeast Edition of
THE WALL STREET JOURNAL. Such interest will be payable as it accrues
on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(c) Notwithstanding any provision of this Agreement to the contrary, the
parties' respective rights and obligations under this Section 4 and
under Sections 5 and 7 will survive any termination or expiration of
this Agreement or the termination of the Executive's employment
following a Change in Control for any reason whatsoever.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, but
subject to Section 5(h), in the event that this Agreement shall become
operative and it shall be determined (as hereafter provided) that any
payment or distribution by the Company or any of its affiliates to or
for the benefit of the Executive paid or payable or distributed or
distributable pursuant to the terms of this Agreement (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the
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Internal Revenue Code of 1986, as amended (the "Code") (or any
successor provision thereto) by reason of being considered "contingent
on a change in ownership or control" of the Company, within the
meaning of Section 280G of the Code (or any successor provision
thereto) or to any similar tax imposed by state or local law, or any
interest or penalties with respect to such tax (such tax or taxes,
together with any such interest and penalties, being hereafter
collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment or payments
(collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be
in an amount such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such
taxes), including any Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations required
to be made under this Section 5, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether
a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, shall be
made by a nationally recognized accounting firm (the "Accounting
Firm") selected by the Executive in his sole discretion. The
Executive shall direct the Accounting Firm to submit its determination
and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if
applicable, and any such other time or times as may be requested by
the Company or the Executive. If the Accounting Firm determines that
any Excise Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to the Executive within fifteen business
days after receipt of such determination and calculations with respect
to any Payment to the Executive. If the Accounting Firm determines
that no Excise Tax is payable by the Executive, it shall, at the same
time as it makes such determination, furnish the Company and the
Executive an opinion that the Executive has substantial authority not
to report any Excise Tax on his federal, state or local income or
other tax return. As a result of the uncertainty in the application
of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or
local tax law at the time of any determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have
been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In
the event that the Company exhausts or fails to pursue its remedies
pursuant to Section 5(f) and the Executive thereafter is required to
make a payment of any Excise Tax, the Executive shall direct the
Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting
calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment shall be promptly paid by the Company
to, or for the benefit of, the Executive within fifteen business days
after receipt of such determination and calculations.
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(c) The Company and the Executive shall each provide the Accounting Firm
access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by
Section 5(b). Any determination by the Accounting Firm as to the
amount of the Gross-Up Payment shall be binding upon the Company and
the Executive.
(d) The federal, state and local income or other tax returns filed by the
Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax
payable by the Executive. The Executive shall make proper payment of
the amount of any Excise Payment, and at the request of the Company,
provide to the Company true and correct copies (with any amendments)
of his federal income tax return as filed with the Internal Revenue
Service and corresponding state and local tax returns, if relevant, as
filed with the applicable taxing authority, and such other documents
reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting
Firm determines that the amount of the Gross-Up Payment should be
reduced, the Executive shall within fifteen business days pay to the
Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
Section 5(b) shall be borne by the Company. If such fees and expenses
are initially paid by the Executive, the Company shall reimburse the
Executive the full amount of such fees and expenses within fifteen
business days after receipt from the Executive of a statement therefor
and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up
Payment. Such notification shall be given as promptly as practicable
but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise
the Company of the nature of such claim and the date on which such
claim is requested to be paid (in each case, to the extent known by
the Executive). The Executive shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following
the date on which he gives such notice to the Company and (ii) the
date that any payment of amount with respect to such claim is due. If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the
Company;
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(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the
subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all
costs and expenses (including interest and penalties) incurred in
connection with such contest and shall indemnify and hold harmless the
Executive, on an after-tax basis, for and against any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and
expenses. Without limiting the foregoing provisions of this Section
5(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 5(f) and,
at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim (provided, however, that the
Executive may participate therein at his own cost and expense) and
may, at its option, either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
PROVIDED, HOWEVER, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and
shall indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such
advance; and PROVIDED FURTHER, HOWEVER, that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which the contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of any such contested claim shall
be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(f), the Executive receives any refund
with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 5(f)) promptly
pay to the Company the amount of such refund (together with any
interest paid or credited thereon after any taxes applicable
thereto). If, after the receipt by the Executive of an amount
advanced
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by the Company pursuant to Section 5(f), a determination is made
that the Executive shall not be entitled to any refund with respect
to such claim and the Company does not notify the Executive in writing
of its intent to contest such denial or refund prior to the expiration
of 30 calendar days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of
any such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid by the Company to the Executive
pursuant to this Section 5.
