<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
X Quarterly Report Pursuant to Section 13 or 15(d) of
_____ the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
_____ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 0-27146
AMERIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3085148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Randolph Drive, 49th Floor, Chicago, IL 60601-7125
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 540-0078
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___
---
APPLICABLE ONLY TO ISSUER'S INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT NOVEMBER 1, 1998
----- -------------------------------
<S> <S>
Voting Common Stock, $.01 per value 24,806,613
Nonvoting Common Stock, $.01 per value 1,656,909
</TABLE>
<PAGE>
AMERIN CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and December 31, 1997. . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 30, 1998 and 1997 (unaudited). . . 2
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1998 and 1997 (unaudited). . . . . . . . 3
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 5
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
(unaudited)
(in thousands of dollars)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value. . . . . . . . $427,834 $374,320
Short-term investments. . . . . . . . . . . . . . . . . . . . . . 566 3,400
-------- --------
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 428,400 377,720
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 4,506 4,456
Accrued investment income. . . . . . . . . . . . . . . . . . . . . . . 5,663 5,872
Premiums receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 6,339 5,020
Current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 3,757 ---
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . 14,431 7,776
Leasehold improvements, furniture and equipment, at cost,
net of accumulated depreciation . . . . . . . . . . . . . . . . . 12,493 9,315
Goodwill, net of accumulated amortization. . . . . . . . . . . . . . . 2,021 2,133
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,815 3,009
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $483,425 $415,301
-------- --------
-------- --------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Liabilities:
Loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,184 $31,280
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . 25,585 23,352
Current income taxes. . . . . . . . . . . . . . . . . . . . . . . --- 790
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 10,337 5,015
Accrued expenses and other liabilities. . . . . . . . . . . . . . 8,873 4,709
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 84,979 65,146
Common Stockholders' Equity:
Voting Common Stock, $.01 par, 50,000,000 shares authorized,
24,806,613 shares and 24,487,992 shares issued and
outstanding in 1998 and 1997, respectively . . . . . . . . . 248 245
Nonvoting Common Stock, $.01 par, 50,000,000 shares
authorized, 1,656,909 shares issued and outstanding
in 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . 17 17
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 321,187 316,642
Accumulated other comprehensive income. . . . . . . . . . . . . . 13,511 8,229
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 63,483 25,022
-------- --------
Total common stockholders' equity. . . . . . . . . . . . . . . . . . . 398,446 350,155
-------- --------
Total liabilities and common stockholders' equity . . . . . . . . $483,425 $415,301
-------- --------
-------- --------
</TABLE>
See accompanying notes.
1
<PAGE>
AMERIN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ ----- ---- ----
(unaudited)
(in thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Net premiums written . . . . . . . . . . . . . . . . . . $32,456 $26,241 $89,715 $68,578
Increase in unearned premiums. . . . . . . . . . . . . . (1,219) (2,240) (1,351) (2,173)
------- ------- -------- -------
Net premiums earned. . . . . . . . . . . . . . . . . . . 31,237 24,001 88,364 66,405
Net investment income. . . . . . . . . . . . . . . . . . 5,311 4,698 15,728 13,771
Realized investment gains. . . . . . . . . . . . . . . . 1,522 77 2,073 62
------- ------- -------- -------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 38,069 28,776 106,165 80,238
Expenses:
Losses incurred. . . . . . . . . . . . . . . . . . . . . 9,064 7,681 25,484 21,061
Marketing, policy issue and underwriting expenses. . . . 5,569 2,629 15,161 7,923
Other operating expenses . . . . . . . . . . . . . . . . 3,739 3,800 11,349 10,912
------- ------- -------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . 18,372 14,110 51,994 39,896
------- ------- -------- -------
Income before taxes. . . . . . . . . . . . . . . . . . . . . 19,697 14,666 54,171 40,342
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 5,713 4,137 15,710 11,429
------- ------- -------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,984 $ 10,529 $ 38,461 $ 28,913
------- ------- -------- -------
------- ------- -------- -------
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . .. . . . . . . $ .53 $ .40 $ 1.46 $ 1.11
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . $ .52 $ .40 $ 1.44 $ 1.09
------- ------- -------- -------
------- ------- -------- -------
Average common and common equivalent shares
outstanding (in thousands) . . . . . . . . . . . . . . . 26,721.3 26,509.9 26,719.1 26,455.3
</TABLE>
See accompanying notes.
2
<PAGE>
AMERIN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------
1998 1997
------------- ----------
(unaudited)
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,461 $28,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in:
Accrued investment income and premiums receivable . . . . (1,110) (118)
Loss reserves . . . . . . . . . . . . . . . . . . . . . . 8,904 8,349
Unearned premiums . . . . . . . . . . . . . . . . . . . . 2,233 3,574
Accounts payable and accrued expenses . . . . . . . . . . 3,987 (437)
Federal income taxes. . . . . . . . . . . . . . . . . . . (2,068) 586
Policy acquisition costs deferred. . . . . . . . . . . . . . . . . . . (12,157) (6,499)
Policy acquisition costs amortized.. . . . . . . . . . . . . . . . . . 5,502 5,310
Depreciation and other amortization. . . . . . . . . . . . . . . . . . 1,867 1,039
Realized investment gains. . . . . . . . . . . . . . . . . . . . . . . (2,073) (62)
Other items, net.. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,325) (956)
--------- ---------
Net cash provided by operating activities. . . . . . . . . . . . . . . 41,221 39,699
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Fixed maturity securities . . . . . . . . . . . . . . . . . . . (197,282) (79,406)
Property and equipment. . . . . . . . . . . . . . . . . . . . . (4,933) (3,854)
Sale or maturity of:
Fixed maturity securities . . . . . . . . . . . . . . . . . . . 153,668 28,882
Short-term investments, net.. . . . . . . . . . . . . . . . . . 2,828 17,958
Property and equipment. . . . . . . . . . . . . . . . . . . . . -- 7
--------- ---------
Net cash used by investing activities. . . . . . . . . . . . . . . . . (45,719) (36,413)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . 4,548 732
--------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . . 4,548 732
--------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 50 4,018
Cash and cash equivalents at beginning of period . . . . . . . . . . . 4,456 1,176
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $4,506 $5,194
--------- ---------
</TABLE>
See accompanying notes.
3
<PAGE>
AMERIN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the requirements of Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
NEW AUTHORITATIVE PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 established 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. However,
segment information is not required to be reported in interim financial
statements in the initial year of adoption. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Implementation of this standard is not expected to have a material
effect on the Company's financial statements.
In June, 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because the
Company does not currently use derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
2. INCOME TAXES
The provision for income taxes varies from the statutory federal income tax rate
applied to income before income taxes principally due to tax exempt interest.
4
<PAGE>
3. NET INCOME PER COMMON SHARE
The following table sets forth the computation of net income per common share
(in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------- ---------------------
September 30 September 30
------------ ------------
1998 1997 1998 1997
------- ------- ------- ------
(unaudited)
(in thousands of dollars)
<S> <C> <C> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,984 $10,529 $38,461 $28,913
------- ------- ------- -------
Weighted average number of common shares outstanding. . . . . . . 26,440 26,130 26,334 26,110
Dilutive effect of stock options using the treasury stock
method. . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 380 385 345
------- ------- ------- -------
Weighted average number of common and common
equivalent shares outstanding . . . . . . . . . . . . . . . . 26,721 26,510 26,719 26,455
------- ------- ------- -------
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $.53 $.40 $1.46 $1.11
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . $.52 $.40 $1.44 $1.09
</TABLE>
Where the effect of common stock equivalents on net income per share would be
antidilutive, they are excluded from the average common and common equivalent
shares outstanding.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the interim reporting requirements of
Statement of Financial Accounting Standards No 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS 130 has no impact on the Company's net income or stockholders' equity.
SFAS 130 requires unrealized gains or losses on the Company's available for sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year consolidated
financial statements have been reclassified to conform to the requirements of
SFAS 130.