(h) Notwithstanding any provision of this Agreement to the contrary, if
(i) but for this sentence, the Company would be obligated to make a
Gross-Up Payment to the Executive, (ii) the aggregate "present value"
of the "parachute payments" to be paid or provided to the Executive
under this Agreement or otherwise does not exceed 1.15 multiplied by
three times the Executive's "base amount," and (iii) but for this
sentence, the net after-tax benefit to the Executive of the Gross-Up
Payment would not exceed $50,000 (taking into account both income
taxes and any Excise Tax) as compared to the maximum net after-tax
benefit to the Executive of parachute payments the present value of
which is not equal to or greater than three times the Executive's base
amount, then the payments and benefits to be paid or provided under
this Agreement will be reduced to the minimum extent necessary (but in
no event to less than zero) so that no portion of any payment or
benefit to the Executive, as so reduced, constitutes an "excess
parachute payment." For purposes of this Section 5(h), the terms
"excess parachute payment," "present value," "parachute payment," and
"base amount" will have the meanings assigned to them by Section 280G
of the Code. The determination of whether any reduction in such
payments or benefits to be provided under this Agreement is required
pursuant to the preceding sentence will be made at the expense of the
Company, if requested by the Executive or the Company, by the
Accounting Firm. The fact that the Executive's right to payments or
benefits may be reduced by reason of the limitations contained in this
Section 5(h) will not of itself limit or otherwise affect any other
rights of the Executive other than pursuant to this Agreement. In the
event that any payment or benefit intended to be provided under this
Agreement or otherwise is required to be reduced pursuant to this
Section 5(h), the Executive will be entitled to designate the payments
and/or benefits to be so reduced in order to give effect to this
Section 5(h). The Company will provide the Executive with all
information reasonably requested by the Executive to permit the
Executive to make such designation. In the event that the Executive
fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner
it deems appropriate.
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be
difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date and that the non-
competition covenant contained in Section 8 will further limit the
employment opportunities for the Executive. Accordingly, the payment of the
severance compensation by the Company to the Executive in accordance with
the terms of this Agreement is hereby acknowledged by the Company to
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be reasonable, and the Executive will not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor will any profits, income, earnings or
other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive hereunder
or otherwise, except as expressly provided in the last sentence of
Section 4(a)(ii).
7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to
be extended to the Executive hereunder. Accordingly, if it should appear
to the Executive that the Company has failed to comply with any of its
obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this
Agreement void or unenforceable, or institutes any litigation or other
action or proceeding designed to deny, or to recover from, the Executive
the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to
time to retain counsel of Executive's choice, at the expense of the Company
as hereafter provided, to advise and represent the Executive in connection
with any such interpretation, enforcement or defense, including without
limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive's entering into an attorney-client relationship
with such counsel, and in that connection the Company and the Executive
agree that a confidential relationship shall exist between the Executive
and such counsel. Without respect to whether the Executive prevails, in
whole or in part, in connection with any of the foregoing, the Company will
pay and be solely financially responsible for any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
of the foregoing.
8. COMPETITIVE ACTIVITY. During a period ending one year following the
Termination Date, if the Executive shall have received or shall be
receiving benefits under Section 4, and, if applicable, Section 5, the
Executive shall not, without the prior written consent of the Company,
which consent shall not be unreasonably withheld, engage in any Competitive
Activity.
9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will
create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office
or position in the Company or any Subsidiary following the commencement of
any discussion with a third person that ultimately results in a Change in
Control shall be deemed to be a termination or removal of the Executive
after a Change in Control for purposes of this Agreement.
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10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as the Company
is required to withhold pursuant to any law or government regulation or
ruling.
11. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all
or substantially all of the business or assets of the Company, by
agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform
if no such succession had taken place. This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the
Company, including without limitation any persons acquiring directly
or indirectly all or substantially all of the business or assets of
the Company whether by purchase, merger, consolidation, reorganization
or otherwise (and such successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise
be assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 11(a) and 11(b). Without limiting the
generality or effect of the foregoing, the Executive's right to
receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest, or
otherwise, other than by a transfer by Executive's will or by the laws
of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 11(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
12. NOTICES. For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to
the Company (to the attention of the Secretary of the Company) at its
principal executive office and to the Executive at his principal residence,
or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of
address shall be effective only upon receipt.
13
<PAGE>
13. GOVERNING LAW. The validity, interpretation, construction and performance
of this Agreement will be governed by and construed in accordance with the
substantive laws of the State of Illinois, without giving effect to the
principles of conflict of laws of such State.
14. VALIDITY. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will
not be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance
with any condition or provision of this Agreement to be performed by such
other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements
or representations, oral or otherwise, expressed or implied with respect to
the subject matter hereof have been made by either party which are not set
forth expressly in this Agreement. References to Sections are to
references to Sections of this Agreement.
14
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together
will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered as of the date first above written.
Amerin Corporation
By: /s/ Randolph C. Sailer II
-------------------------
Senior Vice President
/s/ JEROME J. SELITTO
--------------------------
Jerome J. Selitto
<PAGE>
EXHIBIT 10.11
RELEASE AND SEPARATION AGREEMENT
This is an Agreement between John F. Peterson ("Employee") of 214 Laurel, San
Anselmo, California 94960, and Amerin Guaranty Corporation, an Illinois stock
insurance company, including its officers, directors, employees, attorneys,
benefit plans and plan administrators, affiliates, agents, successors and/or
assigns (collectively, "Employer").
I. VALUABLE CONSIDERATION In exchange for his entering into this
Agreement, Employer will provide Employee with the following
consideration:
1. Continuation of Employee's medical insurance premiums under the
Employer's medical plans for a period of twelve months from April 30,
1998. Premiums will be paid by Employer, but Employee must elect
this benefit.
2. Acceleration of vesting of options to purchase 12, 874 shares of
the Common Stock of Amerin Corporation at an exercise price per share
of $5.26, which options were originally scheduled to vest in two
equal installments of 6,437 on each of January 1, 1999, and 2000.
Pursuant to this Agreement, such 12,874 options shall vest as of May
1, 1998, and must be exercised not later than July 31, 1998. In
return for the acceleration of vesting of these options to purchase
12,874 shares, Employee agrees that he shall not be entitled to
exercise the options to purchase 5,600 shares that would other wise
become exercisable as of April 21, 1998.
3. In response to any written request for information from any
prospective employer, Employer will provide only Employee's position
and dates of employment as of the date of termination.
Employee acknowledges the above consideration is over and above anything
owed to Employee by law, contract or under the policies of Employer, and
that it is provided to him expressly in exchange for entering into this
Agreement.
II. TERMINATION OF EMPLOYMENT Employee's employment with Employer in the
capacity of Senior Vice President, Marketing, shall be terminated pursuant
to resignation of Employee as of April 30, 1998. Employee acknowledges
his continuing obligations with respect to non-competition, all as set
forth in Equity Award Agreements previously entered into between Employee
and Amerin Corporation.
III. RELEASE AND WAIVER By signing this Agreement, Employee releases and
waives all legal claims of any nature whatsoever which Employee has or may
have against Employer as of the date of this Agreement is signed by him.