5
<PAGE>
The components of comprehensive income and accumulated other comprehensive
income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,984 $10,529 $38,461 $28,913
Net change in unrealized gain on available for sale
securities, net of income taxes. . . . . . . . . . . . . . . 5,494 4,075 5,282 5,183
------- ------- -------- --------
Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . $19,478 $14,604 $43,743 $34,096
------- ------- -------- --------
------- ------- -------- --------
Accumulated other comprehensive income at beginning
of period.. . . . . . . . . . . . . . . . . . . . . . . . . . $8,017 $ 1,330 $ 8,229 $222
Net change in unrealized gain on available for sale
securities, net of income taxes.. . . . . . . . . . . . . . . 5,494 4,075 5,282 5,183
------- ------- -------- --------
Accumulated other comprehensive income at end of
period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,511 $5,405 $13,511 $ 5,405
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The statements contained in this quarterly report that are not historical
facts are forward-looking statements. Actual results may differ materially
from those projected in the forward-looking statements. These forward-looking
statements involve risks and uncertainties, including but not limited to, the
following risks: that interest rates may increase rather than remain stable
or decrease; that housing demand may decrease for any number of reasons,
including changes in interest rates, adverse economic conditions, or other
reasons; that Amerin's market share may decrease as a result of changes in
underwriting criteria by Amerin or its competitors, or other reasons; and
changes in the performance of the financial markets, in the demand for and
market acceptance of Amerin products, and in general economic conditions. The
Company also notes that a variety of factors could cause their actual results
and experience relating to compliance with Year 2000 to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements concerning Year 2000 issues. These factors include
(i) the unanticipated material impact of a system fault of the Company
relating to Year 2000; (ii) the failure to successfully remediate, in spite
of testing, material systems of the Company, (iii) the time it may take to
successfully remediate a failure once it occurs, as well as the resulting
costs and loss of revenues, and (iv) the failure of third parties to properly
remediate material Year 2000 problems. Investors are also directed to other
risks discussed in documents filed by the Company with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997. Net premiums written for the three months ended
September 30, 1998 were $32.5 million compared to $26.2 million for the three
months ended September 30, 1997, which represents a 24% increase. The
increase was primarily attributable to growth in insurance in force and
related renewal premiums of the Company's primary insurance subsidiary,
Amerin Guaranty Corporation ("Amerin Guaranty"). Management believes that
Amerin Guaranty was able to increase revenues due primarily to increased use
by existing lenders of the Company's borrower-paid mortgage insurance and the
addition of new lenders which began doing business with the Company during
the last year. Amerin Guaranty's monthly premium plan represented 87.9% of
new insurance written for the three months ended September 30, 1998 compared
to 84.2% for the same period in 1997.
Net premiums earned increased by $7.2 million to $31.2 million for the
three months ended September 30, 1998 from $24.0 million for the three months
ended September 30, 1997. This increase was primarily due to the increase in
insurance written and in force in the 1998 period over the corresponding
portion of the 1997 period.
Net investment income of $5.3 million for the three months ended
September 30, 1998 increased by $.6 (or 13%) over the same period in 1997
primarily due to investment of the proceeds of Amerin Guaranty's net
operating cash flows over the course of 1997 and the first nine months of
1998. Realized investment gains for the three months ended September 30,
1998 were $1.5 million compared to $77,000 for the same period in 1997.
Losses incurred in the three months ended September 30, 1998 were $9.1
million, compared to $7.7 million of losses incurred in the three months
ended September 30, 1997, as a result of the significant growth in insurance
in force. Because of the Company's limited operating history, its loss
experience is expected to significantly increase as its policies age further.
Marketing, policy issue and underwriting expenses during the three months
ended September 30, 1998 of $5.6 million increased by $3.7 million (or 112%)
compared to the same period in 1997 principally due to the development of
contract underwriting for certain lenders and the increased production of new
insurance written in the 1998 period compared to the prior year period. New
insurance written increased 78% in the third quarter of 1998 compared to the
same period last year. Other operating expenses remained stable for the
three months ended September 30, 1998 compared to the same period in 1997.