This release and waiver includes but is not limited to:
<PAGE>
1. any claims for wrongful termination, defamation or any other
common law claims;
2. any claims for breach of any written or oral contract, including
but not limited to any contract of employment;
3. any claims of discrimination, harassment or retaliation based on
such things as age, national origin, race, religion, sex, sexual
orientation, or physical or mental disability or medical condition;
and
4. except for the severance amounts and benefits referenced in
Paragraph I above, the payment of any accrued unused vacation to
which Employee may be entitled by law, any claims for any
compensation of any sort, including but not limited to salary,
severance pay, benefits, commissions and bonuses.
This release and waiver includes all claims that may arise by contract,
under the common law and under all federal, state and local statutes,
ordinances, rules, regulations and orders, including but not limited to
any claim or cause of action based on the Fair Labor Standards Act, Title
VII of the Civil Rights Act of 1964, the Age Discrimination in Employment
Act, the Americans with Disabilities Act, the Civil Rights Acts of 1866,
1871 and 1991, the Rehabilitation Act of 1973, the Employee Retirement
Income Security Act of 1974, the Vietnam era Veterans' Readjustment
Assistance Act of 1974, Executive Order 11246, the Illinois Wage Payment
and Collection Act, the Illinois Human Rights Act, the Cook County Human
Rights Ordinance and the Chicago Human Rights Ordinance, as each of them
has been or may be amended.
Employee warrants that he has not and will not institute any lawsuit,
claim, action, charge, complaint, petition, appeal, accusatory pleading or
proceeding of any kind against Employer, and Employee waives any right to
any form of recovery or compensation from any legal action brought by him
or on his behalf in connection with Employee's employment or the
termination of his employment with Employer. Employee warrants that, at
the time of execution of this Agreement, he has not instituted and has no
present plans to institute any lawsuit, claim, action, or charge against
Employer.
IV. CONFIDENTIALITY Employee acknowledges that by reason of his employment
by Employer he has had access to highly confidential business information
of Employer, the misappropriation of which could harm the business
interests of Employer, including but not limited to financial information,
financing plans and arrangements, personnel information and records,
customer records and information, business plans and marketing strategies.
Employee hereby agrees not to use or disclose such confidential
information at any time in the future. Employee hereby also acknowledges
his statutory and common law
2
<PAGE>
obligation to refrain from using, for himself or in the interests of
others, and from disclosing to others, all such confidential
information. Employee also agrees that he will keep the circumstances of
his resignation and the existence and terms of this Agreement strictly
confidential, and that he will not discuss them with or reveal them to
anyone other than his legal representative(s) or as may be required by
law.
V. NON-DISPARAGEMENT Employee agrees that he has not and will not make any
oral or written statements about Employer and/or its financial condition,
personnel, business methods or otherwise, which are intended or reasonably
likely to disparage Employer in the community or among its customers.
VI. REMEDIES Employee acknowledges that his breach of Paragraph IV or V of
this Agreement could result in irreparable harm to Employer, and that
money damages would be an insufficient remedy. Therefore, the parties
agree that Employer will be entitled to injunctive and other equitable
relief should Employee breach Paragraph IV or V, as well as actual
damages, costs and attorneys' fees. Employee also agrees that he will
repay the severance payment amounts provided pursuant to Paragraph I(1),
(2) and (3) of this Agreement should he breach this Agreement in any way.
VII. KNOWING AND VOLUNTARY RELEASE Employee agrees that his signing of this
Agreement has been knowing and voluntary and has not been coerced or
threatened. Employee also agrees that he has been given sufficient time
with an attorney before signing this Agreement.
VIII. ENTIRE AGREEMENT AND SEVERABILITY The parties agree that this
Agreement sets forth the entire agreement between them and supersedes any
other written or oral understanding they may have had. The parties also
agree and acknowledge that no other promises or agreements have been
offered for this Agreement (other than those described above) and that no
other promises or agreements between the parties will be binding unless
they have been reduced to writing and signed by the parties. Employee and
Employer further agree that, if any portion of this Agreement is held to
be invalid or legally unenforceable, the remain portions of this Agreement
will not be affected and will be given full force and effect.