The Company's effective tax rate was 29% in the three months ended
September 30, 1998 compared to 28% for the three months ended September 30,
1997. The effective tax rate for the third quarter of 1998 and 1997 was
below the statutory rate of 35%, reflecting the benefits of tax-preferenced
investment income.
As a result of the foregoing factors, the Company had net income of
$14.0 million for the three months ended September 30, 1998, compared to net
income of $10.5 million for the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTMBER 30, 1997. Net premiums written for the nine months ended September
30, 1998 were $89.7 million compared to $68.6 million for the nine months
ended September 30, 1997, which represents a 31% increase. The increase was
primarily attributable to growth in insurance in force and related renewal
premium of the Company's primary insurance subsidiary. Management believes
that Amerin Guaranty was able to increase revenues due primarily to increased
use by existing lenders of the Company's borrower-paid mortgage insurance and
the addition of new lenders which began doing business with the Company
during the past year.
7
<PAGE>
Net premiums earned increased by $22.0 million to $88.4 million for the
nine months ended September 30, 1998 from $66.4 million for the nine months
ended September 30, 1997. This increase was primarily due to the increase in
insurance written and in force in the 1998 period over the corresponding
portion of the 1997 period.
Net investment income of $15.7 million for the first nine months of 1998
increased by $2.0 million (or 14%) over the first nine months of 1997
primarily due to investment of the proceeds of Amerin Guaranty's net
operating cash flows over the course of 1997 and the first nine months of
1998. Realized investment gains for the first nine months of 1998 were $2.1
million compared to $62,000 realized gains for the first nine months of 1997.
As of September 30, the yields to maturity in the investment portfolio were
5.7% for both 1998 and 1997, and the average durations of the investment
portfolio were 6.3 years and 6.4 years, respectively.
Losses incurred in the first nine months of 1998 were $25.5 million,
compared to $21.1 million of losses incurred in the first nine months of 1997
as a result of the significant growth in insurance in force. Because of the
Company's limited operating history, its loss experience is expected to
significantly increase as its policies age further. Marketing, policy issue
and underwriting expenses during the first nine months of 1998 of $15.2
million increased by $7.2 million (or 91%) compared to the first nine months
of 1997 principally due to the growth in the level of marketing and contract
underwriting activity in connection with the increased production of new
insurance written in the 1998 period compared to the prior year period.
Other operating expenses increased by $.4 million (or 4%) for the first nine
months of 1998 over the first nine months of 1997 due to the increase in
insurance in force and increases in various administrative and occupancy
costs relating to growth in the Company's personnel.
The effective tax rate was 29% in the nine months ended September 30,
1998 compared to 28% for the same period in 1997. The effective tax rate for
the first nine months of 1998 and 1997 was below the statutory rate of 35%,
reflecting the benefits of tax-preferenced investment income.
As a result of the foregoing factors, the Company had net income of
$38.5 million for the first nine months of 1998, compared to net income of
$28.9 million for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources considerations are different for
Amerin Corporation and its principal insurance operating subsidiary, Amerin
Guaranty, as discussed below.
Amerin Corporation is a holding company whose principal assets are its
investments in Amerin Guaranty and Amerin Re. Amerin Corporation has no
operations of its own and no employees and has only limited needs for
liquidity to meet certain legal, accounting, tax and administrative expenses.
Amerin Corporation relies primarily on dividends and other permitted
distributions from Amerin Guaranty and Amerin Re as sources of funds. Amerin
Corporation does not currently have any committed lines of credit.
The principal sources of funds for Amerin Guaranty are premiums received
on new and renewal business, amounts earned from the investment of its
contributed capital as well as the investment of its cash flow and
commissions on ceded business and reimbursement of losses from reinsurers.
The principal uses of funds by Amerin Guaranty are the payment of claims and
related expenses, reinsurance premiums, other operating expenses and
dividends to Amerin Corporation. Liquidity requirements are influenced
significantly by the level of claims incidence. Amerin Guaranty does not
currently have any committed lines of credit.
8
<PAGE>
Amerin Guaranty generates substantial cash flows from operations as a
result of premiums being received in advance of the time when claim payments
are required. Cash flows generated from Amerin Guaranty's mortgage insurance
operations totaled $60.8 million and $46.2 million for the first nine months
of 1998 and 1997, respectively. These operating cash flows, along with that
portion of the investment portfolio that is held in cash and highly liquid
securities, are available towards the liquidity requirements of Amerin
Guaranty. The fair value of Amerin Guaranty's investment portfolio was $383.6
million at September 30, 1998 and $333.3 million at December 31, 1997.
All of the Company's $427.8 million of fixed income securities at
September 30, 1998 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-."
RISK TO CAPITAL RATIO. As a condition to maintenance of its
claims-paying ratings, the total amount of insurance risk that may be written
by Amerin Guaranty is limited to a multiple of 20 times its statutory capital
(which includes the contingency reserve) less the carrying value of
non-investment grade debt and tax and loss bonds and investments in
affiliates, or such higher or lower multiple as is reasonably determined by
the rating agency in its sole discretion. Amerin Guaranty has several
alternatives available to control its risk to capital ratio, including
obtaining capital contributions from the Company, purchasing reinsurance and
reducing the amount of new business written. A material reduction in
statutory capital, whether resulting from underwriting or investment losses
or otherwise, or a disproportionate increase in risk in force, could increase
the risk to capital ratio. An increase in the risk to capital ratio could
limit Amerin Guaranty's ability to write new business (which in turn could
materially adversely affect the Company's results of operations and
prospects). At September 30, 1998 and December 31, 1997, Amerin Guaranty's
risk to capital ratio was 17.6 to 1 and 16.1 to 1, respectively.
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 has completed the inventory and assessment phase and is
approximately 75% complete in regards to remediation. The Company presently
believes that with modifications or replacements of existing software and
certain hardware, the Year 2000 issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Company. The cost of the Year 2000 initiatives is expected to be
approximately $750,000 including all direct and indirect costs and is being
funded out of current operations.
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.
The Company is currently establishing a contingency plan in two phases;
business disaster recovery and disruption recovery; to address all aspects of
continuing business operations.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of holders of the Company's
securities in the third quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on Page E-1 for exhibits filed with this report on
Form 10-Q.
b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter for
which this report on Form 10-Q is filed.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: November 13, 1998 By: /s/ Gerald L. Friedman
---------------------------
Gerald L. Friedman
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1998 By: /s/ David I. Vickers
----------------------------
David I. Vickers
Senior Vice President,
Chief Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document Page
------- ----------------------- ----
27 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from condensed
financial statements and related notes of Amerin Corporation and Subsidiaries
for the nine month period ended September 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 427,834
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 428,400
<CASH> 4,506
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 14,431
<TOTAL-ASSETS> 483,425
<POLICY-LOSSES> 40,184
<UNEARNED-PREMIUMS> 25,585
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 265<F1>
<OTHER-SE> 398,181
<TOTAL-LIABILITY-AND-EQUITY> 483,425
88,364
<INVESTMENT-INCOME> 15,728
<INVESTMENT-GAINS> 2,073
<OTHER-INCOME> 0
<BENEFITS> 25,484
<UNDERWRITING-AMORTIZATION> 15,161
<UNDERWRITING-OTHER> 11,349
<INCOME-PRETAX> 54,171
<INCOME-TAX> 15,710
<INCOME-CONTINUING> 38,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,461
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0<F2>
<PROVISION-PRIOR> 0<F3>
<PAYMENTS-CURRENT> 0<F4>
<PAYMENTS-PRIOR> 0<F5>
<RESERVE-CLOSE> 0<F5>
<CUMULATIVE-DEFICIENCY> 0<F5>
<FN>
<F1>Common stock at par value
<F2>Available on an annual basis only
<F3>Available on an annual basis only
<F4>Available on an annual basis only
<F5>Available on an annual basis only
<F6>Available on an annual basis only
<F7>Available on an annual basis only
</FN>
</TABLE>