IX. NON-ADMISSION The parties acknowledge that this Agreement does not
constitute any admission by Employee or Employer of any wrongdoing or
liability whatsoever, but results from the desire of the parties to
resolve all actual and potential disputes between them.
X. APPLICABLE LAW All provisions of this Agreement will be construed and
governed by Illinois law without regard to the laws of any other
jurisdiction. Any suit, claim or other
3
<PAGE>
legal proceeding arising out of or relating to Employee's employment,
his termination from employment or this Agreement shall be brought
exclusively in the federal or state courts located in Cook County,
Illinois, and Employee and Employer hereby submit to personal
jurisdiction in the State of Illinois and to venue in such courts.
XI. RESOLUTION OF ALL MATTERS This Agreement resolves all matters between
the parties relating to Employee's employment and his resignation and
termination of employment with Employer. This Agreement becomes effective
and binding when it is signed, witnessed and dated by Employee and
delivered to Employer.
AMERIN GUARANTY CORPORATION (Employer)
By: /S/ROY J. KASMAR Date: March 1, 1998
----------------------
Roy J. Kasmar
President
JOHN F. PETERSON (Employee)
/S/ JOHN F. PETERSON Date: March 1, 1998
- -----------------------
4
<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 January 22, 1998, 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, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 374,320
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 377,720
<CASH> 4,456
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 7,776
<TOTAL-ASSETS> 415,301
<POLICY-LOSSES> 31,280
<UNEARNED-PREMIUMS> 23,352
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 262
<OTHER-SE> 349,893
<TOTAL-LIABILITY-AND-EQUITY> 415,301
92,329
<INVESTMENT-INCOME> 18,607
<INVESTMENT-GAINS> 1,167
<OTHER-INCOME> 0
<BENEFITS> 30,272
<UNDERWRITING-AMORTIZATION> 10,520
<UNDERWRITING-OTHER> 14,643
<INCOME-PRETAX> 56,668
<INCOME-TAX> 15,909
<INCOME-CONTINUING> 40,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,759
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.54
<RESERVE-OPEN> 18,730
<PROVISION-CURRENT> 29,196
<PROVISION-PRIOR> 1,076
<PAYMENTS-CURRENT> 4,537
<PAYMENTS-PRIOR> 13,185
<RESERVE-CLOSE> 31,280
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 308,076 151,021
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 328,793 296,982
<CASH> 1,176 1,054
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 5,569 4,419
<TOTAL-ASSETS> 354,824 316,328
<POLICY-LOSSES> 18,730 7,092
<UNEARNED-PREMIUMS> 20,525 12,710
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 261 260
<OTHER-SE> 300,348 273,877
<TOTAL-LIABILITY-AND-EQUITY> 354,824 316,328
62,349 27,559
<INVESTMENT-INCOME> 16,871 7,612
<INVESTMENT-GAINS> 161 491
<OTHER-INCOME> 0 0
<BENEFITS> 20,681 7,757
<UNDERWRITING-AMORTIZATION> 8,485 6,641
<UNDERWRITING-OTHER> 10,623 42,656
<INCOME-PRETAX> 39,592 (21,392)
<INCOME-TAX> 11,363 1,419
<INCOME-CONTINUING> 28,229 (22,811)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 28,229 (28,098)
<EPS-PRIMARY> 1.08 (2.32)
<EPS-DILUTED> 1.07 (2.32)
<RESERVE-OPEN> 7,092 262
<PROVISION-CURRENT> 20,344 7,037
<PROVISION-PRIOR> 337 720
<PAYMENTS-CURRENT> 3,821 520
<PAYMENTS-PRIOR> 5,222 407
<RESERVE-CLOSE> 18,730 7,092
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
